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First I see the news that German billionaire Adolf Merckle had stepped in front of a train. Then this news from the Chicago Tribune.

Steven Good, who built Sheldon Good & Co., the real estate auction house his father had founded, into the largest player in the business, apparently put a bullet into his head.

These men couldn't have lost all their money. What's even stranger is the Good's business was probably doing very well, with all the distressed property needing to get sold. So sad.

Manhattan real estate sales plunged more than 40% in the fourth quarter to 2,500 units, accoding to the latest survey from the Corcoran Group brokerage firm.

Median sales prices for all properties inched up 3% to $937,000, according to the firm. But that was only because sales of some pricey new condos lifted all boats. Look only at sales of existing units and prices fell 4% in the quarter, to a median of $759,000.

What will that buy you exactly? Not much by the standards of the rest of the country. Corcoran's Web site lists an open house this weekend for the 1,200 square foot one bedroom apartment on West 78th St. pictured above. The price: $795,000.

David Lereah, the National Association of Realtors' former chief economist who famously denied that the housing bubble existed even as it started to pop, is finally admitting that he was wrong.

Lereah, whose book "Why the Real Estate Boom Will not Bust and How You Can Profit From it" was published in February 2006 just before the bubble went bust, suggests in a new Money Magazine interview that his rosy outlook might have had something to do with his position as top spokesman for the Realtors. Lereah, now a private real estate consultant, says he's bearish about the housing market and has been for a year and a half.

"I worked for an association promoting housing, and it was my job to represent their interests," Lereah said. "If you look at my actual forecasts, the numbers were right in line with most forecasts. The difference was that I put a positive spin on it."

The damage Lereah caused, of course, was serious, especially for the many home buyers who bought the hype. Lereah said he now expects only a modest recovery in sales activity this year.

"I was wrong," Lereah told Money. "I have to take responsibility for that."

UPDATE:

I just spoke with the Realtors' current chief economist Lawrence Yun, who has also been criticized on blogs such as the "Lawrence Yun Watch" for his overly optimistic predictions.

Yun, who worked as a number cruncher for the industry group during Lereah's tenure, said he "disassociates" himself from the way his former boss did things and is careful not to let his role as lobbyist for the group influence his work as the group's chief economist.

"I don’t see my job as somehow spin," Yun said. "I share the housing data and say 'What does it mean and what it may imply about the future.'"

If people want to discount his predictions, they can, Yun said. And he doesn't think Lereah's admission hurts the credibility of the National Association of Realtors, though "it might hurt his [Lereah's] credibility," Yun said.

Economists at Wells Fargo predict the economy will improve by the second half of 2009.

"The ongoing impact of $2 trillion in government stimulus, with other factors such as pent-up consumer demand and returning consumer confidence, will finally lead to a turnaround, and the third quarter of next year will be “better than expected” by many," says Dr. Jim Paulsen, chief investment strategist of Wells Capital Management. “It’s like you’re at a cookout and you’re trying and trying to get your charcoal going and you keep squirting on lighter fluid and all of a sudden it goes ‘poof!’”

Dr. Scott Anderson, senior economist for Wells Fargo & Company, predicted that the housing sector will lead the way. “One bright note is that the sector that led the economy into this morass is about to turn the corner, perhaps as soon as this summer, and will start to lead us out,” Anderson said.

Dr. Eugenio Aleman, senior economist for Wells Fargo & Company, said he was most concerned that the injecting of hundreds of billions of dollars into the economy through the financial sector – is not helping those who need it most.

“Current monetary policy will help only those households that do not need help – those that have plenty of money and have a stable job,” he said. “They will refinance, buy homes and consume. It will not help those who are struggling to make ends meet, or have lost their jobs or may soon lose them, because no financial institution is going to lend them money to buy a home, no matter what the interest rate is.” He said it is up to the new administration to help these households through fiscal policy, with government spending that will create jobs.

The current job market is one of the worst in decades, with another 3.7 million jobs expected to be lost this year. That means that job losses in this recession will total 5.5 million, twice as many as were lost in the 1981-1982 recession, the second worst since World War II. The unemployment rate will rise to 8.8 percent by the end of 2009, Wells Fargo predict and will average 8.2 percent for the year. Gross domestic product will decline in the first two quarters before expansion resumes in the third quarter.

Economist Paulsen blamed “fear mongering” by government officials to persuade Congress to pass the $700 billion Troubled Asset Relief Program in the fall for the depth of our problems today. That, he said, “froze everyone in their tracks” and resulted in “economic paralysis.”

Anderson said the U.S. government will provide the primary support for the economy in 2009. This will come in a stimulus package from the new administration with infrastructure spending and middle-class tax cuts, plus “natural stabilizers” such as unemployment benefits, food stamps and other welfare payments. The infrastructure spending will be too narrow to help everyone, he said – but the middle-class tax cuts will offer more sustained consumer spending than recent one-time stimulus checks. Savings rates may also rise to 5 percent.

Steve Wynn's new Encore resort is just what Vegas doesn't need right now--more high-end hotel rooms. Some friends of mine just stayed at the nearby Venetian resort for just $119 a night with $100 in restaurant and other credit thrown in as an enticement. They said they'd never seen the Strip so free of traffic.

The tough economy and abundance of rooms has casino builders doing their best to cut back. Among the high profile projects that have been shut down or put on hold in recent years are Boyd Gaming's Echelon resort, George Clooney's Las Ramblas, a Waldorf=Astoria and a W hotel.

A new report from Deutsche Bank analyst Bill Lerner screams "We have never tracked a greater number of stalled projects in Las Vegas than today," some 41,000 new room cancelled. "What a difference two years makes."

Lerner now forecasts that 25,000 new rooms will open over for the next three years. That's half what he had been predicting a year and a half ago. Lerner figures at least one more project could enter the "bone yard." Among the new ones still expected to open, MGM's massive City Center in late 2009 and the Fountainebleau in 2011.

The city's condo hotel market has also taken a hit.

According to Lerner: "Since the end of September, we have identified only 37 units closed
at the four actively closing high-rise condo / condo-hotel projects
we track (Allure, Palms Place, Panorama and Trump 1; there have been
no additional closings at MGM's Signature III since we began tracking
earlier this year). This works out to be just over three closures per
month per project, or significantly below the theoretical average of
100 units per month per project in the prior economic environment.
Palms Place has now closed nearly 60% of its units, while Allure
(condo-only) has closed nearly 50%, with Trump 1 still below 25%
closed."

Still. a recent review of the Encore in the Los Angeles Times concludes: "That dry desert floor outside town is littered with the corpses of pundits who have proclaimed that Las Vegas is overbuilt. And there's probably a special section in that cemetery for people who underestimated Steve Wynn."

Happy New Year everybody! Here's to a better time in '09.

Credit where credit is due: Peter Schiff of brokerage Euro Pacific Capital saw this housing bust coming from a mile away. To prove his perspicacity, his brother (and p.r. agent) Andrew Schiff is recirculating some of the pieces that Peter wrote back in 2004, when most of us were just getting excited to be out from under the shadow of the 2001 recession and subsequent jobless recovery.

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?

Where were you in March 2004? Because that's the last time home prices were as low as they are now, according to the Standard & Poor's/Case-Shiller 20-City Composite Home Price Index for October 2008, which was released on Dec. 30.

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!

The activist group ACORN got a bad rap during the recent presidential campaign when John McCain accused them of using paid solicitors to sign up bogus voters. Barack Obama had to distance himself from the group, which has been a big advocate for low income homeowners.

ACORN has come out slugging against Hope Now, an alliance between banks, mortgage servicers and other consumer groups.

Says ACORN:

"HOPE NOW's own numbers show that far less than a third of their nearly 3 million foreclosures prevented in 2008 actually involved modifications to the underlying mortgage, rather than weak repayment plans that do nothing to address the structural unaffordability of so many loans. The HOPE NOW estimate of 950,000 mortgage modifications in 2008 is a pathetic failure when stacked up next to the 2 million Americans who lost their homes. We don't know how many of these modifications actually resulted in reduced monthly payments that are affordable to homeowners, the driving reason behind high re-default rates. Instead of more excuses, we need solutions that will stop all these unnecessary foreclosures and fix our economy where it is hurting most."

The group also notes that Credit Suisse recently released revised projections that foresee 8 million foreclosures in the next four years, up from a prediction of 6.5 million in April. "The industry's current bad practices are essentially responsible for doubling the foreclosure crisis and preventing the broad economic recovery we need. The mortgage industry doesn't need any more PR, it needs systemic change."

ACORN is calling on mortgage servicers to enact a 90-day moratorium on foreclosures, taking that time to implement the FDIC's modification protocols that were successful at avoiding unnecessary foreclosures and re-defaults at Indymac. This change alone would stem the glut of Real Estate Owned properties that are dragging down housing prices and would help jumpstart the economic recovery. The federal government must use every stick and carrot at its disposal to help Americans save their homes, including enacting the Bair proposal to use TARP funds to facilitate 2.2 million mortgage modifications, lifting the ban on judicial modifications, and demanding that banks receiving TARP funds start modifying loans per the FDIC protocols."

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!

So much about home prices, what about investments in shopping centers?

The research firm Green Street Advisors says real estate investment trusts that own strip shopping centers are taking a beating as consumers cut back on spending this holiday season. As aresult the shopping center operators have cut their own spending for development and acquisitions and focused just on keeping their centers leased. To do that they’ve been offering rent relief or concessions to struggling tenants, particularly smaller mom and pop owned stores.

The firm figures occupancy rates will drop to about what mall owners saw in Texas during the 1980s bust. If you're looking for investment advice, Green Street says buy Federal Realty and Regency Centers. Sell Equity One and Kimco Realty.

Guest blog from BusinessWeek Banking and Finance Editor Mara Der Hovanesian:

The mortgage brokers and the government are at each other's throats again. As soon as the Department of Housing and Urban Development issued rules on Nov. 17 about disclosing how brokers are compensated, the brokers' main trade group cried foul and filed a lawsuit.

A copy of the mortgage brokers' lawsuit can be found here, embedded in the National Association of Mortgage Brokers' Dec. 19 press release.

The gist of the new ruling is disclosure: As part of a slew of mortgage reforms, HUD wants third-party brokers to reveal to homeowners just what their broker is getting paid for helping them with the loan. And the gist of the lawsuit is that brokers don't want to operate under different rules from those for other lending officers that are employed directly by the bank. For a copy of the HUD rule look here.

This battle has been going on for a decade. Brokers claim that they do lots of heavy lifting for potential homeowners to get them into a home--especially those with few resources to pull together for down payments and closing costs. Brokers can help finance these costs through what the industry calls "yield spread premiums," or commissions they earn that are paid by the ultimate lender or financer of the loan, either a traditional bank (or in the boom years, Wall Street). These sorts of commissions and deals are not struck with employees of the firms and so bank employees are not subject to HUD's new disclosure rule.

In many of the interest-only and other wildly popular low-cost loans of the last housing boom, almost all of a mortgage broker’s commission compensation came from the YSP. But some officials and class-action lawyers think that the YSP is a violation of lending laws because it constitutes a kickback, which is illegal. Brokers say that the fees they get are permissible because they are earned for hard work.

The problem is that many of the low-cost loans that mortgage brokers helped to originate in the past few years are exactly the loans that are in the worst shape these days. NAMB president Marc Savitt argues that the new ruling hampers small business in America because it will be onerous for these independent agents to comply with the law.

The mortgage brokers and Savitt need to get with the program. Everybody under the sun associated with the mortgage lending business will be under far more scrutiny and regulation going forward, and for obvious good reason.

My friend Bill is always complaining that he should have stayed in the Army. He would have had such a better life, cared for by the government, he says. Now in his 40s, he lives in his parents home again in Boston. Then I got the notice from a company called Balfour Beatty Communities, a private sector company which manages residential units on military bases. That's one of their properites in Fort Eustis, Virginia above and Jacksonville below. Wow!

Expanded construction budgets have greatly improved family housing at many military bases, the press release read. It went on: At Marne Point, a garden-style apartment community that will be Balfour Beatty's first apartment complex to provide military housing for single soldiers, the $37 million complex feature private bedrooms and baths, full kitchens, and living rooms. Every apartment has a private entranceway, and is equipped with a walk-in storage closet and washer and dryer. Nine-foot ceilings provide an open, airy feel. Marne Point will also include a community and recreation center with a clubhouse, full basketball court, heated pool, car wash station, and running trails.

Maybe my friend Bill was right.

Ratings agency Standard & Poors has more bad news for homebuilders. The firm expects their results to keep deteriorating and has 18 of the 22 companies it follows on watch for possible downgrades. Three others are in default. Only one, NVR, has a stable outlook.

New home deliveries for the group fell 33% in November. The average sale price fell 9% to $273,000.

“We believe that new housing starts may bottom out this quarter at their lowest levels since the end of World War II, but that excess supply and weaker demand will continue to push prices down through the middle of next year,” analyst James Fielding says.

If you want to brighten somebody’s holiday, visit a new home showroom.

An article from the January edition of Reason Magazine caught my eye the other day. It shows just how far out of whack home prices had gotten. Editor Tim Cavanaugh writes that “Comparing data from the U.S. Census Bureau and the National Association of Realtors, a house today costs four times your annual salary. Ten years ago it cost only three times as much. In 1988 it cost twice as much; in 1978, less than twice as much."

The day before I read that I had got an email from Rob Jenson, a Realtor in Las Vegas whom I've found is very honest about the crummy state of the market. His email was titled "The moment we've all been waiting for," and it went on to say "You can finally buy investment properties and get a Positive Return on Invesment!"

He didn't elaborate on the math but I'm sure he's right. Prices in Vegas have finally fallen to the point we're buying actually makes financial sense.

I went to a bank-owned home auction run by ValueHomeAuctions.com on Saturday. The event, in downtown Los Angeles, started at 9:30 and it was only half-way done when I got there two and half hours later. They were auctioning off over 140 homes.

Compared to an auction I went to earlier in the year, this one had probably half as many people. And there was no free coffee! This event had cheerleaders though--well they were auction house employees clapping on the sidelines during the bidding to get folks fired up.

Just to make it clear, these are not sheriff's auctions where people lose their homes to the bank. These are homes that have already been foreclosed on. Typically the bank has tried to sell the property through local Realtors and unable to do that now just wants to get rid of it.

Another thing I noticed about this event was much lower prices. Six months ago homes at the auction I went to were selling for about 60% of the "previous value" which is typically what the bank had last listed it when it was trying to sell it through a real estate agent.

Here are some of the prices I saw:

A five bedroom home in Norco, Calif., way out east of L.A., had a starting bid of $136,000 and sold for $390,000. It was previously valued at $990,000.

A three bedroom, three bath in Menifee, again one of the those far out but still nice Los Angeles suburbs, went for $130,000, twice the starting bid of $58,000 but about one third of the previous value of $431,000.

A four bedroom house in Hemet, again one of those far east suburbs, went for $125,000, twice the starting price of $54,000 but one-third the previous value. You see a pattern here?

Although I didn't inspect any of the above mentioned properties they all looked like fairly decent houses, built during the boom and bought by people who for one reason or another, couldn't keep them. That's the house in Hemet in the photo above.

By the way, today's Los Angeles Times has an article about how the state is--for the fourth year in a row--seeing more people leaving than moving in. A trend entirely related to what I saw on the auction floor.