Excellent article in the New York Times describing how United Airlines’ pension scheme was effectively destroyed (along with many others as we will discover in the future). Short summary: Wall Street persuaded the trustees to invest in stocks, instead of the traditional matched-maturity bonds, and then reducing contributions based on the assumed higher returns.

How Wall Street Wrecked United’s Pension

Definition of a market bubble from Robert Shiller: “A market situation in which news of price increases spurs investor enthusiasm which spreads by psychological contagion from person to person, bringing in a larger and larger class of investors, who, despite doubts about fundamental value, are drawn to the investment partly through envy of others’ successes and partly through a gambler’s excitement.”

From the eponymous piece by David Rosenberg of Merrill Lynch:

• Real estate has accounted for 70% of the rise in household net worth since 2001.

• Over 40% of private-sector jobs created since 2001 have been housing-related.

• Excluding housing, real final sales slowed sharply in the first quarter of 2005 to a 2.4% annual rate, from 3.2% in the fourth quarter and 4.9% in the third quarter, of 2004.

Under the heading “Over-leveraged,” he points out:

• Subprime market has accounted for a 28% share of new mortgage funding in the past six months (vs. 5% five years ago).

• The Fed’s loan-officer survey shows that mortgage standards have eased a massive 13 percentage points in the past three years.

• An estimated 42% of first-time buyers made no down payment on their home purchases last year.

• In the hottest price areas, adjustable-rate mortgages (ARMs) now account for over 50% of new mortgage originations.

• Over 60% of new mortgage loans in — where else? — California this year have been in interest-only loans or option ARMs.

Under the heading “Affordability Stretched,” David notes:

• According to the FDIC, 38 of 50 states in the past year have seen home- price appreciation far outpace personal incomes — and nationwide, home prices grew 6.7 percentage points faster than incomes.

• From 1955 to 1995, home prices rose with inflation, or basically 0% in real terms. Since 1996, home values have risen 45% in real terms. End result: a $5 trillion increase in housing-bubble wealth.

• Over a third of homeowners are devoting over a third of their income to monthly mortgage payments; 12% are devoting over half their income.

• Homeowner affordability is now at a 13-year low and total household debt-service ratio in the first quarter hit a peak 13.40%.

• Oversupply may be a looming risk to prices — housing starts at two million units per year are now outpacing new household formations of 1.6 million. Could the excess supply, David muses, reflect speculative buying?

• And, finally, under the heading “Speculation Rampant,” he ticks off the following:

• National Association of Realtors data show 23% of home sales in the past year were “investor” (read: speculative) based; another 13 were second property.

• A proxy for speculative buying, he reports, namely units sold but not yet started, are up 47%, year over year, a record high. Nearly one in four Americans polled in the University of Michigan Consumer Confidence survey believe that now is a good time to buy a home because it’s a good investment and/or prices will continue to appreciate. That represents a 25-year high in bullishness.

• His research shows that 60% of the country is currently in a housing bubble (where the ratio of house price to income is greater than one standard deviation from the historical mean). And that includes the Northeast, the Pacific Coast and any number of pockets in between.

• He calculates that a decline from double-digit growth in home prices to no growth would trim at least 1% from GDP next year (which, he reports, is the current experience in the U.K.). Of course, if we might put our two cents in here (that’s all we have on us on us at the moment), such a drastic change in the trend of housing prices would reverberate through the length and breadth of the economy, and its real effects would be as profound as they are unfathomable.

Flippers sue Pulte

“Jason Beaver of San Francisco followed some untimely advice from a friend who’d made a hefty profit flipping homes in Las Vegas.

He paid $350,000 for a three-bedroom, 1,500-square-foot new home in the Solera subdivision of Anthem last September, just weeks before the builder, Bloomfield Hills, Mich.-based Pulte Homes, lowered prices in several communities across Las Vegas Valley.
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Pulte and a handful of other builders had to lower prices in response to an increase in inventory, which had slowed demand for new homes and curbed runaway appreciation rates that led the nation for the second and third quarters.

The business decision sparked a class action lawsuit from people who closed escrow on Pulte homes between Aug. 1 and Oct. 1, about two-thirds of them investors. Pulte cut prices by as much as $100,000 on Oct. 2.

Beaver’s home dropped in price to $280,000. He’s unable to cover his mortgage with the $995 monthly rent he collects from the home.”

Clearly this is the wave of the future. Frustrated flippers will turn on sellers in an attempt to recover their losses. This could be bigger than asbestos or tobacco for the plaintiff’s bar.

The “for sale” inventory in Las Vegas MLS has grown from 16,346 on May 24 to 19,969 as of yesterday.

Rich House, Poor House. Financial guru Robert Kiyosaki has turned bearish on the boom he helped create

“But now, in the past couple of months, the man — whose engaging financial parables have coaxed millions of ordinary under-earning boobs (including yours truly) into the real estate market — has become a major bubble-blower. On richdad.com, which contains a forum for his casual and dedicated followers (including those who pay $100 a year to join his “INSIDERS” club), he’s begun posting articles that caution against what might be called “surreal estate exuberance.” He cites the Economist at length, including the assertion that “the global housing boom is the biggest financial bubble in history.” He confesses that he’s currently dumping real estate that produces no cash flow (from rental income) and going “long on gold and oil.”

Curious about why one of the foremost real estate boosters had begun to sound like a survivalist in the Utah desert, I caught up with Kiyosaki by phone at his home on Waikiki Beach.

“Don’t get me wrong, I’m still buying real estate,” he told me, adding that he was in the process of buying seven new properties but that he wasn’t buying anything in expectation of appreciation. “I’m an investor, not a speculator. … I want it to cash flow.”

He knows that many others have not been so prudent. “I’m worried about people using their houses as ATM machines,” he says, referring to those homeowners who have refinanced their homes to buy cars, remodels or simply more real estate. “And I’m worried about all the people who are flipping properties [those who buy properties in order to immediately resell for a profit] — that’s really stupid right now.”

But didn’t his books — despite all their sound financial advice about reducing liabilities and increasing assets — probably help fuel this real estate craze?

“I think it’s so,” he concedes.

To be fair, Kiyosaki hasn’t recommended that people leverage their homes for real estate riches. One of the key tenets he hammers away at is that a home is not an asset but a liability. “A lot of people think of their homes as real estate,” he says. “I don’t play games with my home. I own two houses and I’m very attached to them, but I don’t get attached to my real estate investment. It’s just ‘Show me the money’ — if it doesn’t cash flow, then I sell it.”"