march 2008 charleston market report

8/9/2019 March 2008 Charleston Market Report

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www.charlestonmarketreport.com

March 2008

Hola! I hope everyone is having a good month. Regarding the quotes above. I think I should get to brag a littlebit. I took a bunch of crap for these quotes back in the day. I have been more accurate than many of the talking

heads on CNBC. Maybe one day I will get to go to NY and hang out it with the CNBC babes Erin Burnettand Trish Regan. :)

Well there are certainly not any dull moments in the current real estate and financial sectors right now. Sometruly amazing collapses are occuring at this very moment. I am going to try and cover the highlights of the pastmonth in the newsletter and give you mine and some others perspective.

Please remember this newsletter can sometimes be a little edgy and sarcastic. During these tough times I thinkit is important to laugh and try not to take life to serious, although that is difficult for many. This is my writingstyle. If I offend a company you work for or with please do not take it personally. Besides if you work for alarge institution they really do not care about you anyway. All the "top dogs" care about it is the stock price and

their compensation. There is no loyalty, gold watches and pensions left in corporate America anymore.Look out for yourself and your family first. Have a backup plan ready in case you get canned. Many companiesare sharpening their scissors right now and some of you may get cut. The minute you get a pink slip and nolonger receive a paycheck how loyal are you going to be anyway?? Just food for thought.

We sure do live in a crazy world awash in hypocricy. Amazing what happened to Elliot "I am aSteamroller" Spitzer. I have an old saying that "What comes around goes around." He was hated on Wall St.with many enemies and it is obvious somebody took him down. Trust me, it was not a coincidence he gotbusted. He intentionally ruined many people's reputation who did not deserve it.


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The Fed

I want to talk a bit about what the Fed and Ben "Bunyon" Bernanke are up to these days. The action of The Fedis very important to all of us. Whether you work in the financial or real estate industry or not the monetarypolicy has a major impact on our wallets and pocket books. For whatever reason our government shifted from astrong dollar policy during the Clinton years to a weak dollar policy during the Bush years. I am personally fora strong dollar policy and you should be as well. The weak dollar policy, which is exacerbated by The Fedcutting rates so aggressively, is causing the following problems* Inflation, which is an invisibile tax on the lower and middle class.

* Higher oil prices and higher commodity prices.* Falling Dollar....U.S. cash is becoming Trash* All institutions are looking for a handout, which results in a bailout at taxpayers expense.


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I would like to see the Fed stop cutting rates but I doubt that will happen. The recent actions of the Fed is clearthat they are doing everything possilble to save their banker buddies. I would like to see the free market workout the problems which is wishful thinking. The Fed seems very focused on doing everything possible to bailout the banks. They are behind the curve and are merely creating other problems in the economy with theircurrent policy. The bond traders are not buying their cure for the economy, which hurts the housing marketeven more.

I would like to see the Fed abolished, banned, shutdown! They are destroying the economy.Some key points from Jim Rogers, one of the brightest minds on Wall Street:

In the 1970s, the Fed printed money to avert a recession, boosting inflation and then forcing interestrates to more than 20 percent to keep a lid on price rises.

"No country in the world has ever succeeded by debasing its currency," he said. "That's what this man istrying to do. He's trying to debase the currency as a way to revive America. It has never worked in thelong term or the medium term."

Investment Banks should be allowed to fail. "If you bail out every investment bank that gets in trouble, that's not capitalism, that's socialism for the

rich." A recession may be a good way to clean up the economy, while trying to prevent one may cost more and

actually worsen the recession.

Let's take a look down Memory Lane and let me remind you what these Academics have been up to recently.


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**A 75 to 100 bp cut is expected at the Monday, March 18th meeting of minds at the Fed.

The Fed Funds Rate was cut down by "Bunyon" Bernanke by 225 bps from 5.25% to 3% in eight months! Let'snot forget The Fed introduced the "Term Auction Facility" or TAF in December 2007 which allows for theperiodic auction of funds to depository institutions in exchange for a wide variety of collateral. These auctionsstarted at $20 billion and now are up to $100 billion. Then the Fed created the TSLF or Terms SecuritiesLending Facility which will allow major Wall St. firms and banks that trade directly with the Fed to conduct upto $200 billion in new transactions. This is what was just recently used for the Bear Sterns Meltdown.

My question is how many Printing Presses do they have in D.C. to keep bailing out these banks for crying outloud! Just let them fail! Why do the banks get special treatment for being so RECKLESS???? Somebodyplease tell me. How about it BofA, Wachovia, etc. What do you have to say about all of these writedowns andbailouts? Do you want me, the readers of The CMR and the rest of the taxpayers in this country to bail your

asses out for having poor risk management?


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Lending Bubble? I Thought it was Contained.

Folks, the scary part of this entire "Lending Bubble" is that we are only maybe halfway through it if we arelucky. Why you may ask? Because the de-leveraging process is a slow and very painful process. Here is thecurrent tally of the worldwide bank blowup I created this chart from the Bank Implode Meter website. As oflast week the total was $190 billion, with a B! The writedown mess will go over a Trillion dollars after all theseinstitutions come clean and tell the truth what is actually on their books. It will take time since many of thesecompanies are very good at hiding the truth and cooking the books.


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So many of you are probably asking yourself, "What is the solution to this mess." The best solution I have seenwas published by Caroline Baum of Bloomberg. Here is an excerpt of what she calls The Jon Galt Plan:Galt, the hero ofAyn Rand's magnum opus "Atlas Shrugged," stops the world by going on strike. He and the"men of the mind" literally withdraw from the world after watching their wealth confiscated by the looters (thegovernment).Toward the end of Rand's 1,000-plus page novel(or polemic), the economy is in shambles. Desperate, the

looters kidnap Galt and prod him to "tell us what to do."Galt refuses, or rather tells them "to get out of the way."

Brilliant! Government is NOT the solution it is the problem. Isn't that normally the case, unless you are aSocialist??? Is this really a Democracy? Sometimes I wonder.


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Think Outside of The Box! (NO PUN INTENDED)

I have an idea for all of the developers out there looking for an idea to provide some affordable housing inCharleston and other inflated areas. These new "high rise townhometrailers" will allow you to truly maximizethe land and squeeze plenty of cash flow out of the deal. Once the sprawl and growth catches up toyour development then you can just clear this "New Highrise" away and build something which will best fit theHighest and Best Use of the property. Not a bad idea huh? Not sure how this would play out from the zoningangle. How about it Mt P?? We could put these on Shem Creek Park or put it where the Doggy Park issupposed to go near the future Waterfront Park near The Ravenel Bridge. I am kidding of course. :)

National Real Estate

I took the following commentary from John Mauldin's recent newsletter:


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Let's look at a chart courtesy of John Burns Real Estate Consulting. This shows that part of the bubble inhousing was in the number of transactions that occurred during the bubble years. In 2005 alone, there were48% more housing transactions that occurred than should have been expected based on historical averagesales per household. In large part this was caused by "investors," many of dubious financial strength, buyinghomes and condos on readily available credit with no real lending standards and no way to pay the loans if theywere not able to sell them at a higher price.

As a result, there are now 3.5 million excess homes that need to be filled by qualified homeowners. Over time,

due to growth in the population, the demand will eventually catch up, but that will be a process of several years.Housing prices will have to fall by another 15-20% or so to get to a place where homes become affordable tothe marginal buyer. And that assumes rates can stay low.

Annual new and existing home sales are currently running at about 5.5 million. John Burns expect that will fallto about 4 million before we see the bottom of the market. Notice, in the above chart, the drop in sales after theincrease in housing sales above the trend projection in the 70's. We have a long way to go to correct the recentbubble, and Burns's research suggests that we will get there sooner rather than later.

But this means that home values will drop another 15% or more. Homeowners are going to see $5-6 trillion inhome equity vanish in the next year.** The important aspect of the chart above is to look at how the total sales moved away from the average

trendline. This really picked up steam around 2002 thanks to creative financing pushed by the banks andlenders. The top of the market clearly was late 2005-early 2006. What is even more interesting is that thisgraph is just about to break the historical average sales line in pink. How far will it go? Clearly we have notseen the bottom of the housing market yet but we are well on our way to getting to the bottom in 1-3 years if thelate 70s and early 80s are any indication.

Appraisal Industry

"In my opinion, 70% to 80% of appraisals that were done during the housing boom are probably not worth thepaper they're written on because the appraisers were rewarded with more volume,"said Jonathan J. Miller, aNew York appraiser and longtime critic of industry practices. He estimates that home values are overvaluednationwide by at least 10% because of inflated appraisals.


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Kenneth Harney wrote a good article about the proposed changes coming in the appraisal industry. This allbeing driven by Attorney General Cuomo from NY, Fannie Mae and Freddie Mac. I like the proposed changesbecause the mortgage brokers association hates them and The Appraisal Institute likes them. That tells me theirare some good control mechanisms in the proposal.

I actually wrote an article a long time ago (October 2006) about how the Appraisal Management Companieswork called, "Would You Like Fries with that Appraisal." Read it and it will give you a good idea of what BSthese Thrid Party Management Companies really are. The big banks that use them do nothing but take a third

of the appraisal fee to line there own pockets because the bank owns the TPMCs. Coumo's proposal should puta stop to this...we hope.

Banks Collapsing

Need a job? The FDIC is hiring in anticipation of bank failures.Article


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Once the de-leveraging process begins it spreads like a bad form of cancer. Nothing can stop it....not even thebest drugs in the world. So the Fed's medicine is a Printing Press....dollars.....liquidity for the banks. It is onlydelaying the cure which is let the market cleanse itself of the crap. I guesss the analogy would be "Let naturetake its course." Unfortunately, a great deal of money is lost in this scenario but the market can not go upforever. The following quote came from The Washington Post.

"The real problem began in late February, as several of Wall Street's biggest investment banks prepared toclose their books for the quarter and realized they were looking not only at big declines in profit from issuance

of new stocks and bonds and fees from mergers and acquisitions, but also another round of write-offs in thevalue of their holdings. In response, the banks began to hunker down, instructing their trading desks to raisemargin requirements for hedge funds and other customers, requiring them, in effect, to post more collateral ontheir heavy borrowings.Thus began a chain reaction in which hedge funds began selling what they could -- largely mortgage-backedsecurities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae -- to raise the cash to meet their newmargin calls. That wave of forced selling drove down the price of those bonds, which prompted more margincalls and more forced selling. By the end of last week, the interest rate spread on those securities -- thedifference between their yield and that of risk-free U.S. Treasury bonds -- had jumped four, five, even 10 timesthe normal rate."

Source: Steven Pearlstein - The Washington Post

Commercial Real Estate

The graph below shows the national path of office rents. While the CBRE/Torto Wheaton Research forecast for2008 shows growth that is relatively flat, that does not necessarily suggest, for a typical office property, flatincome as well. The reason is that tenants are typically shifting from leases signed four, five, or even ten yearsago. As the graph illustrates, this means that today a portion of an office building is seeing a 15% increase inincome on five-year leases, as a lease that was signed for less than $26 now garners more than $29. Even ifrents were to remain flat throughout 2008, a year from now, any portion of the building that saw a rent rollwould see a 26% increase on leases from five years ago. The change comes not from rents increasing, but fromthe timing of the cycle; rents bottomed out five years ago, September.

Furthermore, the acceleration of income growth next year (as shown in the graph) raises the probability that2009 will bring value increases. The fact that none of these incentives exist in the residential market is leadingsome to walk away from loans, adding to that market's distress.

It should also not be lost that, while rents are uncertain, a 15% decline within a year would be a very extremeevent. That current vacancies are low to average in the vast majority of markets makes such a decline nearlyimpossible. This is to say that the roll-up in rents is a near certainty, even if marginal rent growth is not. So, inthe immortal words of Jim Morrison, "Let it roll".

Source: Jon Southard, Principal, Director of Forecasting - Torto Wheaton Research


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Oil

On January 18, 2008 in the Q4 edition of The Charleston Market Report I made the prediction when a barrel ofoil was trading for $90.57 that it would hit $125 per barrel sometime during 2008. Unfortunately, we are 2/3sof the way to that price since I made that statement because it closed at $108.80 on March 11, 2008. The pricewill probably rise some more as we get closer to the summer and let's not forget hurrican season. The price ofoil like every other commodity is based on supply and demand. The OPEC Cartel is cutting production in orderto increase the price because of the falling dollar (Oil is priced in dollars on the international market). Also,there is a supply problem of PEAK oil in certain areas around the world. Add in the fact that India and Chinaare trading in their Rickshaws for cars and we have a genuine supply problem. So I would encourage you to

live within your means if you can not afford $4 to $5 per gallon for gas. I think they pay more than that inEurope...why should we be any different?

The graph below reminds me of the 70s. All we need is a President like Carter. Oh, I forgot we have GeorgeW.


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The Stock Market

It is clear we are witnessing a stock market where you have to play individual stocks and sectors to besuccessful. The generic Mutual Fund is not going to hold up well in this market. What we may be witnessingover time is the bottoming out of the stock market. The NYSE Bullish Percent, which is a measurement of theoverall risk of equities in the stock market, reversed to Os on March 10, 2008 . The pressure from institutionslike Bear Sterns collapsing and recessionary problems will put more downside pressure on the market. Think ofit as a great opportunity to buy some great companies on sale soon, but remember this is a process and will taketime. Patience is a virtue. Do not get caught up in the doom and gloom scenario the media tries to put outthere. Get with a Financial Advisor who understands risk management and you will be able to manage the

downside and make nice returns. If you want to learn on your own I suggest you start learning Point & Figuretechnical analysis from Dorsey Wright & Associates. It would be a great investment of your time if interested.


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It is very ironic that Baar Stearns grabbed the headlines on Friday and is on the verge of collapse. This wouldbe the equivalent of IBM going down the tubes. Bear Stearns has always had a solid reputation on Wall Street.Bear Stearns really got the lending debacle in the headlines when their hedge fund collapsed a couple of monthsago. My question is why would you put the word "Bear" in the name of a major Wall Street firm? That is justnot right.


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Now lets discuss this anatomy of a collapse. When you look at the Point & Figure chart of Bear Stearns it isclear this stock has been bleeding badly for a while. If you are long this company you should re-evaluate yourstock picking techniques because it is truly a falling knife. If you used technical analysis you would have beenout of this stock in November 2007 when the relative strength turned negative and it broke the trend line. Iwould have been out sooner than that based on what was going on in the mortgage lending world. You wouldhave gotten out of BSC around $100 per share. If you held on for a miracle in a sector and company withobvious lending and leverage exposure you simply got pummled. This is why I measure trends in real estateand stocks. It simply helps me manage risk and make better financial decisions. Would you rather sell BSC at$100 or own it at $30 or lower?? Not a very hard question but you would be surprised how many people arestill stuck holding this company because they are only assessing risk from a fundamental perspective. Theymay want to lock down the windows at the Bear Stearns building on Monday. It will not be pretty.


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Anatomy of a Collapse: Bear Stearns


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Charleston Market

Quote of the Month

Doug Holmes said the biggest issue affecting inventory levels is overpriced properties, and he partly blames theindustry for that. He also said the market's natural correction is being hampered by sellers who are only testingthe market and are asking too much."If Realtors and sellers continue to overlist properties, it's going to take us longer to get out of this," Holmes

said. "We can choose how long it's going to take."Souce: P&C "Number of Homes for sale Dips"Mr. Holmes, you must read The CMR. Great quote!

Mt. Pleasant gets voted 5th Worst Walking City

Come on Mt. P get your act together! This is unacceptable and just another example of the poor planning overthere. Heavy traffic, nowhere to walk, bribery, overpriced real estate, controversy regarding a Doggie Park,bored cops who do nothing but write speeding tickets...there is always some controversy going on in Mt. P.

(Hat Tip: Chile)


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Single Family Residential < $600,000


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Single Family Residential > $600,000


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Condo/Townhouse < $600,000


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Condo/Townhouse > $600,000

Thanks,brad


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Disclaimer

The research done to gather the data in The Charleston Market Report involves examining thousands oflistings. With this much data inaccuracies will occur. Care is taken in gathering and processing the data andinformation within this report is deemed reliable. IT IS NOT GUARANTEED. The real estate market iscyclical and will have its ups and downs. Past performance cannot determine future performance. The purposeof the Charleston Market Report is to educate you on current and consistent market conditions by reporting

leading market indicators with the support of traditional real estate data.

This information is offered with the understanding that the author is not engaged in rendering legal, tax or otherprofessional services. If legal, tax or other expert assistance is required, the services of a competentprofessional are recommended. This is a personal newsletter reflecting the opinions of its author. It is not aproduction of my employer. Statements on this site do not represent the views or policies of anyone other thanmyself.

Investing in real estate is not a get-rich-quick scheme nor is there any guarantee you will make a profit. Everyeffort has been made to make this report as complete and accurate as possible. However, there may be


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mistakes. Therefore, this report should be used only as a general guide and not as the ultimate source formaking money in real estate.

march 2008 charleston market report

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