Wednesday, April 25, 2007

Same Coin, Different Sides



Two great headlines appeared on my Bloomberg in the last 24 hours.

The first came yesterday—Spain's Property Stocks Drop on Concern Bubble Burst—above a story carrying a rather stark reminder that all Bubbles end badly:

Spanish real-estate and bank stocks tumbled on concern the country's property boom is imploding.


Inmobiliaria Colonial SA dropped as much as 22 percent and Grupo Inmocaral SA fell as much as 19 percent in Madrid, leading the slump by developers of homes and offices. Banco Bilbao Vizcaya Argentaria SA, the country's second-biggest bank, declined as much as 3.2 percent on speculation bad loans will rise.

Inmobiliaria Colonial, S.A. "purchases, constructs, sells, and leases all types of real estate properties. The Company operates primarily in Barcelona and Madrid. Inmobiliaria Colonial owns 40 buildings, of which 38 are office buildings."

Grupo Inmocaral SA does basically the same thing.

And, as in the manner of all good Bubbles, the fates of Grupo Inmocaral SA and Inmobiliaria Colonial, SA are inextricably linked, because the former bought most of the latter just about a year ago.

Now, we all know that the Spanish Property Bubble is a unique situation entirely based on strong fundamentals that will never change.

Nevertheless, investors in both Grupo Inmocaral and Inmobiliaria, as well as the banks which have loaned them money to buy all those wonderful buildings, might want to read carefully the second great Bloomberg headline of the last twenty four hours, as well as the story beneath it, for a sense of things to come.

Subprime ‘Liar Loans’ Fuel Housing Bust With $1 Billion Fraud

April 25 (Bloomberg) -- Cheating on mortgage applications is so widespread and so seldom punished that it's fueling an increase in foreclosures that will prolong the housing slump, said Robert W. Russell, counsel to the director of the Office of Thrift Supervision, which oversees savings and loans.


Borrowers and brokers commit fraud when they exaggerate the applicant's income, qualifying the borrower for a home he otherwise couldn't afford. Such fraud robbed lenders of an estimated $1 billion last year, according to data collected by the Washington-based Mortgage Bankers Association and the Federal Bureau of Investigation.

``Misstatements about employment and income are being made every day,'' Russell said. ``The brokers are just putting down on paper what the underwriters would require. There are borrowers providing false information as well.''

What do the excesses of one property bubble have to do with the other?

Everything, I think.

Google “Spain property bubble” and you get 1.75 million search results. Google “Spain property collapse” and you get 1 million search results.

My bet is that ratio is about to flip.



Jeff Matthews
I Am Not Making This Up


© 2007 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


4 comments:

whydibuy said...

True, this real estate bubble we've experienced seemed to be heavily fueled by everyone from the mortgage brokers to the appraisers to the homebuyers screwing the capital lenders with BS info. It makes me wonder how long a lending system can continue to function under those kinds of conditions. Yet at the same time I'm reading about the fraudfest in real estate, I read money mgrs like Ken Fisher dismiss the bubble as media hype. Hard landing? Soft landing? He says there won't be any landing whatsoever. I certainly respect guys like him but to say that the contraction in available credit won't affect housing I find totally delusional. By his logic, requiring people to pay cash out of pocket would not affect pricing. Pu-Leeze. Or Seth Glickenhous who back in the fall in a Barrons article laughed off the housing bubble talk with the comment, " you would have had to have been on another planet not to hear all the talk about the housing bubble" . He was considering the mortgage lenders then as a contrarian play. I guess he was on another planet to not see the crap happening before his eyes. I respect these guys but when I read stuff like that, it sure makes me think we're a long way from the washout bottom. If they're blind to it the guys actually lending money out at banks and HF's probably are too. This subprime stuff reminds me alot of the junk bond times of Mike Milken. Sure, subprime before the elimination of any and all standards was not overly risky. Just like junk bonds pre milken were not that bad as shown by historical returns. Only Milken redefined what a junk bond was. Junk in the sense of high probabilty of default. Just like the subslime mortgages put out since about '01.

Babak said...

Jeff,
the implosion in the Spanish real estate equities sector was ignited by Astroc (which did a fishy related party transaction to juice their profits).

The actual real estate market (as opposed to the equities traded on the Mercado Continuo is doing just fine.

The price rises have moderated but things are humming along. Most people who call for a 'bubble' implosion in Spain's property market are standing far away looking in without really understanding the nature of the country nor what is driving the demand.

There may be further mellowing but I really doubt there will be a 'crash' in real estate prices.

Lee_D said...

So Babak, what you're saying is that I shouldn't get my hopes up on swinging a firesale pricing deal on a little place in Ibizia?

Aaron said...

to whydibuy:

"...but to say that the contraction in available credit won't affect housing I find totally delusional."

I am in complete agreement with you. My thinking here is that a tightening of the credit markets for existing and potential homeowners will limit the availablility of HE loans to tap out equity and drive consumer spending. This is especially true if existing home values decline as sellers put their homes on the market to compete with newly built homes (hello, Lennar)!

When you think about it, economic growth lies with consumer spending, not business spending with their capital outlays for computers and other technologies.

My opinion is that the subprime loan fiasco will cause a slowdown in consumer spending and, ultimately, slow economic growth in the US to around or less than 2% (but I could be wrong!).

P.S. - Respectfully, however, I have to disagree with your opinion that junk bonds are/were like subprime mortgages. Junk bonds are a way for companies with poor credit quality to obtain needed cash from institutional investors looking to maintain their operations.

Junk bonds also alllowed Mr. Milliken to engage in mergers and acquisitions that he would not have otherwise been able to accomplish with investment bank loans.