Are Home Loans Being Diverted to Builders?

A nasty corollary of cheap loans is that instead of funding the dreams of home owners, the loans are being diverted to builders and developers. This could be another reason why builders can continue to hold on to inventory, resulting in huge developments priced at inaccessible costs.

Take the Nahar group for instance, which has entered in to an agreement with HDFC to pay a home buyer's EMI until the time the flat is constructed, which takes about 2-3 years. You pay the 20% down payment, and they pay the EMI for 3 years. Nice idea, except we do not know if the flat which you are paying for is actually worth the price. Remember there are no free lunches, and hence all the costs are written in to the deal.

This is similar to what triggered the US boom in real estate, when loans on exhorbitant properties were sold to those who could ill-afford them in the long run. Who says we do not have a subprime crisis looming?

This specific case of Nahar, simply means, HDFC funds the construction of the building by paying the money upfront to the builder, which borrows money at home loan rates meant for individual home buyers. This means the developer itself has become a home buyer in its own construction.

Completely laughable! In any other business, Nahar would be paying at least twice this interest rate. As I see it, this is a clear loophole, which many developers in connivance with banks are exploiting. The Raheja and Nirmal groups are also reported to be using this route to fund their projects, in which they are offering to pay the EMI for potential home buyers.

Wake up, Mr Chidambaram!

Read reference story in DNA

Realty: Greater Fool Theory in Slow Motion

Ever wondered why rates of homes are spiralling each month, despite large tracts of buildings remaining unoccupied? Several like Keki Mistry, MD of HDFC, say prices in India are 3 times more affordable than in the US and around the world.

Basically, has Mr. Mistry lost his nuts?

I have friends who earn more than Rs 25-50 lakh a year, and yet cringe at paying an EMI of Rs 1 lakh a month. And as someone said, try getting a 800-square feet home in Andheri and Goregaon (suburbs of Mumbai) for less than Rs 60 lakh (Rs 6 million).

Everytime, the markets go up, Mistry and others talk of these ubiquitous genuine buyers driving up prices. This is definitely not true, because these so-called genuine buyers have themselves become speculators.

The second reason they give is that the arrival of cheap home loans have made housing more accessible. This is indeed true, yet, not completely responsible for this manic rise of 300%.

Contrast this to 1995. There were no home loans then, yet prices were driven up to what they are at current levels in India. Then came the huge fall where a correction went to almost 50-60%, and during this time, home loans were amply available; yet they did not take the market up. So somewhere we are missing out an important fact.

Fact is, real estate is not being driven up by availability of cheap home loans or genuine buyers, but by the same bunch of speculators/investors who buy "call options" on homes - i .e. they book 100 flats by paying the price of one flat at booking time. A month or two later, the building is advertised to retail buyers. When these buyers approach the builder, they are told that the project is already full, but a flat is available only on resale.

However, retail buyers, either driven by desperation for a home, or by sheer desire to make capital gains on a perpetually rising-in-value asset, are forced in to a purchase. It's the greater fool theory, in slow motion. This cycle was excellent as long as speculators could access easy money from the profits of stock markets and pump it in to real estate.

However, this cycle now has faced a massive discontinuity -- the effect of which will become evident in April 2008. Huge losses in the stock markets and the subsequent broker payment crises of January 2008 will rear their ugly heads on these housing industry speculators at the end of March 2008.

In May 2008, professionals will see their salaries cut, as is evident in the IT industry, which will turn in to less demand for new rentals and home purchases, since professionals buy homes in the May-June timeframe, after looking at their raises and perks in March.

The next year, we will bear witness to a painful downturn in real estate prices, as current projects will experience a massive slowdown.

An interestin phenomenon in the US is the emergence of "ghost towns", where large swathes of row houses and condiminiums have been abandoned by buyers who cannot afford the EMIs any more, as they see the cost of their homes fall to half of what they were when they purchased them. I will not be surprised to see this phenomenon here in India too. In the 1995 boom, we did not have massive projects like townships, cities etc. Today in 2008, real estate companies, flush with funds, are developing entire cities and towns.

The main indicator is the advertisement of BL Properties of the UAE, which was advertising its Lakeview project in Mumbai newspapers. These chaps are selling "Ajman" a desolate emirate in UAE as a potential suburb of Mumbai. Now, I have heard of good salesmen selling snow to the Eskimo and sand to the Arab. However, this is the first instance of me seeing an Arab selling sand to an Indian. As I see it -- either Indians are super rich, super fools, or the real estate market has truly hit the peak.

Sex, Drugs and Ticker Tape - In(Fidelity)!

* A trader at Fidelity used a broker to buy 8 million shares in Tyco International days before the broker flew him on a private jet to the Super Bowl in Houston in 2002. The trades cost the Fidelity funds as much as $18 million.

* A former Fidelity trader received ecstasy pills and marijuana from brokers on " a number of occasions,' and had his bachelor's party in Miami funded by brokers. The three-day party cost brokers $160,000.

* Another former Fidelity trader took 24 trips in which brokers covered most expenses, including two first-class flights on the supersonic Concorde airliner.

The US Securities and Exchange Commision (SEC) has nailed Fidelity Investments for accepting gifts worth over $1.6 million from brokers angling for business.

The case indicted, among others, vice chairman Peter Lynch for accepting tickets for concerts, theater and a Ryder Cup golf tournament, while head trader Scott DeSano was hauled up for turning a blind eye to his traders' misdeeds.

The 3-year old case was settled for $8 million has seriously dented Fidelity's image which promotes itself as a company that protects the interest of its fund investors . Instead, it now appears that the tentacles of brokers have penetrated even this hallowed precinct.

SEC said that Fidelity's traders were shipped out in private jets to holiday locations that included Mexico, Bermuda and Las Vegas (USA), where they were entertained with female escorts, - basically means sexual activities - supplied with Ecstasy pills - an illegal drug that heightens feelings of euphoria and love.

Lynch, 64, the former manager of the flagship Fidelity Magellan fund, admitted to have received free tickets to concerts, theater and sporting events from Fidelity's traders, according to the SEC. He agreed to forfeit more than $20,000, representing the value of the gifts, plus interest.

Lynch, however said in a statement yesterday that he had asked the trading desk for "help locating tickets.'' Events included performances of " Nutcracker'' and the " Lion King.'' He also got 14 three-day passes to the Ryder Cup golf tournament at the Brookline Country Club in suburban Boston, where he had once been a caddy.

"I never intended to do anything inappropriate, and I regret having made those requests,'' Lynch said. He never worked on the trading desk and hasn't placed trades on behalf of Fidelity for 17 years, he said.

Fidelity has over $1.6 trillion as funds under management and serves 24 million customers.

Read the original SEC press release here

Read the Bloomberg story here

Read about Peter Lynch here

A Healthy Respect for Risk

Before entering any investment, you should ask yourself these four questions:

1. How much profit can I make?
2. What is the maximum loss I can take?
3. What what point will I get out if I am wrong?
4. When should I take profits?

Source: The Options Course, George Fontanils

The Final Trump Card

A lot of hoopla surrounding inflation, a slowing economy in the US, and what not. Many astrologers predicting planets that point out to difficult times ahead. All of this is possible.

Can someone please come up with an analysis on what would happen if Bush ended the Iraqi War and called troops back to the US.

Would this be his final trump card? What would the implications be on oil, gold and the US dollar? Would world markets react positively to this?

What would the Democratic positions be on the Iranian oil bourse which was slated to be launched in February but we hear nothing of anymore, since those Middle Eastern Internet cables were cut. Would Barack Obama (should he win) make peace with Ahmadinejad and convince Iran that the dollar remains the currency for oil trade. Should this happen, what would be the repercussions?

I am surprised that we never have considered the fallout of the end of the Iraqi war, although both Obama and Clinton have vowed to do this if elected to power.

I think we need to have some discussion on this too, besides Jim Rogers castigating Bernanke and others merely following suit.

Mr. Rogers, please.

Guidelines for Successful Trading

Achieving trading success is not easy. In fact, just getting started can be an overwhelming process. The road to wealth can take many paths. Successful traders only use the funds that are readily available and can be invested in a sound manner.

Respect the following trading guidelines:

1. Gain the knowledge to succeed over the long run.
2. Start with acceptable trading capital.
3. Establish a systematic approach to markets.
4. Be alert for trading opportunities at all times.
5. Develop the fine art of patience.
6. Build a strong respect for risk.
7. Develop a delta neutral trading approach.
8. Reduce your stress level.

(Source: The Options Course, by George A. Fontanills)