‘Sharper Declines Than Expected’ For The Housing Bubble
Some housing bubble reports from Wall Street and Washington. “Federal Reserve vice chairman Donald Kohn said the US central bank must heed the lessons of the 1970s by keeping inflation and public expectations about inflation in check. Kohn said the US central bank had a key role to play in reassuring the American public that their spending power would not erode ‘unexpectedly.’”
“‘The lesson from the 1970s..is that an unchecked or permanent increase in inflation would only feedback adversely on demand for dollars,’ Kohn said. ‘Such an unmooring of the anchor of price stability could only elevate the odds on abrupt changes in interest rates and asset prices, instability in the US economy, and disorder in global adjustments,’ he said.”
From Ken Harney. “Wall Street is sounding the alarm on one of the most popular ways to buy a house in many high-cost areas around the country, so-called ‘piggyback’ programs.”
“As of July 1, the most influential ratings agency in the mortgage arena, Standard & Poor’s, has upped the ante for lenders who seek to fund piggyback deals through capital market financings. The move is likely to raise interest rates and fees for some homebuyers this summer, mortgage experts say, and could reduce the volume and availability of piggyback programs overall.”
“The reason for the change is that an exhaustive study of the performance of piggyback loans found them anywhere from 43 percent to 50 percent more likely to go into default than comparable stand-alone first-lien purchase transactions.”
“Piggyback plans were developed as a creative response to soaring home prices and borrowers’ desires to stretch their down-payment cash. According to a study, piggybacks quadrupled their market share between 2001 and 2004. In a sample of loans in California markets the percentage of piggybacks exceeded 60 percent in some cases.”
From Reuters. “The regulator for U.S. government-sponsored housing enterprises expects to complete talks on possible mortgage portfolio limits for Freddie Mac, by the end of July. Freddie Mac’s portfolio in May shrank for the first time in four months, decreasing by an annualized rate of 1.2 percent to $723.1 billion. The company attributed this to lower mortgage purchases due to reduced mortgage origination volumes.”
From Fitch Ratings. “Fitch acknowledges that Freddie Mac’s business strategy has been undergoing a gradual shift towards increased purchases of floating-rate and alternative mortgage products, reflecting the greater significance of private-label issuances in the secondary market.”
“Although fixed rate product still comprises over 60% of the total retained portfolio, the percentage of floating-rate product, particularly alternative mortgages, has been increasing.”
“Fitch expects the firm to expand its acceptance of alternative mortgage product and hedging instruments. The net interest margin may remain pressured with a flat yield curve.”
Also from Fitch Ratings. “While Fitch Ratings continues to project a soft landing for the U.S. homebuilding sector in the intermediate term, recent new home sales data and major builders’ orders, net of cancellations, have registered sharper declines than expected.”
“‘Increasing credit costs and the higher energy prices will take their toll, and revenue and profit growth among the major homebuilders should slow and most often mildly decline during the second half of 2006,’ said lead homebuilding analyst Bob Curran. ‘Despite steady Fed increases in short-term rates, which are likely to continue in the near term, U.S. interest rates remain below the historic norm and housing activity in the aggregate has continued moderately above trend.’”
‘U.S. interest rates remain below the historic norm and housing activity in the aggregate has continued moderately above trend.’
I read this as saying rates are going to continue up and the builders are putting up too many houses. Fitch must be getting a bit nervous, here is the title for a conference call next week:
‘Fitch Discusses Beginning of U.S. Homebuilder Contraction Tuesday 7/11, 11AM ET’
It’s not just interest rates but global liquidity. Probably a good helping from Japan. Fed needs to reign in liquidity (no chance in my opinion) besides raising rates. And then Japan needs to reign in liquidity (they’ve made a start).
The huge amount of 100% financing (80% first loan, 20% second loan) is the single most risky factor facing mortgages and real estate prices. Here in SoCalif, I do not know the percentages, but one I heard was 27% of purchases in 2005. If this is true, there is potential for big problems. Back in the early 90s, the loans with the highest foreclosure rates were FHA and VA loans, which were the only form of 100% financing (or close to it) at the time.
Try 53%, with a median down-payment of only 2%: http://www.usatoday.com/money/perfi/housing/2006-01-17-real-estate-usat_x.htm?csp=14
And this is a NATIONAL statistic. California is one of the most bubbly markets in the country, with some of the riskiest & most reckless borrowers.
Sorry, mistyped. That was “only” 43% of FTBs nationwide used 100% financing in 2005.
Thanks for the link–scary statistics.
Here is a primary reason there is a negative savings rate in the US! One of the primary traditional motivations for saving was to accumulate the funds to make a downpayment on a home purchase. Now that piggyback loans and other methods enable home purchase with 0% down, this incentive to save (and to thereby signal financial stability to your would-be lender) has been mothballed.
Downpayment funds whose source was from savings has been, for the most part, non-existant. The only people bringing in money to close are the ones who’ve been “trading up” and have funds from the sale of their previous homes. It’s been so long since I’ve seen a buyer come into my office with hard earned savings for a downpayment on a home. It used to be, and I’m going back years now, that I would get folks that would come in to qualify and their first question would be “how much do we need to save for a downpayment?” Those days are long gone. When I look at all the applications I’ve taken over the last few years, whether it be a purchase or refinace, it is truly amazing to find out what people have in their checking and savings accounts. Virtually nothing. I would say that over 90% of the people I’ve qualified aver the last 5 years live month to month.
If you do not think that our nation sits on the precipice of economic disaster, think again.
Thank you for your insight. I agree 100%. Additionally, REAL inflation has been eating away at our purchasing power, making it even more difficult to save. Look at all the people here who make over $100K, yet can’t afford to buy a simple house in a safe neighborhood. Look at healthcare costs (a BIG problem, IMHO), and education. I saw some recent figures for the cost of a semester in a state college…unbelievable. Wasn’t that way when I went to school, and I was making about the same (late 80s/early90s) as people would make in the same positions today. So goes the middle class…
Inflation by central bankers is deliberate and yes, it has been hard to save as the Fed hammered rates down.
UNH and UMass is around $8K in-state and add $10K for out of state. Add probably $10K for room and board. It’s a burden but much less than private schools.
When I went to college, tuition at a good private school was $3,500. I worked 20 hours a week and you could make a pretty good dent in tuition costs with a non-professional job.
My current car is over six-years-old. I went to the Toyota dealership and told them that I’d write a check for the car if they could give me the deal that I wanted. I also asked how many people pay cash and they basically said that noone pays cash.
I do know others with no debt (no mortgage and no car loan) and they are generally older and cheap like me. Or from other countries where people aren’t as optimistic as we are here.
Higher education has become a lie. We have allowed the state of our public high schools to deteriorate to the point that a high school diploma has become meaningless. College is now required to differentiate a high school grad from the masses of high school grads who didn’t earn their degree through academic achievement. Hence, qualification for non-professional jobs also includes the requirement for a college education. If you don’t believe this is true, look at the employment requirements for trivial government jobs. These jobs obviously don’t need expansive, well rounded thinkers, but as an absolute requirement of employment the job seeker must have a degree.
The rapid increase in tuition is not an indication that the economy is more reliant on a well educated populace. The rapid increase in tuition is bases on the fact that more people see this as the only way to qualify for positions that really don’t need that level of education.
Brains, a good work ethic, and experience should be enough to get you ahead in life without mortgaging your future to acquire a degree of dubious value.
“While Fitch Ratings continues to project a soft landing for the U.S. homebuilding sector in the intermediate term, recent new home sales data and major builders’ orders, net of cancellations, have registered sharper declines than expected.”
Really? Funny, but I’m willing to bet that regular readers of this blog expected precisely this outcome….
I was listening to the news on the radio this morning. Retail sales were down in June, and the commentator was surprised. Really? Let’s see, HELOCs are more expensive now because of higher interest rates, so the “housing ATM” is empty. And those same higher interest rates are making it more difficult to keep up the minimum monthly payments on credit cards, which means that smart people are purchasing less with their credit cards. But somebody on the radio this morning was surprised to discover that retail sales were down in June….
negative savings has direct correlation w/ MEW. you will start to see better savings % in future.
Here’s the quote that says it all from your link:
“If we do get a spike in mortgage rates, and a modest decline (in the housing market) turns into a rout, there’s almost no bottom to that,” Baker says. “That’s a crash scenario.”
The way people have been borrowing virtually GUARANTEES this scenario. When the marginal homebuyers (markets are made on the margin) to the tune of $2.5 Trillion of a ~$8 Trillion mortgage market are going to have their ARMs adjust to market given what short term rates have done in the past 24 months, that is essentially a “spike” to those borrowers. And as foreclosures rise in frequency, the psychological change to move away from ARMs occurs, there will be a further “spike” in rates for those in the market to buy.
Given the aggressiveness of borrowers, we will see the “spike in rates” scenario, even if the 10-year stays at 5.2%.
[NAR President Thomas Stevens says he isn't worried that nearly half of first-time home buyers put no money down, but adds, "If the number was higher than that, I'd be concerned."]
Sharp guy! If he’s the president and David Lereah is the chief economist of the NAR, you don’t need to wonder a lot about the standards of the organization. What a buffoon.
I 100% agree. S&P is *smart* to start flagging these 100% loans as riskier. Although, this is closing the barn door after the cows got out… probably a bit of CYA.
Neil
Something like 3/4ths of the buyers in San Diego last year used ARMs or worse. Or worse; I/O. NegAm, intro rate, hidden seconds, 100%+, etc.
I got an offer in the mail yesterday to refinance to a %2.56* (I think it was) interest rate and I could even get cash back!
* %2.56 interest rate good for first 30 days of loan.
“hidden second”? I’ve never heard that one before. Google doesn’t give me a good answer either. Can you define it please?
The two most common; Seller carrying back private paper and Parents “gifts” that in fact need to be repaid. There’s no end to hiding housing debt as other things.
This past three years has been like watching paint dry, ever since I went short housing and long precious metals, but articles like these prove that “progress” is being made.
It is kind of eerie that after reading all sorts of great commentary on this blog and elsewhere, and all the anecdotal evidence, that what we have been predicting is actually happening.
Right now has got to be the calm before the storm. “It’s quiet - too quiet”. I fear something real bad is going to happen in the next few months, like another 9/11, or a global outbreak of H5N, etc.. If nothing happens, then the real carnage in real estate and in financial confidence that starts this fall will unleash an awful lot of pent up frustration and anger upon the powers that be.
I’m not a conspiracy theorist, just an observer of facts. Fact is that 9/11 and the war on terrorism sure did a lot to distract folks from the fact that $8 trillion in shareholder equity passed from the weak hands to the strong hands after the market peaks in early 2000.
What will serve as the distraction away from many many more trillions lost in real estate equity?
How about North Korea firing a couple of scuds into the ocean…
If that doesn’t work, we’ll revisit the civilization-destroying effects of gay marriage.
or bombing Iran
For a scary scenario of how this might play out, check the Global Guerrillas blog…
http://globalguerrillas.typepad.com/
terrorists were caught trying to blow up the Holland Tunnel and flood downtown NYC Katrina style today:
http://tinyurl.com/hdznz
Funny. I wonder why the North Koreans launching a few crappy missles into the ocean is such a big deal. Even if that crazy little bastard could create a missle which could reach the US, we would absolutely know where it came from and could kick the crap out of them.
The real danger to the US is some 47 virgin hankering dumb fu@k blowing up a bomb in one of our ports. Forget the North Koreans, they are the least of our worries. Militant Islam is the real threat to the developed world.
I think we’re closer to the bears’ holy grail (a 12 sigma downside event) than we have been since 1987.
Too many circuit breakers. Engineered 5∑ bullet to the brain, 3∑ stake through the heart, 2∑ garroting follwed by a long slow poisoning. See? That’s only 10∑.
Txchick
What’s your take on Ken Lay having a “heart attack” and the government not being able to collect money from his estate?
From “Restaurant at the End of the Universe:”
“I’m spending a year dead for tax reasons.” - Douglas Adams
Bush was going to pardon him anyway in 2008 as he left office.
somebody better check the coffin before they bury it….
I’m with you on this. Of course as this blog’s self-proclaimed resident tin foil hat-conspiricist, I would naturally have to agree. Something big HAS to happen BEFORE the dollar or housing crashes and the natives figure out who (correctly) to blame(White house/congress/FED) for their misery. Otherwise, attempts to misdirect this building anger will not work for them this time.
Once again I say that mortgage and appraisal fraud have been designated as the scapegoats for the people’s anger. Look for the media exposes to begin in late 2006 and the arrests and showtrials throughout 2007.
Exactly. People keep blaming “loose lending practices”. An institution can lend money however they please. Their standards wouldn’t be loose if the money supply wasn’t out of control.
True –and if the GSEs weren’t underwriting all that risk –as in buying up toxic loans with that “implicit” (though technically incorrect) taxpayer guarantee. MBS buyers are pricing these things like they’re practically risk-free, equivalent to T-Bills.
Nobody ever made anyone buy a house. Greed is what drove this bubble. From the builders, buyers, sellers, lenders, realtors, appraisers, and even home inspectors, everyone was chomping at the bit to make a quick and easy buck. And as for the home inspectors, yes they flocked to the action in droves as well looking for their share of easy money. My old neighbor is still trying to sell his house, a real overpriced shitbox, but he is a nice guy, and I wish him the best. At any rate, the buyers sent over an inspector who was apparently recommended by their agent. This guy shows up looking like he is ready more for a day of jetskiing than climbing under a house. Turns out he was. The guy spent like ten minutes looking around, not under the house, not anywhere really. No notepad, nothing. Took a look around, and left. Generally, inspections come back in a day or so, sometimes same day if done early enough. Well, a week later, no inspection. They call him, he apologizes, he is real busy, he will get the report over. The report comes back just fine. Great for the seller, not so much for the buyer. Seems the guy pretty much missed all of the plumbing, electrical, foundation and dry rot problems that were of epic proportions and in the sellers anxious mind. But the inspector was just there to take a look around for 10 minutes and grab a quick $350. Talk about a sham.
hey auger-inn, I’d buy you a beer anytime, wearing your tin foil hat or not!
There’s enough conspiracy facts out there to keep one plenty busy from even having to get their feet wet on the theories.
What it almost always comes down to is the individual person’s capacity to absorb the reality of new information that flies in the face of their perception based reality.
The last year of the housing market is a classic case study. Look at all of the objective, empirical, fact based evidence of a crash in progress that is oozing forth from every corner of this country - yet it is not enough to cause folks to actually change their fragile, eggshell minds.
Keep yer powder dry, dude!
Oil, boys. Oil. Its price and impacts on personal lifestyles will provide the out needed. Why blame the guy in the mirror when Exxon is such a nice, fat target?
Yep, just read Twilight in the Desert by Matt Simmons (energy investment banker) on the world’s only 2 super giant oilfields in Saudi Arabia.
$200/bbl oil is coming, just a matter of how soon. (6-36 months) accordinto to Matt Simmons.
http://www.simmonsco-intl.com/
Presentations on peak oil by an energy investment banker (roughneck).
http://www.simmonsco-intl.com/research.aspx?Type=researchspeeches
Check supplies? We are about to repeat the recent NatGas and other commodities real soon now. Could freefall to $58, economic tapering to $45 before the bleeding stops.
Robert,
I wouldn’t be too sure about that. Until we come up with a renewable source of actually producing more oil vs. more efficient methods of just extracting finite, existing reserves (as in Brazillian style ethanol), I can’t see how oil is going to come down anytime soon. Yes, there will be considerable volatility in the short-term spot markets, but the secular trend is in one direction: up.
Of course I could be dead wrong but oil and NatGas are fungible critters. Seen NatGas prices these last few months? A lot of things; electricty, aluminum, steel, chemicals including agricultural chemicals can be made from oil OR gas. NatGas prices relieve demand on oil. Oil in process reserves are consistently coming in above expectations and rumors of tankers holding offshore abound.
Or are you telling us that oil only goes up so better buy now or be priced out forever?
I thinketh you both are right. Bottom line - oil is wickedly profitable for too many of the elite few at the top of the world dung heap. You have to believe they are working overtime, through their think tanks, to come up with ways to maintain the demand and keep the price pressure on.
Technology wise, we have had everything from the Pogue carburetor to E85 to nazi gasoline made from coal to pebble bed nukes to solar to wind to all kinds of stuff that could easily take up the slack of any perceived shortage and have the potential to just eventually phase out crude. And that’s not even taking into account the Russian style deep well drilling technology that supposedly is finding lots more of the black goo underground, or the theories that crude is constantly being generated deep in the mantle and just keeps finding its way to the surface, even recharging old oil fields in the Gulf.
Problem is, these technologies are ruthlessly suppressed, bought up, sandbagged, ridiculed, or otherwise to keep them from demonstrating their viability.
Point is, how much of this peak oil situation is fact, and how much of it is the oil industry trying to save their future profit potential?
Unfortunately peak oil is devastatingly real.
There are some technologies which could take up the slack—or more correctly—get used to less oil. Except for nuclear reactors, which could easily have been built 20 years ago, there are significant technological and insutrial limitations. Wind electricity is actually doing quite well at the moment as soon as technology and economics coincided to make it practical. It won’t help oil use until we have plug-in hybrids as 50% of the fleet, and that’s 25 years away.
The technologies haven’t been “suppressed” by a conspiracy but normal economics, and short-term greed. A few people actually think otherwise, e.g. by buying a $25K Prius at list price which has the same utility as about a $15k gasoline-only car.
The enhanced oil recovery technologies can only suck out what is there already, and current oil production is already starting to rely on these. In fact, we are already past peak according to past predictions. By the way the idea that a carburetor could get huge mileage now is factually false. Modern fuel-injected engines combust 99%+ of the energy in the fuel put into them, and the car companies are not suppressing easy technology which could gain them better efficiency—though sometimes they choose not to build them (a bad idea) in favor of low-efficiency trucks to satsify machismo of buyers.
The past predictions are in fact quite accurate on total oil in the ground (when independently checkable) but
Check out production declines in Norway and North Sea and the USA—these are the most open and honest markets.
Check out http://www.theoildrum.com for a lot of good, independent, analysis by smart oil insiders. They harsh on the official statistics quite brutally—-but their point is usually that things are WORSE than what the governments and power bases (including oil companies) claim.
Its funny you’d mention this. An article I read the other day said the price of oil would stay artificially high through the next year or two and then crash to between $35-40 per barrel by the middle of the next decade. The more you think about it we seem to be living in a massive bubble period with multiple assets affected - including real estate and oil. Looking at historical periods like the oil embargo in the early 1970s seems to confirm this. The price of gas was - what? - between $5 - 6 dollars a gallon adjusted for inflation and oil had to be $150 - 200 a barrel. Then what happened? The crisis passed and gas crashed to between $1-2 per gallon until the current crisis erupted. It sat at this price for decades. This current spike is way too convenient.
I do not believe in conspiracy theories, either.
However, the “war on terror” did not just *HAPPEN* to distract folks “from the fact that $8 trillion in shareholder equity passed from the weak hands to the strong hands after the market peaked in early 2000.”
The “war” was the excuse the strong hands used in order to make that happen — under cover of “national security,” of course….
Good news:
“As of July 1, the most influential ratings agency in the mortgage arena, Standard & Poor’s, has upped the ante for lenders who seek to fund piggyback deals through capital market financings.”
This is the true beginning of the end… when market forces reduce the availability of easy credit.
“More ominous still for the piggyback market: Federal financial regulators are expected to issue new guidelines for lenders within the next few months that will force them to throttle back on piggybacks, payment-option loans and interest-only loans to borrowers with marginal credit scores and incomes.”
If they actually do this (seems we’ve been hearing about this for almost a year now - boy do govt regulators take their time), it will kill the CA market. First time homebuyers will disappear completely, as the affordability drops even further. This will cause sales to drop even further, and foreclosures will increase and prices will begin significant declines.
I can’t wait!
Me neither! These stupid b*stards need to be taught a lesson! They will not stop borrowing until it is taken away from them! These FB are true drug addicts and definately need a dose of rehab!
Regarding the new guidelines, IIRC, they apply only to federally-regulated banks. The vast majority of the subprime lenders can basically thumb their collective noses.
Technically I agree, but this “sets the bar” as far as categorizing MBS for the open market? This way there will be a measurement of the quality of the MBS?
I still don’t see any equity market discipline when companies like NEW, LEND and FED can keep their bloated stock prices while the party winds down and the hangover begins. My shorts aren’t hurting, but they sure are boring.
And will the Fed sit idly by and let asset deflation occur with a corresponding general deflation? These guys can’t have it both ways. They may be able to mop up the MBS market with backroom deals and monetizaion, but the housing market they will let implode.
There is no wealth effect without cheap credit and high asset prices and these guys know it. I’ve been in the hyperinflation after stagflation camp for a while, but more and more I think we are going to have a complete seize up of credit markets and at best, a very bad recession. IMHO this about saving the dollar as world reserve currency with the general domestic economy sacrificed at the altar of the Treasury whilst the Treas. Sec. chants “strong dollar policy, strong dollar policy.” Yes the Treasury has an altar, I swear
P.S. $100 oil and $5 gas might buy them some time!
What exactly is there of the economy if we weren’t the world reserve currency? What proportion of jobs are directly or indirectly funded from foreign credit? I know mine is and would guess that more than half of the posters her work in fields that benefit mightily from being the global financial market or investment center. Off the top of my head it’s finance, construction, retail, accounting, and much of government. It’s good to have a Treasury sec that chants “strong dollar policy” ad nausium.
Just wait until July 14th when the Japanese raise their interest rates for the first time in years!!
More money drying up!!
Stupid me! Here is the text of the article:
For over a decade, the Bank of Japan has been pouring torrents of money into its economy; and for over a decade, much of that money has been spilling over into U.S. markets.
But exactly one week from now, on July 14th, we could see the first step toward a major change in that trend.
That’s when the Bank of Japan will likely raise short-term rates for the first time in almost six years.
That’s when Japan’s fire hose of free money could start sputtering.
And it’s also when you could see a tsunami of selling in high-risk U.S. assets and bonds — driving interest rates even higher on our side of the Pacific.
My recommendation: Do not underestimate the significance of this event.
Why Japan’s Rate Hike Is So
Important to U.S. Investors
Many U.S. investors focus solely on the Federal Reserve Board. They think our central bank is the only one that matters. When investors saw the Fed chicken out last week — failing to signal an aggressive inflation-fighting stance — they snapped up both U.S. stocks and bonds.
However, the fact is that global interest rate markets are interconnected like never before. What central bankers do overseas is as important, if not more important, than what our Fed does here.
Why? Because money flows from country to country much more easily today than ever before.
You, your neighbor — even your stockbroker — might not give a hoot about what’s going on in Japan’s economy, or what its central bank is doing.
But the bond managers who trade hundreds of millions of dollars worth of Treasuries sure do. So if you want to really know what’s driving interest rates, you’d better pay attention to what’s going on in Japan.
Sure, the U.S. capital markets are the biggest in the world. But the U.S. markets are international. Foreign money managers invest billions of their dollars in our bonds and stocks.
Indeed, foreign investors now own more than half of our publicly held Treasuries.
Result: Our markets depend on foreign money. If the flow of money from abroad — especially from Japan — slows down or reverses, then U.S. bonds and high-risk assets are likely to sink.
And that’s exactly what could start happening one week from today when the Bank of Japan raises its interest rates for the first time in six years.
We’re talking about a monumental policy change in Japan. Here’s why it’s happening …
Japan Is The World’s Second Largest Economy!
And Now It’s Swinging from Deflation to Inflation.
Japan is the world’s second largest economy, surpassed only by the United States itself. For the longest time, however, it was struggling to get its head above water. Reason: Massive bubbles in stocks and real estate popped in the early 1990s.
The Bank of Japan (BOJ) tried desperately to revive retail sales, employment, and corporate spending by cutting interest rates. Rates fell and fell. All the way down to a big fat ZERO!
Then something very unusual happened in 1994: Inflation (rising prices) flipped into deflation (falling prices). And despite some minor bounces, prices continued falling month after month, year after year.
So, except for one brief hike, the BOJ kept rates at rock-bottom levels.
Official short-term rates have been glued to the zero line ever since.
And the BOJ even went beyond just zero-percent interest rates. It flooded its economy with money in a desperate attempt to end the deflation.
In the U.S., if our Fed did something like that — handing out free money to banks like Citigroup or Bank of America, you’d expect those banks to lend it out to consumers and businesses, right?
Well, that’s not what happened in Japan because nobody wanted to borrow:
* Consumers weren’t taking out home mortgages because real estate prices were falling.
* Manufacturers weren’t borrowing to build factories because there were too many old ones sitting unused.
* Retailers didn’t want to borrow because deflation was driving down the price of their products. They certainly weren’t interested in opening up new stores.
So where did all the Japanese money go? It didn’t just sit in Japanese banks.
Instead …
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The Torrent of Cheap Japanese
Money Flooded into the U.S.
Markets and Other High-Risk
Assets Around the World!
Japanese banks, insurers and other investors poured money into U.S. bonds and other assets.
International hedge funds and other global investors did the same. They realized money was “on sale” in Japan. So they borrowed cash from Japanese banks at virtually zero cost, and plowed that money into U.S. investments with higher yields.
They poured the Japanese money into U.S. subprime mortgage bonds … U.S. junk bonds … U.S. commercial real estate … U.S. Treasuries — anything that yielded significantly more than 0%!
Heck. It cost virtually nothing to borrow the cash from Japan. So “why not?” was the attitude.
There’s a fancy Wall Street term for all this — the “yen carry trade.” “Yen” because they were borrowing in yen. “Carry” because their carrying cost (interest) was extremely low. And “trade” because they were using the cheap money to buy all kinds of other higher-yielding assets.
I would agree with you in terms of $ amounts that a large portion of our economy is directly tied with the reserve currency phenomenon. In terms of what I would call productivity, outside of “pricing games” our economy is weak. Off the top of my head finance, government, SFH construction(in that a house does not produce any goods), are not capital producing enterprises unless these activities can be monetized, derivitized, packaged, and sold for a $ amount and thus stake a claim that these activities are economically viable. So yes, we should be grateful as American citizens that the Treasury Sec. defends our dollar but simultaneously be ashamed that we have allowed our domestic economy to be reduced to a financial one.
We’d be better off doing each others laundry than pretending than trading pieces of paper with a 5% return created out of nothing but ethereal promises of future payment is an economic activity. Of course this game continues through the centuries as a certain subset of the human species likes the idea of getting something for nothing. That type of activity always ends badly.
Bad news:
“…Freddie Mac’s business strategy has been undergoing a gradual shift towards increased purchases of floating-rate and alternative mortgage products, reflecting the greater significance of private-label issuances in the secondary market.”
““‘The lesson from the 1970s..is that an unchecked or permanent increase in inflation would only feedback adversely on demand for dollars,’ Kohn said. ‘Such an unmooring of the anchor of price stability could only elevate the odds on abrupt changes in interest rates and asset prices, instability in the US economy, and disorder in global adjustments,’ he said.”
Need a little Fed-speak help - in essence, is he saying that inflation fighting is and will remain the Fed’s number one goal, regardless of whether rising rates affect current asset (ie, housing) prices, in order to insure that future asset prices are more stable? So, another rate likely in August?
Actually, I get he’s saying that inflation targeting is, and will be, the overriding focus of the Fed. Rates are going up. And the up may just be way higher than is comfortable.
Thanks. That’s what I was reading but you never know with Fedspeak - he could have been trying to tell us that Godzilla was coming and he wanted to eat strawberry ice cream:)
I think that’s what he’s saying. Dow is down about 150 today, so it looks like that’s how they are taking it- more rate increases.
But look at bond yields–who’s the fool here?
http://tinyurl.com/ha37k
Anyone who goes long on bonds in this environment is a fool.
Speaking of fools:
“NAR President Thomas Stevens says he isn’t worried that nearly half of first-time home buyers put no money down, but adds, ‘If the number was higher than that, I’d be concerned.’”
Anyone who goes long on gold in this environment is a fool.
If the Fed’s serious about defending the dollar, I agree. But I’m not willing to say the Fed’s that serious just yet. I have no doubt interest rates will rise, but will they control the money supply, and will they take drastic action if foreigner banks and governments start dumping dollars.
At this point I wouldn’t buy gold. If I owned any, I would probably sell a good chunk of it. But I have no confidence it’s going to fall.
Thank goodness. This is the first sign I have seen so far that the flood of underpriced credit risk is slowing down.
Yes. The frst baby steps in the process. Thank God.
Still pretty amazing how long it’s taken for these people to ferret out the problem.
But if they’re beginning to think it needs to be corrected, that is trully good news.
I think based on data, there is high liklihood of another fed hike. Big question is what happens in Sept. Bears are predicting increase…and equity correction.
Simmssays…Foolish Ways We Spoil Our Kids
http://www.americaninventorspot.com/spoil_our_kids
The FED should not and cannot start the precendent of trying to maintain asset price stability. People who have made bad financial decisions should be held accountable and not be able to count on a gov’t bailout to help them pay for their overpriced home.
We live in the land of excess. Everyone is free to make their own choices and I respect that and will fight for that right, but to be able to live in excess and have everyone else pay for it? No thanks.
Also a couple of stories about conditions in LV
http://tinyurl.com/r2xsw
and
http://tinyurl.com/mdrp2
“While Fitch Ratings continues to project a soft landing for the U.S. homebuilding sector in the intermediate term, recent new home sales data and major builders’ orders, net of cancellations, have registered sharper declines than expected.”
I guess they won’t call it a hard landing until after all these dogs have capitulated…
http://tinyurl.com/n49cp
And I wonder about that phrase “in the intermediate term”. Does that mean that we might have a hard landing “in the short term”, or maybe a hard landing “in the long term”???
This is going to get very ugly. Once the media catches on, there ill be a GIANT flood of more houses put on the market for sale. Most the people I talk to still don’t understand that housing is a bad investment (at this time).
It’s really too bad that all of this has to happen because it could have been prevented if only people new that history ALWAYS repeats its self (recessions/housing downturns). Look at 911, remember all the patriotism…where has all that gone. How soon we forget (except for us on this board)!
Look at 911, remember all the patriotism…where has all that gone.
Not much of a mystery: it was exploited in order to start an unnecessary war. Most people have since come to their senses, and they’re understandably upset.
“‘The lesson from the 1970s..is that an unchecked or permanent increase in inflation would only feedback adversely on demand for dollars,’ Kohn said.”
And the lesson from the 2000s will be that longstanding Fed governors who publicly commit themselves to avoiding the mistakes of the past are certain to take the actions necessary to back up their words. Good luck to all of you who have bet in favor of a continuation of the conundrum, because the withdrawal of the punchbowl implied by Kohn’s remarks suggests the conundrum’s demise is imminent.
If the supposed conundrum is whether or not to continue raising short term rates, the true conundrum is whether or not they wish to be blamed for the failure of the economy. I’ll wager that they are hoping for the economy to tank before they take any strong measures, so that they can’t be seen as presiding over the economic catastophe just around the corner.
They will tiptoe after the tail of inflation right off the cliff of recession, at which point it will, dependent upon their true resolve, be either easier or harder to address the inflationary trends.
Hey I thought Greenspan retired, now he is speaking to us through blogs as Getstucco.
The 100% financing is also going to kill people who need to sell and have no equity. Paying a standard RE agent commission on a high priced home will put a lot of people underwater. Around Boise, I’ve noticed a lot of people are either going FSBO or flat rate realty to sell their homes. I suspect a lot of these people bought near the top with 100% financing or have taken too much cash out of the house ATM and can’t afford to pay a RE commission.
“Paying a standard RE agent commission on a high priced home will put a lot of people underwater.”
You raise an interesting point which I had not considered. If I buy a home on 100% financing and its price never changes, I am nonetheless already underwater on a future sale, unless I can sell it for free. Last I checked, the standard RE commission was 6%.
This is probably the biggest threat to the standard RE commission. If you actually have to pay 6% out of your own pocket you are more likely to explore alternatives (especially if your pocket it empty :-). With the gains people are used to recently it was just considered transaction cost…
I dunno. Anyone who is dumb enough to buy a house at recent price levels w/100% financing may also be too dumb to FSBO. Like the slobs whose hand-lettered sign is hanging from the garage across the street from where I live (snicker).
Not to mention the fact that there will be a lot of RE brokers trying to scrape a living. They could live on 6% of $200,000 houses 4 years ago, you don’t think they could scrape by on 3 or 4% of $400,000 houses now?
I do.
The way things work here, you can figure about another 1.5-2% of the price for escrow, title, city transfer tax, etc, etc. It’s about 7.75% off the top to sell with a full commission agent.
in the 80’s I was never offer neg am i/o or piggyback
having down payment in anything but cash free and clear was forbidden
Is that true?
I’d be interested in the history of piggyback loans. I had thought that they’d been around for a while, but that they were associated with high lending standards. I base that on what I read before I bought my house–I have an 80/15/5–but I didn’t realize then how messed up some of the “mainstream” RE advice was.
In hindsight, I should have started questioning what I though I knew about mortgages when I showed up at the lender’s with an accordian file full of past tax returns, old W2’s, bank accounts, and brokerage statements and he seemed surprised and impressed.
With the rising environment, which is a better path? 80 with 20 piggy or 100 with PMI
IMO, 100% w/ MI, you can get MI dropped if the home appreciates 20-25%, while 80/20 you are stuck paying both loans unless you refi into a lower rate (but then you have $4-8k in closing costs). The tax writeoff is not that big of a deal. I think of a woman I did a 100% w/ MI on. She wanted a 80/20 but didn’t qualify. This loan closed in 2004. She easily had her property appreciate 25% in 1 1/2 years. With one call to her mortgage company and having them remove PMI, her real rate will decrease by .92% and she won’t have to pay $4k for closing costs (though she may have to pay for an appraisal or AVM). This person made maybe $2500-3000 a month. She will see her payment go down $83 a month. That will make a real difference. I hope she has made the call to her servicer.
Another little-known mechanism for getting MI dropped is to make sufficient additional payments so that you’ve paid off 20% of the principal.
Other than VA no down or FHA low down, i think the most liberal loan back in the 80s was the negative am 95% ltv loan (citicorp was agressive with these back then). back then with less than 20% down taxes and insurance had to be impounded and paid with the monthly payment.
in the 80s (and even 90s) god hadn’t yet invented and blessed 100% piggyback loans, no doc lie loans, option ARMs, etc.
A recent Title insurance industry article showed that it costs 11% in total transaction costs in a home sale. This means total for both buyer and seller. In other words, if you sell a house and buy another one, your total costs are 11% of the sale price of one of the homes. For very high priced homes, this percentage will be lower. But it is easily 6 to 8% to sell, including commmisions, transfer taxes (city and county), title, escrow, inspections, home warranty, repairs, etc.
I keep seeing headlines saying “mortgages at four year high” or “lines of credit at five year high.” As if the ultra-low interest rates of the 2001 to 2005 period were normal.
At current yields/asset prices there is no incentive to save. No wonder people have been borrowing like crazy to buy things. When a 15-year fixed mortgage is at 7 percent, which is what I got in 1994 (and was happy to get it), I’ll say interest rates are moderate. Until then, interest rates are low.
Good point.
Indeed.
When I first bought (in Australia, where mortgage interest is not a deduction for owner-occupiers) interest rates were around 11% and they went higher.
The more responsible financial columnists kept beating the drum that nothing J6P could invest in was as good as the completely tax-free and risk-free 11% (s)he got from paying off mortgage principal.
“In a sample of loans in California markets the percentage of piggybacks exceeded 60 percent in some cases.”
San Francisco… first-time buyers in recent years? I would bet it exceeds that figure easily.