Will We Hit ‘A Real Debt Crisis?’
Several readers wanted to discuss the economic effects of a bursting housing bubble. “All of the growth in the last 5 years has been driven by debt. We’ve had anemic job growth, no real wage gains, a government going more and more into the red qnd consumers with all time debt and no savings. A housing boom based on loose, unregulated, exotic loans. Which has been responsible for most of the growth in GDP.”
“So if (or when) we hit a real debt crisis, how much of a sh*t storm will we be in?”
One reader replied, “We already have a debt crisis my friend….It has not reared its ugly head because Joe Shmoe has been able to service it. Watch the jobs data. And, anecdotal evidence of deterioration like being able to get a electrician the same day you call.”
Another said, “I’d appreciate more input from people in the business on their market observations, good and bad. What are those in the business going to be doing if they decide to go back to a prior work environment. There are thousands of support staff in escrow, title, mortgage etc….that will be affected by markets slowing down. This doesn’t include the construction industry, which is vast.”
“For example, we know a wonderful husband & wife Realtor team that is really struggling in sales. They are considering alternatives to real estate and we happen to be in market that is still plugging along rather well Seattle-Puget Sound area.”
And another said, “I was wondering along similar lines this morning. Is it really a sure thing that the debt/credit crisis will become a true crisis? All around me I see people buried in debt, yet they keep piling it on without worry. I’ve known people who shrugged it all off by casually filing bankruptcy (before the new laws were in place).”
“I’ve seen people with the attitude of ‘you can’t take it with you! and they can’t come after me for the money once I’m in the grave!’ So if more people have these attitudes than don’t, what’s to put a stop to it all?”
The Business Journal of Phoenix. “The U.S. economy created 121,000 jobs in June but that number was weaker than expected and the two key sectors in Arizona, construction and retail, lost jobs last month. The construction job decline comes as the housing market has cooled substantially in Phoenix and other major U.S. markets.”
“‘Underlying the weakness in employment growth is a weakening housing market and a sagging retail sector. Construction employment dropped by 4,000 jobs in June and retail lost 6,600 jobs that same month,’ said economist Christian Weller. ‘This may reflect the fact that a weakening housing sector provides less fuel for people’s consumption due to fewer refinancing opportunities.’”
“The Business Leaders Confidence Index, compiled by the University of Arizona, showed its largest single drop, sliding 8.4 points to an overall score of 49.6. A third index reported an 8.9 percent decrease in business leaders’ views of economic conditions, bringing the index down from 62.6 in January to 53.8 in June.”
“Fueled by a sharp increase in delivery times and inventories, as well as a decline in new orders and production, the index is now approaching the 50-point line, which indicates a recession forecast. Tom Fraker, ASBA’s executive director in Phoenix, agreed that the current economic indicators are lagging, especially housing start forecasts.”
This is a good question because there are so many variables. But the answer almost certainly will determine the hard or soft landing issue. I see alot of increasingly desperate ads in the paper from people holding ‘brand new’ houses.
One of the reasons that hedge funds and the like are recommending this blog to clients is because of the value of hundreds of contributors giving personal viewpoints on hard-to-call matters like this. TIA for the input.
Here’s one from Florida:
‘King Richards Family Fun Park on Airport-Pulling Road is being bought by Toll Brothers, a luxury home developer that wants to build a condominium complex on the North Naples property. The news upset everyone from children to parents to park employees. CeCe Smith, who has worked at the park for about five years, said the demise of the park will also eliminate potential jobs for local teenagers. The 57-year-old said she is the oldest employee out of about 40 staff members and the rest are teenagers.’
‘For the first time in more than a decade, Sarasota County is not adding teachers for the upcoming school year, largely because of a slowdown in student enrollment and overstaffing in the past. Eighty-four classified employees, the bulk of which were teacher’s aides, were laid off late last month. No teachers were pink slipped, but 61 vacant instructional positions were eliminated.’
‘The overstaffing became apparent when student enrollment dropped last year. The district had expected 1,600 students for the 2005-2006 year, but instead got 461. To compound the issue, Sarasota schools lost about 250 students between October and February. The intense 2005 hurricane season, the slow down of the housing market and the lack of affordable housing in the area are the key reasons school officials say enrollment has dropped.’
The school district is probably still in denial. My experience is that government at all levels can’t (won’t) reduce expenditures voluntarily. They will still spend their reserves and then cry for higher taxes and fees. Vote NO
The deflationary depression won’t start until they cannot service their debt. They won’t stop spending until bankruptcy and foreclosure, because the alternative is a lowered standard of living and short sales of RE (bringing a check to closing). The doubt and prolonging of this happening will suck in more greater fools.
absolutely
I totally agree.
Nothing short of banktruptcy would stop our (American people and fed. gov.) habit of borrow and spend.
Ever wonder if the US govt will just do a quick devaluation of the currency? Maybe just drop one zero? $10 becomes $1. $500,000 mortgage becomes $50,000?
That would be really ironic. Everyone participating in the bubble would be rewarded, and everyone that saved up would get totally bent over.
There are interrelated internal and external issues which imply that playing the devaluation card is no panacea. Internally, senior citizens represent a huge, well-educated, growing voting block (baby boom demographic wave) who are largely dependent on a fixed-nominal-income pension system. Whichever politicians reap the blame for stealing their retirement wealth through some combination of high inflation and/or devaluation can expect to be punished when the votes are counted (think Roosevelt Revolution).
Externally, creditor-nations which have helped pay for a US debt-fueled consumption binge against the backdrop of a negative savings rate would not take kindly to a collapse in value of the $US-denominated bonds they have received as IOUs in exchange for their largesse. A giant sucking sound of liquidity withdrawal would result as creditor nations would be less willing to give deadbeats a second chance to borrow than, say, your friendly neighborhood domestic creditor.
It is doubtful the US body politic would survive the cold turkey treatment very well. The aftermath for the domestic economy of a country whose currency undergoes devaluation is never pretty, but given the sole-superpower status of the US since the collapse of the USSR, and the world’s economic dependence on the US as its “growth engine,” it seems fairly safe to conclude that a US devaluation would set off the next Great Depression. And this is why Ben Bernanke and other US economic leaders will ensure it does not take place, no matter how many nasty things Marc Authier can think up to say about the situation.
The fact remains that the dollar can not be a store of value (purchasing power) when so many debt obligations remain unless these obligations are defaulted on. The senior citizens have one of two choices: get paid in devalued dollars (because by the most conservative account the current obligation is in the 30-50 TRILLION dollar range depending on whose numbers you use) OR, don’t get paid in nominal dollars what is owed (either a complete or partial default through new legislation like means testing). The whole ponzi scheme called Social Security is a bunch of bonds representing money collected and spent. The gov’t is going to have to either monetize or borrow to pay seniors when the bonds are redeemed as it is. The foreign creditors are in the same boat.
The U.S. dollar has lost value since 1913 and is now worth about 4cents on the dollar (some accounts say 1 cent), I’m seeing a trend here.
With regard to foreign investors, by all reports every currency is being printed in the 8-10% range now( annually). This is becoming a competitive devaluation game between countries so their currency doesn’t trade higher and screw up their exports.
No one knows how the FED plans to monetize gov’t debt, although the TIC reports are becoming very suspicious. Private debt will be defaulted on and those fools (FB’s) will swing in the breeze since the gov’t can get no traction on wage inflation feedback due to china. But, monetize they will for gov’t debt because otherwise it would be a default which gets them to the same place we are ultimately going to arrive but much sooner.
If the U.S. goes into a true deflationary depression, the gov’t will have to default on it’s debt because by the true definition of deflation (reduction in credit and M3) the gov’t would have to drastically reduce spending below the combined deficit (700+ billion?) and decrease in tax revenues (?, due to depression) in order to service the interest on 9+ Trillion debt (because borrowing/monetization is actually inflation of money supply). All this at a time when the citizens will be screaming for money and increased gov’t services due to the depression. I don’t see where that scenario becomes anymore likely to please voters than the devaluation model. The fact remains that 1). We have been on a devaluation/inflation model for some time now so that would appear to me to be the plan for the future.
2). The world goes into a depression regardless of what extreme we hit (hyperinflation or deflation)
3). The system we now own (FED) only exists with continued inflation. So to call for deflation is to call for the end of the FED.
On a side note, I personally believe that the FED is just a cover for a banking cartel (read “creature from jekyll island” by Edward Griffin, http://www.amazon.com/gp/product/0912986212/qid=1152458001/sr=2-1/ref=pd_bbs_b_2_1/002-4910667-4570445?s=books&v=glance&n=283155
for explanation on how FED was created, by whom, and for what purpose) which essentially controls all of the western central banks through the BIS (head honcho’s). This cartel isn’t going to fold easily or without a fight.
Additionally, I believe that plan B of the U.S. gov’t is to initially (after it inflates the piss out of it) fold the U.S. dollar into a joint currency between Canada and Mexico (the amero) this plan (I believe) is part of the SPP signed last year by Bush although not specifically spelled out in the document made public. http://www.eagleforum.org/column/2005/july05/05-07-13.html
http://www.humaneventsonline.com/article.php?id=15809
The ultimate goal of these jackals is for a one world currency (or as many countries as possible) and one world gov’t (or as many countries as possible). This would greatly diminish the ability of the average joe to track the debasement and transfer of wealth, which is ultimately the power given to the FED(banking cartel) under the current system. But, that’s just my “tin foil” hat opinion and not to be taken seriously. Nothing going on here, just keep watching american idol, borrow money and be happy!
You had me in the beginning, but somehow you ended up in Wickywacky, the land of aluminum foil hats.
I know, I’m very confused!
you have to admit that it is entertaining though!
No it can also start when nobody in the rest of the world, trust the paper structure backed by complete nothingness. Remember the controversial declaration by Helicopter Ben that if required, the FED could use helicopters to disperse “free” dollar bills. The more as time goes by, the more I think that the US will finish like the Weimar Republic or an Banana Republic. It will happen when these stupid morons in Asia, start to understand what is really going on. Anyways one thing is sure, dear Americans. Your country will soon loose it’s independance. And your real bosses will be in Tokyo and Bejing. Happy 4th of july!
Come on, now - the “loose” vs. “lose” issue is almost as annoyingly ignorant as the their/there/they’re and your/you’re mistakes. Notice I didn’t call them “typos.” That would be like forgetting to capitalize July. That’s no biggie.
Also - and I am reluctant to even mention this - all four of your commas are incorrectly used.
“Come on, now - the “loose” vs. “lose” issue is almost as annoyingly ignorant as the their/there/they’re and your/you’re mistakes. ”
Those are my pet peeves too, but not as much as the moronists (moron “me first” motorists) who do not use turn signals, and they cross both political boundaries. I see them with Kerry/Edwards bumper stickers and I see them with Bush/Cheney bumper stickers! Grr!!!!!!
I see them with Kerry/Edwards bumper stickers and I see them with Bush/Cheney bumper stickers! Grr!!!!!!
Anyone who voted for either is the same brand of stupid as far as I’m concerned.
I’ve said it before, but…bankruptcy used to turn people into financial pariahs, and that will happen again when the current liquidity dries up. I know two people who went bankrupt a decade ago, and at that time they were treated like lepers by their own banks - one couldn’t even get a checking account, let alone a credit card, for years after.
As a friend of mine recently said, “people think it [cheap liquidity] will last forever, but they don’t realize it’s an event; it’s a one-time event that will never happen again in their lifetimes.”
Your comments are so true Betamax . By the way the NAR/realtors are talking , the rates will be down again in no time ,along with the easy underwriting/money ,(which might never happen again) .Lenders might not want to give the fixed rate loans anymore down the road . Anything could happen down the road . I think everyone was a little shocked in late 70’s early 80’s when the interest rates were at 16/17% for a first trust deed .That was a great time for people who had money in CD’s .
Someone I use to know would say “one day chicken and the next day feathers “.
“rates were 16/17%. That was a great time for people with money in CD’s”.
You betcha that was a great time. I saved enough in interest on my CD’s for a 30 % downpayment on the house I bought . And that was off of a lousy teaching job!
Been longing for a return to those days ever since. The past 20 years have been a shock to my financial system. It was, at that time anyway such a *safe* way to accumulate money.
Wiz — even so, I think it is TFL for two reasons: (1) all of the ARM re-sets that will capsize their owners; (2) all of the flippers who are realizing that their properties will not realize anywhere near the gains they anticipated and may even generate a loss.
To me, and I may be wrong, regular mortgage rates do not need to rise any farther than they are for prices to come tumbling down toward the mean. Hopefully with the normal overshoot. Got cash. Got cojones. Ready to buy low.
Oh I agree , it will not take much at all to topple this market at all and by the looks of it its already happening at rates under 7% .I’m just saying people can’t count on interest rates going back to between 4-6% or that easy money will be available for a number of years once this correction takes hold .
I have been hearing the “low interest rate” mantra in the last 5-10 years or so. “It is good time to buy because interest rates are so low”. What about principal? If I got a 500k loan, even with 4% interest, still I have to pay back that 500k principal. The principal will not go away. If I earn 100k a year, say bringing back 70k after taxes. If I dedicate 25k (more tahn 2 k a month) to pay the principal only, it will take me 20 years. 4% of $500k is 20k a year, too, let alone property taxes, insurance, etc. The only way to do it is to dedicate at least 55%-60% of your take home pay to service debt and interest. Please note that I was very optimistic about income (100k), loan (500k) and interest rate(4%). Bottom line, is there is no way 90% of the buyers can afford anything and they should stay out of the market until homes got into 200k range and ahve a decent down payment (20%).
I agree . A general rule is that you should not buy a house that is more than 2 1/2 times your yearly income .
I thought the rule was you should not obtain a mortgage that is more than 2.5 times your annual salary… (i.e. Say my salary is $60K/year - my mortgage amount should be no more than $150K - but the house price can be higher depending on how much downpayment I have.)
We’re probably saying the same thing. Though I prefer your theory because I DO have money socked away so if the rule becomes house price of 2.5 income (and homes become priced accordingly), woo hoo for me!!
The ripple effect of lost jobs won’t be significant for a couple of years. This may be a vicious cycle as people start to save like crazy. [Short term treasury rates are up, and it's easy to get into T-Bills. For a minimum of $1,000 someone can order a T-Bill through http://www.treasurydirect.gov after setting up an ACH account with his bank.] I do think the pendulum will swing to “saving” as the national passion. The combined saving and job cuts will be a major blow to consumer spending. So small company stocks will probably not do well. Remember, this real estate bubble is going on in other nations and now many of their central banks are jacking up interest rates. So I’m not sure if international stocks in developed countries would be a good idea if all of them are suffering from lack of consumer spending. Emerging markets in Asia ex-Japan, but especially India, may be a good place to park money, in addtion to regularly buying precious metals. If I see 30 year bond rates up to 10% (and that is precedented - around 1980), I will park half my money in them, and not worry if they go higher, because they will head back down below 10% before I really need the money. For my individual stocks, I’m staying away from growth stocks and focusing on value stocks, and I’m always on the hunt for stocks with yields of 6% or more, P/E’s under 12, and not in real estate! The last 6 years, I took advice from sages and saved in these good times so I could spend in the bad times. Others just fiddled and bought more house than they could afford on variable rates!
I’m wondering what will drive or motivate people to start saving. I’ve never stopped putting money aside even with the awful rates and trying to buy dividend paying stocks for the long haul. But I think this is a personal decision or preference on my part and I don’t see it being adpoted by others younger than myself. This is an instant gratifiction society fed by easy credit and in fact the whole economy seems to be built on a shaky foundation of rampant consumerism. One thing comes to mind as breaking the selfish trend of baby boomers is that many are getting ready to retire and will get a shock soon as they find the amount of saving they have is simply not enough given their lavish lifestyles. Once they have to live on social security and their meager 401K saving the party is going to stop for sure, selling the McMansion and putting the proceeds into CD’s’s may be the only way they can survive. Maybe seeing Mom & Pop trying to live on $20K a year will wake the younger generation up.
I would guess it will be the full wall to wall 24 hour coverage of a protracted economic downturn. The reason our grandparents were so thrifty on average is they learned it as a survival skill. In the 1920’s it was quite common for everyone to belive the good times and easy money would roll on for a while.
Note, I don’t know if we are going to have a big downturn, but it’s certainly possible should a number of these things unwind at the same time.
It took 20 years of the roaring 20’s before the overspending took its toll………
That’s a long decade, 20 years
It feels like we’ve had 26 years of the 80’s now too…
By George, we have had twenty-six years of the 80s!
Mo Money - “Maybe seeing Mom & Pop trying to live on $20K a year will wake the younger generation up.”
You bet it will. Big time. And (relative to the stuff we talk about here) that is the single biggest shock that is around the bend, IMO. MSM talk to-date has been about affluent boomers — maybe, maybe not. Except for what they inherit, where’s the money? Their defined-benefit pensions are being cut, their in-retirement health benefits are being cut, they are about to lose their butts in real estate and they don’t have a lot in savings. The early ones out the chute will look OK and probably will promote a vision of healthy, wealthy Boomers for a while. But I think the truth for most of those who are not at the leading edge is much darker.
Well, my husband & I are Baby Boomers in our early 50’s, and we’re hardly going to wind up in the bread lines. A lot more boomers have more saved than readers here seem to realize. A tremendous amount of people in their 30’s & 40’s are so far underwater with excess debt that they will *never* be able to save adequately for retirement. That being said, there are a lot of boomers and those below them in age that will be surprised when their latest snowmobiles and Skidoos ( with trailer, of course ) won’t be enough to tide them over in their seventies & eighties. As for us, we are supposed to pass the $ 1 mil. net worth mark in 1 1/2 years. We will be 54. By the time we’re 62-64 years old, we should have a net worth of $ 3 mil. I want to retire with $ 2 mil in the bank/stocks/bonds. I think we’ll get there.
The average boomer has $50K put away for retirement.
“Well, my husband & I…”
The average boomer is probably also divorced.
My first husband divorced me after 23 years of marriage. One of the problems was that he was and is a big spender and sometime gambler who forged my name on a large business loan. One way that I became good with debt management/financial choices was because I had to work out ways to pay this massive loan and other business debts back without going bankrupt. It ruined our relationship, since we are polar opposites financially as well as emotionally, but the skills I picked up over 10 years of difficult times and paying for his/our financial problems have stood me in good stead many times in my later life. My second husband is honest and we are both savers by nature, so we are much more compatible financially.
“The average boomer is probably also divorced.”
I’m a boomer that was never married. I have an older sister who was married for two years in her early 20s, another sister never married, and another sister who divorced after a 23 year marriage. I also know a lot of divorced boomers. Marriage is expensive, and so is divorce. The lawyers win in any divorce. I know a 54 year old who has to pay his ex wife $45k per year for four years. Then he’s free. Another man I knew back in the year 2000 told me he’s on his third house and third wife. My personal net worth is in the high $600s. Accomplished without real estate, without financial planners, and without marriage. My tax deferred stuff is slightly over half of that net worth. I’ll join your million dollar club within 5 years, and I will be 52 at that time. But inflation will diminish the value of that $1,000,000 of course. I would prefer to have a million bucks valued in 1964 value of the dollar! I was a kid back then, but I remember when a million bucks meant you had a big yacht, several houses, a butler, a chauffer, and a cook. So a million bucks today is nothing. Just a magical number that sounds good when you say it or looks good when you type it.
For the last 5 to 7 years alot of retired people who were counting on CD rates being higher have struggled during this period . Those people are looking forward to higher yields on low risk investments .
It really is a good thing to have a paid for house when you go into retirement . Inflation eats retired people alive .
I have talked to alot of retired people who said they never thought that they would live as long as they are living .
“As for us, we are supposed to pass the $ 1 mil. net worth mark in 1 1/2 years. We will be 54. By the time we’re 62-64 years old, we should have a net worth of $ 3 mil. I want to retire with $ 2 mil in the bank/stocks/bonds. I think we’ll get there. ”
Just checking the math. So in 1.5 years you’ll have a $1 million and expect in about 8 years after this milestone to have $3 million. You will need about 15% growth a year to get there. And you said assets. I presume you included real estate there, too. If anything, the real estate portion will depreciate.
SHEOPLE: N.B.: NEVER retire unless your house is completely paid off. In fact, it would help if you had your house paid off 10+ years before you retire.
You are a FOOL to retire with a mortgage …
I said I WANT to have a net worth of $ 3 million to retire on. If we don’t get there, and ” only ” have a NW of $ 2 or $ 2.5 million, so what ? At least we’ll have met a high net worth retirement goal, which is one of the reasons to save, yes ? One of our homes is completely paid off, and we only owe $ 130,000 on the 2nd one, as of this month. By the end of the year, we’ll owe $ 127,000. Our cash/stock/bond savings are pretty high and I dedicate 70 percent of what I earn to our retirement accounts. I like having NW of one or two or three million dollars. With so many bankruptcies and people struggling to make snowmobile payments, it makes me sleep easier at night. We do have a financial planning/accounting firm. We needed it — when we got married, we had 48 different accounts that needed to somehow be blended together. We have had and sold rental properties. We have had parents die. We have needed good financial and tax accounting advice. My husband was a widower, not divorced.
The mean (average) held in retirement accounts by those who are
Mo money!
What will motivate people to save? I will give you my opnion by first saying that your question implies that the motivation is causal.
I would suggest that the better question what will cause them to stop spending like their is no tomorrowand borrowing as if it doesn’t need to be repaid!
Simply the mass phsychology displayed by a negative national savings rate in of itself MUST mathematically be reversed. When? I am not certain -3% now to -10% or maybe the banker will get religion and become concerned that he may not get repaid? We carry more debt than ever recorded using any tool of measurement. Our pensions are going bust. The myth of a 10% return on stocks after nearly 8 years of less than Tbill returns is getting old.The PResident says their is no “lock box” for SOC SEC. The govenrment statistics on inflation and their wages and Soc Sec. checks don’t match. Everything and anything can blamed.
As with the endless housing bubble bursting suddenly in June - August 2005, the market stopped frothing suddenly seemingly out of no where, and across several markets.
But in truth this market and ALL markets don’t stop until everyone is on board….When every last buyerand lender has made 1 to many transactiosn extending them beyond their means {even making loans to illegals who could be deported- for example} At that point who is left in the bathtub to buy? All that was left in the market were sellers. {witness the MLS numbers}
So people will stop spending like there is no tomorrow suddenly and swiftly. Because they collectively reached their limit and /or its time to be concerned about tomorrow.
“It” what ever “it” was, apparently has begun!
Retail sales don’t match inflation, car sales down 29% in June alone 6-7% this year, housing sales down 20-46% lower versus YOY, etc….all down..sharply. The ATM window is closed and the bills keep rollin on in! All debtors are in the overflowing tub.
I don’t have much savings as of right now. I had to pay off my HELOC because the rate was going higher and higher. Even if it was low, I would have paid it off. Right now my only plan is to pay down my home. My mortgage is at 6.25% because I went with First Horizon (First Bank of Tenn. I believe). I have since looked and at the time I got the loan, I might have been able to get under 6% at another bank…oh well. My small public state retirement plan was in all Small Caps. It had done well over the last three years. However, just before we left for vacation, I moved all the money to the Guaranteed Fund. Right now it is paying 5.75% over a year. The Small Cap paid me 15% over the 1st quarter of 2006, I am hoping that I don’t lose any of that and should find out soon enough. I figure with all the ARMs coming do, killings on the rise (indication that drug dealers are feeling the pinch), theft going sky high….things are not doing well at all.
I have decided to just pay down my mortgage. The interest alone if I pay over 30 years is well over six-figures. I figure that will be my savings.
History repeats itself because to many people forget and also believe this time is different . People literally believe what they are told to believe by the news media or their peers and cannot think for themselves. When the real event starts they panic and that tends to send a correction in the economy to much deeper levels than it would oridinarily occur. This is why we over sell a market and tend to over buy a market. What is coming in the housing market will certainly lean out the non professionals and many uneducated investors . It is necessary and will bring our economy back to a long term sustained level of growth across the board.
I think the dividing line will be Labor Day. At that time sellers will realize that this crunch is real. Also, a full yearly cycle will be completed.
Last year, posters here were saying that Oct would be the start of the downturn and that projection proved to be very accurate. At first, the spinner line last fall was that sales would start picking up after Thanksgiving. Didn’t happen. Then after New Years, then after the Super Bowl, then the spring upturn for sure. Now its after July 4th and no more imminent projections. The excuses have run out.
I’d bet things will get pretty grim by the end of the year. Mortgage loan resets next year will be a killer. Foreclosures, bankruptcies? I’m wondering how the banks will hold up. And especially, the FDIC. As far as FNMA goes, it’ll dissolve I’m thinking - then the pain will really crank up.
One thing to bet on - congress will look the other way as long as possible. But will some tax law gimmicks be passed to save those in default? Bet not, the US is broke. Little money left to borrow. About the only choices to be made at that time? Inflation or deflation.
Unless we run out of paper and ink the FDIC will be just fine.
I realize that you’re probably right, but it fuels inflation - BIG, in the long run. Then you have SS/retired people suffering and COL increases that the government frets about. Wage increases follow. Dollar gets hammered so even more erosion since gasoline is a huge import. A vicious cycle. Too dangerous.
My bet - FED continues to cranks up rates and finally reins in the money supply. Slows the economy but keeps the dollar from falling off a cliff and saves SS for a while longer…
You’re right that it will fuel inflation but the alternative is worse. The FDIC exists in order to prevent bank runs. If a bank goes bust and the FDIC reneges then there will be the mother of all bank runs once that info hits the MSM. You would see a collapse of the entire banking system.
Diemos…your comment suggests that The Wiermer German republic and others have never happened!
I recall the Housing execs, all saying 1 year ago today!!
“Rising Interest rates don’t matter that much - we’ve seen 8-10% rates, as long as the economy is doing well the real estate sector will do well.”
Well boys interest rates are still historicallly low 6.5% (Is Japan still near 0……….The GDP latest numbers 5.6% positive….BUT Dominion sales in Q2 down 46%..othrs down over 20% and more!
Just pooped that bubble…The FED is next!
Whenthe debts in default the money supply will collapse as teh fractioanl speed in which it was created..Unfortunately this will casue other good loans to be bad, etc….For example follow the REFCO story that began last fall….even the Palestinians are out 1billion…
I said that the FDIC would be fine. I never said that WE would be fine once the FDIC was through printing money.
It seems there is never a specific time line for this. I’m in Fl, and some one in NV will have a different timeline, but its all the same, what goes up that far up tends to crash. Local services make it sound good here, local realtors are to say the least disgusted (with themselves or the flippers, which a good % are, is difficult to discern.) But at the end of the day we just rented a house that had been on the market for 309 for 1300 a month (smokers, with 2 dogs–house has pool, lanai, ect, done by pro landscape guy.)
Just got a call from someone else wanting to rent us a house.
Yes Suzzane, the market is just perrrrr fect
“smokers and 2 dogs”. LOL. Yes that about says it all. A dream rental market down there in FLA.
Next year I am going to join the growing pool of renters who are also dog owners!
LOL
“All of the growth in the last 5 years has been driven by debt”
I was thinking along these lines the other day. They keep saying how strong the economy is and how growth is up, but is is really if debt(comsumer as well as government debt) is higher than ever. Are we not just mortgaging the future for what we consume today, after all they just raised the debt cieling to 9 trillion, that is staggering to me, how will we ever pay that? And consumer and motgage debt is also at an all time high-it makes you think when this wall of debt will collapse-scary stuff.
how will we ever pay that?
We won’t.
and when we renege on our debts, imagine Americans trying to live on their incomes. no more credit. oy vey.
A government bond is a promise to exchange one piece of paper for another sometime in the future. Unless we run out of paper and ink there will be no problem paying off the debt.
That’s a bit simple minded. Dollars are the key currency and attempts to print our way out of difficulties can have serious consequences insofar as foreign investors are concerned. Of course we can print our way out of debt but we won’t be the key currency when that’s done. We’ll be a lot more like Argentina a few years back.
Not a problem. There’s a certain “foreign investor” in the Caribbean that will always buy US debt. This particular “investor” has been pretty busy buying during the last month.
The “devaluate the currency” card can really only be played ONCE. After that, the dollar stops being the world reserve currency. The U.S. has been saved by the fact that we owe our debts to the world in dollars. Our strong and efficient economy (at least relative to others) has meant that the dollar has largely replaced gold as the metric by which all other currencies are measured, and the one in which large capitol flows are denominated.
After a defacto devaluation, we will be either unable to borrow money in dollars, or we will pay a large premium to lendors to ensure them against exchange rate risk. It is the fact that the dollar is the world reserve currency that has enabled our persistant trade deficits. These too will stop. I sometimes wonder whether the analogy we should be searching for is not the depression US economy, but the post-war British one. “Sound as a pound” didn’t used to be a joke. But for them, the war was incredibly expensive and come VE day unlike the US, which had huge brand spanking new factories and large foreign markets to feed, they had a depleated infrastructure, and a fractious colonial system. They didn’t even end rationing until 1954.
That’s rolling over the debt, not paying off the debt. Two different things entirely. Sure Uncle Sam can keep rolling it over, but the world is going to demand higher and higher yield on that debt.
Sorry, I was trying to make a snide comment on how our currency is nothing more than ink on paper. Borrower turns in bond, receives treasury notes in return. As LJR points out, the dollar collapses at that point.
Anyone see the Businessweek article on how Target is not as well-off as its earnings may show? Most of its growth lately has been through the credit section - anecdote about a lady making 17k who already hit the $7000 limit on her citicard. What’d they do? Upped it to 10k. Then 12k. The only way for Target (according to the article) to continue to show profit was to let their buyers go further and further into debt. Nice long-term plan. Not.
This is done all the time. Once the cards are maxed out target will sell the entire credit card division to MBNA or one of the other professional hosers.
Hey we rent, ohayo gozaimasu!
Yours is the first of 4 terrific comments on this thread — the best I’ve read yet on Ben’s Blog. I’ll put the 4 together at the bottom, but great catch! You’ve given a heads up to a variation on the old creditors/bank chestnut!
9 trillion in debt isn’t that big of a deal when you think about it. It’s basically $30,000 in debt for everyone in the US (9,000,000,000,000 / 300,000,000). Spread out over 30 years at 5% interest, that’s about 120 bucks / month / person (less than most people’s minimum payments on their credit cards). If you spread that over the number of corporations as well as people, the payment is even less.
I’m not saying we shouldn’t be more prudent in our federal finances, but it’s less to worry about than the trillions of dollars made by banks who burgle from credit card customers, homedebtors, and investors.
That said, it is about time we stop government deficit spending, no matter how much the Fed feels it might be “contributing to deflation”.
Will we? We have been having a real debt crisis for years, from the level of the federal government to the individual equity extractor. Pick a measure and we are so far in the red it is almost unbelievable; current account deficit, federal budget deficit, household savings, household cash flow…just pick a measure. The economy of the last 5 years or more has been financed almost entirely by debt. Government debt is now so high there is no way it will ever be paid off. We will have to find a way to renege on our obligations, while claiming to pay them, of course. When that happens people in Argentina will say ‘at least we aren’t American, they have to eat stucco and wallboard’. The end is very, very near and most people don’t even know it.
It will end when the Chinese stop deciding to underwrite our excesses.
To some extent they need to keep doing that to bring in outside hard currency investment to prop up their own suite of bad debt and shadey loans.
In a free society it’s one thing to have this problem, in a quasi closed society like China, you have these businesses that are funded with the public debt belonging to top generals and high party officials. You think they are going to let them go under that easily? Their governement is more than willing to ransom everything to let the top fat cats keep the game going. As someone pointed out on my mid-year prediction (and it was a good point too) China is not going to let anything look bad until after the 2008 Olympics.
From a math standpoint, I don’t see how they can last past the end of this year. The machinery that let them get away this long is breaking even now.
Maybe they won’t stop then. It could be fun watching us drown ourselves.
And very little of that money has been used to finance productivty improvement. Instead it has been used to finance foreign goods (the trade deficit, consumer debt), the invasion of Iraq and entitlement payments (the government deficit), and inflated asset prices (the housing bubble). It’s kind of like watching the mouse go through the python. It will take a LONG time to digest all of this debt. Some will be paid, and some will be defaulted upon. The proportion of each will do much to establish who the winners and loosers are.
There is a tendency that, when people think that they’re doing well, they call upon the Republicans to keep the government off of their backs. When they think that the rich are conspiring against the “middle class”, they ask the Democrats to go after the “fat cats”. In our currently polarized political system, it doesn’t seem likely that we’ll pass through fiscal responsiblity when flipping from one extreeme to the other.
on the front lines of the mortgage business, we see an increasing number of borrowers that have lost the capacity to refinance over the last twelve months. the majority of them used 80/20, interest only and even worse, pay option arms. now, at their reset anniversary, they are overleveraged and the appreciation train has stopped. with the concentration of these types of loans reaching half to three quarters in many markets, the marginal buyers of three years ago should turn into panicked sellers by the end of the year, and the players on the margin are the ones that make the market. i think the government numbers on construction are a joke (4000 jobs lost). three quarters of the homebuilding industry is mom and pop. same thing with the mortgage industry. i sense that the market is starting to realize how close we are to heading into a recession.
I am not a professional economist, but if I had to guess I would say the recession started this spring. There seems to be some sloppy math now habitually ingrained in the published statistics, as you frequently hear of revisions of key indicators.
As an engineer by trade, I would not be allowed near a project if I came to the Program Manager after the first run of assembled systems was in the hands of the customers, and claimed that “woops, I guess I did not have all the figures, looks like we need to revise our design… “ yet it seems to be the standard practice now for published numbers.
The highly unscientific “Empty Storefront and Liquidation Sale Indicator” says that, at least in my neighborhood, the recession started in Spring 06.
John William’s “Shadow Government Statistics” state that we entered a recession the middle of last year.
So, the people who said ‘everything is fine until after the November 2004 elections’ were right?
Right now, everything “needs” to be “fine” until after the November 2006 elections.
sm_landlord
I agree with you there. Neither political party is going deal with this issue until after the election. I fully expect that a recession will become ‘ official’ in Jan. 07′. A couple months after the election and after the Holiday buying season.
sm_landlord
I agree with you there. Neither political party is going deal with this issue until after the election. I fully expect that a recession will become ‘ official’ in Jan. 07′. A couple months after the election and after the Holiday buying season.
“I am not a professional economist”
Well that just brings more credibility to your comments as far as I’m concerned. While we are on the subject, how is it possible that the vast majority of economists either didn’t call this or at least never got an interview that made it into print? It doesn’t seem possible that we would be this far into this disaster and only now hearing disclaimers and “I told you so’s” from economists. Back in 03, which is when I thought this thing had gone far enough, nary a word from any source that would have been considered credible and would possibly have mitigated this debacle. Now that any idiot can see what is going on, economists and others are claiming this great insight into housing dynamics. It just seems a bit odd and unlikely that this would be so uniformly missed by both the media and economists. Are all these guys trained at the same college or what? Perhaps they need to revisit the economic theory these guys work under?
Some professional economists know better, but are paid to make their living by deceiving sheep with specious arguments.
Boulder Bo — thanks for your news from “the front.” I’m thinking about making a low-ballin’ trip to a few areas I fancy — my wife is cringing at the thought I might offer 50% of an asking price. Told her she could always wait in the car with ‘ol Blue.
LOL. Funny to think of the shock and horror on the sellers face, but I imagine those who have to sell could not bring enough cash to the table to do a 50% deal. And those selling who own outright or at least close to it would just slam the door, stamp their feet, and sulk knowing their dreams of huge gains have been just that….
Yes but what if, despite the stomping of feet and sulking, that outright owner or one with lots of “equity” must sell because of death, divorce, or some means of destitution.
That’s where the lowball 50% offer might work, and that is what will cause the market to take a dive.
I hate to say it, but I don’t think we have seen the end of the debt binge yet. I honestly think the US consumer is “fight’n drunk” on fake wealth and will probably spend over a cliff. I speak from first hand experience having almost done that myself in ‘99 when I was pulling in 250K a year.
For me it was the catalyst to (hopefully) change course. No, did not go BK, I dug myself out one shovel at a time.
Until it’s too late, your average Joe / Jane does not know they have a problem. It’s all too easy to get yourself in far over your head, and it can take several months to finally come to the realization that your commited outward cashflow is exceeding what you can possibly take in.
I’d like to see one day Joe Six-Pack who went out and got a bad loan have to be eating rice and beans for a little while. Not homeless, but having to make due without the Happy Meal. The materialistic entitlements out there these days astounds me.
I was just having this conversation with my friend not more than an hour ago. He is no friend to realtors® or mortgage bankers, but took a devil’s advocate position of why increased credit and lending not just go on forever. Okay, he acknowledged a few bad markets like Denver and Florida, but why not elsewhere can’t the funny money keep pouring into the system. Well I guess it can, which would result in a hyperinflationary recession, but the likelihood of a deflationary recession turned out to be a hard argument to make. In other words he was asking why we HAVE to go into a K-cycle.
So I explained the fed rate hikes, which he acknowledges will probably go to at least 6%, and the number of non-fixed loans out there, and that our system of credit requires a constant increase of housing values so sheeple don’t get totally burried by their debt, where even if prices stay flat like they are right now FBs are going to have to stop borrowing and start paying.
Which brought us to our point of disagreement… he didn’t believe in all the FBs out there that I asserted exist. If their numbers are overblown that the correction will be slow. A true crash I think does depend either on a substantial number of FBs, OR if nearly all remaining buyers refuse to become FBs. The former piles supply onto the market through foreclosures, the latter lowers demand, and with either or both we will see a correction more sudden than not.
***
Which brings me to something I have been wondering…there are $2.5 trillion worth of ARMs waiting to adjust. How much in the way of credit card debt is adjusting. Or HELOCs? How much of that is out there and due to reset along with rising mortgages?
All of it.
It seems to me that “Joe six pack” is just a guy trying to make a living….the one’s who I’d like to see eat rice and beans - what my diet consists of out of choice- are high income types who can’t do without their fancy restaurants and steaks. Might be a blessing in disguise…rice and beans are infinitely more healthy.
Rice and beans are good for everyone. Rich or poor. Literally or figuatively.
These people don’t know HOW to limit themselves to rice and beans!!! That’s part of the problem! If they knew how to budget…they wouldn’t be in this predicament. They will just leech off Mom and Dad who went through the depression and own their house outright!!! Expect this for at least a year!
My brother has the 80/20 deal. Apparently, his 80 doesn’t reset until summer of 2007 (bought in 2004). HOWEVER, he told me this past week that THE 20 HAS BEEN ADJUSTING FOR THE PAST TWO YEARS - slowing squeezing him and his flatmate all along!
Good grief!
I predict tough times ahead. This blog has revealed the house of cards created by the RE bubble as consumer spending has been driven by home sale gains home equity loans. The employment rate has been kept low by growth in construction, RE related services, and retail.
Around Boise, the job growth has been driven by the boom in construction. The paper reported construction jobs grew by 18% over the past year. What happens when the bubble bursts and the jobs tied to the bubble dry up? What will happen when the home refinance ATM is empty? It is going to be ugly
“three quarters of the homebuilding industry is mom and pop.”
Also in places like Cal., Florida, Vegas,Atlanta a large number of the construction workers are illegals, I dont know how they are accounted for in these figures.
I predict part of the “guest worker” problem will be reduced as some of the markets they had helped to fill shrink, and these guests self deport themselves elsewhere in search of an income to send to their families.
If the government actually passes some strong enforcement policies and makes them happen, I think there will be a big change from reduced job opportunity and increased threat of being apprehended.
Exactly. I was talking to a friend who is a drywall contractor and whose father brought him into the trade. He told me that the “guest workers/illegals” have slowly but surely been taking over that industry. But when they get laid off, do you think that it is reported? Hell no!!! They were never reported to have been there in the first place. That is precisely why all these statistics of job losses are fuzzy math at best. The construction industry knows good and well that times are tough right now and the future looks grim. I think our guest worker/illegal population may be shrinking as we speak.
BB:
Yours is the second of 4 terrific new insights on this thread. I’m going to put them together at the bottom.
Yup, that’s a great point. In fact, as a resident of San Diego, it’s an earthshatteringly important point. Say what you will about illegals but they do spend thier money here.
ei
Will We Hit ‘A Real Debt Crisis?
Will??? More like when! Let’s see…
1) FB Homeowners
2) FB “Investors”
3) SP&P 500 underfunded fixed pensions based on overly optimistic return assumptions
4) PBGC
5) State, County & Local government underfunded pensions & benefits
6) Federal debt, deficit, current account deficit, and future benefit obligations
The end of the housing bubble spells crisis for every one of these.
Exactly!
“All of the growth in the last 5 years has been driven by debt”
Yeah, my buddy a year ago was very bullish on R.E. and equities, but I tried telling him back then that many of these jobs that drove down unemployment are in the fields related to the real estate bubble. I think my buddy’s turning point was from some of the links I sent him, showing the 2004 - 2005 type of house buyers mostly could not afford the houses with 80/20 financing and took out interest only loans or ARMs. At least my friend’s into a good “balanced” mutual fund, which hardly ever has a down year. Maybe one year in every ten years. DODBX - but it’s closed to new investors. The quote at the top of my post here is brief, but means quite a lot of things, severe things, that are going to happen. Perhaps a good turn to building up savings, like I mentioned earlier, will be a long bitter pill, but put the country back on its tracks. I know I sound pessimistic, but it could be 2020 by the time we become a nation of savers (substance) as opposed to a nation of spenders (style). Goodbye Hollywood and hello Cornbelt! In my earlier post, I was musing that international stocks of nations with the same debt problem and real estate bubble as ours (and rising interest rates) may not be where you want to go in equities. But I want to amend that statement and suggest value investing in foreign stocks. Unless a new Einstein discovers the secret to nuclear fusion, and makes it available in nuclear fusion fuel cells for automobiles, or unless a new oil field triple the size of Ghawar (Saudi Arabia’s largest field) is discovered, I would say precious metals, short term bonds, and value stocks would be the places to park (and dollar cost average) your money.
There are several “black belts” on this board, and I would dearly love to get comments on the impending rate hike by Japan, and the possible end of the “Free Yen for Everyone!” game that has helped our debt crisis extend.
“I would dearly love to get comments on the impending rate hike by Japan, and the possible end of the “Free Yen for Everyone!” game that has helped our debt crisis extend.”
I read about this impending Japanese rate hike on an excellant board where you may have got it from: http://www.kitco.com - the rate hikes in Japan, according to the article on Kitco, could knock down gold back to the $500 to $550 range. I don’t know when the hikes are expected, but the article suggested very soon, as in two weeks from now. For those buying gold, I suggest that if you invest in it regularly over a multiple of weeks, to just buy gold once a week in smaller amounts. Personally I’m doing a lot of overtime work this summer and the next 8 to 20 weeks, I’m going to buy one ounce per week of gold (and occasionally buy platinum). All along, I am also buying US T-bills and prefer the 3 month kind. Rates going up in other parts of the world are also pressuring the beleagured Fed to push its own rates up. These are interest rate wars folks, in case you did not realize it! Japan joining the fray! Oh my! I’m looking forward to buying lots of 10 year notes, but now is not the time for them! We’ll be pushed to 7.75 federal funds rates and 8% 10 year note rates in a couple of years, I think.
The action in Japan is being closely watched by those that care about liquidity flows. What I read is that Japan pulled out a large amount back in May and then put back about 50% of that recently. Perhaps to prevent a really sharp downdraft (crash) in markets. So it indicates that they are willing to do a little fine-tuning. The politicians in Japan are basically telling the central bank to not raise rates but the CB is supposed to be apolitical. It may be that the CB is providing cover for the politicians here.
The North Korea situation is a further complication. It would be interesting to see a Japanese military buildup in response though it would take some legislation to make that legal over there. That would certainly be inflationary.
On gold, buying coins one at a time is inefficient with respect to the premium that you pay. It is far more efficient to buy ten or a hundred at a time.
Platinum coins carry a huge premium when you puy and sell them compared to gold. I think that Platinum coins have less liquidity as well but if you like precious metals, it’s hard to resist having at least one of them.
I concur on the potential for gold to get whacked on a BOJ rate hike.
“On gold, buying coins one at a time is inefficient with respect to the premium that you pay. It is far more efficient to buy ten or a hundred at a time.”
It all depends on where you buy. One company I went to in Los Angeles (up to the end of March when I lived there) would charge you 8% sales tax on purchases of metal under $1,000.00. But otherwise you pay a 4% premium. I think the 4% premium is worth it, since I’ve been buying a year ago in March when it was around $440 per ounce. if I waited until I could get ten coins, I would have been buying at nearly $500 per ounce. I do not know if that shop had a 10 coin discount. There is a big outfit here in Phoenix where you can buy in quanties of 10s, 100s, and 1,000s of ounces. But the savings are not major on those volumes. So I figure, why bother? Gold and platinum are not a major part of my portfolio, but I’m working on building up to 10% of my assets in physical metal. Got a long way to go. If the price of gold goes as Citigroup predicts, I probably won’t have to wait that long!
I bought between $250 and $412 and haven’t purchased since then. We don’t have sales tax in our state which does make quite a difference.
With Silver, the premium makes a huge difference. I recall single coins around $9 when spot was $6. At
10 units, the price went down a buck. There was
a bigger discount if you bought a mint-green Treasury box of them.
The hike is supposed to take place July 14th.
First, no black belt here
But when the Icelandic Krona collapsed back in March due to a rush for exits in their government and “big bank” bonds, one of the precipitating causes was anticipation of Yen tightening, thus ending the carry trade in Icelandic bonds.
That money ran for cover in relatively safe havens, the dollar being one of them. So my point is that many of the big players have already positioned themselves for the end of zero interest rates in Japan. Thus a rate hike by the JCB might even trigger a contrarian move once the news is out.
that is a good point.
I would also like to point out that gold has already survived tightening in the US.
“..a husband/wife realtor team is really struggling with sales. They’re considering alternatives to real estate and we’re in a region- Seattle/Puget Sound- that happens to be plugging along quite well.”
= Realtors struggling with sales to the point of looking for a carreer change but RE here is doing pretty well.
This is what I don’t get about this area. Does anybody else think this statement is illogical?
But people around here really eat this stuff up.
Price reductions don’t mean the market’s turning, it doesn’t even mean the market MIGHT be turning, it means the houses were priced too high to begin with.
Slow sales , well we are confused as to what that might mean because REALLY, the market’s fine here!
Increasing DOM’s we don’t/won’t/can’t talk about it.
No wonder Seattleites got “whiplashed” in the 1990 downturn- they *didn’t see it coming*.
I don’t think this RE slowdown is anything new. Back in November 2005, my accountant mentioned that several of her RE clients hadn’t moved a property in six or more months. That was back in 2005! I can’t imagine their prospects have improved anymore since then. (I live in San Diego, btw).
I think that what they meant was that Seattle hasn’t been feeling the crunch as much as some other areas of the country yet, which is quite true.
First, I think it is very cool that Ben used my post about the debt crisis to start this thread. Thanks Ben. And thank you all for your comments. I have an economics 101 understanding of things at best.
But I just don’t see how this housing bubble doesn’t have a hard landing and our country doesn’t go into recession, or worse.
Okay, for fun, I’ll give this a try
IF…
1. There really aren’t that many FB’s, as we think. Bloggers are overstating the issue. They may have to scrimp and save and maybe work some extra hours. But they’ll be able to make their mortgage payments. Barely, but they don’t foreclose.
2. Rate hikes stop, and loose credit never ends. There doesn’t turn out to be that many foreclosures. As above, FBs have to give up their Hummer and ski vacations, but they find a way. So more potential buyers become FBs, and house declines remain tepid at best.
So….
3. There is a moderate amount of inflation. Like 5-10% a year. It’s ugly for people saving their money (like me), but it never gets “hyperinflationary.”
4. Every nation is in the same boat, so foreigners keep buying treasury bonds because where the hell else are you going to put your money? Now don’t say “gold!”. That’s too obvious an answer.
So… is this a possible solution between a “deflationary recession” and a “hyperinflationary” one? One with medium inflation? Home prices stagnate, dropping in value but not in price. Why is a “medium inflation” scenario not likely?
I’m rooting for the deflationary recession, buy why can’t the fed “medium inflation” our way out of this housing and credit mess?
I’ve been wondering about these things, too. Like you, I hope for deflation, a nice reward for us savers.
However, to be honest, I’m in my late 20s and have never seen (in my adult life) anything but “good times.” Yeah, my dad got laid off in the early 90s recession, but ever since I trekked off to college (1996) it’s been all gravy for me, my friends, and my family (helps that that group is composed entirely of white collar workers, many of whom are in the technology fields). But the point is, I’ve not seen “hard times” so it’s hard to envision them coming, to imagine what they might look like. And I think a lot of people fall into that boat and had this attitude over the past six years that bad times could never come - they just kept spending.
After the dot com bubble, the economy stayed bouyant because of consumer spending. Even though many people took it in the shorts, few significantly cut back their lifestyles. Granted, the Fed’s liquidity firehose didn’t do anything but encourage such behavior, but the fact was that even after a “scary ride” on the stock market, people were still willing to finance their lush lifestyles by borrowing money. And, to bring this thing full circle, I think the reason they were willing to go deeper into debt was because, like me, they had only seen “Good Times” (or were only choosing to remember those good times).
But… assuming there aren’t as many FB’s (which I disagree with) if people are scrimping and saving and working extra hours just to make the mortgage, they are not engaging in “consumer spending” which has driven the economy for the past ten years or more. If consumer / luxury spending, as you stated, vacations, sports, electronics, cars, etc. contracts significantly, ripples spread, and a recession is guaranteed. Fear is also contagious, thus the question as I see it is “Can the shills keep the sheeple from panicking as their specuvestments collapse?”
A realtor I spoke with a week ago said she felt a “thud” in the housing market in May. She says things just went limp. Those aren’t good words, and, quite frankly, I’m not sure any CPR can assist with this market. It’s a question of who blinks first, the foreign investors, the domestic speculators, or the government. Frankly, I think they’re all going to blink. I also think that the conjunctions of lack of savings (negative rate) combined with flat or falling real estate, massive government debt and trade imbalance, severe foreign committments, rising international tensions, rising foreign investment rates, etc., etc., will create a perfect storm scenario and panic will be inevitable. The Argentina scenario is very possible, and even “secure” investments like T-bills and bonds may be in jeopardy.
There are tons of FB’s out there (especially in CA). I have a friend at work who is an agent on the side and he has told me stories of some of the people he has sold houses to and they are definately FBs!! Don’t let this nonsense fool you, there are tons of people out there who are screwed! When the average income is $50k a year how can they afford a half a million dollar house???? This is insane! Don’t belive the lies that there aren’t many FB’s out there! They are everywhere just go into the store and look around! People are so much more stressed lately! My husband works with a bunch of kids in their 20’s who own multiple houses and are constantly worried about the rates. Believe me, these people don’t make the kind of money we do and we rent!! These people are going to be in big trouble!
“A realtor I spoke with a week ago said she felt a “thud” in the housing market in May. She says things just went limp.”
Too bad we can’t see real-time valuations of housing like we can of, say, the Indian stock market or gold. Because I conjjecture that the crash in gold and emerging market stock and other risky asset prices which played out in May also hit the value of US housing.
Because sellers do not have to sell below their reservation prices, the sharp drop in values was masked by the growing mountain of unsold inventory, and will only show up in the sales price data slowly over time.
“The Argentina scenario is very possible, and even “secure” investments like T-bills and bonds may be in jeopardy. ”
If that is true, the only safe havens are: physical gold bullion, 5 acres of land where water is plentiful (to grow your own food) and lots o’ ammo. And this stuff reminds me of the survivalist movement in the late 70s. We’ll see those creatures on TV talk shows soon, all in their boy scout / paintball game fatigues.
I’ll offer this as a possible roadmap for inflation/deflation.
http://www.financialsense.com/editorials/petrov/2004/0926.html
Long article. I will repeat below the three paragraphs which seem most relevant to the current situation. I am quite certain that Dr. Bernanke is familiar with von Mises’ description of the Hobsons’s choice he faces (in the original sense — http://en.wikipedia.org/wiki/Hobson’s_choice), and I suspect he agrees with the conclusion of the passage below.
‘However, low inflation cannot last forever. Sooner or later, people wake up to the fact that inflation is here to stay and that current high prices will get even higher. They realize that they gain by buying now, so they step up their purchases. General prices now begin to accelerate higher. As a result, the government revenue falls in real terms, and if the government accelerates the money supply, consumers respond by accelerating even further their purchases. Now consumers begin to spend not only all the new cash that they get, but also that extra cash that they have hoarded while inflation was low. At this point prices begin to increase faster than money supply. Now the economy switches into a qualitatively different regime: from one of “low” inflation, to one of “high” inflation. As Rothbard puts it in his Man, Economy, and State, “This stage of inflation is the beginning of hyperinflation, of the runaway boom” (p. 876, 4E). In economic terms, the increase in the quantity of money causes a fall in the demand for money. Now inflation has reared its ugly head. It is no longer benign, but vicious. Prices continue to rise and incomes can’t keep up with them; real incomes fall and people begin to feel impoverished. Interest rates begin to reflect the new inflationary expectations and as a result begin to rise. As a consequence, bond prices fall, the stock market drops, and real estate falters. Feelings of prosperity vanish, and consumers retrench their spending. Good times turn into bad times (even though technically these are still boom times and the bust has not yet even begun). As the situation continues to exacerbate, prices rise further while at the same time people reduce their cash holdings. As a result, a crisis develops where there is a perceived shortage for cash, and there are more cries for further inflation in order to alleviate the cash shortage.
At this point, two scenarios are possible: (1) hyperinflation or (2) deflationary bust. In the first scenario, the situation gets so out of control that financial authorities oblige the public’s demand for more money and accelerate the money supply, now almost exponentially. This is “hyperinflation”, the third and terminal stage of inflation. Mises refers to this as flight into real goods or the crack-up boom. His description from Human Action is as follows: “Everybody is anxious to swap his money against real goods, no matter whether he needs them or not, no matter how much money he has to pay for them” (p. 428). And Rothbard calls it flight from money and describes it as “getting rid of money as soon as possible in order to invest in real goods—almost any real goods—as a store of value for the future. This mad scramble away from money, lowering the demand for money to hold to practically zero, causes prices to rise upward in astronomical proportions. The value of the monetary unit falls practically to zero… The economy in effect breaks down” (p. 876). Hyperinflation ruins the middle class and wipes out the fixed income groups. It finally leads to unemployment and lower standards of living.
In the second scenario, before runaway inflation gets totally out of control, the pain of inflation becomes so unbearable and widespread that the government has no choice but to put an end to it. More importantly, as opposed to the clear benefits from low inflation, during high inflation, the benefits of the government from more printing are actually increasingly negative, since price inflation quickly erodes the purchasing power of the budget. Having little to gain, and standing to lose even more, the government reluctantly stops the printing presses, terminates the boom, and the bust begins its course. According to Rothbard, the bust is clearly better than hyperinflation.’
SFM: Yours is the 3rd of 4 great new insights I’ve seen on this thread. Great post! I’m gonna try to put them together at the bottom.
Here’s a possible new twist on prolonging the debt bubble (and living beyond one’s means in general:
http://memphis.craigslist.org/apa/179692609.html
To get the whole picture, you do have to go to the site referenced in the listing - the fun part is on this page: http://www.powerhouseconstructiongroup.com/join.php#pfa
Yes, it’s a rent-to-own MultiLevelMarketing Scheme! Think a few hungry agents/builders/mortgage brokers might bite? And best of all, renters have to join the MLM and are “incentived” to recruit their friends, families and co-workers.
It’s so hideous, it just might work.
Hideous is an understatement.
Is this by those pyramid people who sell soap suds?
A Ponzi scheme by any other name…
Here’s a possible new twist on prolonging the bubble:
http://memphis.craigslist.org/apa/179692609.html
To get the whole picture, you do have to go to the site referenced in the listing - the fun part is on this page: http://www.powerhouseconstructiongroup.com/join.php#pfa
Yes, it’s a rent-to-own MultiLevelMarketing Scheme! Think a few hungry agents/builders/mortgage brokers might bite? And best of all, renters have to join the MLM and are “incentived” to recruit their friends, families and co-workers.
It’s so hideous, it just might work.
I had the opportunity to make a business pitch to some folks who run one of America’s trading floors this week. As luck would have it we also had some drinks afterwards, and I had a chance to talk to the CIO and a handful of his crew.
I asked him what he thought about the Housing Bubble, and he remarked that it was a very real and near term problem. We were likely the see some tough economic times in some markets starting pretty much now. He thought the Fed Funds Rate was 6% “In the bag” by the end of the year, and maybe more depending on some factors.
Oddly enough this same “pitch trip” had me a day earlier talking to managment and execs at one of the top credit card issuers in the world. They told me off the record that they are already working on how to manage what they forcast is an increasing uptick in defaults, bankruptcies and late payments. Seems they started getting statistically meaningful increases last year, and the trend is accellerating.
Yes, I am not using names because I think I was told this stuff “off the record” in direct response to questions I asked after the business portion of the meeting had concluded.
I got a letter from Citigroup last week stating that my interest rate will go to the higher of 28.99% or 26.99%+LIBOR if I have any credit blemishes anywhere and if I carry a balance. I was tempted to dump the card. It was originally an AT&T Universal card that I got decades ago. Citigroup bought the unit out. I use the card once a year and was pretty annoyed that it is a Citigroup card.
I guess that’s one way the credit card companies are reacting to defaults and late payments.
How is this? I have a Citibank credit card and my rate is 1.9% fixed until the balance I transferred is paid off? My other credit card is at 0% until 11/07. I guess I live in a different world?
I don’t know what the regular rate on the card is but I’d guess it’s in double-digits. I’ve never really bothered with interest rates on credit cards as I’ve haven’t carried a balance since the early 1980s. But I think that it’s notable as to what banks are charging if you have any blemishes.
I HATE Citibank… they are vultures.
Google: Universal Default Clause
Somebody has to pay for all the free stuff that those of us who pay off our charge balances every month get for being good do-bees. It may as well be the customers Citi is encouraging to find another lending sugar daddy.
I just paid my citicard early since I’d be out of the country, but missed my guess by $20. They applied the payment early, then said I didn’t pay the $20 “payment due” on time, applied a late fee and raised the interest rate to 29%. LOL. I don’t really care since I don’t carry a balance, and they’ve already credited the late fee. But 29%! Ouch!
Don’t dump any card you’ve had long term. Just use it very carefully. Part of a high credit score is how long you’ve had various credit. I keep a credit card and a checking account (balance $1) for this very reason.
sigalarm:
Yours is the 4th of 4 great new insight I’ve read on this thread. The best thread yet I’ve read here.
I’ll put them together at the bottom.
(We will have to find a way to renege on our obligations, while claiming to pay them, of course.)
It’s known as inflation.
Look at how people blame the oil companies rather than their own energy intensive lifestyles for the run up in gasoline prices. If people’s wages rise, but fall behind inflation, there are lots of people to blame. If you have a recession, people lose their jobs can’t service their debts, it’s either blame themselves and their borrowing or blame the politicians and their borrowing.
Even a soft landing requires either inflation of a recession — just less of it than a real disaster. I really think we are looking at a choice between the two.
I was optimistic in 1993. We were at a bottom, but on solid ground. Now? We’ve run off a cliff.
I spoke with our RE agent the other day, she told me that a great place is coming on the market that we might like (no, we’re not buying anytime soon). The sellers have taken out equity over and over and now are nervous about their finances and have decided to sell and live in thier RV. How many times is this happening all over the country?
So… we should invest in trailer parks, campgrounds and used mobile homes?
How are they going to afford the gas with no home equity to pull out???
Why they think they can sell their house at a price which would cover their debts? They may be already upside-down and they do not know it.
There is a lot of trust on this blog as we realize the collective knowledge of the contributors.
Would those waiting to buy in the OC or elsewhere commit to buying with a 20% reduction? 25%? Could they qualify? What does it take to make you commit?
I felt left out for 15 years, finally bought in ‘87.
We’ve been fine ever since (mostly). Timing is everything!
When will you pull the trigger and why? I know my reasoning, and I was watching the market from the early ’70s. Still watching, and still a first-time homebuyer. Scared the hell out of me then, but I think it should scare the hell out of first-time buyers now even more.
Please wait and watch, first-timers like us. It’s going down fast. Be patient. Even higher interest rates may be you friend as they drive home prices down
I would buy (again) without hesitation if prices fell by 25%, because then my mortgage payment would be less than my rent.
OT…but I’m watching Property Ladder. A 25 year old coffee shop manager from the East Coast moved to Los Feliz, Ca (near Los Angeles) and bought a Craftman’s bungalow fixer for a little over $500k and had plans to renovate and sell it for $800k. Timeline: 12 weeks, $15k carrying costs (mortgage pymt $4,800 per month)…and NO money…and he thought he could do the work for $50,000…yes, with NO money. He had pie-in-the-sky ideas which he was told he should NOT do(add a loft, rip out kitchen cabinets, redo the master bedroom, rip out wall…LOTS of stuff), but he didn’t listen. He learned the hard way. His attempts to get loans to do the work all fell through. So what does he do? Goes crying to Mom and Dad to bail him out. He wound up having to change his plans (duh!)….and he had to do a lot of the work….and he is NO handyman…at all!
Long story short, this is how it ended:
After 21 weeks on the market, TJ’s Craftsman house sold for $680,000. The sale closed after TJ had made nearly $30,000 in additional mortgage payments. Although his gross profit is $27,200, TJ had to pay realtors’ fees, taxes and penalties. He calculates that his net profit after expenses will be less than $14,000. He still hopes to be able to pay back his parents. TJ says that, if given the opportunity, he will flip again.
I wonder how many other clueless flippers like him are out there about to lose their shirts? He was lucky he even had parents to help him. I don’t know that many people that have $30k laying around.
BayQT~
Yes, but how did he manage 3% Realtor fees as they stated?
If it was the 6% now typical he would have been underwater for sure.
The guy was certainly a moron and probably figured from the beginning that he could call Mommy and Daddy for a bailout.
His Dad did a great deal of the labor as well.
Property Ladder - Watch the date of the shows…the ones made in 2005 usually have happy endings…the ones made in 2006 (including the one you watched) have been trending towards harsher incomes. I hope they follow that guy on his next flip.
But also look what happened…SOMEONE paid $680K for, what, a 2 bedroom/2 bath house in an arguably crappy part of LA (Los Feliz, literally “The Happy One”). Look at the houses next to his; this is NOT a good neighborhood. Yet SOMEONE bought this small house in a not-so-great (or even crappy) neighborhood for $680K!
In a non-bizarro world, that is a LOT of money! In saner times, a price like that would require a $136K down payment and around $4K a month PITI payment. Would anyone sane pay $136K down and $4K a month to live in that house, in that neighborhood??!
However, since we ARE in bizzaro world in LA, the buyer is probably a FB with an interest only/option-ARM/teaser rate, no money down, no income verification loan. They’ll be able to make the smaller payments for this small house in a crappy neighborhood fairly easily, just as if they were renting…until The Day Of Reset. But why should they care about it now, it’s all about the (initial) monthly payment, right?
Even worse….it was a 2/1 when he bought it, and 2/1 when he finished. He didn’t have enough money to add a bath as the host recommended that he do. If you’ll remember, the RE agents who toured the house, and the visitors to the open house, had problems with the house….too high a price tag, the lack of a 2nd bathroom, cheap fixtures, and so on. BUT…a GF came along on week 21 and bought the damn thing. He himself bought it initially for $584! and thought he would be able to sell for $749! A few weeks later, he reduces it to $649 and some poor schmoe actually signed up for $680,000. I don’t know the area but from what you said about it, the price tag was ludicrous. Crazy.
I’d like to see another flip from this guy, too. It’ll be interesting to watch more of these shows…maybe I’ll be able to catch some of the 2005 ones, too.
BayQT~
Not to worry… personal debt, government debt and the housing bubble will all be taken care of O.A.C.
Is that O.A.C as in (On Approved Credit), or as in (Our Asian Creditors)?
LA Times - Default rate of ‘piggyback’ loans spurs Wall Street to action
http://tinyurl.com/gbc2g
“As of July 1, the most influential ratings agency in the mortgage arena, Standard & Poor’s Corp., has upped the ante for lenders who fund piggyback deals. The move is likely to raise interest rates and fees for some home purchasers this summer, say mortgage experts, and could reduce the volume and availability of piggyback programs overall.”
Note the 60% rate of users of these snarky loans from California, as many on this blog including myself have previously noted, this will be a significant factor in the all but certain reversal of prices in the coming years.
‘Federal financial regulators are expected to issue 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.’
We keep hearing about this Great Pumpkin. But if it ever really happens, the RE bust will be unstoppable. We just removed 25% or more of the buyers who were speculating on appreciaition. Now we will remove another 25% or more of real buyers.
“I’ve seen people with the attitude of ‘you can’t take it with you! and they can’t come after me for the money once I’m in the grave!’ So if more people have these attitudes than don’t, what’s to put a stop to it all?”
And Mama looked up with a tear in her eye and said,
“Son, Papa was a rolling stone. (Well, well, well, well)
Wherever he laid his hat was his home.
(And when he died) All he left us was a loan.”
“Papa was a rolling stone.
Wherever he laid his hat was his home.
(And when he died) All he left us was a loan.”
This is a great thread, and everybody has left great comments!
Let me put together the 4 great new insights I’ve read here, that I hadn’t thought much about before — because together they paint an interesting picture:
1. When 10m debtors owe 110b to creditors, the creditors own them. When 100m debtors owe 10T to creditors, they own the creditors. That’s what is happening now with credit card debt.
2. Employment numbers have been misleading this who last 5 years, becuase in the most booming industry (construction) many if not most of the workers are illegal and can’t be reported. As the boom unwinds, the numbers will be equally unreliable, masking the extent of the bust.
3. To deal with the bust, creditors are already making plans to soak debtors with some ability to pay of as much interest as possible — to try to offest the increasing number of debtbeat debtors (see point 1).
4. This means that all participants in the debt bubble are in too deep — and it will play on until the last possible moment, after which the unwinding is likely to take years — either a hyperinflation/bust, or else a sustained period of perhaps 10% inflation where assets as a whole do not increase in value, but real wealth declines across the whole middle/upper class, year after year after year….
Thanks! This is why I enjoy reading this blog so much.
Good summary
Very good correlation between a big collection of posts. Are you an editor by trade?
I just like to think I have a facility for connecting the dots and seeing the big picture (or I’m totally self-infatuated and deluded, take your pick).
The more I thought about those posts, the more I saw a picture of a “critical mass” of FB’s creating FC’s as well (and it’s dawning on the FC’s).
I’m thinking this is like a poker game where everybody is in so deep, everybody is afraid to call, so every round (here, every financial quarter), they just raise and raise and raise — trying to put off the catastrophe as long as possible, but knowing deep down they are all on the Voyage of the Damned.
Iguess the new federal guidlines are comming out right after the Nov. elections - go figure lol
When Feds stopped publishing M3 numbers, No one in the media, No one economic commentator/columnist made a note of this event.
What is up with that !!?
Fleckstein did an article on the M3 issue - CNN website - sorry I don’t have the link
The debt collapse/recession started on 01 January 2006, when SEC Regulation ‘AB’ went into effect. (’AB’ stands for Asset-backed, and many/most mortgages are sold into the markets this way)
Within a few weeks, the blogs were reporting large pile-ups of houses in the Florida, Phoenix, and elsewhere.
Makes you wonder about the “quality” of these Asset-Backed thing-a-ma-bobs ‘before’ 01/01/2006….