Bits Bucket And Craigslist Finds For August 3, 2006
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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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A lot of RE sob stories in the (Australian) papers today, after yesterdays 1/4% rate rise.
Rates have gone up now also in Europe (ECB) and England (BOE). I’m hoping this worldwide house of cards will crash soon.
This world-wide crash is a 5-10 year process. It won’t happen (e.g., bottom out) “soon”.
This is great stuff (AU and ECB tightening). It will make it really hard for BB both to give Wall Street their hoped-for pause (aka respiking of the punchbowl with Bacardi 151) and to maintain a credible commitment to his academically-advertised inflation targeting plan.
Sounds like global plunge protection time…
—————————————————————————
EUROPE MARKETS
European shares slip after BoE hikes key rate
ECB follows suit with its own rate hike
By Sarah Turner, MarketWatch
Last Update: 12:05 PM ET Aug 3, 2006
LONDON (MarketWatch) — European shares fell Thursday after the Bank of England unexpectedly raised its key rate by a quarter-point to 4.75%, which exacerbated fears that central bank rate rises will dampen economic growth.
The U.K. FTSE 100 index (UK:UKX: news, chart, profile) closed down 1.6% to 5,838, the worst performer among major European indexes.
The German DAX Xetra 30 index (DX:1876534: news, chart, profile) dropped 0.7% to 5,640 and the French CAC-40 index (FR:1804546: news, chart, profile) fell 0.9% to 4,983.
http://tinyurl.com/pl6ts
Do Wall Street folk really think that BB is the only CB on the planet who will stop tightening when all others are dumping water on the fires of inflation? I just don’t see how he can act that independently, but maybe others who post here know better…
http://tinyurl.com/mh5o9
First post. I just found this blog a few weeks ago. Great entertainment!
I have a friend here in Phoenix who simply cannot stop spending money. Being the nosy yet concerned friend that I am, I recently took a look at the Maricopa County Recorder website to see if all his money was coming from where I thought it was coming from: cash-out refis against his home equity. What I found is concerning.
In November he took out a $200,000 ARM. Then in February of this year (yes three months later), he took out a $400,000 balloon ARM, most of which he has used for expensive toys recently. I then checked Zillow to get an idea of what his home is worth - $375,000. So he is already potentially already upside down six moths into his loan before rates on his ARM go up (they will) and as the housing market in Phoenix begins to crashes (it will). He makes a decent salary (attorney) but I have zero confidence he can save his way out of this. My concern is that once the market here takes a serious dive, he will not be able to refinance his mortgage when the balloon payment comes due since he will be so far upside down.Is it inevitable he is going to lose his house?
It depends: if he can swing an unsecured loan for the difference between the balloon and what he can refinance his house for, then he may be able to skate. Of course, such a loan would be very expensive.
I just find it amazing that so many people who are intelligent in other matters can be so stupid with the most important asset they will ever own. Boggles the mind.
It is not really amazing. You can not expect any different from over-indulge society. We have excess on almost everything, we consume more calories, energy per person, borrow/spend too much, etc. etc. etc.
No, we have an entitlement society.
Which is why when this bubble nears the bottom, we the taxpayers will be called in to bail them out.
And to think that American Revolution in 1776 started over tax on tea….
Re American Revolution. Another view is that it had something to do with opening up western lands to land speculation. If you read Measuring America it is interesting to find how many leaders benefited from this.
I have a subscription to Money magazine. I find a majority of the editorial value of that magazine to be slightly less valuable than toilet paper. The articles allude and empower people to spend above their means. People with NO money are spending $35,000 HELOC on a SUV because they had a baby. WTH? And MONEY tells them the best buy is a “Honda Pilot” instead of telling them it’s a stupid move.
The only guy with much reason is that Bill guy who does “Contrarian Chronicles” on MSN Money. The rest just cowtow to the masses.
Unsecured loan? Send him down to Joe Palooka’s Restaurant on 34th. At a table in the back, there will be a bored-looking, well-fed guy chomping on a big cigar. He’s missing half the pinkie on his left hand and will be drumming his other three fingers on the table. Be VERY polite. He’ll fix you up good.
He may be crazy like a fox.
So he gets foreclosed on… what does he have to show for it? Lots of toys.
What did he put down for that home? If it was very little then he essentially paid for all his toys with nothing.
Foreclosure comes and then time will wipe that away.
Now most people probably aren’t clever enough to work that out, but they may end up taking advantage of the scenario anyways.
Interesting, but doubtful. He has a wife and two small kids. I have my doubts that his marriage would survive a foreclosure or a bankruptcy. I think it’s basically no self control and a need for instant gratification without concern for the future.
I’m wondering if I should say anything to him or let him learn a severe lesson the hard way. I doubt anything I say can change his financial course at this point anyway. The die is already cast.
If he is a friend I’d have to say something so I could sleep lightly.
I’d have to admit I was snooping around his public records. I’m not sure how he’d take it.
I’d have to admit I was snooping around his public records. I’m not sure how he’d take it.
Here’s how you handle that. Get him interested in looking at stuff on the computer. “Hey [Bill], check this out! You can look up what people owe on their houses. Let’s look at mine… Now, let’s look at yours. Wow [Bill], what the heck’s goin’ on here? yada, yada, yada.
MjM
You know, I’ve had to be very careful about what I say lately. When I suddenly find I am touching a nerve– usually unexpectedly because to my mind I am stating only common sense (i.e. homes are priced greatly out of proportion to investment value)– then I back off very quickly.
Of course, if it’s a friend who is not a homeowner but is contemplating buying a house, then they get the whole story and I refer them to some blogs.
I have physician colleague that wants to buy in Brooklyn. One of our other colleagues just bought and got “70,000″ off the list price (funny my first thought was well the list price may have been overinflated) rather than this guy got a deal. Everyone now assumes its a “great time to buy”. I tried talking him out of buying now and waiting for a year, but he is “tired of renting” and being “a renter”. I sent him to this site, to a couple of calculators to get him to realize in a falling market, its better to rent than buy. He is convinced that the “tax break” is worth it and he is losing out on interest deductions.He says he is looking for deals and will only buy if he finds one. Its hard to convince anyone in NYC that prices will also correct here. Everyone believes that this place is special and even if there is a correction it will be short lived and small.
I agree that if he is a good friend you might want to mention something to him. When I’m in that situation, I sometimes use a technique I call the “parable of the distant friend.” I just start talking about somebody that I know (and am making up so the other person obviously doesn’t know him/her) who is doing something close to what the friend is doing and express concern/mild criticism. You get the point across without ever having to directly criticize the person.
Don’t say something if you want the friendship to last. He won’t listen to you anyway but the “I told you so” knowledge that you have on him will make him turn away for you. If he comes to you with this problem then, by all means be truthful, but if I were you - I would not bring this up to him.
It’s true. They don’t want to listen. The school of hard knocks is the only way these types learn. I tried to warn a friend who just bought a million $ *fixer* and felt like I was telling her there was no Santa Claus. She bought it anyway…has yet to unload it…and is angry at me for spoiling her fun.
Hey, you’re in a lose-lose situation. I recently had a friend come up to me, who I tried to stop from buying a an overpriced bomb last year, and tell me I should have “made her stop” from buying the home. She’s now in financial dukey and has had the home on the market for some time now at break-even pricing. So you see, it’s still my fault, even though I warned her, because I failed to shackle her to the bedpost and “make her” not buy. No one wants to take responsibility for making an idiotic decision. But if she had made 100K in equity in the last year, it would have been due to the fact she was a genius, of course. (By the way, no way she sells at break-even pricing. She going to get slaughtered.)
It’s true. I agree with SF Mechanist — if the friend hasn’t bought a place yet, then jump in with your opinions. It’s not too late! But if they’re already HELOCed to the hilt, it may be better to keep your mouth shut. Take heart: Your friend’s financial life really isn’t your responsibility.
I try real hard just to keep my mouth shut. One of my very best friends is in contract for a preconstruction condo in Miami (good god) and still says she’s up 80,000. Praying that by the time she closes all will be well (common sense says no, but hey, by spring 2008 anything can happen.)
Hey nnvmtgbrkr, I am curious….what city is she trying to sell in??
TCA you don’t have to admit to snooping. Just tell him it’s obvious he is spending way more then he earns and you are concerned because you have been hearing stories of HELOC hell and you don’t want to see it happen to him.
I’d have a hard time telling a buddy who is in a hole, “Whoa, buddy, you’re in a hole!” If he hadn’t fallen in yet, I’d try to warn him, but for this fellow, it looks to be too late.
When I was young, I worked in an office where a colleague gambled away all his money at the dog track. When he ran out, he gambled away his daughter’s college fund. It’s revolting, but there are people like that.
Lots of toys, a deficiency judgement, and 1099.
I don’t see the 1099 as a major issue for a FB. Typically when a bank bids at a foreclosure for the underlying asset that secures their loan they bid full value (principal + interest accrued + receiver costs). From the borrowers perspective the price paid at auction for transfer of title is the effective purchase price for tax purposes regardless of whether the bank’s REO department sells this asset for less than the outstanding amount owed. I agree with you on the deficiency judgement.
Disagree. Second trusts and HELOCs will not bid their full debt + costs in a down market. They will open at a dollar (subject to the first, of course) and will not go any higher unless other bidders will bid up the price. They will attempt to maximize their deficiency and, if it is large enough, either a bankruptcy or a 1099 or both will ensue. Federal tax debts are not dischargeable in bankruptcy.
KIA, good point on the subordinate debt. If value is less than the first mortgage + fees outstanding then second lien would, as you rightly pointed out, be considered a write-off and be recognized as passive income. In terms of the first mortgage I think the point still holds. Banks will bid full value even if the property is worth less. So from the borrower’s perspective there is potentially some relief from passive income from the 1st lien, though it is most certainly a mixed bag if there is a subordinate lender involved.
He is a lawyer. He probably knows how to manipulate the system to walk away from the debt somehow.
I wouldn’t count on it. The “bar” for entry into the legal profession isn’t that high and there are a lot of lawyers who aren’t particularly sharp.
[Typically] a BA degree, 3 year of law school and a 3 day bar exam.
Compare this to say, the “test” to be a Realtor (TM), or whatever you have to do to become a mortgage broker, which seems to be about the same as to become a used car salesman, i.e., nothing. And these people are giving financial advice for the largest transaction most people will ever be involved in.
Sure there are plenty of lawyers who lack common sense, but there are significant barriers to entry.
Either drop the cash to pay down the balance so you can refi, or adios su casa.
Attorneys are some of the most status conscious and profligate spenders around. This is something I know as I spent 15+ years in big law firms, am married to one, and damn . . . that’s practically all my friends too, now that I think of it.
One woman attorney I know who makes a great living working out of her house (over $400K per year plus writes the house off as a home office) is in debt up to her ass. She spends money on things like arm waxing.
Blowing through $400k a year and still racking up debt is either some truly FINE living - or something more sinister.
She’s probably the type that’s too good for regular arm-wax and instead has to pay $10k a pound for luxury arm-wax that’s made from the ear wax of an endangered species of cat that lives on Cypress and is only harvested two nights a year by blind orphans–or something along those lines.
It’s amazing how easy it is to blow through money if you shop at the “right” stores.
You got it. Nothing too good for this 49 year old fat-ass who btw, has never been married and never will be (nobody can stand to be around her)
Thats mean
Not being married does not signify that someone is a loser.
Your posts always make me laugh!
Yeah really! I know some married folks who ARE losers. My ex boyfriend from high school…he got married, and has been for 15+ years. He is extremely dissatisfied and comes over to my place to talk because he is so lonely. No, I am not interested in him. He totally settled and is miserable because of it. His life is working, going home looking at porn and then going for a swim in the pool (the pool part is nice). He also is buying at the top of the market!
Often, but not all the time, singles lead the most interesting lives. We volunteer more, we do more, we get involved more…the singles I know make a difference while the marrieds are mostly into their own families and it stops there.
Agree w/Ozarkian on this. Lots of really good people out there who are not married either because they didn’t find the right partner or prefer to have their own life (can concentrate on your own career, friendships, interests, etc. regardless of where it takes you, etc.).
Txchick doesn’t want kids, and it’s admirable that she knows this BEFORE she has them, and doesn’t feel pressured by society’s expectations that she is somehow selfish or incomplete without them.
To each his/her own. In a post which decries someone who is status conscious (follows the herd=bad), it’s a bit ironic that the person’s lack of a husband (doesn’t follow the herd=bad) somehow makes her a loser. Unfortunately, husbands and wives are often thought of as status symbols (young, pretty wives and rich, handsome men) to be shown off.
Not trying to give you are hard time, Txchick. Just want us all to be nice to one another!
TXChick57,
I appreciate and enjoy your no-bs comments.
I’m not and attorney, I don’t even play one on TV. I’m 35, I only make $50,000/year. But I have zero CC debt, I have a 1998 Chrysler Sebring with 100,000+ miles that I own (no payments). I have over $50,000 in a 401K, nearly $30,000 in a high yield savings account. The one thing I know is that even though I don’t make anywhere near what others make I am in infinitely better financial shape. Oh, I also don’t own a home. I wasn’t financially prepared to buy until 2003 but common sense told me that housing was overvauled even here in the Chicago area. Friends, except for one, ridiculed me for not taking advantage of the low rates. They are now in CC debt from furnishing their new homes, have motagages they can barely meet and some have puchased new cars in recent years as well. They can keep they’re heftier salaries, I’ll take my financial status any day over thiers. It’s not what you make it’s how you spend/invest it.
And the nice thing is you don’t need tranquilizers to go to sleep at night.
Yep, but I do have the occasional Grey Goose and tonic a couple hours before bed. One of my few splurges.
I like to use Grey Goose for my apple martinis
Right there with you Ken. I know a few people that have much nicer cars and lots of toys, but they don’t own these things the bank does. It’s great to drive around in a $30,000 + car, but how does this make you more affluent if you only own $2,000 of it or perhaps are even upside down. What I have I own.
I go to downtown Chicago (I rent in the burbs) to visit friends. They all tell me I missed out, that I should have bought a condo there when they did in ‘03 & ‘04. I feel sorry for them but I just keep my mouth shut. I’ve been calling for a correction since the spring of ‘03 and I would have been right sooner than later but they green lighted the exotic loans shortly there after and extended this thing out another few years. My friends think I miss read the market. I think they did. We’ll soon find out.
“In November he took out a $200,000 ARM. Then in February of this year (yes three months later), he took out a $400,000 balloon ARM, most of which he has used for expensive toys recently. I then checked Zillow to get an idea of what his home is worth - $375,000.”
Please tell us you made these numbers up. Otherwise, I will have to conclude that the loan underwriting industry has gone collectively mad.
so wait, does this mean he owes $600k on a depreciating $375 house? or did the 400k loan include the original 200k. confused.
Good point; I was interpreting $200 + $400 = $600, but maybe I misunderstood the post.
He rolled the original loan into the new one, so he “only” owes $400,000 on a house worth $375,000.
Sorry I wasn’t clear about that.
I live in an upper income suburb of Cincinnati. Market has been tight here for last 8 years. Every seller was getting their price or close to it. Suddenly I am seeing Price Reduced signs here! There have NEVER been such signs in my 8 years of living here.
Welcome to the party Cincinnati. Get used to seeing the stupified faces glaring back at you as you go about your daily routine. People where I’m at just have this look that says “OK, we’ll wake up tomorrow and everything will be fixed, just like it was…” Ah, the poor saps.
Here’s what’s going on in the Phoenix summer home market. http://www.sunnymountain.com/homes.php
Have been reading this blog for several months and appreciate the various perspectives of the contributors. One thing (actually one of many) that I would appreciate additional views on is the deflationary (?) or inflationary (?) impact of the housing/credit bubble on the future of the economy in general. Assuming that there will be a 30% correction in housing from 2005 prices and that the predictions regarding foreclosures becomes fact, will the resultant fallout for secondary markets cause inflation or deflation? Can cash be king in either scenario? Will cash be a falling asset in either or both scenatios? Is it a crapshoot because of unknown/unintended consequences? I know that I am asking you for you to break out the christal balls but I an stumped. Thanks in advance.
It depends on the Fed banks response. If they raise rates aggressively they would save the dollar and kill housing. If they lower aggressively they may do both. While there is much difference of opinion here on what will happen, I will throw in my opinion:
1) Fed will sputter along with raises/pauses until a (deflationary) crisis appears. This is the point when cash is king.
2) Fed will then start dropping rates or even buying securities directly in order to inject money into the economy. This is when cash will be dirt.
So in answer to whether we are facing inflation or deflation, the answer I believe, is both. Gold is a decent store of value in both scenarios, although only relative to other assets in deflation, and again… that’s a hedge as part of your portfolio, not sitting underground cackling hysterically while surrounded by ammunition and ignots (although that does make a fun summer vacation). Gold is insurance, and like any insurance, you pay to hold it. I also like short-term bonds, which have been crap for a long time but are returning better and better. Ultimately even property will be a good place to store value well once the funny money dries up.
I think the key is timing. Not timing as in clicking the right instant or price on your Etrade account… but assessing the six months to a year when everyone else has decided has decided sitting underground is a good idea. Cash will be king then because there will be no buyers for many types of assets. The Fed will try to fix this, and as usual, it will screw it up, injecting too much money and making those cheap assets over-inflated.
That is my view, based on history, a lot of reading, and posts from smart people here. I really think I’m right which is why I make sure to have at least part of my portfolio invested completely the opposite.
that’s a true contrarian spirit.
Excellent analysis, Feepness. I believe the Fed is currently trying to nullify the leading edge of a hyperinflationary pattern by jacking the interest rates and trying to lower the money supply. If it goes too far, it will create deflation. If it does not go far enough, hyperinflation will get under way. This is an incredibly delicate balance, and the level of confidence that the Fed can pull it off is low. Moreover, this morning’s interest hike by England, which will probably be followed by the ECB (Europe) gives credence to those who suggested previously that there will now be a tit-for-tat series of rate hikes around the globe as other nations decide that they would like to get some of the capital which is sloshing around before it dries up. This not only complicates the Fed’s task since it suggests inflation is everywhere and the risk of hyperinflation is becoming global, but also practically guarantees that other economies will cool, thereby lowering their demand and creating further imbalances on the US trade front. This leads to higher deficits for the US, which makes the dollar and US investments more unattractive, makes investors reconsider the solidity of US Treasuries, etc., etc.
The foregoing mans that Bernake has no choice but to raise the US interest rate next week in order to keep the status quo relative to other nations, but also to keep investors compensated for their increasing risk in the US. This will have dire effects on ARMs and HELOCs in the domestic market.
As icing on the cake, London was already reporting record defaults and a couple of billion pounds of write-offs on bad real estate loans last quarter. Raising their rates will cause their housing bubble to implode as well.
I sincerely believe at some point the various parties tugging on the apple-cart will upset the whole thing and everyone will be left with a broken cart and a whole lot of applesauce drying in the sun.
“….but also practically guarantees that other economies will cool, thereby lowering their demand and creating further imbalances on the US trade front.”
We have a trade front? To whom?
Didn’t you know that we export massive amounts of small pieces of green paper with dead presidents and worthless numbers on them?
The ECB just raised their rate 0.25%… I agree that the Fed better raise another 0.25% on the 8th, but on the other hand I’m not in doubt that their secret agenda is to let the US$ drop -very very- slowly, maybe 20-30%, inflicting the pain to our creditors in very small increments. The only reason the US$ is holding out right now is that everybody is betting it will drop.
“jacking rates and lowering money supply”? Where is this lowering money supply of which you speak. No such thing.
Bottom line, inflation in the things you need, deflation in the stuff you don’t. That is NEED, not WANT - they are 2 different things outside of the bubble mindset.
Good reasoned prognostigation Feep. I don’t know if the next meeting is a 1/4pt or a pause but I know for sure the next two will be a combination of a 1/4pt and a pause. What I don’t understand is gold. It is a nice shiny commodity with the added attraction (and risk) of being desireable in certain circles not unlike baseball cards or Thomas Kinkade paintings. If things get real bad the nice people with the guns won’t let you use the stuff. If things get just bad people won’t need the 1/3 of supply for building computers and stuff. If things just stagflate its just a trade with high loads. If consumers are fatigued then it reverts to its’ base metal utility $450. I don’t see the attraction although I wouldn’t want to impose that contrarian to contrarians view on others.
I agree Robert. I also don’t see the attraction. I remember my mother buying gold in the 70’s. Not much came out of that. I think she has still got some tucked away somewhere. She tried to sell it later and couldn’t get near what she paid for it. If my cash becomes worthless - I will just pay off my fixed rate house mortgage with it.
Tell that to the central banks buying it up. And if fiat goes down the drain and the next reserve currency country bases some of their currency on gold, look out. Still, buy it now only at the insurance level. Wouldn’t go all in or eve nclose to it.
The rise in gold is all about economic and currency instability. It’s also about coming back into line with relative value which has been ignored for so many years..
It’s also about the end of the short-lived pax Americana (1991-2001)…
sellnrun thats an interesting idea but isn’t all value relative. Tulip bulb used to rule the world and now folks know how to make real diamonds. Couldn’t it be that gold is just another overvalued thing that looks cool (do not give this info to jewelry box!)
I personally own gold and have bought more, I also bought a hard currency fund and a gold mining stock fund. The funny thing about gold is that it is the primary form of currency for emerging economies. Gold as a financial medium eliminates inflation (see some of A. Greenspans papers on gold). Paper will always be paper, but gold is still gold.
I meant value relative to all other asset classes: stocks, homes, etc.
I’m of the opinion that gold is in the first stages of a commodities bubble. As you noted, you can’t spend it and it’s only a store of value. In event of a crisis, it will be confiscated or banned, or someone with guns will be stealing it from you.
I’m sure you’re right about the FED rates. I’m leaning towards 1/4% increase then pause.
All that you need to know about gold is this (now listen up, people):
YOU ARE SPECULATING. PERIOD.
Buy it as a hedge, fine. But, last time I heard, there is no dividend for holding gold. You can be as sure as shit that the value will rise - but you’d only be guessing (educated guess, granted). I have no idea where gold is heading. You could end up right. You could end up wrong. The only way to guarantee being wrong, is to be sure. Being SURE is wrong. Again, kind of the like religious folks who proclaim righteousness. Believe what you will about a god or gold - the only time you become 100% wrong is the moment you proclaim that you are 100% right.
Don’t be like Buzz Lightyear. “I’m always sure!”
Feepness says: “That is my view, based on history, a lot of reading, and posts from smart people here. I really think I’m right which is why I make sure to have at least part of my portfolio invested completely the opposite.”
There you have, folks, what I would call a “post from a smart person here.”
TWO STUPID QUESTIONS:
From what I’ve been reading, there are a lot of people who think oil prices will continue to rise. Part of me agrees, but mostly based on an intermediate term/peak oil theory. In the near term, if we hit a global recession, demand for energy goes down and, other than mideast politics, I don’t think we have a true supply issue with oil at this point. Thoughts?
Second Stupid Question:
When the fed “drops money from helicopters,” how is it doing this? Is it selling more bonds for cash? Is it printing more money, providing it to the central bank to make loans? In other words, how do the greenbacks actually get from the printer to a wallet?
I won’t bother spouting off the party line on gold. We’ve all heard it before. You might consider the fact that over a billion muslims or so seem to think gold is money so a U.S. centric view may not serve. Also, the folks that have lived through a hyperinflation or depression seem to find utility in it as well. I find it interesting that “Kippers” mom, who I assume isn’t a jeweler, went out and bought gold in the 70’s (during a time that inflation expectations were high). Right now BB is trying very hard to manage inflation expectations down. IF he fails I would expect to see moms out buying gold again.
With regard to the FED, my amateur analysis leads me to believe in a hike and perhaps two for the following reason.
1). This is the first hike that BB has had the opportunity to surprise the market by raising rates. All the previous hikes were “baked in the cake” and thus not an opportunity to prove what an inflation fighter (ha ha) ole BB is.
2). The Western Central Banks are enforcing their demands on BB vis a vie raising their rates as is noted in the above post (BB has to keep the spread intact for dollar concerns) it will be difficult for BB to pause until the other CB’s pause.
3). There is no IMMEDIATE emergency requiring a pause. Unless a severe exogenous event (911 like) hits then I don’t see a pause/easing until something publically breaks. I personally think they are trying to break the CRB index while steadying the other equity indices through manipulation (but that’s my tin foil hat coming out). By the time there is widespread public defaults from the RE market I would expect a pause/easing to have already happened so I think we are getting close.
Of course the problem with this type of analysis is that everyone is trying to guess the priorities of the FED. They can stop inflation any time they want to. I don’t think they can control deflation or a dollar run (although I note that the FED nows has the legal ability to trade foreign currencies so perhaps they can mitigate that somehow through derivatives or something exotic like that). At any rate it is all guess work and I’m usually wrong.
“TWO STUPID QUESTIONS”
I don’t know if you mean will oil prices continue to rise indefinately or if the will rise for the near future, but there comes a point in any commodity when the price becomes high enough that people switch to alternatives, and I think oil is reaching that point with biodiesel and other alternatives coming more into play. This happens with other commodities, too, and is well known by persons familiar with the futures markets, of which I only know a bit. Because of alternatives, it is unlikely that oil will continue to rise to the sky.
The Fed has two ways of “printing money” as they call it, although neither one involves printing money. They can lower interest rates to encourage more borrowing, as they have done in the last few years, we should be saying helicopter Al, not helicopter Ben, or they can encourage lending by being lax in regulating the loans that they allow banks to make, which they have also been doing. They already pretty much nullified the reserve requirement, so that is no longer available for them to use to increase the money supply, and I don’t see how they can loosen requirements any more since there don’t seem to be any requirements so that leaves trying to lower the interest rates again which they may or may not be able to do since the bond market controls interest rates.
Kim,
I’m totally ignorant WRT the Fed, and am trying to learn, but couldn’t they also sell Treasuries? How does this factor into the above?
BTW, I always enjoy your informative posts!
I found the following:
http://en.wikipedia.org/wiki/Money_creation
And Robert, don’t forget what history tells us, which is that our government has been known to crash the gold market when it is seen in their interest to do so…
http://en.wikipedia.org/wiki/Black_Friday_%281869%29
I look at gold and silver as the inverse of paper money. In my opinion, paper money is the bubble, and the bubble is going to pop, possibly in our lifetimes. Something else will emerge as a store of value, and it may be gold and silver. I say be gold and silver because those are the two commodities that have been used as a store of value since time eternal. The bankers would like everyone to forget about this, because when you do, then they have control, because they’re the only ones that can create money from nothing. If you try to do the same thing you’ll get arrested by the secret service.
The free market has never chosen baseball cards or Thomas Kinkade paintings as a store of value. But time and time again it has chosen gold or silver. And 1 billion Chinese and 1 billion Indians and 1 billion Muslims are getting richer (with the exception of a few countries who are being bombed into oblivion). That’s 3 billion potential consumers of real money, all of which, culturally, believe that gold (and maybe silver) is real money.
Ultimately, if you don’t think you understand gold, then you shouldn’t invest in it.
“2) Fed will then start dropping rates or even buying securities directly in order to inject money into the economy. This is when cash will be dirt.”
Feepness,
Do you have any evidence on whether Japan tried this in the mid-90s, and if so, why it did not work to stave off inflation? I seem to recall lots of so-called zombie companies, which were companies that would have gone BK if they had not been propped up by the govt…
http://www.buzzle.com/editorials/11-19-2002-30652.asp
I thought that Japan was too slow to respond and then dropped rates but didn’t inject money into the economy until at which time two things happened:
1) People were ‘paid’ to take loans with effective interest rates being something like -1%
2) The Japanese mentality towards savings kept people from taking loans, further lengthening the recovery period.
Bush & CO did the same thing in 2003 to jumpstart the economy. Give people a reason to spend instead of save. it’s not in our culture to save so it was very effective immediately. Hence the 7.8% Q3 03 GDP growth.
“I really think I’m right which is why I make sure to have at least part of my portfolio invested completely the opposite.”
I think diversification is key here. But the tricky thing in a conundrumish world is to know when you are truly diversified.
Traditional notions of diversification suggest allocation across risky assets like long-term bonds (”safe”), real estate (less safe), stocks (riskier) and commodities (riskiest). Options are to be avoided, because they are “too risky.” But in the post-Greenspan investing landscape, subject to a lingering conundrum, the risk premiums are missing in action, which means that the risk / return metrics which give rise to the above dichotomy are defunct. In the current investing climate, one needs to worry much more about the economic fallout from governments trying to artificially stimulate and prop up asset prices than more mundane considerations of risk and reward considered by traditional financial analysis. Hence it is hard to know whether putting money in the bank is conservative or financially suicidal, whether investing in gold will make you or break you, and whether investing in bonds will turn out to be profitable (in a deflationary future) or foolish (in an inflationary one).
So as you suggest, it is best to have some assets parked in a variety of investments which lie outside the traditional diversification box, chosen so that something will stay afloat no matter what future pans out (I guess this includes guns and ammo
).
actually, an optimum risk/return portfolio is 50/50 stock/commodities (diversified, that is). commodities get a bad name because of the way most people try to play them.
well said!
A fall of 30% in nominal house prices will be deflationary in the extreme. Inflation is the result of too much money (or credit) chasing a limited supply of goods and services. Such a fall will cause widespread defaults, which in turn will impair the ability and willingness of lenders to assume credit risk. The lending and re-lending of money multiplies the monetary base to the total money supply. Tightened credit will reduce the money supply even though the Fed may increase the monetary base in an attempt to compensate. Consumption will fall, unemployment will increase and a vicious cycle will take over. Where and how it will end is unclear.
Agreed. Deflation.
The 30% decline will slow down spending and the economy, a la Japan.
One big wildcard in all of this is the Middle East. If things get hotter there, oil could go through the roof, slowing demand even more.
The yield curve is inverted right now. That doesn’t bode well …
Short term money here, FDIC insured please.
Incase you’ve been living on the moon, Ameritrade, Etrade and your local bank have been taking a large spread on customers who have cash sitting in their accounts. If you are going to sit on cash, Emigrant Direct or other online banks pay much better rates right now.
You can negotiate with your banker, at least at the big banks - they give higher rates than they let on.
I wouldn’t rely on FDIC insurance. It is designed to cover only a normal number of defaults and little more. Better to make sure you have your money in a safe bank or Tbills.
Even the insurance companies sell FDIC-backed CDs, at very attractive rates. Stop by a State Farm office, for example — they usually have a rate sheet available at the front desk. I’m getting over 5% APY on all of mine, now. Wife loves it - thinks it’s raining money.
All FDIC insured deposits ONLY INSURE THE DEPOSIT!!! The interest is not insured. Banks could be offering a 10% yield - go under - the FDIC does not pay interest!!! No guarantee on interest!!! See the S & L debacle of the 80’s when Texas S & L’s were offering 2 points over prime to get funds. A number of people I know invested and got their money back 9 months later -NO INTEREST. Everybody say - Deposit insured, Interest Not insured.
Disagree. A fall of 30-40% in one component of the economy is merely a big commodity bubble popping. Yes, I’m talking a big, $7-9 trillion bubble but compared to the national debt or unfunded obligations not much at all. Remember, an awful lot of that $7-9 trillion is paper asset valuation. It never was counted by its’ holders and never entered the economy. My house losing $600k doesn’t affect me or my property taxes and it never was in the economy in the first place. I’m not buying fewer vacations or plasmas no matter what happens. There will be impacts on the margins. Recent leveraged buyers, those nearing retirement who were counting their housing chickens, etc. Just don’t fear deflation from a commodity reverting to its utilty valuation.
I believe that the popping of the RE bubble will have more effect on the economy than you think, Robert. I think that one effect of this bubble has been increased velocity with so many people spending borrowed money like it is going out of style, and I think it will go out of style, leading to decreased velocity. Also, the economy was on the brink of a severe recession or depression when the main part of the housing bubble propped it up with all the spending so the housing bubble itself it not the whole story, but the fact that the economy was already considerably out of balance beforehand, and the bubble didn’t help put anything back in balance, but more out of balance.
You may not take less vacations or plasmas, but you may not be in the majority; a lot of people have been spending money borrowed from the “value” of their homes, and they will be forced to stop the spending. You may not have taken 600k out of the “value” of your home, but a lot of others did, more than just a marginal number.
You’d find that I am one of the loudest about big and far reaching impacts. I was just discussing the deflationary aspects of the housing bubble. Paying less for a house and insurance and taxes isn’t deflationary, it is just not inflationary. Your point about the velocity of money is well taken. That’s a recession. Youalso correctly observe that the Greenspan liquidity injection that funded the housing bubble was a prop. A prop that worked and also caused a commodity bubble in housing. Those conditions are not the conditions we have now. We’ll be having an entirely different recession instead. MEW (mortgage equity withdrawl) is going to hurt a lot of people but the money merely ends up in other peoples’ pockets (mine). The higher rates are inflationary and stimulate in their own perverse way. Deflation in the housing sector won’t be enough to erase the raging inflation in the rest of the economy.
Could the economy get hit worse than the housing market? If FBs hunker down and stop spending on all the frills, just to make their house payment….?
But will they give up the Hummer before the house?
No, they will sell the Hummer and the house in a package deal (as discussed at length on one of Ben’s posts yesterday…).
You know, I really don’t think that our predicted decline in house prices will effect enough people to pull our entire economy in a different direction than it’s already going. Although most of the recent (last 2 years?) buyers will find themselves up shit creek, the truth is that only a small percentage of consumers are 2-year-recent buyers. Everybody else either bought their house a long time ago, is renting, or lives with their parents.
Of course, there are quite a few who have been living off HELOCS, and I agree all those high-school dropout construction workers and real estate agents will have to go back to being poor, but once again, we’re talking about a sector of the economoy, not the whole entire thing.
I think Ben expects inflation to continue (unhindered by the bursting of local RE bubbles) and will increase in August, although I hope he doesn’t, because I bought gold yesterday.
The velocity theory has rarely been mentioned lately. I believe it will be a major factor in the impending slowdown.
Rose and her husband were pretty astute!
You’re right: whether we get inflation or deflation is the most important question for anyone today. I think it has to be deflation, or else one should be buying more real estate right now (and of course, that is absurd). Treasuries, thru Treasury Direct, or the ETFs (symbols IEF and TLT) would be your best bet. I don’t trust the price of gold after it has run up so much; gold could be in a bubble too.
I wonder if we should start to segment expectations, so that we’re not just talking about “inflation” vs “deflation” but rather sector-driven inflation vs deflation. I have been pondering the big I vs D question and lately am thinking that if the RE market has another 6-8 months to get a serious national contration underway and well-reported in the MSM then it would take a long period of liquidity injection before buyers would turn around. One expectations of RE appreciation turn south, it’s a while before the sheeple stop running and turn around. So, I wonder if it is possible to have a deflationary scare inspired by RE crash, a liquidity injection, and see the money essentially disappear into some sectors (commodities? gold?) without ever affecting the RE market. I wonder if smarter minds than mine on this blog might have opinions on I vs D on each of these sectors:
Real estate
Equities
Commodities
Bonds
Doc
Oh, and one more thing to add: consumer products.
A continuing depreciation of the $USD just makes US exports more attractive and imports less attractive. At some point that effect is going to become pronounced enough that the US economy will steam ahead on it - just not sure if that is in 1 year or 10. We’ll all be driving a lot more US cars and a lot fewer ones from EU and Japan but that’s not all that bad a thing. I lived through something like this in Canada in the early 90s where the $CDN depreciated massively and it was terrible for a while but then a whole export industry appeared and things went well. So, we might see varying levels of inflation or deflation in consumer products as well, depending on whether they are domestic or imported
We are seeing a “return to the mean” of the housing asset class, but does that truly represent deflation? Or should deflation be measured from the mean down?
We are currently seeing inflation in the costs associated with manufacturing, labor, and raw materials.
Here’s what may very well happen:
1. The Fed pauses (I believe they will)
2. The economy, which is currently on the slide (evidenced by GDP fall from Q1-Q2), will continue until we go near zero GDP growth by Q4 or Q1 2007, at which point the Fed may loosen without effect. Market forces will take over, driving bond yields and interest rates substantially higher as foreign central banks diversify out of the dollar into gold, oil, and other currencies.
3.The dollar will continue to weaken, thereby reducing trade deficits and raising gold and oil prices.
4. Foreign buyers will reduce purchase of(and perhaps even sell) US debt, disabling us of financing our current account deficit.
5. The dollar ceases being the world’s de facto currency, and dollars flood back into the US, causing post-inflationary deflation?
You have to be able to make “logical” assumptions about so many things to reach a conclusion that any change in a particular assumption may change the entire outcome. For instance, if FCBs demonstrate an unwillingness to liquidate or reduce dollar holdings because of its risk to them, inflation may be the remains of the day…
Housing cannot return to the mean without deflation UNLESS wages go up. Can wages really go up that much in today’s environment of outsourcing? I have my doubts. I see the opposite happening. For instance, we have a friend who works at Boeing as a janitor who makes a good wage, but the new janitors are making about half what he makes and they are gradually getting rid of the old janitors. IF wages went up and housing stayed the same, inflation might catch up with housing prices. I don’t really see how this could happen because of all the ARMs resetting- too many people are going to have to get out or default. Even if housing prices stay the same many people will be forced to sell or default who normally would not want to sell, because they really can’t afford their homes and depend on increasing valuations in order to refinance to a new ARM when the old one resets. Any increase in defaults will be deflationary as defaults lower the money supply.
I think you misunderstood my point. Of course home prices coming down is a deflationary effect. But the “deflation” is merely the removal of a manic price increase, which under normal circumstance, would not have occurred.
My question is this: for TRUE deflation to occur, wouldn’t an asset necessarily need to drop in value beneath its historic inflation-adjusted mean?
My suggestion is YES. Otherwise you simply have mean-reversion to normalized market conditions, without structural imbalances (e.g. wages/ home prices).
I am with Feepness in that I think there will be a deflation followed by inflation. However, I think the deflation in the RE sector will be greater than 30% in most areas because there will be a spiral effect with repercussions in the economy that will put greater downward pressure on RE prices, both commercial and residential.
I don’t think the government will be able to stop deflation once it gets started; it will play out to the bottom despite their efforts to lower the rates but the rates may stay up in spite of their efforts. The Fed really does not control interest rates as much as they like people to think; the bond market does. When defaults begin to occur in earnest the interest rates will rise no matter what the Fed does, because risk will be perceived as higher, especially when housing prices are dropping. The risk is high right now, but it is perceived as lower than it actually is. Because interest rates will probably rise in a scenario with many defaults, long bonds are a poor risk. Short term and very short term is the way to go right now, no more than a year to maturity.
The stock market is just entering the 3rd and last and most severe stage of the bear market that started in 2000. Don’t think that the Nasdaq can’t fall very far because it has already fallen so much, it could still drop another 70% or more, the Dow could, too. All manias end lower than their starting point, and the stock market never even got close to a real bottom by any logical starting point. This mania will not be different. The only thing that is different is the extremely long time over which it is playing out. At least 90 percent of stocks will fall during a bear market of this magnitude, so it will be much easier to play the downside than to try to find winners for those who want to be involved in the equity market.
Commodities and equities have risen together in this last burst of liquidily and I think they will both drop together, especially copper, silver, and probably gold, but they may not hit their respective bottoms at the same time and I do not expect that commodities will drop as much as much as equities percentage wise.
After the deflation has run its course, during which the Fed will be trying everything it can to increase the money supply, then, perhaps suddenly, their effort will take hold and we will experience a rapid reflation, hopefully not up to the point we are now. That bottom will be the time to have put your money into gold and RE and some stocks, but that bottom won’t arrive for at least 2-3 years and the bottom will be somewhat different for each of them timing wise.
This blog and it’s readers advocate financial responsibility. Unfortunately our government doesn’t…as you probably know:
http://www.usatoday.com/news/washington/2006-08-02-deficit-usat_x.htm
So what else is new? I love they way they count what is and is not important when it comes to inflation.
I was speaking to a family member last night who is a lawyer and the real estate bubble came up. Many on this blog have speculated that builders add incentives to keep previous buyers from suing them, but the lawyer said they have no recourse there. The builders are more concerned about their comps to keep statistics artificially high for further sales. Anybody taking “advantage” of these deals is participating in the bubble at the high and prolonging the pain for the rest of us when we can go back to purchasing at fair market value. Please bubblers, talk to people about what you know even if the news is not well received. I know I have saved the future finances of at least three young families. They haven’t said thank you yet but that’s the way it goes.
This blog is a tiny microcosm of society. Nothing we say or do will have much difference. Second, let em keep this circus going a little longer. When prices drop hard you can bet the mainstream media will be all over that.
Sadly I’ve given up. I probably saved one, and tried (and failed) to saved another.
But these people are so damned determined to destroy themselves. I just nod and smile. And have done so for a long time now.
Tried to stop a colleague in Tucson from buying three months ago. Sent her links, told her things were topping out. No dice. She bought. And, she has three university degrees
When she described her house, she described the benefits of owning in ways that were purely psychological. She went on about the “peace of mind” of owning, the “expectations” of future returns, the “sleep soundly” bit knowing the asset is hers, etc. The RE machine has woven a very convincing scenario that lures them in and makes them feel good about owning even when reality does not align with their beliefs. I wonder how many will continue to buy into the remainder of the ownership-equals-success-in-life psychology even when expectations of appreciation evaporate. Some of those feelings seem very strong in people.
It is remarkable, isn’t it? I’ve actually “saved” a couple of youngsters by telling them of the last local bust. It is amazing how much peer pressure they are under to buy, now, or be priced out forever.
My own GF was living in a rental that got converted to condo last year - had a heck of a time talking her out of it, but succeeded. We moved her out and the buyer closed in July 2005 - the peak almost to a day. That buyer’s monthly nut is nearly twice what the rent was - in a marginal neighborhood to boot. I’ve since been able to put “House Prices Falling” headlines in front of her - you should see the eyes widen like saucers!! Hey, I’m not nuts after all.
She has three university degrees? Well there’s the problem! Some of the most impractical people I know are those with advnaced degrees. Dunno why, and some of the rest of us mere undergraduates speculate that too much time in universties isolates you from the real world.
When she described her house, she described the benefits of owning in ways that were purely psychological.
Does she have three liberal arts degrees?
In any case, there is a very strong psychological component to housing, and much as I wanted to be *free* of life-encumbering ownership in my younger, more mobile days, I know many more people who enjoy the perceived stability of owning.
As for talking others out of making a mistake, I’ve successfully talked a handful out of it (and proud to say so); however, I’ve been completely unsuccesful with others.
Even last weekend I was trying, umnsuccessfully, with a newlywed couple who are hot to buy, so hot to buy that I could see the daggers in their eyes whenever I resorted to the usual arguments about why buying in this overpriced part of hell is madness right now. So I gave in and basically tried only to encourage caution. Which I doubt they will exercise.
I would “sleep soundly” a bit more if I owned a home too… But only if I actually OWNED it (ie, no mortgage). I’d sleep less soundly with if I OWED big money on a home. Big difference between owning a home and owing on a home…
-mr b.
“She went on about the “peace of mind” of owning,”
Who owns the house, SHE or THE BANK. When you pay off the house then you truley own it, till then the bank is the true owner.
Because of property taxes and eminent domain, only the gov’t truly owns property; one is just renting it from them (and sometimes gets the appreciation in price, thankfully). The politicans, police and teachers will ensure that they get paid, even if property taxes go up so much a lot of people are driven from their homes.
“Because of property taxes and eminent domain, only the gov’t truly owns property; one is just renting it from them (and sometimes gets the appreciation in price, thankfully).”
I believe many people are realizing that there is no true “ownership” when it comes to real estate. With the recent real estate bubble came hefty tax increases, cutting directly into peoples budgets. And there really is no negotiating when it comes right down to it. When someone claims they “own” their house outright, I have to disagree. Try not paying any taxes. One fun thing I like to do is calculate the per hour rate of their real estate tax based on a 40 hour work week. People become bothered when they realize they are spending $2 per hour or more of their wage just for their property taxes alone. (In my area based on a neighbors taxes).
real estate is the only asset where you pay taxes to buy, taxes to own it and taxes to sell it. now WHO thinks this is always a great investment? raise your hands.
I’m 0-4 on my attempts to talk folks off the RE ledge. The only folks considered credible are RE folks and we all know they are up to their respective asses in leveraged deals. Why anyone would consider them credible always boggles my mind. Especially if you consider that almost none of them has any formal financial/economic training.
This whole RE episode is so bizarre to me that I don’t even attempt to rationalize any aspect of it. It is like the collective masses were fed a retard sandwich simultaneously and the rest of us were the ones that called in sick that day. Go figure?
In the last 4 months, I’ve been giving friends the inventory and foreclosures talk. Most have gone ahead and bought anyway, but my advice does give them the confidence offer extreme lowballs and play hardball from there out. In that sense, I feel I have helped.
I’m 1-1 on this talk in the last six months. A friend in Atlanta rejected my concerns without listening too closely and said “Atlanta is different!” Another couple recently took the time to work through the numbers on their proposed condo “investment” with me. After factoring in all costs, insurance, maintenance, taxes, etc. their expected return, with full, regular, no-hassle rental would have been 3.8%. I pointed out that SunTrust has a 13-month CD for 5.25% so they would actually earn more money with less hassle, no tenant difficulties, and no chance of a downturn taking a chunk of their capital. They actually listened. I was thrilled.
How very true…my bro-in-law is a realtor, he is a nice guy and all, and a competent realtor (whatever that means) but truthfully he is quite ignorant when it comes to financial matters.
It amazes me as well that people actually listen to someone who spent several hours learning to pass a test on what usually is the most important purchase of their lives.
retard sandwich
My new favorite quote
MjM
I’ve eaten the ‘tard sandwich in the distant past……didn’t go down so well….won’t do it again. What’s amazing is that most, after trying the ‘tard sandwich once, will go back for repeated helpings.
I’m not sure it’s worth it to talk to people about the bubble. My friends bought pre-bubble but now are in serious denial that their house may soon be a depreciating asset. I almost feel blamed because I told them this would happen (being an economics study) and now that it is, it’s spoil-sports like me that hid the alcohol at the party.
I had a date the other day with a girl who is condo shopping in the area. I kept my comments mum and she mentioned that everything was too pricey and she was too picky. Hope she continues to feel that way for a while, I’d hate to see anyone wind up in financial ruin who isn’t being stupid.
“Don’t shoot the messenger”
She sounds like a keeper!
I talked my neighbor across the street into selling shortly after we did last July, and my brother soon thereafter. Worked out great, and I was glad to help them avoid the downturn.
I think it is damn near impossible to “talk someone off the RE ledge”. The ones that you succeed with were probably going to figure it out during their own research anyway, and we are just one data point (perhaps making it a faster conclusion, but not a different conclusion).
The ones that are going to buy are not going to listen to you anyway. And if you state the bubble case too strongly, you will cause significant damage to the relationship. When your friends are in trouble, you don’t want them avoiding you simply because of the fear of an I-told-you-so.
I think the salient difference between the two cases is that one approaches the problem with an open mind, the other does not.
No, it is worth mentioning the bubble to people, because some people, just assume that RE prices don’t go down, but if someone gives them a little evidence that they can they will listen or do more research that they would not have done if your hadn’t given them the heads up. This is especially the case with younger people looking to buy for the first time. Older persons are less likely to listen, and RE agents are the worst because they think they know so much more about it than you do.
This is especially the case with younger people looking to buy for the first time.
This is a good point. But certainly there are young people who are headstrong (who, me?) that need to learn stuff for themselves.
Older persons are less likely to listen,
Only the ones that have not had a truly humbling experience.
and RE agents are the worst because they think they know so much more about it than you do.
100% agree, it’s pretty much a waste of air for this case…
“I think the salient difference between the two cases is that one approaches the problem with an open mind, the other does not.”
Very true. The knee-jerk reaction of most people to anything challenging the Gospel of Real Estate is especially frustrating. I’ve only been able to get 2 people to stop and actually think about the absurd situation of the current RE market. They had enough of an open mind to look at what I told them and showed them. They also did a bit of their own research afterwards and found that what I had explained was happening where they lived as well.
The most frustrating situation I’ve encountered is having to deal with relatives now trying to sell a home from their parents’ estate in the IE. They absolutely refuse to believe that the market has changed there. Inventory? Flippers dumping new homes on the market? Price reductions? It JUST DOESN’T EVEN REGISTER. They’re also paying on a large equity line taken against the home and I’m afraid that they are going to be chasing the market downward on a small, non-descript old house.
They’re going to be singing the praises of real estate until it turns into singing the blues.
/rant off
I’m done talking to people, too. I’m told that I’m either a) “just jealous” or b) “just angry and bitter”. Oh, and those remarks came from FAMILY members (well, just one actually…the one that is likely HELOCed to the hilt, makes killer money, and has more debt than little ol’ “jealous, angry, and bitter” me).
As far as trying to share the facts I’ve learned on this blog…..We don’t own a 4000 sq ft finely decorated home and drive new $35k vehicles so what would we know about finances and/or money.
It does get their attention, however, when I tell them if I would just go back to work we could be debt free in 5 years. You can see them doing the calculations in their heads. And then they get this little clouded look on their face.
When I give financial advice to my co-workers they say that I am “old fashion” person. I may be old fashion but for sure I am financially secure ,not like them who are one pay check away from banktruptcy.
A couple more across the nation heat waves followed by a very cold winter would raise cooling and heating bills to the point that many people will be forced to sell. I can’t believe that people are out house hunting in this heat nor buying anything but school supplies at the major box stores.
a co worker in the san fernando valley got his power bill 475$ ouch
When I buy, and before moving in, I plan to re-do the air conditioning system completely unless it is one of the few houses I’ve seen with three separate units. True, it’s a big expense, but this will be my final SFR and I’ll leave it more or less feet first. Regulating temperatures in different parts of the house directly, instead of by using the legerdemain of baffles, appeals to me a lot.
Thank you Feepness and Libertas for your sage comments on the deflationary/inflational potential of this mess. Looks like a few guilty and a lot of innocents will be hurt by the inevitable consequences of shortsighted Fed policies. After a while it gets depressing thinking about/discussing the future of the middle class whose “American Dream” was a shot at a decent job, a house and raising a family. Not melancholy, just do not share the zest of some of the posters on this blog regarding the difficult future a lot of decent folks face.
who will still have a job ? not much to be zesty about
gov/mil is all, others doomed
The American dream has been perveted by the media and marketers’ insistence that everyone of any means can live like a millionaire. The dream used to be about a comfortable house, living wage, and family values and now it’s about moving up on everything, old is junk, and family is something that gets in the way of toys.
Don’t be depressed about it. We can each make a personal committment to live our lives the way we want without undue influence from others, difficult as it may seem.
Home loan demand at 4 year low:
http://www.washingtonpost.com/wp-dyn/content/article/2006/08/02/AR2006080201884.html
Has anyone in LA heard the radio ads for “800-out-of-BK”, with statements like “interest rates are rising, and property values are falling”, so “refi now before it’s too late”? They also have a statement along the lines of “the equity you think you have in your home will soon be gone”, and they don’t mean because a HELOC took it away. This ad is running pretty often.
Bank of America has a home loan ad which is targeting hispanics (though the ad is in English.)
Whoah….! Can’t wait til they’re running those ads in every city and town in America.
Talk about not mincing words. Phew!
I do not remember which company is doing the advertising, but there is a radio ad in our area where a guy approaches his friend and says “I just broke my ARM!” His friend replies, “But you haven’t got a cast!” To which guy says, “Not my arm…my adjustable rate mortgage!”
The tag to the ad is “Break your ARM before your ARM breaks you!”
This week is the first week that zillow is reporting major value loss for most homes in Irvine, California across the board. Orange county is different indeed. Look out below.
Incidentally, the homes that I pay particular attention to that sold for $850k last year now sit unsold at $750k. The reported median increase is BS.
zillow has trimmed my hood
22151
You want someone to blame for the credit bubble?
With approximately $412 billion of MBS outstanding and more than $2.4 trillion of cumulative issuance, Ginnie Mae’s MBS program has been a significant contributor to the growth of the secondary mortgage market in the United States…
Our guaranty is the only one in the market to enjoy the full faith and credit of the
United States government — and we are the only player in the business to guarantee the timely payment of interest and principal.
Like someone here said, privatize profit, socialize risk.
Same here - I’m tracking about 50 houses scattered across most of L.A’s Westside and south San Fernando Valley, and started at 850K. Two months later, some of them have come down in price (some as much as 100K), but the Days on Market has skyrocketed.
How much more ‘nudging’ do you need, if your house has stood unsold for 90+ days, that it might be time to drop your price?
And yet…one house actually had a price increase this week. After being on the market for 80 days!
Another one had a price reduction…from a princely $700K to $699,999! Yes, that dollar reduction is all that stands between me buying and not buying.”Not!”, to quote Wayne.
With the kind of increases seen in the LA County market over the last 6 years, I’m not expecting ‘reality’ to hit anytime soon. Still, its fun - in a cruel pulling-the-wings-off-flies kinda way - to watch houses (that 5 years ago were ‘worth’ 50% of the asking price today) sit, and sit, and sit….
“And yet…one house actually had a price increase this week.”
I’m starting to think that people are raising prices so they can drop them again. I.e. just trying to draw attention to their property without really dropping prices.
….or just slipping the house into a new range in the real estate search engines
I’m thinking the “market value” for a house is the price necessary to sell the place in one month, or one that was underpriced and people bid up, or one sold at auction. It’s a bit complicated, by I wish there was a way to look up houses recently which sold under any of these conditions. Just as I wish there were a way to look at the number of homes sold in a given location per month. I suspect the key data to analyze this bubble is under lock and key.
SF Mechanist –
The auction value of a home is a lower bound on market value. If this were actually the market value (that is, the most one could get for a home in an arm’s length sale), then everyone would do it. However, evidence produced by Steven Levitt (U of Chicago econ prof / Freakonomics author) suggests that realtors selling their own homes took more time and sold for a higher average price compared to the (shorter) time on the market and (lower) price realized by their clients. So an accurate measure of market value has to factor in the value of waiting for a higher offer, and gets even more muddled against the backdrop of falling prices (like we currently are experiencing)…
There’s a metro area in the sticks that I’ve been following for almost a year now. In it, hardly anything has sold - average days on market is way over 6 months. Yet they do not reduce their asking prices. That is useful information — it looks like few people there actually need to sell and the area does not have any growing industry. Now knowing all that, I’m pretty much dropping it from my radar altogether — it seems like it would be next to impossible for me to unload, later on, anything I would have bought there.
GetStucco… thanks for the info.
I agree SF Mechanist…. except one nitpick. Market price should be the price for a 60 to 90 day sale. We’ve gotten spoiled by the
Hehe… yeah… I suppose I’m flexible on that… maybe in most areas, thought in the Bay Area the turnover is high enough that 60 days should be plenty of time to sell a place at market value.
“And yet…one house actually had a price increase this week. After being on the market for 80 days!”
I’m keeping on eye on houses in Encino. Several houses (South of the Blvd) have reduced their price. One has been on the market for over 3 months. First price: 1.4 m. went down to 1.265 m, and now it’s down to 1.85 m. But, another house has been on the market for the same time and went up from $998,000 to $1,195,000 (something like that). That baffled me.
Dogs …trying to create panic refinancing . No question that they would charge high loan fees and give the borrower a 5 to 10 year fixed rate or another adjustable .
This kind of advertising is sure to add to listing volumes. Some of the people hearing the advert will not refi but will try to sell (or both). Interesting to see how some companies who might stand to be really hurt by a housing bust are contributing to it.
100K haircut (and counting). SSSSWWWWEEEETTTTTTT! Bring on more stories like that. Good work, downwardspiral.
This is entirely OT but can anyone suggest a better way of reading this blog than through a standard browser? I’m using Firefox and need to refresh the page and then skim around to see what’s changed. Not very efficient. A link or two to a product or feature that would let me do this more efficiently would be greatly appreciated. Thanks!
You might try using the RSS feeds. I have not tried this myself. Baseline Firefox is very clunky about setting up feeds, but there is probably a plug-in that makes it easier. There is also probably a good dedicated feed reader out there someplace with more features such as sorting, but I have never had time to look for one. Any suggestions from folks who use the RSS feeds on this blog?
Had to mention a radio ad that started on my Bay Area station recently. It’s for a HELOC product called “The Pulse Loan.” The tag line goes: Anyone with a pulse (and a little home equity) can qualify! I kid you not.
Before checking out the article posted below, here are some back-of-the-envelope calculations to help frame the discussion:
SD County Notices of Default
3Q 2004 649
2Q 2006 1,778
Annualized rate of increase in defaults since the bubble popped:
[(1778/649)^(4/7)-1] X 100% = 78%
And as to Marshall Prentice’s reassurance (”We would have to see defaults roughly double from today’s level before they would begin to impact home values much.”):
Quarters to double notices of default at recent rate of increase =
7 X [log 2 / log (1778/649)] = 4.8 = less than 1 year, 3 mos
Given that SD prices are already falling, I guess Marshall Prentice is telling us that November 2007 will be a pretty bleak time for those SD homeowners counting on home equity gains to simultaneously fund their consumption binges, Phoenix and LV investing activities, and retirement savings accounts…
——————————————————————————-
S.D. mortgage defaults double
DataQuick calls trend important, not ominous
By Roger M. Showley
STAFF WRITER
August 3, 2006
Mortgage default notices in San Diego County nearly doubled this spring to the highest figure in the past seven years, according to a report released yesterday.
Analysts read the new statistics as further evidence of a real estate market slowdown and blame the increase partly on home purchases made in the past several years that required little or no down payment and which carried below-market adjustable interest rates that are now rising.
(Graphic: Mortgage default notices in California
In the second quarter ended June 30, 1,778 notices were mailed to homeowners who had failed to make one or more mortgage payments on time, said DataQuick Information Systems. That compared to 894 notices in the same period last year and the highest number since 1,831 in the second quarter of 1999.)
A notice of default is the first step toward a lender’s foreclosure on a property. About 7 percent of such notices actually end in foreclosure.
“This is an important trend to watch, but doesn’t strike us as ominous,” DataQuick President Marshall Prentice said in a news release. “The increase was a statistical certainty, because the number of defaults had fallen to such extreme lows. We would have to see defaults roughly double from today’s level before they would begin to impact home values much.”
http://www.signonsandiego.com/uniontrib/20060803/news_1b3default.html
Major US stock indexes are bleeding red, but the homebuilders continue their recent share price rally. What gives? Shorts covering? Share buybacks? Contrarian rallies? Or was a news item I missed that the whole housing market slowdown idea was a media rumor, and the fundamental outlook is as good if not better than it was in Summer 2005?
http://www.marketwatch.com/tools/marketsummary/default.asp
Getstucco,
I’m also left scratching my head on this one. Covered my short position in TOL a few months back with a nice 7 point gain in 6 long months…only to jump back in and short at 22.50 and watch my profits quickly go up in smoke in 2 quick weeks. I really don’t understand who is buying here. I would think most of the shorts like me would be shaken out already. I’m still short here but cautiously keeping an eye out. God help me if the FED pauses next meeting.
I have to think the homebuilder’s best days are definitely behind them.
Maybe TXchick can weigh in here.
Said over and over. They were vastly oversold and being pumped everywhere as “value plays.” That’s a code word for “you can buy em and we’ll take em up so we can dump & short at higher prices.” Even the most bearish HB funnymentalists I know were saying, it’s time to cover and wait for better prices to short.
I don’t see much upside to efforts to pump & dump, as there is just too much headwind of negative fundamentals for this to get very far.
Yeah there were negative headwinds in 1999 for dotcoms and fiberoptic hypes. But that didn’t stop them for a long LONG time.
Txchick,
So do you see the HB continue this move upward for much longer? I agree that the MM are toying with small fry but at some point these dogs have to collapse to pre-bubble levels.
Had the dot coms already lost over 50% of their market prices as of 1999? I must either have my dates wrong, or else your timeline does not fit the facts very well.
Knowledgable experts (Dean Baker, Ed Leamer, Ken Rosen, The Economist) were already warning on housing in 2003; can you say the same for the “New Economy” of the .com era circa 1996 (three years before 1999)?
The end of the housing bubble was widely publicized by last summer, and the correction in homebuilder stocks was well underway by late last year. The only thing to finish off the crash is the ending of all these dead cat bounces for the builder stocks with a final, capitulating thud …
http://www.economist.com/opinion/displaystory.cfm?story_id=E1_QDSJQVR
Focus on the long view, and you may feel better about bizarre short-term price movements in a direction 180 degrees apart from what fundamentals dictate…
http://tinyurl.com/rv5ed
My take on this is that fundamentals aren’t a good way to make decisions on trading, even on longer trades like the one you described. Better to use Elliot wave theory along with Relative Strength index on something like the QQQQ, Elliot doesn’t work as well on individual stocks. I was using this in my IRA (with options and 3-10 day trades, more or less) and it went from 10k to 30k in about 6 weeks but my husband asked me to stop because he feels that it is like gambling at the race track and objects on moral terms. I figured he would, so I didn’t tell him until it reached 30K. He did say he was tempted, though. I would have liked to try my system for longer to see if it kept working as well over the long term. Maybe he will change his mind later.
Kim,
Have you read “A Random Walk on Wall Street”, by Burton Malkiel? He presents a mountain of empirical evidence to show that (1) fundamentals drive prices over the long run, (2) technical analysis is roughly as effective as the proverbial monkey throwing darts, and (3) buying the whole market through no-load funds beats asset picking strategies with advisor fees. You may accuse me of being a chartist for putting up the long-term stock chart of Toll Bros, but I simply do this to show the pace of reversion to the long-term trend. Fundamental considerations suggest the correction will take prices to below the S&P 500 trend line before it ends, unless this time is different.
I was trying to respond to Elo’s comments about how frustrated he was and how one trade did well and the next so poorly, but for some reason at the time my browser didn’t give me a reply here tab where I wanted it so I put it on yours, I should have made it more clear what I was responding to.
My experience leads me to believe that technical analysis can be much more effective than monkeys, especially with indices, but a lot of TA that I have read about would not be much help in my opinion, so I can see how someone could easily gather evidence that it didn’t work very well. I agree that fundamentals drive prices over the long run and that Toll bros will correct to below the S & P trendline, but for someone who is trying to make trades, fundamentals don’t tell you when a bear market rally will appear or when it will end.
wow. it looks just like a dot com.
Here’s an article from today’s MSN (taken from Kiplinger’s) about why a 20% down payment is a good idea. (Gee, ya think?) Towards the end a financial adviser in West LA counsels first-time homebuyers to cool their heels in a rental and save for a decent DP.
http://articles.moneycentral.msn.com/Banking/HomeFinancing/WhyYouNeedAHomeDownPayment.aspx
(Gee, ya think?)
Only when homes go on half-off sale, and then only if the financial advantages of a larger downpayment (lower rate, lender requires it, etc) outweigh the disadvantages of tying up that much of your savings in a nonperforming asset…
Things are accelerating at a fast rate when the media starts talking about the advantages of a 20% downpayment.
They’re going to have to a hard sell on this one as so many are now convinced of the “Benefits” of no DP at all, or think that a 5-10% DP is something to be proud of.
Hopefully this is the first of many articles touting the “new trend in purchasing RE”! 20% DP, what a novel idea!
Nothing will bring housing prices back to the mean faster than convincing Americans a 20% DP is the way to go.
I’m thrilled to see an article like this so soon in the downturn and by a mainstream outlet no less, not some “kooky blogger who likes to save money”.
San Diego UT had an ad from Home Depot Expo this morning. They have a special sales event on Stainless Steel appliances and Granite Countertops. It was only 10% off everything, but the symbolism is striking…..
For Premature Curmudgeon:
Sorry this is long but it might help with some posts above…
I found this interesting bit of info from Russ Winter http://www.xanga.com/russwinter on the process of credit expansion and “bubble economics” (i.e. what happened when the Fed dropped the Fed Funds Rate to 1% after 9/11). You can find this (and more) by clicking on the link “Brazil American Late or Non-receiver Poodle Groomers) in Tuesday’s 8/2 post:
————
“Now, the expansion in banks’ credit, i.e., credit out of “thin air”, begins with a particular individual or a group of individuals—in other words there are always first receivers of money out of “thin air”.
The first borrowers are the greatest beneficiaries of the new credit since they are the first receivers of the newly created money out of “thin air”—their purchasing power has increased. The early recipients can now purchase a greater amount of goods while the prices of these goods are still unaffected.
Because the early recipients of money are much wealthier now than before the monetary injections took place, they are likely to alter their patterns of consumption. With greater purchasing power at their disposal, their demand for less essential goods and services expands. The increase in purchasing power, while boosting the demand for goods and services of the early recipients of money, also gives rise to demand for goods which, prior to monetary expansion, would not have been considered at all.”
Here is the Ludwig von Mises essay describing this aspect of Bubble economics: http://www.mises.org/story/1131
————-
My quick response to Fed printing money out of “thin air”:
The Fed controls credit via the reserve required ratio and retail sweep programs, and the bank’s cost of borrowing money to maintain those ratios via the Fed Funds Rate. The monetization of US Treasury debt increases the supply of money. Many years ago, I think they also figured out a way to monetize the $6b debt of Poland. Ha, your dollars were backed by the debt of Poland! Don’t know if it ever got paid. I’m not the brightest bulb but I spend way too much time trying to understand monetary theory and macro stuff so I can make more debt money and convert it to Au.
Bottom line: This is why we have asset bubbles (Nasdaq 2000, Real estate 2006). The bubble assets always revert to the mean (Market Crash).
Thank you for the response. I’ve advanced the ball slightly downfield, but also realize to get to the roots of this is, unsurprisingly, no simple matter. In the process of looking into this, I came across the following: http://nesara.org/main/index.htm
http://www.frbsf.org/publications/economics/letter/2001/el2001-02.html
I’m planning on spending some time on this info to see if I can finally arrive at a meaningful understanding of it (perhaps I should have studied macroeconomics instead of birds and bugs).
Not sure why my earlier response didn’t come up. In short, thanks for the info. This is not a simple area for someone who is not well-versed in economics. One site I came across that has an interesting take on money, fed reserve, etc. is: http://nesara.org/main/index.htm. I must admit, though, I find looking behind the curtain to be disconcerting.
I was unfortunately unable to talk a niece and her hubby (both in their early 20s) out of buying. I had the niece listening when she first came to me for advice. That was when her husband was still in Iraq on his second tour of duty. She has a college degree but works retail. Her husband works retail, too - but they both wanted to buy a house asap.
The moment hubby got home from Iraq he blew his bonus on expensive toys he was ‘entitled’ to, because he’d risked his @ss for the money. He then decided they would buy a new 4/2 waaaay out in the boondocks. His rationale: ‘you get more home for your dollar when you buy far out’.
It’s been six months since they bought. They each drive 100 miles round trip daily to their retail salesclerk jobs. They didn’t anticipate the insurance and property taxes being so high, and they continued to spend money on their booze collection and toys.
Result: he volunteered to go back to Iraq for a third year-long tour. They need the money!
We have a multitude of stupid decisions here, culminating in the suicidally stupid decision to go back to a war zone just to collect another bonus check. (You’da thunk he’d insisted wifey use her college degree to get a decent-paying job first.)
I was in their subdivision recently. There’s about three homes occupied, the rest have the builder’s For Sale signs on them. If they ever decide to get out from under the house, I don’t know if they’ll actually be able to. The builder cancelled the next two phases of the subdivision because sales of the first phase have been so poor. So I think they’re gonna be stuck out in Nowheresville for a long, long time. Assuming he doesn’t come home in a box.
“They each drive 100 miles round trip daily to their retail salesclerk jobs.”
They must eat up a goodly share of their daily earnings on commuting costs.
My sister in FLA. had the same story to tell about a 21 year old colleague and her new husband.
Bought way outside of the city (Naples) to get a “deal” on a 4/2 (more house for the money).
The mania has really infected young buyers now. It’s like that’s the last demographic for the REIC to take advantage of.
In Seattle they’re pushing 20 somethings into the overpriced condo market. The media’s been on it hot and heavy for the past month or so - how studio condos are a hot commodity and likely to appreciate even more than Single Family Homes (give me a break!), etc.
Thank God, it’s illegal for 10 year olds to buy RE or that would be the next stop on the way down.
It IS illegal for 10 year olds to buy RE, right?! Let’s all hope.
Man, that sucks.
No amount of toys is worth risking your life for. Again.
I’ve done it. Figured it was my own business, so long as wife agreed. Got my toy and also added to the family till. BUT I wasn’t needing a house — the toy was on top of “already-comfy.”
I would have expected something better from an Army man. My military friends say the hammer comes down hard if you are in the Army and miss a payment on an obligation, bounce a check, or file for BK. It’s called ‘conduct unbecoming’ or something like that.
But that story sounds like a divorce in the making.
A lot of military people, especially enlisted members, have horrible credit and are financially irresponsible. About 2/3 of the time is because wifey lacks the maturity or smarts to handle the money while her husband is deployed overseas.
Today’s foreclosure report: at the Fairfax County Courthouse bidding was tepid. Bidders were present, but clearly looking for deals. At least one auction went for more than $100k below full lender payoff - and nobody fought for it. One of the attorneys I talked to reported that he has thirty five (35!) foreclosure sales scheduled for a *single day* in late August in neighboring Prince William County. He also indicated that while foreclosures are WAY up in Virginia, he hasn’t seen a corresponding rise in bankruptcies either.
Leading edge of the bust? You betcha.
He hasn’t seen the bankruptcies because most of the bwrs can’t qualify for chapter 7. They make too much money (income) from jobs.
In response to an article about unaffordable housing in Bozeman, MT, I posted a reply referencing the housing bubble. The author’s reply to me seems to amount to “it’s different here.” But is it possible that mountain resort-type locations will always be unaffordable? Think Jackson Hole, WY.
By the way, one poster calculated that about 1 in 33 homes in the Bozeman area are now for sale.
New West Bozeman article
Marcia says:
I’ll give you one word in return: decades. That’s how persistent Bozeman’s inadequacy of affordable housing has been. It has remained true in profoundly varying market conditions and was evident right before the bubble started expanding (at the beginning of this long growth cycle, when the city first studied and considered IH in 1994 and decided to try other approaches first). I agree with you there are signs of market softening and prices beginning to adjust, but prices would have to plummet spectacularly for home ownership to be in the price range of average workforce wages. And Bozeman shows every sign of continuing to be popular, to attract new residents because of its amazing setting, etc. Typical predictions are that its growth cycle may not always continue at the current record pace and may vacillate some but that Bozeman will continue to grow at a significant rate for many years. That will continue to put upward pressure on housing prices, even if occasional adjustments occur. Affordable housing is a nearly constant issue for growing communities, and it’s why so many in similar circumstances to Bozeman have adopted IH. After 27 years of addressing housing issues in Bozeman, I do not believe the need will cease, though the program target will doubtless need occasional adjustment as conditions change. And any practical alternatives for addressing our persistent affordability challenge certainly deserve attention, but Bozeman needs a mechanism to ensure steady, reliable creation of affordable housing along with higher-end housing as the community grows. IH in other communities meets that goal more effectively than any other approaches anyone has been able to identify so far.
Well, we have a society that will pay hard earned money for friggin RING TONES for a cellphone. So, the value of a dollar is lost on them. They buy everything with plastic, so there is no sense that money left their hand and no thought to trying to haggle and get a good deal. “What’s the monthly payment?” is the mindset now. It blows me away.
South Africa raised 50 basis points today to 8%. Wonder how property is doing down there today.
Check out this FB in Temecula: http://inlandempire.craigslist.org/rfs/189224030.html
So nice of him to sell “below market”.
Sickening, that guy should lose some money for making a stupid purchase. He’s a speculator, not an investor. Plus looking at the satellite picture sure looks like cookie cutter suburban home hell.
I’m been enjoying forclosure.com. It’s a bit of extra work to check stuff
out without buying a membership.
Check out the third one down on this page, owned by a Kostas Iannios.
http://tinyurl.com/hwa5d
If you look him up, he’s at 139 N. Mansfield.
But the address is a duplex he bought at 141 N. Mansfield, 90036 in June 2005 for $1.6M, and it’s already in preforclosure. Must have made payments for 10 months and then called it quits.
http://tinyurl.com/ebscc
I don’t believe it would sell for more than that today,
so I’ll be watching this one with interest.
Excellent area, nice property. First franklin is the lender if your interested call and sign up for their R.E.O. list. Those folks are toast. They overpaid by at least 600k for what that is. But that area is hard to get into even in a down market. Most of the folks over there sell after someone has taken them out feet first. It’s not on the MLS so he must be going down with ship if foreclosure.com is accurate.
This is un fking believable. A trailer in SD for 260K.
http://sandiego.craigslist.org/rfs/190209805.html
Rent is 425/mo. What the hell is this moron thinking?