‘Housing Boom Inevitably Followed By Bust’
The homebuilders have the September confidence numbers out. “Reflecting increasing builder concerns about conditions in the market for new single-family homes, the National Association of Home Builders Housing Market Index declined for an eighth consecutive month to a level of 30 in September. This amounted to a three-point drop from an upwardly revised 33 reading in August, and is the lowest level the index has reached since February of 1991.”
“‘Builders are adopting an increasingly cautious attitude in their near-term outlook for new-home sales,’ said NAHB Chief Economist David Seiders. ‘They’re experiencing falling sales, rising sales cancellations, and increasing inventories of unsold units. And although many builders are offering substantial incentives to bolster sales and limit cancellations, many potential buyers now are waiting on the sidelines to see how the market shakes out before proceeding with a home purchase.’”
Some housing bubble news from National Mortgage News. “This coming Wednesday two Senate subcommittees will tackle the sticky issue of ‘exotic’ mortgages, or as they like to call them, ‘nontraditional’ loans. At a hearing this past week, payment-option ARMs took it on the chin, sharing some of the blame for home prices soaring into the stratosphere.”
“Meanwhile, we’re hearing that one large POA funder selling billions of dollars of these loans to Wall Street has been, in the words of one source, ’screwing up’ the index on the mortgages, and may be forced to buy back mortgages. The problem, said the source, has been going on for two years.”
“Merrill Lynch analyst David Rosenberg on housing: ‘We know that the housing boom will inevitably be followed by a bust, and..we know that leaves the consumer exposed to perhaps a long period of balance sheet repair. We believe that home prices have become so far out of whack that it could take several years before prices realign themselves.’”
From MarketWatch. “Credit Suisse analyst Gary Balter told his clients, ‘Housing prices and spending usually only begins to be impacted six to nine months after housing peaks and we believe we are not near the worst yet.’”
“The worst of Fannie Mae’s regulatory troubles may be behind it, but one longtime skeptic of the mortgage giant thinks it could face bigger problems from trouble in the U.S. housing market. Gilchrist Berg, founder of a $2 billion hedge-fund firm, said in a recent letter to investors that Fannie Mae could lose $22 billion to $29 billion if, as he expects, the housing bubble bursts and foreclosures increase.”
“‘We are not sure the folks running the show fully embrace the risk of declining house prices,’ Berg wrote. If the housing market continues to decline ‘a major portion of Fannie Mae’s value could be wiped out.’”
The Chicago Tribune. “If you believe the surveys, small-business owners are growing less optimistic as they see the economy slowing. Some business owners are upbeat because they’re in industries that stand to benefit from a downturn.”
“Lew Freeman, whose Miami-based businesses include forensic accounting and real estate consulting concerns, specializes in helping lenders who are worried about borrowers who look like they’re heading for default. Business is up right now because lenders are seeing more signs of trouble as the economy slows and they don’t want to wait for an actual default to occur.”
From Bloomberg. “Washington Mutual Inc., the largest U.S. savings and loan, is heading to Europe’s corporate debt market for cheaper financing in its biggest bond sale. The slowdown may prompt investors to demand a higher yield than they would on covered bonds sold by European companies, said Max Beinhofer, who helps manage 12 billion euros of covered bonds.”
“‘We expect a risk premium for the U.S. collateral,’ said Beinhofer. ‘The advantages for European investors of diversification might be offset by the risk of a slowdown in the U.S. housing market.’”
The Globe and Mail. “Craig Alexander, a Toronto-Dominion Bank economist who has been tracking Canada’s residential real estate market, said Monday the U.S. housing-led slowdown has become a reality. ‘Real estate activity has come down quickly and the economic fallout will be felt over the next several quarters,’ he said.”
“The housing correction has become the dominant topic of conversation, fuelling talk about a possible U.S. recession. ‘For Canada, the timing of the U.S. slowdown is rather unfortunate,’ he said.”
“The fragile U.S. housing market probably weakened further in August and early September, economists said, looking ahead to the coming week’s economic data. Home builders have turned very sour on their industry as inventories of unsold houses soar, canceled orders pile up and prices sink.”
“‘The situation in the housing market is precarious,’ said Brian Bethune and Nigel Gault, economist for Global Insight. ‘Emotions could start to play a greater role in builders’ decisions, adding downside risk to the numbers.’”
“‘Demand and supply conditions have been deteriorating rapidly,’ said Jay Feldman, an economist for Credit Suisse. New home sales are off 22% from the peak, while the inventory of unsold new homes is up 22% in the past year. Not surprisingly, prices are flat and probably down significantly considering all the extras builders are throwing in for free to sweeten the deal.”
“‘Speculators, who drove the market for new homes over the past few years, have now fled, said Drew Matus, an economist for Lehman Bros. ‘Home builders are reacting to an increase in cancellations,’ he said. A record 1.73 million homes are vacant and awaiting a buyer.”
“The pace of the decline in starts and permits so far this year is the largest since the recession of 1991. The reaction of builders to the slowdown has been extreme. The NAHB-Wells Fargo index of builder sentiment has plunged at an unprecedented pace. A year ago, two thirds of builders were upbeat about the market, but now only one third are.”
‘Former Countrywide Financial Corp. president and chief operating officer Stanford Kurland sold about $127 million of the mortgage lender’s stock this week.’
‘Net foriegn purchases of U.S. securities dropped to $32.9 billion in July, the lowest level in more than a year, the Treasury Department said Monday.’
‘Hugh Moore, partner at Guerite Advisors, says his firm has developed a proprietary economic model that would have predicted all seven recessions since 1960. The indicator is again flashing a ‘high-risk’ signal. ‘When you take the slowing of the economy and you place on it the largest housing bubble since 1955, I don’t see how we’re going to avoid a recession,’ Moore says. The housing slowdown need not lead to a broader downturn, some analysts say. ‘The 2006 housing market retrenchment was relatively easy to foresee,’ says Citigroup senior economist Steven Wieting. ‘U.S. recessions, however, are much harder to predict than many observers seem to believe.’
If you’ve read many quarterly reports it seems most major banks claim to have sold 80-100% of their option ARMs. I’m not sure where the feces will be flung when it hits the proverbial fan. But reports say hedgefunds are the big buyers. Could we really be so lucky as having the world’s richest people invested in hedgefunds take the brown bath for all our sins?
The hedge funds certainly hold a lot of the risk. Not only do they hold a lot of MBS and CBOs but they are probably highly leveraged in doing so, in essence small losses could be exaggerated into big losses. Take last week’s loss by a hedge fund of $4 billion:
http://www.thestreet.com/newsanalysis/energy/10309512.html
Any one see the sentiment survey of the Home Builders released by NAHB at 1 pm today? It was down more than exptected, by the experts. That is going to be a theme for the next several quarters: down, more than expected. I think the chances of a recession are higher than the experts predict. If we didn’t have one now, when would we?
It was down more than exptected,—> by the experts
Lots of Mansions in Greenwich CT going to be going up for sale if thats the case.
Latest Monthly Trend for the West Palm Beach Area ( not pretty).
http://iprecom.tempdomainname.com/trendg/images/palsld.PNG
August 2006 # of listings- 23,182
August 2006 of homes sold - 817
Number of months supply - 23,182/817= 28.37
Median price dropped from $312,000 in July to $295,000 in August or 5.4% while the average days on market went up from 101 in July to 109 in August.
Average price dropped from 553,000 in July to 548,000 in August and the average price sold dropped from 424,000 to 401,000 in August= 5.4 % .
The MBS often have terms that force the seller to buy-back certain non-performing loans. I know WaMu has had a unexpected surge in these buy-backs over the past 4 months, which originated at thier sub-prime division known as Long Beach Mortgage.
So, the feces may hit the fan and fly right back in the face of the lenders.
i wonder what protection the buyer of the MBS gets if the seller can’t buy back the nonperforming loan. i’m thinking none, other than a taxpayer bailout.
OC Jack,
The buy-backs are often mentioned, and I’ve never seen the terms documented although I have seen the buy-backs noted in quarterly reports. I’ve gathered it’s perhaps a clause that refers only to LTV in the first year or less, or more likely, the borrower missing payments within the first year. Someone even said there’s buy-back cause if the assets fall below 20% of the original mortgages, but I’ve yet to actually see such a clause reported.
What’s the point of off-loading risk if it can be put back to you?
What if fraud is involved? Like when a janitor making 250K per year gets an 800K loan.
Enron off-loaded negative assets (I can think of a power-plant in the Carribean) to the likes of Morgan Stanley so that they could mention in their annual-/quarterly- reports that they don’t own them anymore. Of course, they failed to mention that they had to repurchase them back a few months later at a premium per contract conditions. it was all to enable them cooking the books for a “profit” in their reports.
THANK YOU! I’ve been trying to figure out that piece of the Enron puzzle for years now. I knew they created bogus companies to offload their debt to, but I could never figure out how they still managed to keep it off their books.
There were lots of tricks, it was more complicated than just the sales, Enron would set up a subsidiary where an investment bank or outside fund would invest 3% of the equity and Enron would invest the other 97% (those were set up to meet the then standard that allowed deconsolidated accounting treatment of investments like that).
Enron would then guarantee a loan to the subsidiary (usually with the promise of issuing equity). What caught them was the guy who was at the center of several of these was the “domestic partner” of one of the mid-level treasury executives (family couldn’t put up the 3% but they weren’t married).
At the end it didn’t help that when the first broke, trading partners got very worried about counterparty risk essentially creating a bank run on the company.
Is Bluto Jeff Skilling?
I worked at Enron as well.
What about pension funds? I keep hearing hints (including from some my siblings) about 401(K) fund choices billed as “conservative” which have a rotten core allocation to MBS…
i was discussing that w/ a co-worker who will be retiring soon, he had no idea what MBS were or how exposed he was to them. deer-in-headlights syndrome.
Look at ING Direct’s slim mutal fund choices. The more “conservative” it is rated, the more exposed to real estate it is. I’m wondering if any pension funds have been set on automatic pilot have failed to recognize the changing risk profile of real estate and will also have to be bailed out by Uncle Buck.
My supposedly high-quality bond fund, Dodge & Cox Income (rated 5-stars by Morningstar, for whatever that’s worth), this last quarter just announced it was upping its MBS exposure from about 33% to 43%, and, to boot, is now buying ARM MBS’s for the first time. Scary, and surprising timing given that Dodge & Cox has such a respected and measured investing rep.
Just like corporate bonds, there are lots of grades of asset backed securities (MBS technically only refers to Fannie Mae pools), seasoned, prime pools that are located mostly in the mid-west are probably nearly as conservative as treasuries (but with the implied put). Sub-prime ABS concentrated in say Orange county, not so much.
Suzanne posts Could we really be so lucky as having the world’s richest people invested in hedgefunds take the brown bath for all our sins?
That is really funny! That would pure great, they would become the new “unwashed”
“…says Citigroup senior economist Steven Wieting. ‘U.S. recessions, however, are much harder to predict than many observers seem to believe.’”
But there are some leading indicators which have almost always correctly predicted recessions, including inverted bond market yield curve (check), YOY drop in automotive sales (check) and plummeting NAHB index (check).
Uh-oh…
Soon-to-be-declared endangered species:
http://today.reuters.com/news/articlenews.aspx?type=reutersEdge&storyID=2006-09-18T093822Z_01_N12266445_RTRUKOC_0_US-ECONOMY-BROKERS.xml&src=091806_1321_INVESTING_comment_n_analysis
point should be there is no pink slip or registration w unemployment, hence employment numbers don’t show this
Aren’t most real estate agents considered to be independent business people who are affiliated with agencies?
Unemployment number will show it because the unemployed apply for benefits.
It’s about time. This purge has been long overdue.
Loonofficer posts It’s about time. This purge has been long overdue.
I read there is a night manager opening at Taco Bell.
Filled
And that’s a good paying job. I mean on his mortgage application he said that he makes 90k/annum.
From the article… May 2001 Real Estate related employment was 290K. Currenlty ~500K. So, if we return to mean that’s 200K jobs. Halfway there? 100K - that’s direct employment. Then ask around what the latest auto-industry impact has been related to layoffs.
I wonder if will have a spike in people seeking employment as teachers.
I think we’ll lose the full 200,000.
Yes, there will be secondary job losses off of this. (E.g., REIC people were supposidly the #1 buyers of luxury vacation packages the last few years.)
This has just started.
I’m suprised the industry’s jobs are only down 1,500 so far this year… I guess 4Q2006 through 2Q2007 will be the primary layoff season in the REIC.
I think we’ll lose more, much more. The bubble cannibalized future business and the bust will devastate the trade-up market. How do you trade up negative equity?
I knew a broad who went from trailer living to $600G’s a year as a mortgage loan sleaze.
She had 2 appraisers in the bag, and once the word got out that every deal she did “went thru”, she put everybody else out of business.
Never seen anything like it my life.
She virtually controlled the entire central ME region.
3 million for 5 years work for a HS grad.
Think the systems rigged?
From the update:
‘Reflecting increasing builder concerns about conditions in the market for new single-family homes, the National Association of Home Builders Housing Market Index declined for an eighth consecutive month to a level of 30 in September. This amounted to a three-point drop from an upwardly revised 33 reading in August, and is the lowest level the index has reached since February of 1991.’
‘Builders are adopting an increasingly cautious attitude in their near-term outlook for new-home sales,’ said NAHB Chief Economist David Seiders. ‘They’re experiencing falling sales, rising sales cancellations, and increasing inventories of unsold units. And although many builders are offering substantial incentives to bolster sales and limit cancellations, many potential buyers now are waiting on the sidelines to see how the market shakes out before proceeding with a home purchase.’
“Seiders said the builders’ industry group expects the correction to continue until the middle of 2007 and “gradually moving back up towards trend in 2008.”
I hear ya baby! Wink, wink.
“Seiders said the builders’ industry group expects the correction to continue until the middle of 2007 and “gradually moving back up towards trend in 2008.”
I hear ya baby! Wink, wink.
I expect and the industry is already scaling downward to its newly defined capacity/demand expectation. After it recognizes its still too big, I expect the industry to scale down even more.
Its really tough for these guys to measure demand; first they underestimated demand b/c they did not add speculator demand to the equation; then, they overestimated it b/c they thought speculator demand was real and forever lasting; now, they are underestimating the fallout created by speculator supply.
RE: Builders…the new aristocracy…
Boston Globe ran an article on a guy this weekend with no degree, no biz training, no nothin’, who got into various types of development and buildng material suppy with the aid of equity bucks taken from the land of his intergenerational dairy farm.
Gist of the tale…
Some lowly book-keeper embezzled $$$$9 MILLION DOLLARS over a span of 4 years, and HE NEVER MISSED THE MONEY!!!!!!!!!
We are talking a sole-proprietor here!!!!!!!!!!11
You all can think about that story when your Congressman ponies up a vote for a bail-out and your taxes go up to pay for the wad the RE looters have taken.
I expect a contrarian rally on the home builder stocks in response to the ever-worsening stream of bad news. It is obvious the media is conspiring to hammer the share prices of these rock-solid companies, and value investors would be wise to buy the dips.
GS - Like Cramer, you’ve already missed 15%. Now that everyone is calling for the contrarian rally, it’s over.
The purpose of the market is to inflict the maximum amount of pain on the maximum of people.
Follow-up: Apologies if responding to sarcasm too seriously.
No problemo — thanks for noting the sarcasm, though.
may be faster than he thinks as many on this bb are reporting 2004 prices-thats 2 years gone in 12 months= whoooooooshhhhhhh
“We believe that home prices have become so far out of whack that it could take several years before prices realign themselves.’”
I would like the headline:
House prices testing 2004 levels
(and falling through it)
Significant price drops have yet to happen in the Central Valley (Fresno, Visalia, Bakersfield, Merced) and in southern Cal. Sales are at a standstill. Give it 2 years before the avalanche and it won’t overcorrect until 2011.
I feel helpless watching as the inevitable tax bail-out progresses forward.
I thought Fannie and Freddie did not purchase subprime? What gives?
Right ,and Fannie/Freddie had loan limits of around 400k I believe . That fact alone ,if it’s correct ,could save them from alot of loss.
Both GSEs are going down. Remember, they not only have a better part of a trillion “owned”, they have trillions more “guaranteed”. I read a study stating that their dynamic hedging will fail in the event of an interest rate “fat tail”. IOW, LTCM x 1000.
Interest rate spikes won’t be the problem for F&F, it will be credit quality.
The ‘fat tail’ in interest rates would happen if there is some sudden massive shift, which is very unlikely. The only things which usually bring that about are currency crises, and these happen when the government is attempting to maintain some kind of peg or monetary union (e.g. Argentina, or UK in the early 90’s). The US isn’t so encumbered, and the Fed isn’t going to respond to FX changes that much anyway.
The problem will be credit quality & foreclosures. This will be a a slow grind on Fannie and Freddie as their underwriting losses continue to climb with a bad economy.
The thing is that interest rate risks can be accurately quantified by quants. Assume some random process with tail index ‘q’ (”fat tail factor”) blah blah blah.
Credit risk? There aren’t really secure models for this as it’s such a black box macroeconomic thing.
I don’t think F&F will be toast, but lots of stockholder equity will evaporate. They might even default or have to renegotiate their own “loans”, but I bet the Fed will give them a loan at the discount window before that, with horrible onerous terms like a strongly worded memo.
The ‘fat tail’ in interest rates would happen if there is some sudden massive shift, which is very unlikely.
Agree with most, but not this statement. The “credit quality & foreclosures” alone could easily lead to mortgage rates disconnecting from Treasuries and soaring. Since a lot of MBS are held by foreigners, inflation and/or declining trade could lead to higher MBS rate requirements, too. We’re only talking about a quick 2% jump leading to a meltdown.
great article full of realtor denials.
HOUSING MARKET: LV PRICES SKY-HIGH?
Two studies say housing vastly overpriced; local real estate observers disagree with data
http://www.reviewjournal.com/lvrj_home/2006/Sep-17-Sun-2006/business/8850620.html
as usual, one realtor doesn’t agree with the two studies.
“Neither analysis sits well with local real estate watchers.
“I was looking for the nuances in our market, and I didn’t quite see them in that 27-page (Global Insight-National City) report,” said Linda Rheinberger, president of the Greater Las Vegas Association of Realtors and owner of One Source Realty and Management. “I found it to be interesting reading, but I didn’t see how it pertains to our market.”
Rheinberger and other area observers say neither study considers job formation, a key economic barometer linked to housing demand. The latest numbers from the Nevada Department of Employment, Training and Rehabilitation pegged job growth in Las Vegas at 5.6 percent in July, compared with 1.3 percent nationwide. July unemployment in Las Vegas was 4.6 percent, compared with a national rate of 4.8 percent.
And, as Rheinberger noted, for every hotel room built in Southern Nevada, the resort sector adds 2.5 jobs — a figure that doesn’t include expansion of ancillary services for the growing gaming industry and its employees. Local developers plan to add 41,423 hotel rooms through 2010, according to the Las Vegas Convention and Visitors Authority.
Abundant jobs have helped lure a net number of more than 5,000 new residents a month to Las Vegas for at least the past decade, according to the Nevada state demographer. Such growth calls for thousands of new homes every year, said Larry Murphy, president of local real estate research firm SalesTraq.
Said Rheinberger: “I didn’t see any allowances in these studies for that (population and economic growth). They didn’t show us the particulars that make us stand apart from Naples, Florida, or Phoenix. That puzzled me.”
Said Rheinberger: “I didn’t see any allowances in these studies for that (population and economic growth). They didn’t show us the particulars that make us stand apart from Naples, Florida, or Phoenix. That puzzled me.”
Be puzzled no longer my dimwitted realtor freind ! There are no particulars that make LV “Stand Apart” from Naples or Phoenix, you all have in common low paying hospitality jobs that don’t support the high housing prices. Can I get a job where being clueless is part of the job description ?
Said Rheinberger: ” I didn’t see any KY on the table. That really puzzled me.”
Every hotel room built in Southern Nevada, the resort sector adds 2.5 jobs — a figure that doesn’t include expansion of ancillary services for the growing gaming industry and its employees.
My BS detector has pegged at 11. Say they average $120/night. If those 2.5 people get it ALL they earn $40/day or far below the minimum wage.
how about every home/condo NOT BUILT ?
two maps of median income growth since 1999 show that NV has either about a 3% loss of income or a slight 1% gain. now, if we use an accurate CPI number(like from shadow gov’t stats) we probably find the numbers are worse.
so no income growth=much higher prices.
wonder if homes could fall even if incomes went up slightly? why not?
If LV ever starts paying martket rates for their water or electricity the whole place will dry up and blow away in the dark. If the California Indian casinos achieve critical mass the best LV can hope for is stagnation. The only saving grace may be a falling dollar and international guests but that’s a stretch.
Could they be paid below minimum wage
I’ve been going to Vegas now on and off for about a decade. The FIRST time, I went, I paid $99 during the week, for a crap box.
Good luck finding a room on the strip for $120. And how much do those people spend IN the casino for food, gambling, etc.
I think total expenditure per night for the new hotels would dwarf your $120 per night number.
Don’t know if the 2.5 jobs per room is right, but I think your $120 in revenue per room is low.
JUST $120 per night on AVERAGE. Empties Tues thru Thurs and $150 Fri-Sat and $450 on-peak really do average out.
Let me “concede” the point and call it $200/night and only assign half the revenue to employee incremental costs and the rest to construction and operational costs. That’s lower than my first estimate! See? The claim of 2.5 jobs ex multiples is pure BS.
Vegas has actually done a good job bringing in the convention crowd. My sister used to be on the committee to plan a mid-size proffesional convention every year and found Vegas and Orlando the two easiest locations to book. Thus, filling those hotel rooms mid week for an average spend of $600/night per room. During the right convention weeks, Vegas now makes more money per day during the week than the weekend. (ok, I’m obviously excluding holiday weekends, etc.)
However, I will note most of that money goes to costs or a select few. The Majority of jobs supporting conventions, as with any tourism, will remain low paying on the order of $40 to $50/day per individual.
As to 2.5 jobs per room?
This site had vegas statistics:
http://www.city-data.com/us-cities/The-West/Las-Vegas-Economy.html
In 2004: 811,700 non-agriculture jobs.
~10% in construction
~30% in “liesure and hospitality” (Gad…)
Avergage hourly wage: $14.60/hour (about $30k/year)
I do know its pretty easy to predict airline flight demand in/out of Vegas (during good years). Just take last year’s demand and scale on the change in hotel rooms…
Oh, best I can determine, there are 120,000 hotel rooms in Vegas. So there are about 2 liesure jobs per hotel room.
Neil
Thus, filling those hotel rooms mid week for an average spend of $600/night per room
AVERAGE! Not maximum marginal rate. AVERAGE! Why am I being misunderstood on such an obvious point? 2.5 bottom tier FTEs in the recreation services industry is $90k per year. Actually much more and much much more in Vegas but go with it. A room needs to rent for 365/$90k or $250 EVERY night. NFW. And that is only if building a room has no costs other than personell. Stupid assumption. Come on. The 2.5 FTEs is sooooo unrealistic the reporter blew a scoop.
BTW, $14.60/hr employees do not cost $30k/yr.
Nevermind. Use your own url. “leisure and hospitality: 247,600″ employees. And the number of current hotel rooms? 124,270.
Not to beat this to death, but I understand your comment about average, but no one goes to Vegas and doesn’t spend a significant percentage of their room cost every day gaming, drinking, eating, and generally spending. If you didn’t want to spend, you wouldn’t go to Vegas.
The NEW hotels are very lavish–lots of service, OLD hotels and/or off-strip hotels are not very lavish and don’t have the same service. If, on average, current hospitality jobs are 2 per room, it wouldn’t surprise me if NEW hotels are 2.5 jobs per room. There are off-strip hotels/motels that largely shut down at night and that are included in that hospitality jobs number of 2/1. Casinos on the strip are 24/7 operations–that’s a hell of a lot of shifts to cover, and a hell of a lot of employees.
I doubt they are refering to 2.5 hotel jobs, they are getting into the second (and potentially 3rd order effects) the room provides. The hotel probably accounts for about 1/2 of a job per room.
You can stay on the strip for less than $100 per night Sunday through Thursday…On the south end, not the MGM but all the ones across the street. The only time that is not true is when LV has a huge convention going on.
—
What these REIC LV bulls fail to see is that you can have a million new jobs but if they all pay 25k to 35k the Median House is still WAAAAYYYY to expensive.
Unless you think new lending ratios are the answer:
“Also, Fannie Mae, a federal loan purchaser, is offering new mortgage products that raise the local debt ceiling from 41 percent of gross income to as much as 47 percent of gross income, which should help more buyers qualify for a home.
When asked if relaxing qualifying standards would increase the number of homeowners who are buying more house than they can afford, Rheinberger said Fannie Mae’s move reflected an understanding that in areas outside real estate — for example, utilities and income taxes — Las Vegas is more affordable than other major markets such as San Francisco, Washington, D.C., and Chicago, so debt burdens can be slightly higher.”
These NAR folks don’t care if they bankrupt the whole nation as long as they get their inflated comissions and protect the price of the “investment” condos they own.
My real time search of the Las Vegas MLS today, the 18th day of September shows absolutely nothing is selling, price reductions everywhere, and nothing is selling. The Sept 25 release of existing housing sales should push house prices over the edge, and straight down the black hole.
From Reuters:
WASHINGTON - (INVITED) Federal Reserve Board Governor Randall Kroszner speaks before the CATO Institute “Federal Reserve Policy in the Face of Crises” conference, 0910 EST/1410 GMT.
They folks behind the curtain are talking about it, as long as you’ll pay the $300 to get in.
“Former Countrywide Financial Corp. president and chief operating officer Stanford Kurland sold about $127 million of the mortgage lender’s stock this week.”
didn’t we just see this in the homebuilders in 2005? last time there were sales that big in the HBs the stocks were cut in half.
I was very curious about this bit of news myself. He left abrutly from what I can see. Usually a top executive leaves notifying everyone long before and allowing a bit of a transition period. When someone leaves as abruptly as he had, it usually means something stinks.
It’s been reported that they’ve had a hard time lately trying to sell their MBSs, and have had to retain them. I’m suspecting that it’s all the crappy loans that are stinking up the place.
What is going to happen with Wash. Mutual? These guys are big into sub-prime, and I’m not quite sure what to make of this European bond market article. I’m guessing none of it is good. Should I pull my $ out of WaMu and look for a smaller, conservative institution?
I don’t know, but contrary to popular belief, us Europeans are not stupid enough to be stuffee’s of their crap covered bonds.
Hell yes, I did.
If you are in So Cal use Farmers & Merchants Bank.
Great service and mostly competitive rates. I can afford $5/mo for online account access.
Strongest retail bank in CA and way more pleasant than WAMU.
I think they have sold most of their sub-primes. But even in a best case senerio wamu probably isn’t going to do well over the next 3 years. I’d pull the money and put it into something else. You would do better putting it into some high dividend stocks.
Thanks for the ideas on WaMu. I’m in N. Cal, and while I don’t have much $ deposited with WaMu, I have been concerned about their mortgage exposure. I’ll start looking into some of the smaller banks up here. I was listening to a financial talk show on AM this morning and the host said he’s most worried about housing. Nice to hear, but then he went on to say that there is no bubble! The ironic thing was that while listening I was driving down the highway with homebuilder billboards every 100 feet it seemed. Tons of resale inventory up here now, and alot more housing still under construction. All this with record “ownership” levels and record unaffordability. Yes sir, no bubble here.
these are my postings from http://housingdoom.com/2006/09/12/gse-risk-ix/#comments
hello from germany,
i have something to add on the european covered bond.
germany is the “homeland” of the covored bond. these bonds have to be backed vs a loan. the loan need to have an low loan to value ratio.
for the german banks this ltv ratio is 60%. very concervative.
the loans also need to stay on the balance sheet from wamu. if somethings goes wrong they need to fix it and add to the reserves.
the bonds are also extra protected if wamu goes under.
i hope that heps a little bit.
hi john,
i think it is because the whole concept of the “european style covered bonds” cannot be converted 1:1 for the us.
there will be (from the financial times) a few differences.
because of the lack of law for this kind of construction they have to convert the loans into mbs. these mbs will be given to a “US-Covered Bond Trust” (owned by wm). the fdic is also involved.
the ft says this structure will make the mbs like the covered bonds in europe.
but there are still open questions regarding refinancing, the currency, the variable rate from the loans vs the fixed rate on the “covered bond”.
it will be interesting to see how this plays out.
Some housing bubble news from National Mortgage News. “This coming Wednesday two Senate subcommittees will tackle the sticky issue of ‘exotic’ mortgages, or as they like to call them, ‘nontraditional’ loans. At a hearing this past week, payment-option ARMs took it on the chin, sharing some of the blame for home prices soaring into the stratosphere.”
… or as HBB posters like to call them, ‘toxic’ mortgages or ’suicide’ loans.
I wonder if they will trot out some SOB storys to counter the Loan Industry saying “who are we to tell people what kind of loan they can afford ?” . The loan indusrty is going to get the hairy eyeball after a few single mothers and grandparents testify how they lost their houses and ended up in BK thanks to the helpfull loan officers.
“At a hearing this past week, payment-option ARMs took it on the chin, sharing some of the blame for home prices soaring into the stratosphere.”
It sounds as though some industry insiders have finally figured out that Option ARMs inappropriately used as affordability loans can, paradoxically, actually undermine affordability.
I would like to know who figured out the qualifying ratios on the toxic loans . To require less down ,and to qualify on the teaser rate for regular folk is the opposite of the kind of underwriting ,based on risk , that should of taken place on a loan like that . You would need to require more down payment and qualify on the reset rate . Who dreamed up that the Teaser rate would be the qualifying rate? Some of those teaser rates were and 1.5%.I’m telling you they were making loans based on low risk because real estate always goes up . How stupid can you get .
“Meanwhile, we’re hearing that one large POA funder selling billions of dollars of these loans to Wall Street has been, in the words of one source, ’screwing up’ the index on the mortgages, and may be forced to buy back mortgages. The problem, said the source, has been going on for two years.”
What is POA? Or did they misspell POS?
Pay-Option-Arms
aka POS
[sorry Ben, posted this in another article tread, wanted it in this one]
I’m waiting for the article titled “ARE NATIONAL BUILDERS GOOD FOR THE COUNTRY? ”
We already have blogs etc on the impact of a Walmart entering a community , what logic or positive impact does a National builder do when it moves into your area.
Lower price or better value on there product? well no on price. Value, in some areas of the materials they use it is a sham, the way walmart “lees’ jeans are not the Lee’s jean’s you expect but are made to these power house’s spec’s and priced lower.
The “pella windows” on some of these builders homes are not the Pella window you would expect, they are lower quality and of course price…… But the kicker here is they buy National and beat up the supplier, than expect the supplier local agent to “service” same window, for a cost of sometimes a buck a window . 30 windows in a home and for $30 the local supplier has to service. Is this exp. helping the community?
Local Trade labor? Again, these power house’s have the funds [bonds, NYSX] to do whatever they can to lower there production costs. Import illegal to work, fine with them. Than local labor gets the Ax.
To add, we have been reading here about some of these Subs,with no buyers and unsold homes to be a blight on a local community. and should be Bulldozed. Is this a benefit to any of the party’s?
Maybe when the dust clears after all this, States or community will have to have a “certificate of need” permit they required of Hospitals and Old folks homes for the builder to have before the do these square mile tracts of homes.
but I would not hold my breath on that one.
Someone has recently posted a link to a graph of the NAHB Homebuilders’ Index lagged 12 mos against the S&P 500, which shows the NAHB index to be a very reliable predictor of future US stock market moves one year later. Unless this time is different, next year will be a rough one for investors who go long in US stock market index funds.
——————————————————————————
ECONOMIC REPORT
Home builders’ confidence falls again in September
By Rex Nutting, MarketWatch
Last Update: 2:15 PM ET Sep 18, 2006
WASHINGTON (MarketWatch) — The confidence of U.S. home builders fell for the eighth straight month in September, dropping to the lowest level since February 1991, the National Association of Home Builders said Monday.
The NAHB/Wells Fargo housing market index dropped by three points in September to 30 from a revised 33 in August, indicating that most builders think the housing market is poor.
Economists surveyed by MarketWatch expected the index to fall to 31.
A year ago, the index was at 65. A reading of 50 would indicate builder sentiment was balanced between good and poor.
http://tinyurl.com/p9qay
As housing slows, employment in construction, real estate, banking and related retail sectors has also weakened.
“The housing sector is likely to shed 1.5 million to 2 million jobs … over the next several years,” said Andrew Tilton, an economist for Goldman Sachs. Nonfarm payrolls will likely grow less than 100,000 per month.
“This will raise the possibility of recession, and we expect it to result in Fed easing in 2007,” Tilton said.
Housing-related employment totals about 9.89 million, Tilton figured, including construction workers, real estate agents, mortgage brokers, property managers and workers in furniture-related businesses.
“The housing sector is likely to shed 1.5 million to 2 million jobs ”
Plus the illegals that spend money in the States–Taco Bell’s sales were down 2% in the last quarter!
mexicans (legal or illegal)dont eat taco bell. try again.
You got that right.
Del Taco, on the other hand…
Here’s some excellent analysis on NAHB/Wells Fargo index and GDP:
“And to see how this works, the chart below pretty much spells it out. We’re looking at the NAHB (Natl. Assoc. of Home Builders) Housing Index since 1985. As you can see, every single meaningful dip in this index, as we have now experienced in the current cycle, was met with a meaningful rate of change decline in nominal GDP over the last twenty years. Will this time be different? We think not. If nominal GDP is not slowing relatively meaningfully by year end/early 2007, we’ll be pretty darned surprised. In fact, it will be time to rewrite the history books.”
http://tinyurl.com/kp4pt
GS posted ” Someone has recently posted a link to a graph of the NAHB Homebuilders’ Index lagged 12 mos against the S&P 500, which shows the NAHB index to be a very reliable predictor of future US stock market moves one year later”
I saw it and read it carfully. I was already pre-deposed to dumping my S&P 500….. I took a 17k gain but that was the tipping point for me. I will watch and wait, it was in a tax defered aniuity.
When the fuel runs out in a central heating system the room temperature falls all the way back to its natural, unheated level. The same applies to economies.
In the Great Depression years - from 1930 to 1932 - the US economy lost about half of its economic output as people cut back on avoidable spending where they could. During the depression they didn’t go to restaurants, or take luxury holidays, or generally swan about spending money, all of which seems a normal response to bad economic times.
Yet they continued to buy heating fuel, and food, and other basic goods. The business sectors which were most damaged in the Great Depression were the ones which supplied life’s ‘unnecessaries’, many of which had only recently built up, during the roaring twenties.
So when pessimism was at its worst in the depression the world economy was propped by essential goods and services, and this ultimately arrested the downward deflationary spiral, stopping unemployment in the US at a ceiling of around 25%, and productive output at a floor of about 50% down from the output high of 1929. It was only when this production floor was reached that people looked round and realised that it actually couldn’t get much worse, and from then on, confidence started to rebuild.
If the same pattern applies to the world’s next great depression then we have a problem - possibly the cataclysm our grandfathers feared when they originally refused to prop up the western economies with printed money in the early thirties. The result of economic central heating is that demand for progressively more extravagant ‘unnecessaries’ has been ratcheted up year after year, with the result that food, fuel and basic goods and services are now a far smaller constituent of expenditure than they have ever previously been. In 1913 food production represented 70% of world trade, now it represents 17%. Food consumption over 35 years has doubled in the USA, while leisure and recreation have grown by around 10 times. The accretion of so much luxury productive output sets the scene for catastrophe.
If a slump is around the corner, there will be no natural floor until about 80% of output has been eliminated, and a very large number of jobs have been lost. An average US citizen of productive age would then have an income of between $4,000 and $5,000.
C’mon Zadok, don’t sugar coat it. Give it to me strait.
LOL. What’s the word on the street?
Interesting summary. I have to wonder how much our recent economy has been fueled by credit-fueled consumerism–and that could quickly turn in harder times? Will those high end gourmet and home shops survive a downturn?
Then consider how many city centers were “reborn” due to credit-fueled spending. It’s sort of staggering to consider a possible downside.
It’s sort of staggering to consider a possible downside.
Which is probably why most people don’t. It is easier to think in terms of positives and things that make you feel good.
Agree. I think that was part of the reason why the media didn’t ask any hard questions throughout the run up. Part of the American character, for better or worse…
“If the same pattern applies to the world’s next great depression then we have a problem - possibly the cataclysm our grandfathers feared when they originally refused to prop up the western economies with printed money in the early thirties.”
sounds also a lot like the “cross of gold” era.
Interesting book, “The End of Work” discusses what the world will look like when this happens. My hope is that technology will end the era of the bureaucrat at which point the masses will realize big, bloated government means small welfare check. The Robin Hood loving beneficiaries will want an efficient government because they’ll be fighting for the lefovers.
Another point I keep hammering, too… back then, 50% of the working population didn’t depend — directly or indirectly — on government issued checks.
Would you elaborate on the following, please?
“In 1913 food production represented 70% of world trade, now it represents 17%. Food consumption over 35 years has doubled in the USA”…
I’m curious to read more of your assessment on food production vs. consumption…
to me this is a core issue
TIA
How about food production per BTU (unit of energy). The green revolution is based on petro. Combines, fertilizers and other labor saving machines use fossil fuel.
If the same pattern applies to the world’s next great depression then we have a problem ….
A depression today will evolve into social anarchy because of the economic destruction of the country’s rural economies and reliance placed on welfare by enormous segments of today’s society. Remember when the water stopped runnin’ and the light went out, NO went from operational govt. to anarchy in 72 hours.
Wonder what a major big bank run would create?
Go read a book on Surviving the Depression in New England.
What did everyone do after the bank cleaned them out?
Retreated to Uncle Ray’s farm in Maine to chop the firewood for heat; tend the garden for food; milk the cows for drink; and sell a few eggs for cash.
No more farms to retreat to anymore.
All divided up for lots, or bought by some bond trader from NY.
Country and the world is fooked. Best get your ammo & Ak-47 for
insurance.
Ok, and when is this going to happen? This depression stuff is a joke.
As soon as the Y2K bug kicks in. Could be any minute. ARE YOU READY?
Actually, a depression is a deeper and longer recession, so we are really due for one, no joke. Recessions and depressions are the only way to correct the imbalances caused by the inflating activities of the government, and with no recessions or depressions the end result would be hyperinflation in the end. But his does not mean that we will go back to the conditions during the Great Depression, however, it will be a serious time for the economy. Hopefully it will encourage or more likely force people to be responsible about debt and spending. It would be nice if it caused the people to demand a stable currency, too, which would limit the imbalances in the future, but I don’t feel to hopeful about that.
I have doubts that rural life would be better than city life in a depression. There will still be jobs (nurses, and so on) and jobs that are in demand always pay the most. Also, during a depression, cash is king, and bonds. Those who have saved considerably several years worth of expenses will manage to survive without a job. Rural life is not all it’s cracked up to be: It takes a long time for an ambulance or a cop to get out to rural areas. Besides, these days meth labs are scattered over the rural America coast to coast. Before the mid-1970s you could trust most rural people. Now it’s not so easy to trust them. Our society is too drugged. I’d rather live around the corner from a poiice station than next door to a probable meth lab.
I’m not sure I agree with you. In NO, in some cases the cops just laid down their weapons and went home. They were outnumbered by the looters. Imagine this happening in major mtero areas. That’s why I would never live in West L.A. If sh*t does hit the fan in terms of a deep recession or depression, do you really want to live right next to a bunch of lower-class people with no savings who are looking at you and your nice stuff…
Most of the cops are going to go home to the burbs and protect their own homes and families.
The sickening part of this whole thread is that it’s entirely possible and, even before I reached the AK-47 comment, I was left with the urge to buy more ammunition and perhaps another handgun. Now I have a headache!
I don’t know, this all sounds earily similar to the y2k crap we all heard about in the late 90’s. Knew a guy at the time was convinced that y2k was going to be the end of civilization as we knew it. He built a cabin in the mountains, purchased and buried gold bars underground surrounding this cabin, and of course purchased plenty of weaponry and ammo. He was completely obsessed with the whole thing. Friggin complete joke.
“It’s never as good as they say it is, and it’s never as bad as they say it is.”
- Unknown HB poster.
That maybe me, but I credit Ben Jones in his Newsweek interview for the quote.
That means he bought gold at around $250/oz, so he’s probably doing all right.
Now I have a headache!
The Ak-47 reference is no joke. I read a Katrina story about a guy who rode the flood out with a neighbor in his attic.
Then the cops bolted and the looters and gangs took over.
The homeowner said-Never in my whole life have a been so terrified. There were sounds of gunfire coming from all directions. I WOULD HAVE GIVEN ALL THAT I OWNED FOR A COUPLE AK-47’s TO PROTECT MYSELF AND MY PROPERTY.
Had the same thing at beginning of the LA riots. All the Clinton anti-gunners who had no firearms ran for the gunstores the minute everything started burning.
Oops…All closed. Nighty-nite…………..
BTW-Get the .223 caliber. Hard as hell to find 7.62×39 ammo. All the stuff is goin’ to the MidE.
“An average US citizen of productive age would then have an income of between $4,000 and $5,000.”
Different angle but your post fits in with the “Rebalance Theory”.
Zadok Of course this happened prior to all of the New Deal Social programs. None of the above factors in Unemployment Ins Disablty Ins. SS and the loads of WIC and Welfare bennys.Fed and State.
That’s an important point to make Zadok. An economy based on hyper-consumerism (buying things you don’t really need - like an $800 jogging stroller) is extremely susceptible to the whims of the global economy.
Say, with an income of $5k, does that mean people will be preparing their “franks ‘n beans” on granite countertops?
The Great Depression happened to a post WWI world where Europe was thrown backward and not rebuilding and industry world wide shut down. This downturn is going to be really nasty, but there has been no catastrophic mass death and devastation in industrial countries and growth should overall continue to grow which even at a slower rate means many trillions more in the GNP over the next ten years or more as this plays out. The Great Depression analogy is terrible and requires being just as smudgy with the numbers as the housing boosters have been through the last few years.
Wrong…the Great Depression evolved from the speculatory environment contributing to the US stock market crash of ‘29.
This event will pale in comparison to what’s coming…
I don’t think anyone really understand’s the magnitude of reckless lending which has gone on to inflate the value of a necessary commodity (shelter) to incomprehensible levels.
And yet, rebuilding Europe after WWII lead to the 50s boom.
Wow! Politicians are going to hold hearings concerning exotic loans. We are so lucky to vote in politicians who are on the ball and looking after our interests. I suppose we’ll be treated to the usual stern face b.s questions from politicians to those in the mortgage industry. At least from the politicians who are pissed off they didn’t get any perks off the mortgage industry. These hearings are always good for a laugh because of the bad acting…..
Expect them to commission a landmark study that will be completed about 3 months after the first big wave of ARMs reset.
On Thursday they are holding hearings on the plight of the stagecoach industry in the United States.
To paraphrase Casablanca
“I am shocked to discover that there has been speculation going on in this market”
“Your HELOC sir.”
‘Builders are adopting an increasingly cautious attitude in their near-term outlook for new-home sales,’
The problem is that reality will probably still be worse than estimated by the builders. It always happens, and it’s inherent in the way a capitalist economy functions. A cycle of overproduction never misses.
It needs to be pointed out that as all these numbers come out, like builders confidence, homes for sale, months on the market and the rest, they usually refer to it being the weakest is so many years.
Those past numbers were in the depths or toward the end of the last Re downturn. These numbers today are at just the beginning. We have a long way down to go and it’s already as bad as the last time.
Hey folks, I guess I better tell the neighbor with the Chihuahua named “Precious” to stock up on those “gourmet” doggie biscuits. Oh, I can’t, they’ve gone to Carmel this week in their $229,000 Bus/RV with the Cadillac Escalante in tow. By the way, is a business that does dog & cat massages considered an “unnecessary” type of income expenditure?
Over the past several years I have heard several commentators on our pathetic consumption based economy use the term “doing each other’s laundry” to describe our national situation. This took on a whole new meaning when I saw a brand new Ford Ranger pickup with a door sign advertising a doggie doo pickup service. I just don’t know how much worse it can get than that!
From MarketWatch. “Credit Suisse analyst Gary Balter told his clients, ‘Housing prices and spending usually only begins to be impacted six to nine months after housing peaks and we believe we are not near the worst yet.’”
No shit Sherlock…………
Mike said….Wow! Politicians are going to hold hearings concerning exotic loans. We are so lucky to vote in politicians who are on the ball and looking after our interests. I suppose we’ll be treated to the usual stern face b.s questions from politicians to those in the mortgage industry. At least from the politicians who are pissed off they didn’t get any perks off the mortgage industry. These hearings are always good for a laugh because of the bad acting…..
—————————————————————————–
The politicians getting involved is kind of premature anyway. Wait a few years for all the distressed FB stories to come out and then look for another Congressional hearing that seeks to “understand underlying causes…”
“Housing Boom Inevitably Followed by Commodities Bust” (as I have been occasionally saying here for, oh, maybe a year now…)
————————————————————————-
VIDEO (marketwatch.com)
‘Protracted downturn’
Stephen Roach, Morgan
Stanley’s chief economist, sees commodity prices taking a dive as China’s economy slows and the U.S. housing market cools.
Based on my experience when those fast growing southeast asian countries slow down the commodities market takes a dive. I learned my lesson back in 1998.
I should have cashed out of Russia in October of 1997 when the Asian market first started to fall apart. I am not taking any chances this time around.
Then it was the tigers. 800 lb gorillas (CH & IN) will prove far more problematic this time than tigers did in 1997-98, IMO.
100$ Soglasna s’vamy. Eta pochemu Ya bil ochen ostorochene postledny 6 mesyts. Ya ne znal chto menya nada delet. Sechas vsyo ponyatna.
100$=100% ezvenite.
Getstucco -
Post of the Day. Nobody is talking about that these days, although its one of the most important things to watch.
“Housing Boom Inevitably Followed by Commodities Bust” (as I have been occasionally saying here for, oh, maybe a year now…)”
Good. It will mean cheaper gold. Instead of buying 2 ounces at $600 per ounce I would buy 3 ounces at $450 per ounce, 4 ounces at $350 per ounce… No big deal for me. And I’ll buy more oil stock too.
“Zadok Of course this happened prior to all of the New Deal Social programs. None of the above factors in Unemployment Ins Disablty Ins. SS and the loads of WIC and Welfare bennys.Fed and State.”
No problem! Our Federal Govt and the Fed Reserve will just have to ramp up all the deficit spending and credit creation mechanisms and take the oomph out of the coming downturn.
Uh oh. Just one problem. They have had all the deficit spending and credit creation mechanisms on full power output for at least the last five years.
So sorry- no ammo left.
Desbaer ” So sorry- no ammo left. ”
I agree the current Government is a disater and has nothing in common with usuall Rep. spending planks or policy.
Plenty of people who made bad decisions will get the tar beat out of them…. but we will not Fall behind the up comming haircut. Plenty of lumps and baldies comming up. But I am not going to move to a cave in Washington State.
We will have a correction worse (Property) than the 80’s early 90’s but no depression my friend. Get ready to buy and make some dough!!!!
A depression is definitely in the cards. Keep it in perspective, though. Per wikipedia…
A severe or long recession is referred to as an economic depression or slump.
That’s basically it. Most people will still work, play, eat, sleep, etc. It’s the psychology that’s a killer — nobody wants to spend money on anything (unless they’re rich) — and bad news is the only news.
Economics, demographics, globalization, energy… the deck is stacked against us like never before. It’ll be bad, in some ways really bad, but life will basically go on.
And yes, there will be some killer deals to be had, provided you’re in the right frame of mind.
And yes, there will be some killer deals to be had, provided you’re in the right frame of mind. And have actual money to spend. When credit boom liquidity dries up, you no longer have to bid against any moron who can fog a mirror and can fill out a credit application.
“We will have a correction worse (Property) than the 80’s early 90’s but no depression my friend. Get ready to buy and make some dough!!!!”
The 86-89 housing downturn in Denver was a great opportunity. The SO and I were able to pay off a VA foreclosure and get out of the mortgage cycle permanently. All houses since have been bought with straight cash payment. And we have been saving all those unspent home payments and are ready for action in the imminent downturn. At least we will get something back for the last few years while the Mr. Bubbles was keeping interest rates in negative territory.
This upcoming national housing bust will create some great opportunities for those who want to get a paid-off residence. At some point, the banks and govt institutions will just roll over and dump millions of properties for whatever the market will bear. Those few people with good credit and/or cash will be able to write their own ticket.
The best opportunities will be in half-completed and fix-upper properties because the dumping institutions will have an extremely hard time unloading these cosmetic disasters. Many will not qualify for financing because they are not closed in, have no heat, cannot be certified for residency etc. Also these properties will be magnets for vandalism and squatters. They may unload them for the first lowball cash offer. Anyone with the time/skills/inclination to do some basic construction effort will get some great deals.
Come to think of it, a great many people may have the time to tackle such a project once the housing implosion starts pulling down other areas of the economy. Remember that real estate construction is the biggest industry in the US. And it’s tentacles reach deeply into many other areas of the general economy, especially with explosion in consumer indebtedness. All the grand multiplier effects that resulted from the housing boom will now go into reverse and have effects on the negative side comparable in scale to those that occurred on the positive side.
did anyone else enjoy ken harney’s article in the sf chronicle yesterday? it was wonderfully reassuring to read that here in california real estate booms are never followed by busts.
Did he just move to California recently?
He’s talking about the “bust of ‘02″