“Sellers Have Yet To Learn What Too Low Means”: Chicago
Chicago Business reports from Illinois. “Like the opportunists who quit their jobs to become day traders during the ’90s tech-stock bubble, a herd of amateur builders in this decade has stampeded into the residential construction business, lured by years of booming sales and rising prices. These newbie developers have contributed to a flood of spec buildings that has, in turn, pushed the number of unsold new homes to its highest level in at least 17 years.”
“In the third quarter of this year, the inventory of finished, unsold homes in the Chicago region reached 5,499, a 13% increase from the second quarter.”
“Jeff Moudry broke ground on his first house in February. Mr. Moudry started construction on spec, but was so confident he could sell the house, a brick-and-stone four-bedroom in southwest suburban Shorewood, that he quit his job to work full time on the construction.”
“Eight months later, Mr. Moudry has seen the torrid pace of home sales in the area slow drastically, and watched the inventory of unsold homes pile up, including another spec home for sale right next door for $649,000, his asking price. ‘It is a scary market for people just getting into the business,’ says Mr. Moudry. ‘It makes you nervous thinking winter’s coming and I’m going to sit on it all winter.’”
“Of the 14 active listings for the subdivision, all but one are spec homes, says broker Nicolette Berardi. That’s a problem for Mr. Moudry, who is paying $3,800 a month on the $500,000 loan he took out to buy the lot and build the house.”
“It looks like the end of a great housing boom that began in the mid-1990s, making thousands of homeowners wealthy and fattening profits at related businesses, from mortgage brokers to construction contractors.”
“Jim Venhuizen feels the sting of Chicago’s worsening housing slump about 10 times a day. Mr. Venhuizen, the owner of Cimarron Construction Inc. in New Lenox, takes that many phone calls from unemployed carpenters looking for work. Some are former employees he was forced to lay off in recent weeks as his business slowed along with home sales and construction.”
“‘It’s not enjoyable,’ he says. ‘Some of them are going to have some real problems with mortgages.’”
“In the first nine months of 2006, sales of new Chicago-area homes fell 20% compared to the year-earlier period, according to real estate consultant Tracy Cross Associates Inc. In the third quarter alone, sales were down 32% compared to third-quarter 2005. Residential construction spending in Illinois fell 9% in the first nine months of 2006 from the year before, according to McGraw-Hill.”
“Homeowners are sweating, builders are suffering and brokers are scrambling. Rick Levin is having his best year ever. Mr. Levin is a real estate auctioneer, putting him in that coterie of countercyclical businesses that profit when the economy turns south, a group that also includes debt collectors, bankruptcy lawyers and bond investors.”
“Revenues at the Chicago-based auction house have tripled in the past year, as Chicago’s residential real estate market has slumped. Mr. Levin’s clients range from well-to-do property owners on the North Shore who can’t sell their $2-million mansions to developers trying to cut their land holdings in a weakening new-home market.”
“Some sellers agree to take any price. Others retain the right to reject a price deemed too low. In Mr. Levin’s view, many sellers have yet to learn what ‘too low’ means in the present slowdown. They continue to expect the massive price appreciation of the past decade. At the same time, buyers tend to exaggerate the slowdown’s effects.”
“The disconnect keeps a lot of his auctions from leading to a closing. ‘Sellers think it is 2005 and buyers think it’s 1929,’ Mr. Levin says. ‘You can’t get either side to blink.’”
“Still, he’s not complaining. Mr. Levin estimates he will auction up to 500 Chicago-area properties this year, up from about 150 in 2005. He’s looking to add about five people to his full-time staff of 10 and is eyeing new markets like Southern California, Arizona and Florida.”
“On Nov. 15, Mr. Levin will auction five new homes in West Rogers Park. Originally priced at $899,000, the homes have been sitting on the market for about a year. The developer ‘elected to sell them sooner rather than later and reduce their carrying costs,’ says the firm’s lawyer, John DeAngelis.”
“Mr. Levin must be brutally honest with clients, especially homeowners who come to him as a last resort. ‘Sometimes dashing their dreams about what their largest asset might be worth is a real sobering experience,’ he says. ‘I’m afraid that I’ve got a lot more of that in the next 12 to 18 months.’”
In the past, people would post here that building has no downside, that housing is an inherent ‘good thing.’ As these stories show, almost everyone gets hurt in an artificial housing boom.
‘Glenn Morgenroth is doing something he hasn’t had to do in a while: hustle. Mr. Morgenroth, owner of Elgin-based BancPlus LLC, says his business, booming two years ago, is losing money. ‘The next 12 months are going to be a real test,’ he says. Anticipating a downturn in lending, Mr. Morgenroth started shrinking his payroll almost two years ago. In 2004, BancPlus employed 10 people, mostly loan originators. Now, it’s down to two originators and two support staff.’
It is really looking more and more like the NASDAQ correction of 2000. I recall how many, including myself, thought they would make a living trading billion $ cap stocks that only had a webpage going for it ala pets.com. I liquidated that gloomy day in Feb.2000 when the NAS had an intraday movement of 700 points. I was fortunate. And here we are nearly 7 years later with a different market but the same market conditions; get rich quick hysteria, hyperventilating market cheerleaders explaining away a reversal, evaporating equity and we’re only in chapter 1 of this saga. There is no question there will be an Enron and it’s tangled web of speculators washed out on this. Countrywide?
You should add New Century and WaMu to the watch list. All these guys have been feeding off of the $2T of sub-prime garbage over the past 3 years. The fact the secondary market asigned such a low risk primium allowed them to make a lot of money. They have now reached an end to that.
Money is like a drug. It’s a high that everyone feels entitled to. I’m just now starting to understand human nature so well I can almost predict it with a certain degree of accuracy.
“Morgenroth slashed his advertising budget and is targeting first time home buyers directly through seminars.” LOL, does’nt he know they are priced out. No wonder he’s losing money; he does’nt know how to identify the most profitable segment of this market.
“almost everyone gets hurt in an artificial housing boom”
Well, us renters aren’t getting hurt ! We used to be the laughing stock at parties, about how much we were missing out on. Now some of our house owning friends are trying to sell and rent like us !
And man, are there some nice houses to rent out there for cheap !
Its really funny that a year ago all you ever heard was buy, buy, buy before the land runs out and all the rest. What we are seeing now with these auctions is just the tip of the iceberg. Next summer is going to be very interesting if the inventory glut doesn’t clear. Who is there left to buy all these houses ? I mean c’mon, there are very few of us renters out there and as far as I can tell, we are the only ones that don’t own a house.
Prices are going to have to get incredibly cheap to sell all these houses. I’m not buying until I see 40-50% down from the peaks. Not with the rental market as it is !
Well, take the carpenters in the article that are getting laid off. Now it’s true that they had some benefit the past few years, but I doubt many were alert enough to save enogh for this rainy day. And these McMansions were built to maximize bubble profits, not to fill a need.
Unemployment, defaults, etc, is decidely negative for an economy, which are more reasons the folks in charge should have stopped this bubble.
Ben,
The only “positive” I can see from an Oregonian’s perspective is that the bubble “flushed out” a lot of sellers and a lot of really neat homes that would have otherwise never been put on the market! Of late we’ve noticed really cool properties that sit on 1/2 to 5 acres that are adjoining farm land as far as the eye can see! In periods of normal appreciation these homes definitely just stay in the family. With the promise of “outrageous fortune” trust me, one of the heirs is chomping at the bit to cash in! Once the realt-whore starts “working ‘em” there’s no telling just how cheap these places might go for! We’re seeing a slice of life come up on the block here in Oregon like we haven’t seen since maybe the 70’s?
Where in OR is this occurring? Thanks.
It would be better if one of the imploders would use a capital I.
Actually, we’re easier to tell apart than that. I’m lmploder, it sounds sort of like lamp-loader. I write in proper english, use proper punctuation, and generally spell correctly.
imploder is the Carrot Top of the group; he has a small but loyal fanbase who find his prop-comic musings endlessly entertaining. Rarely do our paths cross, and it should be quite easy to tell us apart when you see our comments.
I have been confused, I am not a fan of Carrot Top.
It is indeed quite easy to tell the difference. Imploder is the one who is a legend in his own mind.
We’ve noticed all throughout the upper valley. My wife and I would argur b/c we’ve seen some of the same damn homes sold 3-4 times in the last 10 years and all of a sudden we’re seeing inventory that’s kind of hard to identify. We’ve looked from south of Wilsonville to Albany, Monmouth etc. For years it was the same “made to flip” inventory getting turned over time and again. One subdivision near us (upscale of course) has homes that are on their 4th owner in 6 years. Finally we’re seeing some fresh stuff get flushed out. Probably greedy heirs looking at aging parents and a rapidly deflating bubble looking to get out while the gettin’ is good. Hardly at “can’t say no pricing” but like I say w/realtors looking more like the Donner Party every day there aren’t a lot of comps so they can go to the seller and say, “Hey, it’s an offer”.
This brings up an interesting question. Can a bubble be stopped? The Fed could have raised rates and the regulators could have cracked down on the loose lending standards when things became clearly silly a few years in, but I wonder if the bullish crowds foaming at the mouth wouldn’t have just blamed the authorities for the subsequent bubble burst?
Once that gold rush psychology grabs hold of people, they will viciously attack anyone who operates to the contrary. Think of dinner party crowds ridiculing renters and bulletin boards in the internet mania going after anyone who went against the bubble orthodoxy.
I think the only thing that will protect us against bubbles in the future (whether in housing, internet stocks, beanie babies, railroad or canal stocks, or tulips) is education of people in economic history and getting people to think in nonconformist ways. After all, most of the crowd followers who get caught up in a bubble aren’t thinking for themselves. They just see that Bob and Sally have taken on debt and made money buying houses so they think they must know what they are doing so I’ll do the same thing. In a bubble people always make a mistake of confusing a bull market will high IQ. I don’t think these human flaws can be legislated or regulated away.
And as far as fraud, as distasteful as it is, it has been part of every great bubble throughout history. I don’t know how we change human nature. All we can do is collectively and individually inform people about the contrarian case and hope that some will not be so blinded by the $ signs to see the truth next time, and there will be a next time.
IMHO ,the lenders use to be the check and balance on keeping at least unqualified buyers from buying unless they put in a huge down payment . Lenders would make speculators put more money down and charge them a higher rate which would limit the amount of speculators .No down loans were not done in past real estate cycles unless it was a VA loan .Even FHA use to require 3 to 5% down .
Even if you consider the lower interest rates should of sparked the market ,it was still no reason to change the underwriting standards for affordability and down payment requirements . The fact that lenders could sell off the loans to the secondary market is no excuse to make bad loans ,create a false demand market based on real estate always goes up .
Further , to qualify people on a teaser rate that is short term takes the cake . The underwriting should be harder on a adjustable because of the down side potential .
I have never seen anything so nuts in my life and now it’s going to affect everyone in one way or another .
In “bubbles” one generally sees three elements. First, there are lots of inexperienced new market participants. (check. Look at all the Donald Trump wannabes out there) Second, there is lots of cash. (check. Look at exotic mortages, low interest rates, etc.) Third, there is lots of price uncertainty (check. After the stock market crash, funds flowed into real estate. How high would it go? Was there something ‘new’ about real estate this time?)
The conditions were there for a bubble, and we got one. The only group that is charged with preventing this is the Fed and regulators. But they dropped the ball (they were likely undermanned, and didn’t understand the risk associated with all the exotic mortgage products).
“This brings up an interesting question. Can a bubble be stopped? The Fed could have raised rates and the regulators could have cracked down on the loose lending …”
To really put a clamp down on bubbles is to get rid of the Central Bank and fiat currency schemes. These ALWAYS lead to a collapse, the only difference between historical instances of these schemes is how long the scheme lasts (think decades here).
I believe that that they can’t stop it at this point though. Nor should they. They enabled it , and that was a mistake, but to try and soften the blow can only prolong the inevitable and increase the payback. After all that’s how we got started in this isn’t it , after the tech wreck? The government needs to stop tooling around with the economy. Period. They can only make matters worse over time. They always have.
Good point, Huck. The Fed certainly did enable the bubble with the super low interest rates designed to bail out the economy from the internet bubble. The very definition of moral hazard.
What’s the quote from Shakespeare, striving to better oft we mar what’s well. Capitalism requires people to suffer and feel the pain of their mistakes. If there are no negative consequences then there is no risk and therefore no rationality in economic decisions. Which brings us full circle to the attempt to bail out the economy from the end of the internet mania in 2000. No matter how much we want one, there ain’t no free lunch.
Too bad Greenspan and his Fed cronies didn’t spend more learning about nature while in Jackson Hole each year. Maybe they would have discovered that nature has a certain purpose for everything, such as forest fires setting up the ecosystem for future growth and life. Financial markets and money are no different. So afraid are they to let things find their own balance that they feel they must constantly tinker with it, and almost always make things worse.
Ben;
I’m glad you’re looking at this bust from multiple perspectives. Neither booms and busts are good for an economy. A slow correction is far better than a rapid one.
In the long run, even renters are going be negatively impacted. First, McMansions and impractical housing built to meet specualtive needs isn’t good to rental either. These expensive to maintain homes with excessive space (5brd 3+ bath) are wasted properties. Second, the boom hurt renters becuase construction of new rental properties has been postponed so builders could build condos and homes. In the Bay Area, rents have gone up in reaction to the shortage of new apts and larger number of people needing to rent. Third, the bust is going drive up unemployement and this excessive housing inventory will slow down the construction of quality rental properties. Lastly, those forced to rent an investment property will be unwillng and probably crummy landlords.
J
I don’t think in the end there is a real difference in an “investment” property versus “rental” property. Look how many city mansions in NY and Chicago were cut up in the last depression and made into 2 or 4 flats. Were the mansions “rental” builds? I don’t think so, but they certainly ended up that way.
Rent is starting to go up here in LA.
Oh wait, that’s 40% of core inflation… Gee, it would really be sad if the fed raised rates one more time… Hmmm… what would that do to the stock market?
Then again, I estimate that with 7% per year rent increases, I would be ahead $400k renting a home versus buying a home after 5 years… Hmmmm… Oh, that’s assuming homes continue to appreciate 7.5% per year! Gee… might that appreciation not happen.
Neil
I wouldn’t be so quick here. If your FB landlord goes under, you could become a FR. Not many people will can tolerate a long term negative cash flow. Some smart financial wizards may use it as a capital loss to offset other cap gains, but that will not be many. Years back in the UK, I was given a months free rent to cut my lease as my landlord was going under.
Housing layoffs will also strain other areas. US economy is heavily depending on consuming. No consumption = layoffs, lower tax raised (Feds and Local sales tax) etc. Credit for everything will tighten.
Agrred. I think credit tightening is necessary though. It was necessary 6 years ago when this all started. It was necessary 2 or 3 years ago when Ben and many others saw a bubble forming in RE and nobody cared. The FED may have raised rates 17 consecutive times , but credit expanded at a breakneck pace throughout the entire duration. The American consumer has made himself an ugly bed. He will sleep in it. It’s just a matter of when. To expect it to happen painlessly is naive. At this point I tend to believe that it may not be able to happen at all without a downright depressionary event. I still hear commercials on Bloomberg radio “If you’re paying more than 1 1/4 % on your mortgage , you’re paying too much - CALL US TODAY!!”
I still see people paying for coffee with credit cards ( I doubt they’re all doing it because they’re record keeping uber-budgeters). I still see big HELOC signs the minute I walk into the bank. I still see people making $40k a year and driving $40k automobiles. Among a thousand other problematic signs that have become all too commonplace over the last ten or so years.
Words like production , thrift and saving need to replace equity , credit and ‘cashflow’ (in the sense that term has come to mean).
Rant off.
Tightening credit isn’t the solution to fraud. People misstated their income and lied about their primary residence. It’s the cheats that made this bubble possible. The industry and gv’t failed to police the market and maintain standards.
Low rates and easy credit favor all consumers. Dummies should be allowed to take out ARMs and toxic/exocitic loans if the application isn’t fraudlent.
The problem is these applications were often dishonest and some lenders took unjustifiable risks.
While I agree there is no doubt a lot of fraud in the industry recently , I can’t accept blaming it for the whole bubble. Zero down , neg-am 4% teaser option Arms are going to cause a bubble, because many people are greedy and stupid, whether or not they are dishonest. I also don’t believe that artificially low rates and overly easy credit are a wonderful thing, such as the recent period was when viewed historically. It instills a belief in living beyond one’s means imo. It encourages speculation and punishes thrift by definition , not to mention having those aspects compounded with the aspect of inflation which comes with it (nah , I don’t believe the official numbers at all). I agree Dummies should be allowed to do as they please , I agree. But they should not be encouraged by reckless FED behavior in the form of unnaturally low rates brought on solely to protect these same dummies from a previous bubble, and nonexitent reserve ratios. jmo. It certainly will be intersting to see it all play out , but I fear that we all will bear the burden of the dummies behavior one way or another.
“It’s boom time”
Good for you Mr. Levin! Somone has to step up and clear this inventory out! Don’t suppose Rick will be giving out BMW leases or throwing in pools though. Frankly, I’m a little shocked. I didn’t figure on seeing the auction houses really “rolling in it” until 2007 and perhaps 2008 at the earliest? What makes this all the more surprising is that this part of the country is supposedly the home of mid-western sensibility. Almost from inception we were told that the bubble is a “coastal issue” if it’s an issue at all! Doesn’t seem to be playing out that way.
I moved from Indianapolis over a year ago. The people I still talk to back there who bought within the last couple of years are already concerned about being upside-down on their mortgages. Housing prices appreciated much less dramatically in Indy, but they were still subject to the same artificial drivers as San Diego and Boston, albeit in a much milder fashion.
Interestingly, in the 1927-28 housing crash, Chicago was nearly as bubbly as Florida, but didn’t get the same outrageous press. It took decades to work through the backlog then, even with the influx of people from the South to work in war-related industries.
Buyers may think it’s 1929 but they have the money, so the movement is going to have to come from the other side.
Oh yeah. That’s one of the guy’s more amusing comments.
Sounds like some of these auction guys know this - a bit more brutal in their reality assessment for the seller.
My friend became an amatuer builder. He’s now trying to sell the “old” house while he is finishing the “new” house. The benefit is that he built the new house really cheap, and has been mostly financing the new house on the fly - so he’s not highly leveraged. He’s been in the old house for 10 years and has both paid down equity along with sweat equity.
Even so he’s struggling, and while it appears he will make a profit, I’d be surprised if he nets out more than minimum wage for the time he’s put into it.
“Jeff Moudry broke ground on his first house in February. Mr. Moudry started construction on spec, but was so confident he could sell the house, a brick-and-stone four-bedroom in southwest suburban Shorewood, that he quit his job to work full time on the construction.”
What a mistake THIS guy made.
“Of the 14 active listings for the subdivision, all but one are spec homes, says broker Nicolette Berardi. That’s a problem for Mr. Moudry, who is paying $3,800 a month on the $500,000 loan he took out to buy the lot and build the house.”
I wonder who he is paying that $3,800? Maybe his fiancee is helping him? Hmmm….ya think he still HAS a fiancee? Here we are, rollin’ into winter very shortly (and Chicago is no joke in the winter…who’s looking for housing in below zero temps?) and not an offer on the horizon.
Majorly screwed…..
BayQT~
sfbayqt,
Yeah it’s obvious the interviewer was being generous w/this guy. If the carrying cost were not an issue Mr. Flopper would not have brought them up. Since it’s apparent they ARE it’s as if the author leaves the door open to do a follow up piece. I mean, even journalists need a little job security once in awhile.
I’ve mentioned here before that much of the bubble in Chicago is in infill spec houses, especially in the suburbs. In the town I live in alone, there are nearly 100 of these houses for sale. Some of them are being built by people with no experience in building houses at all.
Kathy,
I grew up in that area (mostly Cicero/Berwyn) but went to HS in Wheaton. Just for a goof I did a few searches there and it seems the number of listings for under 300K fit on one page! Wheaton has always been nice, but not that damn nice. What gives?
DinOR,
It’s simple. Unjustified appreciation. It’s like that in most DuPage county suburbs. I’d like to buy but I’m having a problem finding what I consider affordable. I’d like to keep my monthly housing debt around 30% of my gross and the housing that falls in that price range is garbage that was built in the 70’s and looks completely out of date. It’s not like I’m poor. I make a decent $50,000/year and I feel like I’ll have to live like a pauper just to get a decent townhouse/condo.
Ken,
Understood. One of the things though (and I’m not looking for a rumble here) is that buying a home in the western burbs and being ACCEPTED are two different things! I’ve seen a lot really decent people squander their lives in Wheaton/Glen Ellen etc. and after 20 years of being ignored when they finally hung a for sale sign your “more established” neighbors would observe that you were really nice people, but kind of quiet and kept to themselves! Seriously, I could write a book about it!
That elitist attitude, other than the far north burbs, has moved to the city over the past 5-10.
I think there has been a big run-up in land prices as builders would buy any lot they could to build $900K + houses. I live in Elmhurst, but I imagine Wheaton is not that different. In my neighborhood, 50×150 lots with a 1950s ranch were going for $425,000 and up. That’s not happening so much. I even see builders selling lots now. People are stretching every which way to buy huge houses that they can’t afford. There is no in-between building here. Everything being built is a huge McMansion.
It was all of this spec building that brought me to Ben’s blog. I couldn’t believe that economic fundamentals supported this excess, and I was right.
Kathy,
In what feels like a different life I played at the Elmhurst “Y” for a team called the Huskies. It was a lot of fun.
Like Ben said earlier the purpose of a McAlbatross is to maximize bubble profits, not to be of any particular practical use! Builders say they’re filling a need for housing but how many of us “need” a 3,500 sq. ft. home?
Has either of you any information on the Evanston area with regard to housing/flippers/inventory, etc.?
Sorry, no info about Evanston, IL but Rodgers Park, both East and West, seems to have a condo conversion or a row of new townhouses on every block. It reminds me of 1979 during the first condo conversion craze in Chicago.
Seen it in Western Springs 60558. Homes on both sides of our old home (300-400K) were torn down and mcmansions built (1.1-1.4M) by a partnership of neighboors investing in properties.
One just finished and is still unsold. They fill the lot and block out the sun. A view from google earth view shows blue tarps (construction) covering the roofs of three homes on that block.
This is interesting…
Homeowners with ARMs are optimistic
From Times Staff and Wire Services
October 30, 2006
Homeowners with adjustable-rate mortgages worry about rising interest rates, but most believe that they will be able to refinance their loans if necessary, according to a study released today.
A survey of homeowners conducted for San Francisco-based Wells Fargo & Co. found that about 1 in 7 respondents had an adjustable-rate mortgage.
An ARM is a mortgage whose interest rate is typically tied to a short-term security such as one-year Treasury bills or the London interbank offered rate, or Libor. The borrower’s payments change over time with the adjusting interest rate.
As home prices rose during the recent housing boom, an increasing number of home buyers turned to ARMs to purchase homes. The reason: ARM rates were lower than those for traditional 30-year fixed mortgages. Lenders also devised ARM variations that gave borrowers even lower monthly payments by allowing deferment of principal and/or interest.
Over the last year, fixed and adjustable mortgage rates have crept higher. Mortgage company Freddie Mac reported last week that the interest rate on 30-year, fixed-rate mortgages averaged 6.40% in the most-recent survey period. A year earlier, the rate was 6.15%.
The Wells Fargo study found that nearly 80% of homeowners with ARMs said they were concerned about rate increases.
But more than half said they believed that they could refinance their loans. And about 20% said they were prepared for rate adjustments and didn’t plan any changes.
Last week, the Mortgage Bankers Assn. reported that the refinance share of mortgage applications increased to 45.6% from 45% the previous week.
Wells Fargo’s third annual study also found that homeowners expected their properties to appreciate, although they apparently were aware that price increases were slowing.
About 10% said they expected their home values to increase a lot, 53% said values would increase “a little,” and 27% predicted they’d stay the same. The rest expected a decline or weren’t sure.
The survey of more than 1,300 homeowners was conducted by Media, Pa.-based ICR. The margin of error was about 3 percentage points.
‘Last week, the Mortgage Bankers Assn. reported that the refinance share of mortgage applications increased to 45.6% from 45% the previous week.’
Funny these comments. Friends and family working in the re-fi mortgage area say the very large majority of re-fi’s they see are ARM’s for ARM’s - adjustable rates mortgages rolled into another adjustable. Very few owners can handle the down and/or the increase in payment - so they opted to hold the line as long as they can.
turnoutthelights,
Doesn’t surprise me. Sadly, it really doesn’t. This is the equivelant of “Last Call” before the bartender runs everybody out. Rather than a decent meal, cold shower and hot coffee what do we get? Uh huh, another drink!
Unfortunately, the survey neglects to determine the percentage of ARM holders who don’t understand how their mortgage works, which may explain some of the optimism.
Debtors lurching drunkenly from one “Transfer your balance” offer to the next. It doesn’t take a financial genius that this will end badly.
“80% of homeowners with ARMs said they were concerned about rate increases”
and the headline is…
Do you think that the mortgage industry was counting on people refinancing when their payments went up to get another clip at the sheep .?Only problem is real estate didn’t continue to go up and 1/2 of those “marks ” don’t have enough equity to refinance .I think the lenders should wave all pre-pays penalty notes for people other than speculators that might be able to get into a better loan and save their owner occupy dwelling .
The next financing scam might be “we’ll pay off your old loan!” kind of like what car dealers do. If someone is upside down on the house or has a prepay penalty, it gets rolled into the new loan, keeping the FB in debt forever. A recently bankrupt borrower would be a prime candidate for this.
Yes your right that some lenders might try to take advantage of a FB and if they aren’t really saving them from a mistake by putting them on a better loan that they can live with long term than what is the point other than a ploy to make money off a desperate person . I would just hope that lenders try to correct lending mistakes if its possible so some foreclosures can be avoided .
Gamblers are optimists, too. Doesn’t always work out though.
Home-valuation site said to mislead consumers
http://tinyurl.com/y9u7t4
This article on Zillow’s purported price-fixing shenanigans is definitely worth a read (from the LA Times). Certainly adds fuel to my prior suspicions that “Zestimate” is synonymous with any seller’s “wishing price.”
lalaland - i didn’t see anything in the article about “price-fixing” or a pattern of estimating property values on the high side. From what i could tell, the complaints against Zillow center on general lack of accuracy, rather than either a “high” or “low” bias. Maybe you have some other source for the price fixing comment?
The comments on this board get so conspiratorial, and i wonder what people have to back up some of their statements.
Personally, i think Zillow is a joke, and i’m surprised that anyone places any value whatsoever on the estimates. In a rapidly changing market (up or down) the site is always going to be a few months behind the curve, waiting for deeds, etc. to be recorded.
From the article:
In a 12-page complaint filed with the Federal Trade Commission last week, a leading fair housing advocacy group says Zillow.com’s “misinformation” about home values is helping predatory lenders, real estate professionals and others take advantage of unwitting consumers.
The website “is increasingly being used to convince borrowers that a property is worth a certain, inaccurate amount,” said John Taylor, president of the National Community Reinvestment Coalition, a Washington, D.C.-based nonprofit organization that works to get credit and capital flowing into traditionally underserved communities.
I used Zillow just once. Looked up my mother’s old house and her neighbor’s, since I know both intimately. They were valued within 1-2% of each other, by Zillow. The neighbor’s house is worth at least 75% more, perhaps double. Zillow might give a decent ballpark in general, but I think anyone who buys a house sight unseen, and I’d guess it still happens, by using a Zillow estimate is nuts, IMO.
Why is the neighbor’s house worth more? It would be interesting to know which paramters are missed by Zillow.
“Zillow.com’s “misinformation” about home values is helping predatory lenders, real estate professionals and others take advantage of unwitting consumers”
“The website “is increasingly being used to convince borrowers that a property is worth a certain, inaccurate amount,” said John Taylor”
bubbleboi (or should we call you bubblebuoy?): Based on the quotes you cite, one would have to be exceedingly naive to think that prices are being skewed lower to help realtors, lenders, etc. Doubtful indeed that this is why the FTC has been alerted about Zillow’s misinformation.
Also, Zillow’s numbers are based on an algorithm in which recorded deeds are only one small part. The rest is based on what? Well, we’ll see what the FTC thinks.
Lalaland,
I love a fellow nit-picker. I found online (google: zillow fair housing FTC) the actual complaint filed by the National Community Reinvestment Coalition against Zillow. Based on what I read, the complaint is really the exact opposite of what I think you’re claiming. You refer to your “suspicions that “Zestimate” is synonymous with any seller’s “wishing price.” In fact, the complaint is really about Zillow providing BELOW market value estimates, especially in minority areas. From the complaint:
“Further, it is the National Community Reinvestment Coalition’s contention …… that the valuation web site provides little or no benefit to consumers or the marketplace due to the
high percentage of valuations that are significantly over or under the residential properties’ true market value.”
The complaint further states that:
“While over-valuations were prevalent in predominantly white areas, under-valuations were more frequent in communities that were predominantly African American or Latino by census tract. NCRC is considering filing a separate complaint to the United States Department of Housing and Urban Development Office of Fair Housing and Equal Opportunity on this issue. “
Furthermore, I take exception to your statement that “one would have to be exceedingly naive to think that prices are being skewed lower to help realtors”. I can think of NUMEROUS situations where a lower Zestimate will help a lender, realtor, potential purchaser, etc. If i’m a flipper, or other real estate type, and I want to take advantage of a homeowner by paying them less than their house is worth, Zillow might be able to help me in this respect if the Zestimate skews lower than I think the property is worth. Also, a predatory lender might tell a homeowner “you can’t sell, cause Zillow says your house is only worth XX, which is less than you owe on mortgage, so you have to refinance with me”. In this market, the easiest listing a broker can have is one that is extremely under-priced. As a real estate investor myself, I’d rather have people thinking their property is worth much less than it actually is.
Where you see vast conspiracy, I see a poor valuation tool. You were simply reading into the article what you wanted to see. I’m still interested in hearing what you’re basing the price fixing charges on.
PS – Bubble-buoy doesn’t do much for me. I wanted to be bubblebutt, but it was already taken. Lalaland is just fine for you.
The thing I find interesting about zillow is that I thought it was based on the comps it lists. However, one house I monitor hasn’t had any change in its comps list since May. Yet every week the value of the home in question goes up some more. On what basis?…
Not sure if this dovetails with your question, but in my example above, the neighbor’s house is still occupied by the people who built it 25 years ago, whereas my mother sold three years back. Zillow had to have guesstimated from the square footage in property tax records, at best, because their tax valuation is skewed by Save Our Homes and there is no sales history.
Curve matching is often difficult for discontinous functions. As prices have gone asymptotic and are now (as evidenced by unsuccessful auctions) undefined, the ability to predict the outcome of a meeting of the minds between buyer and seller becomes increasingly difficult. You can use the torque curve, traction, and vehicle mass to calculate the acceleration of your car… until you drive it off a cliff, and then a completly different set of equations must be used.
Jim, I like your explanation. For weeks I’ve been thinking of current prices as “undefined”. More zero-reserve auctions would at least get us a definition, which in time would be much more helpful to sellers, not just us downside cheerleaders.
“Last month, the company introduced a feature that allowed homeowners to update details about their properties with the goal, in part, of improving the accuracy of the estimates.”
I don’t think that’s going to make Zillow more accurate. If anything, the opposite will occur.
“buyers think it’s 1929″
This is a real problem for sellers. I think the pool of buyers is more bearish as the bull have already bought and the most bullish buyers over bought and are stuck unable to sell and move up. Anyone who was optimistic about housing prices already bought during the run up.
Many of those left probably decided to not participate at the beginning of the bubble feeling prices were unsustainable or sold in anticipation of a bust. Many of these potential buyers will wait till they see prices they consider sustainable, i.e.: pre-bubble.
Add to this that the bottom of the barrel has been scraped for unqualified but willing buyers and they are stuck with ARMS and may lose their homes. These buyer might have been future buyers, i.e. they could have bought without an ARM had they waited a few years and saved or moved up in their careers, but they are now absent from the pool of potential buyers.
I wonder if the guy really knows what it was like in 1929. My grandpa bought a farm (with a house) for $600 - cash - real saved cash - gold coins in his posession cash.
I don’t see that happening right now. People aren’t paying cash from their pockets for houses, they’re still using mortgages and such. Prices are still way higher than people with cash can afford. It’s still a credit game, totally unlike 1929.
That is roughly $18,750 in today’s dollars, using $20 gold pieces equivalent to an ounce of gold, at today’s spot price of about $625 per ounce.
Gold is clearly undervalued now.
YOY Sales are declining 30 to 50% so its natural to have larger inventory numbers, not counting what new units HB bring to market. Unless YOY sales can go back to 03-05 levels then housing inventory numbers will continue to rise into and including next year and beyond. With the large number of new homeowners in recent years the housing pool has become larger and the normal curve which was skewed toward the buy side simply resets reflecting the more normal level of sales transactions thus creating a larger inventory.
“Unless YOY sales can go back to 03-05 levels then housing inventory numbers will continue to rise into and including next year and beyond.”
Not likely to happen, as the large number of buyers surging into the market then was a reflection of the recently-discredited belief that “real estate always goes up.”
http://www.streettalklive.com/XFactor/102806_Strategy_Update_and_Irrational_Exuberance.pdf : A good article from Lance Roberts, a Houston CPA who is also a radio host. He has been bearish on housing for a good few years. For those who trade, take a look at the Dow techicals.
This just in: Every few weeks, a flyer arrives at my house from a local Century 21 office. This is in the Thousand Oaks area in southern california. To be fair, the real estate couple who put these flyers out are not hype merchants like the (now diminishing in numbers) fly by night realtors who arrived in locust like swarms over the last 6 years to cash in on the biggest real estate bubble in US history.
The flyer lists property sold in their office over the last 60 days. They sold 10 properties. 2 were condos. Condo’s are always bad news when property prices decline so I’ll push them to one side. Of the other 8, 2 SFH’s were in Moorpark which is more Simi Valley and were mainly in the $450,000 area. The other 6 Thousand Oaks properties averaged $600,000.
The interesting thing about the flyer was the notations the realtor/brokers made. They said that inventory has now tripled from the inventory low of February 2005. They then note that there have been many limited price reductions but very little actual depreciation over the last 6 months.
So, is this a mixed message or are we seeing what is happening everywhere? That is, inventory continuing to increase but greater fools still buying? That begs the question - that if inventory continues to increase (if we discount the actions of greater fools) at what point does the dam break and the flood start?
I’m thinking that next spring will bring the answer. This build up of inventory HAS to be cleared. I also suspect the inventory is even larger than most think because many have taken their homes off the market for the winter months with the intention of re-listing in the spring. Thus, the inventory will grow even larger around late February, March and April. Frankly, I don’t see thousands of would-be buyers suddenly jumping into the market next spring to clear out these multi-month inventories.
Uhhh, I have a dumb question: Why does the inventory have to be cleared?
Because if you don’t clear inventory you go out of business. If inventory builds too much because nobody is buying, it’s the natural order of things to get cleared out by lowering prices which brings in buyers.
Inventory doesn’t have to reach zero but it does need to reach a manageble level.
Interesting point implosion. From the builder’s perspective, maybe the inventory has to be cleared. But not from the buyer’s perspective. The buyer has no special motivation to clear the inventory as a favor to the seller. Thus the standoff, and why it might take several years for the inventory to “clear out”.
“why it might take several years for the inventory to “clear out”.”
Not to mention that many builders will continue to build spec houses in a period where materials and labor prices are falling, adding more weight to the inventory side of the teeter-totter.
In addition to my post above, I suddenly noticed a small notation on the flyer beneath the realtors phone number. It said, “Ask About Rich and Jan’s Reduced Commission Program”. Obviously, they are hungry and willing to take less commission so the sellers can lower their prices. Doesn’t “Reduced Commission” translate to, “We Will Take Less Commission.” I don’t think they had that wording in their flyers when the boom was in full flight.
Mike. I ‘m from TOaks as well. I monitor realtytimes –local conditions from realtors. Most of them have fluff (like one from STAR).(http://realtytimes.com/rtmcrloc/California~Newbury_Park
Here is another which is simply statistics
Sales of Conejo Valley single-family homes totaled
Sept 114. 173 sold in August and 167 a year ago sept
Median sales price for single-family homes
September 2006 was $823,530;
in 2005 it was $851,744.
here is the split:
$625,000 for 26 three-bedroom homes; and
$678,571 for 40 three-bedroom homes — sept 2005
$911,764 for 88 four or more bedroom homes.
$937,499 for 120 four or more bedroom homes.– sept 2005
New residential listings totaled 300 in September 2006
256 in September 2005
and 318 in August 2006.
My feeling is 300 might be a low number
well finally, after a year of being a hardcore bear i at last got to visit a bubble community and see it with my own eyes. i drove through hesperia, ca (socal, near palm springs kind of) and visited a friend renting in a new kb homes tract. i was greeted by sign flippers and monster billboards on the way in. it didn’t take too long before i saw 3 for sale signs in a row, with 2 more across the street. and for good measure, an equal number of for rent signs. then of course there was the model homes/office complete with balloons and other eye candy. i didn’t go in but from the street it looked underwhelming.
so my fellow bears, is it safe to assume that this sad little scene is playing itself out in city after city after city…..???
The sad little scene will be even worse for those high desert communities like Hesperia. That’s where all the cheap land is in SoCal, and the builders have been going crazy out there the past few years.
this is good…now chicago gets to have some fun in Bubble Land. welcome to the house of pain, boys and girls. now take yer panties down for yer azzwhacking!
“In the third quarter of this year, the inventory of finished, unsold homes in the Chicago region reached 5,499, a 13% increase from the second quarter.”
There clearly is no bubble in Chi-town. Move along, folks…
death_spiral & GetStucco,
You guys would have a field day with these idiots in Chicago. There is such an ignorance here it’s minding numbing. The constant refrain is, “Chicago didn’t appreciate like CA or FL so we have nothing to worry about.”
The only benefit of not going up as sharply as other areas is that would don’t as far to fall.
That’s the same crap they spout in DFW and other less visible bubble cities.
There was a bubble EVERYWHERE. I saw ridiculous speculation in Rapid City, South Dakota.
Interesting, TXC. Any details on the ridiculous speculation in Rapid City?
What I want to know is where will the buyers come from for the houses on the market. Everyone already has at least one house. Sure there are some renters like me, but there aren’t very many of us and generally renters are least able to afford an expensive house because they aren’t trading up. So who is going to buy the houses that are presently for sale ?
And lets not forget that the homebuilders haven’t stopped building either. They continue to add to the surplus, further driving prices down because they MUST sell when they build. They can’t sit on it for year.
And finally, we have the baby boomers, which must be starting to think about retirement and downsizing their homes, further adding to the glut of existing homes on the market when they sell their homes.
How long is it going to take to clear the inventory and who is going to buy all of it ?
That’s a great question tweedle-dee. I’ve had people try to tell me that the baby boomers will ride to the rescue and own two or more houses a piece. This article refutes that… http://realestate.aol.com/article/_a/maybe-boomers-arent-so-keen-on-second/20061025122209990001
For some reason there is a belief that baby boomers are well off. Some are, most aren’t. They are the torch bearers of our debt driven economy. They were NOT savers like their parents. They DO NOT have (on average) enough saved for retirement. The baby boom generation could financially ruin this country.
Well, we early-boomers (i’m 60) could blame our parents for milking Soc Sec & Medicare w/o having continuously contributed to those plans. But when we were in our early 20’s we were all great liberals and thought it was a fine thing that the older generation should get a better deal than they had been getting. We ourselves had grown up in a period of rising living standards and didn’t see that there can’t be Free Lunch for All Forever. By now a lot of us know Soc Sec can’t support us in the style to which we’d like to be accustomed. Some of us tried to compensate for early spendthrift habits by “investing” in real estate. Luckily for me that was not the particular trap into which I fell — but that good luck had more to do with laziness (easier to phone my bondbroker) than with virtue. Not sure who is “ruining” the country. Probably the idiotic notion that we would never have to compete with the developing world. Especially educationally — parents who used to back up teachers now quarrel with them about giving kids too much HW.
The buyers will arrive when the prices line up with fundamentals. It’s that simple. At the moment, prices are TOTALLY out of whack with fundamentals. It doesn’t take a rocket scientist to figure out that, at the moment, you can rent a house for $2,000 a month which would cost $4,000 (or more in some cases) a month to buy if you had a mortgage. Also, the taxes on that rental are usually paid by the owner, to say nothing of repairs, insurance, etc.
When, and that’s the BIG question, these prices fall to the point that rents are a little below the cost of owning, we will have reached bottom BUT, more important, the average income will allow the average person to buy with a (say) 20% downpayment and a (reasonable) interest rate over 30 years. In other words, when we are back in the land of the sane and have left this, free money, exotic loans, deposit paid by builders, fake appraisal, scam artist 60 year mortgage, everyone can get rich by flipping and your house will be worth $100,000 more next year - craziness behind us.
If you buy a property as an investment rental, your mortgage SHOULD ONLY be a little higher than the rent you will charge or should I say the rent you expect to get. You have to bear in mind all those extra expenses mentioned above. However, after several years (in a normal maket but not this stupidity) rents will rise and be more than you are paying for your combined mortgage and expenses and continue to do so over the life of your mortgage. That’s the reward for your investment.
Another way to look at it, is that prices HAVE to decline to where people who are renting and who want to own, will be able to buy and afford the mortgage and have proven they can handle the mortgage by saving enough for a down payment (as opposed to being given the deposit by the builder).
The problem with these Fb’s trying to rent, is they have a negative cash flow and will have a negative cash flow for years to come. That’s fine if they have a nice fat income which allows them to lose money on a negative cash flow property. Not good if they have two mortgages and a thin margin of financial error. And, of course, why would you want to own a property which has a negative cash flow waaaayyy out into the future. A LIMITED negative cash flow for a year or two maybe but for 10 or 15 years? There are better and less worrisome places to put your money and get a positive return.
People in a service industry society (which the US is fast becoming) can only afford to rent. At these current prices of property they are TOTALLY priced out of the market. Of course, they can get an exotic loan………..need I say more?
Makes theoretical sense, but actually it’s worse than you make it out. Prices have to fall so far to get to economic fundamentals that a panic will likely have set in in which the new “fundamentals” for buying actually include expected further price declines. Therefore, prices for owning should drop below renting before the bottom is reached.
Good points. This is just another way of saying that the proper, “fundamental” price of housing can be judged in relation to the cost of renting. We are back to comparing price to rent ratios, and until those get back to historic numbers (that would generally mean 2002 prices) there is room for prices to fall.
Me, Me, I’m one of the buyers in the wings. Sold at the height of the boom and now waiting for prices to go down and then I’ll buy. Not paying $350k for a 1940 house with 800 sq ft on a .11 lot. Just want about 1500 sq ft in a decent neighborhood at a decent price. Then I’m one of the buyers. Not until .. and renting isn’t as bad as I thought it would be. Our amount of leisure time tripled!!
Isn’t it like something out of a dream? The upgraded American dream is LAO= Life after owning.
What I want to know is where will the buyers come from for the houses on the market. Everyone already has at least one house. Sure there are some renters like me, but there aren’t very many of us and generally renters are least able to afford an expensive house because they aren’t trading up. So who is going to buy the houses that are presently for sale ?
And lets not forget that the homebuilders haven’t stopped building either. They continue to add to the surplus, further driving prices down because they MUST sell when they build. They can’t sit on it for year.
And finally, we have the baby boomers, which must be starting to think about retirement and downsizing their homes, further adding to the glut of existing homes on the market when they sell their homes.
How long is it going to take to clear the inventory and who is going to buy all of it ?
There is a bit of a vicious circle going on here. Prices have to fall to clear the existing inventory. But the more prices fall, the more FBs are forced to sell, making the situation worse. I think its going to cascade down !
Some in the media are talking about prices rebounding in 2007. What are they basing this on, especially since the economy is weakening ?
What are they basing this on, especially since the economy is weakening ?
they are basing it on the amount of crack they just blew up their nose.
are you saying there is crack in the bubble?
I thought you smoked crack, not snorted it. Sheeesh, I’ve been doing it wrong all this time . . . maybe that’s why I haven’t invested in RE yet.
I think there is clear evidence that nobody really knows what the hell is going on. So, in the absense of knowledge the media injects its own lousy speculation, and generally misses the mark badly. Besides, whatever they guess (and miss) about is always yesterday’s news - so when the real direction finally stands up they will treat it a something amazingly fresh. The hard truths arived at by posters on this blog will always be far ahead of the curve, and as the wrecks pile up we can watch.
“So, in the absense of knowledge the media injects its own lousy speculation, and generally misses the mark badly.”
The media did not come up with the “recovery in 2007″ story. That came from the likes of Lereah, Appleton-Young, Duncan, Greenspan, etc.
What are they basing this on?
I’ve yet to see anyone make a fundamental argument for prices stabilizing, much less increasing, in a market with overwhelming inventory, a dearth of qualified buyers, unaffordable prices, rising qualification standards (if not rising rates), an increasing number of interest rate “stressed” owners and flippers who are increasingly submerged.
This reminds me of people who told me “you don’t ‘get it’” back in the days of “eyeballs” relating to the value of an internet stock.
They couldn’t explain how that one factor related to real value any more than RE prophets can explain, today, how prices will rise (other than to point to the history of housing price increases).
I’ve always been suspicious of people who couldn’t explain “obvious” things to me so don’t be mystified about people making appreciation predictions based on nothing.
Its far easier to be a Bull and be liked than it is to even express bearish ideas (much less be a bear). Lets face it, bears aren’t fun and the questions they raise tend to be “inconvenient”.
“I’ve yet to see anyone make a fundamental argument for prices stabilizing,”
Greenspan does not have to make a fundamental argument. All he has to do is say “stabilizing” and everyone will instantly infer the reasons.
‘This reminds me of people who told me “you don’t ‘get it’” back in the days of “eyeballs” relating to the value of an internet stock.’
Don’t eyeballs still support goog? Or is it the dog-and-pony show thingee?
The media is basing this on Fed or NAR cheerleaders who see a little through-the-teeth lying as good for the nation. Given the choice between perhaps saving the country by lying, or certainly wrecking it by telling the truth, they’ll choose the lesser of the two evils.
Hey, if a lie is all you got, you play it and see what happens. At the very least, it buys you some time before the inevitable collapse.
Meanwhile, a few more FBs who don’t catch on to the lies get to become the next bagholders. At least it is for the good of the nation, though.
“There is a bit of a vicious circle going on here. Prices have to fall to clear the existing inventory. But the more prices fall, the more FBs are forced to sell, making the situation worse. I think its going to cascade down!”
What’s worse, the more would-be buyers discover “real estate some times goes down, especially right now,” the fewer will want to try to catch a falling knife.
OT, don’t know if anyone posted this, from the WSJ:
“Risk Management: As Home Owners Face Strains, Market Bets on Loan Defaults; New Derivatives Link Fates Of Investors and Borrowers In Vast ‘Subprime’ Sector; ‘These Are the Marginal Guys’
“Bryan Whalen and Ike Spirou have never met. But through the world of modern mortgage finance, their fates are inextricably linked.
“Mr. Whalen, who manages a multibillion-dollar mortgage-bond portfolio at Los Angeles-based Metropolitan West Asset Management, stands to gain if Mr. Spirou, a financially stretched homeowner in New York City, reneges on his mortgage loan. That’s because Mr. Spirou’s $360,000 loan was packaged with thousands of others into a bond, and Mr. Whalen has entered a newfangled derivative contract — similar to an insurance policy — that will pay off if enough loans in the bond go bad.
“‘The sophistication is remarkable right now,’ says Mr. Whalen. ‘You can profit in any scenario.’
“Mr. Whalen represents a new breed of investor: people who are using financial instruments to bet against the homeowners they consider most likely to suffer in a housing downturn. Many such investors, including Mr. Whalen, don’t expect the current slide in house prices to lead to widespread economic malaise. Rather, they’re betting on trouble for folks like Mr. Spirou — so-called ’subprime’ borrowers who have become homeowners thanks to the increasing availability of easy credit.
“Whatever happens with Mr. Whalen’s wager, there’s a lot more at stake than his fund’s performance or the roof over Mr. Spirou’s head. Subprime lending has put as many as two million families into homes over the past decade, helping push the U.S. homeownership rate up to 69% from 65% — a major shift toward an ‘ownership society’ that politicians of all stripes have touted as one of the nation’s economic successes. As the bets play out, they will show how much of that success is permanent, and how much a temporary phenomenon fueled by overly aggressive lending.
“So far, the subprime market has held up relatively well. But it’s beginning to show some cracks — most evident in the nascent derivatives trade, which provides a useful window into investor sentiment. Since August, when house prices logged their first year-on- year decline in more than a decade, the cost of insurance against defaults on bonds backed by subprime loans has risen as much as 16%, suggesting investors are concerned that more homeowners will start to renege.[...]
“Since the beginning of 2002, banks and specialized lenders such as ACC Capital Holdings Corp.’s Ameriquest Mortgage Co., New Century Financial Corp., and H&R Block Inc.’s Option One Mortgage Corp. have made some $2.2 trillion in loans. That is more than five times the amount in the preceding five-year period, and includes a growing share of “affordability” products such as “piggyback,” “interest-only” and “no-doc” loans. These products, respectively, allow borrowers to avoid a down payment, make extra-low payments in a loan’s early years, and state their income without supporting documentation. Subprime loans’ actual interest rates are typically much higher than those on more traditional ‘prime’ loans.
“Foreign investors have played a big role in making money available. Analyst Mike Youngblood at investment bank Friedman, Billings, Ramsey & Co. estimates foreigners snapped up about a third of the $2 trillion in subprime-backed bonds issued since the beginning of 2002, often through investment vehicles known as collateralized debt obligations, or CDOs. These divvy up pools of bonds into slices with different levels of risk and return. [...]
“That means the market for derivatives on subprime debt could be here to stay, too, along with all the other infrastructure that allows investors to parcel and trade the risk of lending to U.S. home buyers. Some believe this will make the economy more resilient to the current housing downturn by keeping the credit lines open. ‘You have given people better tools to manage the risks, and this gives you hope that the pendulum’s not going to swing as far back as it has in the past,’ says Martin Muhleisen, an economist at the International Monetary Fund who has studied the mortgage market. ‘But this new financial world has yet to be tested.’”
Yes indeed, “it has yet to be tested” — and when it is tested, it will FAIL. The premiums on credits default swaps are based on wishful thinking, WAGs, and the larval greed of derivative brokers. This crew is gonna get taken to the woodshed BIG TIME.
You cannot remove the risk from the market. It moves to someone. And the weakest link usually takes down all players.
These people are dreamin’ if they think some derivative is going to save them. lol
the first of the big wave of mortgage resets started in june’06,and foreclosures usually take about 6 months…so,we should start seeing the reset/foreclosure effect in early ‘07.i’m already seeing reo’s up quite a bit,and every half bright agent is taking classes in short sales…since this is where the $ will be.so far we have seen the most marginal speculators an fb’s get bit,next spring,the slaughter begins.there are still a lot of people in the industry who truly expect a resurgence starting in february.they remind me of a guy i knew in high school who took lsd and decided he could fly.he truly believed it,and if you believe in angels,maybe he did.
what became of your friend? did he take one too many leaps of faith?
As has been stated often here, the builders will keep on building until there profit margins are nil and they have used up most of their owned land reserves (or until they go bankrupt), lowering the prices all the way. I also suspect the builders will find new ways to make the homes cost even less, allowing them to lower the price even more to wring out the last few buyers.
Sellers of ‘used’ homes will probably chase the builders down until the pain becomes unbearable. I pity those who must sell a ‘used’ tract home in areas like No Va, because with nothing to differentiate it their only hope to sell is to undercut the builders, meaning they will have no options.
Anyone else notice a significant slowdown on realtor.com?
My daily datamining has been excruciatingly slow today. Did they cut bandwidth to save $?
Just tried it and my saved site refreshed in a blink. I’m in Florida, using DSL.
The site has been coming and going all day. Right now it comes up fast, but has no saved searches or listings. Earlier the saved search option was there but timed out if you tried to open a search.
HA HA HA! People are starting to SUFFER now. Too bad the housing slowdown has barely begun. “Its the housing market, stupid” will be posted to the wall of whichever candidate wins the 2008 Presidential Election. People are going to SCREAM to congress for relief. Laws are going to passed…
They can scream all they want, relief is not gonna be forthcoming: they’re just too many FBs out there to rescue. HOWEVER, they will be given a measure revenge. There are folks who used to wear nice suits and drive BMWs serving hard time right now because they did things that everyone else in their industy (Enron, WorldCom, ML, etc., etc.) was doing too — they just had the bad luck to be in the spotlight when the music stopped.
When an outraged public demands “justice,” always-eager-to-pander government officials will most certainly round up and sacrifice a few (maybe even quite a few) unlucky scapegoats. If you’ve been a particularly aggressive RE developer, mortgage broker, or realt-whore, here’s an exercise to prepare you for what’s coming: drop your pants, bend all the way over and grab your ankles — now hold that position for hours on end. This is your future, baby, get used to it.
I disagree. There will be “mortgage forgiveness” passed by congress to bail out people suffering from ARMs. Remember, its the Republican Base that took out all those I/O loans.
Yeah … the Republican base in those conservative hotbeds of California, NY, NJ, Oregon and Washington. BTW, what even makes you think that the Republicrats will be in control of congress when the SHTF???
Fascinating. It wasn’t that long ago… March? April? That people, even here on the buble blog, were thinking that Chicago was part of the “heartland” … would not see a RE bust like CA/AZ/FL would.
Oh, brother. And we’re only a few inning into this game. What will 2008 be like?