“Pressure Dome” Is Just Too Big: CEO
Some housing bubble reports from Wall Street and Washington. “A gauge of future home buying fell 1.1% in September, a signal that sales will be roughly flat for the next few months, the National Association of Realtors said Wednesday. The pending home sales index fell 1.1% in September. The index is down 13.6% in the past year. Home sales are also down about 14% in the past year, while building permits have plunged 27%.”
“Regionally, the pending home sales index in the Midwest was down 18.5% year-on year. Pending sales in the West and are down 15.2% in the past year. Pending sales in the South are down 9% year-over-year. Pending sales in the Northeast are down 15.9% in the past year.”
“U.S. construction spending fell an unexpected 0.3 percent in September led by a sixth straight drop in private residential building, a government report said Wednesday.”
“The overall headline number was driven by a 1.1 percent decline in private residential construction, which has fallen for six straight months.”
From Inman News. “Lenders still like the loan-to-value odds, which have 51 percent of all equity in American households untapped. Half, then, of all ‘borrowable’ equity in residential real estate is (technically anyway) up for grabs.”
‘”Fifty-one percent: that’s an enormous amount of home equity,’ declares IndyMac Bank CEO Michael Perry. This makes Perry bullish on reverse mortgages, so far a niche product for older homeowners.”
“One reason for IndyMac’s interest in boutique products may stem from major changes in store for the mortgage market next year, changes described in vivid terms by none other than Fannie Mae’s CEO Daniel Mudd. ‘There is going to be some dislocation,’ he warns. ‘There are going to be some unforeseen twists and turns in the market in 2007, because the ‘pressure dome’ is just too big for that not too happen.’”
“Mudd says, ‘Nobody knows exactly what it’s going to be,” but he sees both crisis and opportunity coming as a result. The question is whether ‘the structure of the market is sufficiently robust to deal with the uncertainties.’”
“Applications for mortgage loans dropped last week by 3% compared to the prior week, as consumers shrugged at lower interest rates, the Mortgage Bankers Association reported Wednesday.”
“Mortgage applications are down 11.2% in the past year. Applications for loans to buy a home declined 1.8% on a week-to-week basis, to the lowest level in nearly three years. Purchase applications are down 29% from their peak in the summer of 2005. Also lower, applications to refinance a current loan fell by 4.5% last week. Refinancing loan volumes are down about 42% from the 2005 peak.”
“Compared to July this year, the S&P/Case-Shiller composite index showed prices fell in six of ten major cities tracked by the index: Miami, New York, San Francisco, Washington, San Diego and Boston.”
“‘Home price gains definitely appear to be wearing away,’ economist Robert Shiller said. ‘Not only do we continue to see shrinking gains but actual declines in most cities.’”
From Seattle PI. “At least 1,000 Washington homeowners paid higher mortgage rates than they had to without getting proper notification, according to a lawsuit that a federal judge certified for class-action status.”
“The lawsuit says NovaStar notified the borrowers of the ‘yield spread premium’ arrangement the day of closing, or not at all, despite federal and state laws requiring such disclosure within three days of a loan application.”
“Matthew Geyman said lawyers randomly reviewed 153 loan files and found nearly 70 percent did not properly disclose yield spread premiums. Based on this, they estimate at least 1,000 people across Washington, and possibly several thousand, were affected from July 30, 1999, to now.”
From Fortune. “‘I don’t think we’ve felt anywhere near the brunt of all the adjustable-rate-mortgage resets and the massive increase in defaults and foreclosures in states like California,’ says Liz Ann Sonders, chief investment strategist at Charles Schwab. ‘Housing downturns happen in a fairly slow-motion way, and I really think we’re just at the beginning.’”
“‘I don’t think the macro statistics reflect accurately what’s going on in many local markets,’ says Bruce Karatz, CEO of national home-builder KB Home. In many once-hot regions, order cancellation rates are running above 40 percent, new-home sales volume has dropped 50 percent, and new-home prices are down 10 percent to 25 percent.”
“Karatz says the current downturn is worse than any he has seen, even the early 1990s market that left so many big builders reeling.”
The Associated Press. “An AP-AOL Real Estate Poll found that more than one-third - 36 percent - of those surveyed with adjustable-rate mortgages worry that they won’t be able to afford their monthly mortgage payments if their interest rates increase.”
“The future is gnawing at homeowner Scott Klimek. Klimek bought his home in Brighton, Colo., with a five-year ARM. ‘If it was, like, this year that it was going to adjust, then I would really be worried, but I’m just moderately worried,’ says Klimek.”
“Joann Clapp of Cynthiana, Ky., has suffered a double whammy. She recently moved and hasn’t been able to sell her old home, so she is paying on two adjustable-rate mortgages. The rise in interest rates has hurt her finances ‘big time,’ she says.”
“‘Many Americans have lost the view of the so-called starter house,’ says Lynn Reaser, chief economist at Bank of America. ‘People may want to take a more conservative view of that first home before they move to the mega-mansion.’”
“‘I don’t think the macro statistics reflect accurately what’s going on in many local markets,’ says Bruce Karatz, CEO of national home-builder KB Home. In many once-hot regions, order cancellation rates are running above 40 percent, new-home sales volume has dropped 50 percent, and new-home prices are down 10 percent to 25 percent.”
“Karatz says the current downturn is worse than any he has seen, even the early 1990s market that left so many big builders reeling.”
Wow, a major HB admitting things are really bad. If Karatz says things are bad, things are likely very bad and about to get worst.
The RE market is crashing in slow motion but it is guaranteed to crash. The end result will be the same it is just how long will it take?
This is a significant change from his BULLISH comments in Feb 2006 Business Week. I wonder if this is CYA or a true change of opinion??
Sorry Mar 2006:
http://www.businessweek.com/magazine/content/06_10/b3974141.htm?chan=search
KARATZ: I don’t see a fundamental slowdown other than in the hottest markets. Things don’t continue through the roof forever. This is a breather in prices, and that takes some steam out of the market. In some markets, 10% to 15% of buyers were speculators. You take them out, and the market drops 10% to 15%, and it takes three to four months for whatever overhang there was to be sold, and then the market stabilizes. That’s where I think we will be three to four months from now.
I think we will still be “stabilizing” five years from now.
Isn’t the first wave of baby-boomers supposed to start retiring around then? 1945 + 65 = 2010. Yep.
Wonder how many of them have enough to leave the job market, and how many will linger on, broke, obsolete and clinging to good jobs while ambitious younger workers eye them resentfully and work to undermine them.
Then returning home at night in an oversized gas-guzzling SUV to an overpriced, overleveraged empty nest they wish they could be rid of if only the prices would come back to those heady days of 2005, all the while knowing that their only salvation is that mom has remembered them in the will…and that she doesn’t hang on for too long.
Wonder how many of them have enough to leave the job market, and how many will linger on, broke, obsolete and clinging to good jobs while ambitious younger workers eye them resentfully and work to undermine them.
Already happening.
Certain schools districts in ME are re-hiring “retired” teachers with pensions, for a second “run” at amounts less than they would have to pay a new hire.
In a few instances you have husband/wife HS teacher teams earning over $200k including benefits packages at the public education trough.
And this isn’t even to say these people are good teachers.
Just loyal duespayers to the Maine Teachers Unions.
Oink-Oink…
75% of older workers stop working b/c they have to for health reasons. Boomers might like to think they can keep working, but their bodies won’t let them.
“Just loyal duespayers to the Maine Teachers Unions.”
How’s that education reform workin for ya?
Nah,
He already unloaded a TON of stock to the sheeple and sold thousands of McMansions to FB’s. Kinda like a lame duck politician becoming “honest”, it just doesn’t matter in the big scheme of things to him. He made millions.
Whoa, BigDaddy. Karatz didn’t exactly “sell” stock. He was illegally granted backdated stock options. The investigation is ongoing. KB Homes has not filed their 3rd quarter earnings report yet and faces bond defaults. Mr. Karatz could still find himself in some deep doo-doo.
I do believe this proclamation is truthful. He knows the spotlight is on him and better act like an altar boy at this time. SEC probes will bring out the honesty in people. Mr. Karatz has found religion. Others are sure to follow.
FED Chair warned about Creative Financing (ARMS etc) today. I remember Greenspan asking people to get into short term ARMs to take advantage of the credit bubble he created. Do you guys have link to that recommnedation about 2-3 years ago?
Can some one post it?
http://biz.yahoo.com/ap/061101/bernanke.html?.v=3
One of my favorite requests … of course I’d be more than happy to link to that well-timed (ahem) speech from February 2004:
http://www.federalreserve.gov/boarddocs/speeches/2004/20040223/default.htm
Here’s the money quote…
American homeowners clearly like the certainty of fixed mortgage payments. This preference is in striking contrast to the situation in some other countries, where adjustable-rate mortgages are far more common and where efforts to introduce American-type fixed-rate mortgages generally have not been successful. Fixed-rate mortgages seem unduly expensive to households in other countries. One possible reason is that these mortgages effectively charge homeowners high fees for protection against rising interest rates and for the right to refinance.
American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.
http://interestrateroundup.blogspot.com/
Do you think this is another well timed speech? In other words, do you think rates have peaked?
You know what they say about opinions, eh? LOL. I thought we were going to get more downside in bond prices/upside in rates … and we did for a while, until a few days ago. Then Treasuries went through the roof (prices up, rates down).
Could “the” low for interest rates be in? Maybe. The economy sure has taken a turn for the worse since May-June, when interest rates hit their multi-year high (5.25% on the 10-year T note). Big bond guys like Bill Gross are betting that way. In fact, the inversion of the yield curve has gotten much worse in the past several days on renewed recession/weakness fears. That’s a signal the market believes future rate cuts are coming.
As for the Fed, officals there do have an uncanny ability to get things wrong. Witness all the huffing and puffing from Fed-heads and helicopter Ben about deflation in mid-2003, when long-term rates bottomed and never looked back.
“To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.”
To me this is the key paragraph. When he said “willing to manage their own interest rate risks,” he clearly had in mind someone who had a clue about what these risks might be, not Joe Soccermom who wanted to use an I/O Option ARM so that she could buy a McMansion this year and then buy an SUV next year on cashout ATM financing of the 10% equity gain. So I disagree with those of you who say it was all Greenspan’s fault that the lending industry suddenly abandoned prudent underwriting standards and let everyone of whatever means use an ARM as an affordability loan.
“Some evidence, including recent Federal Reserve research on consumers holding adjustable-rate mortgages, suggests that awareness could be improved, particularly among borrowers with lower incomes and education levels,” Bernanke said
So I guess lower income people with high education levels can take out ARM’s without concern. LOL!!!
This news should bring a “strong buy” recommendation from Crammer on the home builder stocks. Man, when even the CEO of the home builder says trouble ahead and the stock goes up, you gotta wonder how rigged is the stock market??
It is rigged beyound belief!!! And Crammer will tout you the next sure thing..
The big question IMO is how long the rigging works, not whether it is rigged. My knee-jerk answer repeats the words of Herbert Stein, “Anything which cannot go on forever will stop,” but I have no idea what will bring about the end of this, nor when it will occur. All I can say for sure is that it will end very badly.
Stucco, just remember how many of us were saying the housing boom would end in 2002. It took 3 more years. Moving along cautiously during manias seems to be the best approach, regardless if the market is homes, stocks or Beanie Babies. You might miss out on some big gains but you miss out on even bigger losses. I would imagine that this blog is loaded with people that are very hesitant to go long in this stock market. It is true that the turtle beats the rabbit in the race. Have you noticed how many dead rabbits are lying along the side of the road lately?
Markets can stay irrational for a long time when powerful forces are on the side of irrationality. But when they get rational, they get mean. Just look at the housing market. Once the stock market sobers up, it is going to be pi$$ed. The little guy that’s rushing in now, with visions of riches, will get creamed. The Big Boys won’t even blink. The timing is the question, not the result.
Amazing. The IndyMac CEO seems to act as if all that ‘untapped home equity’ is rightfully his!
Is that the world of the future? How dare you little serflets aspire to have assets, don’t you know it’s the Global Rethuglican Class has been given wealth by its Divine Right? If it weren’t so deserving then why are we so fucking rich? It’s because we are your superiors you damn maggots.
“Amazing. The IndyMac CEO seems to act as if all that ‘untapped home equity’ is rightfully his!”
Am I the only one who finds “spending away ones home equity” a disturbing trend? Whatever happened to paying the mortgage down? These banks are vultures. They are picking clean the carcass while there is still a pulse. Someone once said: “A banker is a friend who loans you an umbrella on a sunny day, only to ask for it back when it starts to rain.” They couldn’t have been more correct.
The question is, why are you borrowing an umbrella when it’s sunny outside?
“Someone once said:”
= Mark Twain
Dr. and Bantering I couldn’t agree more. When I read that comment about 51% I had to reread it because i couldn’t believe what he said. His attitude and the sheeple who will fall for his boutique products, like a mortgage is something one finds in an antique shop, is slowly eroding any hope for the future in this country. I think the attitude is just spend, spend, spend, for you never know what will happen tomorrow. I totally agree about paying “off” the mortgage. I thought the goal was to live free and clear somewhere. Obviously, that is the old paradigm, the new one is to keep creating more debt. Alas, I guess when you have a country that can only produce debt and fiat money, that is the only paradigm we are left with. How sad!
Well said DrChaos & OCDan. This debt driven consumeristic economy started in 1981 by way of massive government spending by the Lying Class will ultimately be the deathblow. It’s already coming to bear as we post here as NOBODY has faith or trust in the Lying Class. Let it unwind and hang the Lying Class from the street lamps.
What a riot. 50% of all mortgage equity is out there for the taking. He makes it sound like every homeowner is sitting on a 50% LTV. I’ve got news for him, the vast majority of home”owners” who are willing to suck their equity out, already have. Those that own their homes free and clear who have any sense relish their paid off mortgage. So if each of these two groups approach 50% of the population, how much equity is left for the taking?
Republican or Democrat, there really isn’t any difference. Both major parties are looking to reward themselves and their cronies.
But if I have to make a choice, I’d like to choose less government, lower taxation, less regulation, and more individual liberty. Those are the tenets that made our country great. The antitheses of these will be our undoing.
Which is why I’m voting for Jefferson next in ‘08.
By all means, dig the old boy up. He couldn’t do much more damage in his present condition than the live bodies we have now are doing. All I ask is that we prop Hamilton up next to him, “Weekend at Bernie’s”-style, to keep his ideological fantasies in check. And to keep him away from the help, if you know what I mean.
Imploder like that Show’s Theme Song:
“were moving on up to the big time,
We finally got a piece of the rock”
I guess George owned stock in Prudential.
“But if I have to make a choice, I’d like to choose less government, lower taxation, less regulation, and more individual liberty.”
I agree 100%. I haven’t voted Republican since 1994!
excellent Zinger ChillySnoop!
Can’t believe this CEO has gone completely for the “Missed Fortune” ruse - leverage up 100% and buy annuities. Yeah, your company benefits, but the homeowners will suffer when their accidental investments in home equity turn south.
“‘”Fifty-one percent: that’s an enormous amount of home equity,’ declares IndyMac Bank CEO Michael Perry.”
and next week it’ll be 50% and the week after that 49%…
Dont worry Mr. Perry, all that wasted home equity will find some place to go. However most of it will be going up in smoke and not into your pocket
Here is another interesting comment:
“One reason for IndyMac’s interest in boutique products may stem from major changes in store for the mortgage market next year, changes described in vivid terms by none other than Fannie Mae’s CEO Daniel Mudd. ‘There is going to be some dislocation,’ he warns. ‘There are going to be some unforeseen twists and turns in the market in 2007, because the ‘pressure dome’ is just too big for that not too happen.’”
“Mudd says, ‘Nobody knows exactly what it’s going to be,” but he sees both crisis and opportunity coming as a result. The question is whether ‘the structure of the market is sufficiently robust to deal with the uncertainties.’”
Not sure what to make of this …
I suppose I should look at Ben’s title before “informing” everyone that this is an interesting comment.
Sounds like it time to start milling round the lifeboats.
When the CEO of Fannie Mae tells you “‘There are going to be some unforeseen twists and turns in the market in 2007″ One might be wise to listen.
2007 is gonna be a sh#t storm!
Of course, everyone here already knows that.
Think he sees the writing on the wall: more regulation for the lending industry. Feds have made the comment that loose standards and toxic loans need to be done away with. They’re giving the industry some time to clean their own house before they come in with mandates. Shame, too. Was planning to jump in myself once they announced a 20 year ARM with 100 year optional amortization.
I was hoping lending/appreciation would just get to the point where you could just “reverse morgage” against the future appreciation. So, I buy the home for 1Mil, and all the interest is paid by the appreciation on the home. That way I will never have to pay a dime!
That should illustrate how crazy this run-up has been, you most certainly could have used the appreciation in the past few years to totally cover all the costs on the home. Just HELOC every month, and use that to pay off the current morgage payment.
This is a great idea!
Like something out of Ancient Greek mythology, I’m picturing a perfectly healthy guy, who wants to be fat like a rich man, feverishly devouring his own arm, only to discover that eventually he’s bleeding to death.
I’ve got a sick little head.
“Lenders still like the loan-to-value odds, which have 51 percent of all equity in American households untapped. Half, then, of all ‘borrowable’ equity in residential real estate is (technically anyway) up for grabs.””
When I read this I suddenly felt I understood the feelings that occur when an individual “goes postal”. My apologies to any civil servants whom I didn’t mean to offend with that one.
They won’t be happy until they’ve extracted every last dime from borrowers.
Hands off my equity !
You should have seen the full court press the lenders put on the Texas voters in the years leading up to finally allowing HE lending. Talk about a motherlode of untapped fools and they finally got to it. I personally think that’s responsible for the persistent high foreclosure rate in TX even during the boom years.
The thing that frosts me about this “borrowable equity” is that you’ve just reduced your equity by the amount of the loan. And you have to repay the loan at a variable rate of interest. Ouch.
Methinks that my equity will just have to stay unliberated.
Someone please explain something to me.
How can Americans only own 51% of their homes!?! I’m a housing bear, but I thought it would be more; this runnup should have left someone with 0% down in 2000 with well over 50% equity.
And a lot of this equity will never be touched. My folks own 100% of their 1st and 2nd homes. My fiance’s folks also own 100% of their 1st and 2nd homes. I can name dozens of people (older) who own 100% of their home and often a 2nd home who will never borrow against them as they are at a stage of life where they’re reducing expendetures, not buying hummers!
This isn’t liberated equity, its a loan trap!
Neil
Not that the people you’ve named will have a problem, but much of their “equity” will be “liberated” when the neighbors are foreclosed on.
That’s the interesting thing about this. Most people didn’t own dot-com stocks. Almost everybody gets to play in this new game… whether you bought a ticket or not.
“That’s the interesting thing about this. Most people didn’t own dot-com stocks. Almost everybody gets to play in this new game… whether you bought a ticket or not.”
So true.
[Not that the people you’ve named will have a problem, but much of their “equity” will be “liberated” when the neighbors are foreclosed on.]
Good one and exactly right. These chumps need to do real-time assessments of “equity extraction prospects” as prices tumble. The 51% number will drop into the single digits before this is all over, liquidity in securities markets dries up and no one will want to lend a nickel without assurances. Once a few MBS start to go south selling those products will screech to a halt. Then what?
The stats I’ve read give a 31% figure to outright ownership - or reversed, it says that 100% of the mortgage loan load is borne by 69% of borrowers. Of course, I would also guess that 75% of all mortgages are held against 30% of assests, mainly those homes purchased in the last 5 years. The ‘cost of ownership load’ on these homes is beyond staggering.
The equity position statistic comes from the Fed’s “Flow of Funds” quarterly report, FYI. Here’s the link to one of the sections of that report for Q2 (warning: Mega-sized PDF):
http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf
I actually see “Owners’ equity as a percentage of household real estate” (line 50) at 54.1%. I believe that’s a new all-time low, but I haven’t researched it in detail. It’s certainly well below the 2000 figure of 57.9%, which IS truly remarkable given the gigantic surge in overall equity during that time (from $6.6 trillion to $10.98 trillion, roughly speaking). That just goes to show that as a country, we pretty much borrowed away all our newfound magical equity … and then some. What a great country!
http://interestrateroundup.blogspot.com/
My folks own 100% of their 1st and 2nd homes. My fiance’s folks also own 100% of their 1st and 2nd homes. I can name dozens of people (older) who own 100% of their home and often a 2nd home
Yeah-it’s called “Til Death Do Us Part”-
Most of GreatestGen stayed right the f*ck out of divorce court, enabling them to keep their asset base intact.
Not so the Boomers.
50% and rising.
So true plenty of people own their home and will never go into debt using any equity from the house the worked so hard to pay for. These people won’t even use a credit card.
Will the conservative folks who have not borrowed home equity loans
please stand up and start borrowing, so we lenders can stay in business?
Liberate your equity!
Guess you haven’t seen the “Guns Don’t Kill People, Postal Workers Do” bumper sticker?
Guy that works in the local PO has it on his truck.
From reading the article it appears the “up for Grabs” statement was made by the article writer, not the bank CEO. I couldn’t believe that a bank prez would talk on record in such a brazen manner so I checked it. Not that he’s not “thinking” it, of course.
“A gauge of future home buying fell 1.1% in September, a signal that sales will be roughly flat for the next few months, the National Association of Realtors said Wednesday.”
It is difficult to imagine that sales could hit a plateau over the next few months, given that sales have plummeted YOY and the price knife has started to fall in most markets formerly known as frothy.
Here is significant evidence on the falling price knife. For those who do not know, the Case-Shiller index is a far better gauge of market-by-market price changes than the median statistics put out by the NAR, because it is a repeat sales index. What this means is that the price of each home which sold in the recent period is compared to the price of the same home the last time it sold; an averaging procedure is used to obtain an aggregate index of prices now compared to points in the past. This methodology controls for the main problem with the median sales price statistic (aside from various ways the data might be cooked), which is that changes in the prices of comparable homes are confounded with changes in the quality mix of homes that sold.
“Compared to July this year, the S&P/Case-Shiller composite index showed prices fell in six of ten major cities tracked by the index: Miami, New York, San Francisco, Washington, San Diego and Boston. ‘Home price gains definitely appear to be wearing away,’ economist Robert Shiller said. ‘Not only do we continue to see shrinking gains but actual declines in most cities.’”
And the thing the Case-Shiller index doesn’t even account for is the massive amount of wealth put into housing. So what I mean is from 1993 to 1996 the exact same house is often comparable… or even slightly less valuable due to wear. From 2003 to 2006 the exact same house has probably had their base values increased by flipper renovation!
And prices are declining in the face of that.
I was under the assumption that the Case-Shiller index tracts repeated sales on houses that haven’t had upgrades. Of course, how many people who bought a few years back haven’t slapped in granite counters and other crap? I’m thinking not many.
Feepness is correct. This is one of the criticisms that has been levelled against repeat sales indexes — they don’t properly account for home improvements, which are obviously huge in CA. Thus the second sale often is of a higher quality home than the first sale, creating upward bias in the measured price change. If this bias were corrected, the index would show larger price declines for comparable homes.
I totally agree that this method of measurement is biased. I was just saying that the index is supposed to eliminate sales of homes that have had physical changes by using info from deed records and by applying less weight to sales that are way out of whack with local market trends (indicative of a remodel or perhaps somebody that is totally dreaming).
The problem is that when everybody puts money into their houses, nothing stands out from the trend. I also wasn’t aware that remodel activity appears on a deed. I think I’ll stick with my own index… my own two eyes, and what I’m seeing is ugly.
The Case-Schiller indices account for this by eliminating the outliers in the re-sale index on both sides of the distribution. A house may be considered an outlier if its appreciation is inordinately large (indicating a possible renovation) or small (a house may also be abandoned).
Great insights, skooch and damon. The bias corrections you mention sound ad hoc, and as damon suggests, would not work well when most homeowners are remodeling or making other improvements, which tends to happen much more when forever-rising prices make it easy to finance improvements. If everyone is making, or has made, improvements since the last sale, the bias is definitely in the direction of overstating price appreciation.
Yeah, if you’re not adding square feet or bathrooms I don’t think that’s going to appear on a deed. I the traditional thinking in non-bubble times is that rennovations DON’T add alot to home value. The only thing that tend to pay for themselves are either a major gut and rebuild or minor painting and yardwork. Everything between tends to get at best 70¢ on the dollar.
Case-Shiller shows Vegas going up in Sept. My real time tracking of zip 89031, one of the top 3 zip codes for 3+2 bedroom houses in Vegas, shows increasing inventory and declining sales. I look at bread at butter houses (3bed/2ba at least 1400 sq. ft.) as my index as to what most entry level buyers want and can afford. If it ain’t happening with these, it ain’t going to happen for my investment dollar. In Vegas, it ain’t happening. Sorry, Case Shiller!!
Keep in mind that Case-Shiller actually uses a 3-month rolling average to compute the value that is released each month. So if Sept still showed an increase, it could be cause July hasn’t fallen out of the average yet. As a result, the S&P/CS will show a small lag. But in the end, it will show the plunge accurately.
NAR said not to worry, home buying is still strong, only 1% drop.
Meanwhile, the mortgage folks is saying 30% drop in purchase applications.
Guess the NAR doesn’t see what’s coming.
“Lenders still like the loan-to-value odds, which have 51 percent of all equity in American households untapped. Half, then, of all ‘borrowable’ equity in residential real estate is (technically anyway) up for grabs.”
There’s a number made to confuse. I’m sure they’re throwing it out there to build optimism, because they can’t actually believe that bull. That 50% equity will remain, for the most part, untapped because it belongs to the folks that wouldn’t do something foolish, like turn their home into an ATM machine. They, for the most part, aren’t going to be selling and thus rolling their profits back into the cycle, because these are the people that bought a home to live in, not speculate with. Yes, there’s still a lot of folks that own their homes outright, buit that money isn’t going anywhere. Now the other side of that 50% represents a mass of people who are at 0% or negative equity, and there’s more than enough of these poor bastards to cause a major meltdown.
That number sucks, because even when this thing is all said and done and we revert back to mean, that equity number will still remain positive. Again, it’s meant to confuse.
Half, then, of all ‘borrowable’ equity in residential real estate is (technically anyway) up for grabs.”
How is “borrowable” equity even calculated?
Is it the summation of all residential real estate fantasy values? Or?
Yes, how is it calculated.
For if one expects a 20% down payment that only leaves 31%…
And if 20% of the homes are owned outright (IIRC a historical norm)… that leaves 11%.
Just a tiny little correction reduces that to… ZERO!
Ok, my math was very rounded, but we get the idea.
Neil
Yeah, how will people who HAVE equity because of a propensity to save money rescue banks from the defaulting borrowers that they were foolish to give 100% financing to? It’s ludicrous.
The only way to make sense of that number is to trend that number over time. It was about 70% 20 years ago, and now after the biggest bubble of all time, it’s down to 51%. It’ll be down to 30% if we have a decent correction in home prices.
And as you said, close to 100% of that 51% is held by people who’ve owned their homes for 40-50 years and who paid them off 15-30 years ago.
So much for the “ownership society.”
oxide post’s So much for the “ownership society.”
No under GWBush it is the “bonnership socitety”
giving whole new meaning to the old phrase :
to be “hoisted on one’s own Petard”
Dang, I’ve lived in this house for almost two years, and I STILL can’t find where the ATM is!
‘There is going to be some dislocation,’ he warns. ‘There are going to be some unforeseen twists and turns in the market in 2007, because the ‘pressure dome’ is just too big for that not too happen.’
Didn’t Mt. St. Helens have a big pressure dome right before it blew?
Yeah, Welcome to another addition of “The Pressure Dome”
“Bust a deal, face the wheel.”
“Ladies and gentlemen, boys and girls, dying’ time’s here.”
“The Pressure Dome’s simple. Get to the weapons, use them any way you can. I know you won’t break the rules . . . there aren’t any.”
“Bust a deal, take the wheel (of a BMW).”
“Ladies and gentlemen, boys and girls, buying time’s (always) here.”
“Get to the loans, use them any way you can. I know you won’t break the rules… or at least I don’t care.”
“Twenty-four years of your life, in return, you’ll get back what was stolen. ”
“Sounds like a bargain.”
“It isn’t.”
“Bust a deal, face the wheel.”
LOL…imploder.
I was thinkin’ the same.
Good memory on the lines.
memory? Man I’m so poor I can’t afford to pay attention!
That’s what google is for.
Since reader “Mikey” brought in Shelley this morning, now I’m thinking of a slight variation on Coleridge:
In Xanadu did Kubla Khan
A stately pressure dome decree
Where Alph the sacred river ran
Through caverns measureless to man
Down to 0% equity.
So twice five miles of fertile ground,
with gates HOAs were girdled round
and there were kitchens bright with stainless steel
where blossomed many a granite countertop
and here were forests ancient as the hills
bulldozed to sunny spots of greenery.
“Joann Clapp of Cynthiana, Ky., has suffered a double whammy. She recently moved and hasn’t been able to sell her old home, so she is paying on two adjustable-rate mortgages. The rise in interest rates has hurt her finances ‘big time,’ she says.”
Over the PA system…kkkkk….Joann Clapp…Please come up to the customer service counter and pick up your moron card…kkkkk
The 51% untapped refers to $9 trillion in mortgage debt vs $18 trillion in asset valuations. Calculate a 30% drop in housing depreciation and you see $5.4 trillion in asset loss.
‘”Fifty-one percent: that’s an enormous amount of home equity,’ declares IndyMac Bank CEO Michael Perry. This makes Perry bullish on reverse mortgages, so far a niche product for older homeowners.”
I have a 100% equity in my home. 7/15 homes on my street have traded hands in the last 2 years, mostly option arms with very little down payments. Still others on my street have been tapping home equity to add pools, pool houses, craft rooms, indoor batting cage, etc…etc…
So how does averaging the collective equity on my street help this market stabilize or turn back up???
All that borrowing drives down the percent of equity, but you, like me, still retain your 100% personal equity. I suppose once foreclosures start, and this overburden of debt is reduced this falling percent will flatten out. It may even rise.
Both of you are the targets of IndyMac’s new reverse mortgage products. Buyer beware. Double dippers are in your neighborhood.
I tend to be ‘when you pry my cold, dead fingers off my gun’ kind of target. They won’t make much money off of me. But I do appreciate the sentiment.
OT……but interesting.
What was the good news that sent these stocks down?
GS ?
http://www.marketwatch.com/tools/quotes/quotes.asp?addsymb=peet&symb=tol+kbh+len+ctx+dhi+fnm+aapl+goog+bzh+phm+sbux&siteid=mktw&vc=1&x=17&y=17
Lower interest rates? (That is, if you measure them by the long-term Treasury bond yield
)
Oops — lower interest rates are supposed to make stocks go up
Well the stock markets attitude seems be summed up with: BAD IS GOOD BABY! DOWN WITH GOVERNMENT!
“The future is gnawing at homeowner Scott Klimek. Klimek bought his home in Brighton, Colo., with a five-year ARM. ‘If it was, like, this year that it was going to adjust, then I would really be worried, but I’m just moderately worried,’ says Klimek.”
Tomorrow…I’m worry about it, like,tomorrow.
Paying the piper will extend out way beyond 07.
“Fifty-one percent: that’s an enormous amount of home equity,’ declares IndyMac Bank CEO Michael Perry. This makes Perry bullish on reverse mortgages, so far a niche product for older homeowners.”
Reads more like capitulation along with some spin. First the builders and now the bankers are finally capitulating. It’s an admission that the greater fool pond is empty; as a result, the bankers are looking to tap into a new revenue stream — equity full homeowners. Makes me wonder where the bankers are going to come up with the monthly cash outlays to support the reverse mortgage push, however.
I can’t wait for the putrid promotional messages extolling the virtues of independent living and the like as they fleece the seniors in our communities. They never stop, do they? First, they went after the young ‘uns w/ARMs and now they are preparing for their parents w/reverse mortgages. End to end equity sucking complements your friendly neighborhood banker.
You better hurry up and have a talk with the folks b/4 those messages hit the airwaves. These guys might get to your inheritance b/4 you do.
Reminds me of something I picked up at an early age courtesy of Wild Kingdom with Marlin Perkins and his sidekick Jim : predators tend to prey at the bookends of the life cycle where the weak are found—the young and the old.
This just in….the Fed thinks lending to the uncreditworthy is “sophisticated”
http://biz.yahoo.com/ap/061101/bernanke.html?.v=3
“As the credit market has grown and become more sophisticated, lenders have been able to extend credit to households and businesses that might previously have been considered uncreditworthy, said Federal Reserve Chairman Ben Bernanke.”
[i guess this is more of the new paradigm where making riskier loans is smarter than making less risky loans.]
“In turn, the market for “subprime” borrowers — people with weaker credit records who are considered higher risks — has grown considerably over the years.”
“In 1994, fewer than 5 percent of mortgage originations were in the subprime market. But by 2005, about 20 percent of new mortgage loans were subprime, Bernanke said.”
“A recent Fed study found that black and Hispanic home buyers pay more for their mortgages than do whites.”
I Mudd
will get paid- the highest paid gov clerk since raines
The ‘unliberated equity’ spoken of here represents the hard work and conservative saving habits of an entire generation. The bulk of homes represented here are those of long-term owners. To think that this is now viewed as a target for banks means that as a country we are quickly approaching a bare cupboard environment, eating into the last vestigages of value we still control, so we can spend it on cheap consumer goods from Asia. The wolf pack is hungry and looking for its next meal. They’ve cut out the young and stupid; now they want the old and lame.
The wolf pack is hungry and looking for its next meal. They’ve cut out the young and stupid; now they want the old and lame.
Well said…
“Lenders still like the loan-to-value odds, which have 51 percent of all equity in American households untapped. Half, then, of all ‘borrowable’ equity in residential real estate is (technically anyway) up for grabs.”
Is this good news? When the FED tries to do a bail out will these equity holders protest? Is this our hope for no FED bail out, older folks who saved?
There is an insightful chart in the Fortune article. The NAHB Housing Market Index has been a good one year leading indicator for the S&P 500. It it holds look out below in 2007.
Since I believe in the bursting bubble and a high probability of a housing induced recession, I already shifted some retirement assets out of growth stocks into short term bonds. I’ll probably shift some more.
Suggest you consider putting a percentage of your short-term bond money into Australian govt bonds. Australian dollar has gained a couple of percent against USD since last Fed meeting, and I see no reason for the trend to reverse. Even without the currency play, AUD bonds yield a little more than USD bonds.
Today’s foreclosed McMansions are tomorrow’s starter homes.
And how many families can each of those McStarter Homes hold?
I’ve been talking about this with my wife. We’ve started looking at some homes in Elk Grove, many of which are (mini)McMansions. Right now they’re in the $400-450k range, which would be outside our current budget (~$300-350k). But, in 12-18 months, I think that there’s a chance that some will fall into the low $300k range.
But then the question is whether or not we would necessarily want a 2000-2500sqft home rather than the 1200-1500sqft that we’ve been thinking about. The increase in costs of heating and cooling that much space are not insignificant. And I just don’t know how we would use the extra space. But it will be a nice problem to have.
But then the question is whether or not we would necessarily want a 2000-2500sqft home rather than the 1200-1500sqft that we’ve been thinking about.
Contour your lot and build a ranch with a walk-out/daylight basement.
Best bang for the SQ/FT. buck.
“Lenders still like the loan-to-value odds, which have 51 percent of all equity in American households untapped.
Mission control to flight deck, all clear for take off, we have 51% fuel left to burn off!
This is why I won’t invest in any of IndyMac’s money markets or CDs.