The Housing Bubble

“The technique behind this return is not, in itself, so clever: what a CPDO basically does is collect investors’ cash, leverage up and use the proceeds to write credit default swaps - instruments that offer protection against default. Thus, in its most grossly simplified form, a CPDO is a highly leveraged bet on whether a basket of corporate bonds will default. But the real magic, and its importance for the wider financial world, lies in the credit rating. In the summer, ABN Amro somehow persuaded the agencies to give the CPDO a top-notch rating, thus enabling the scheme to be marketed widely - while also cutting leverage costs.”

Many of the strategies that produce outsized returns in a conundrum-stricken investment universe involve high risk bets that the low recent rate of credit defaults will continue indefinitely. No wonder Geithner is so worried…

JMF, Russ, Hoz, & Stucco,

While you folks bring perspective to the big picture, I am breaking ground on the local level. You previously read here about the 5 mortgage fraud loans in Lincoln (Sacramento) totaling $987,000 over the combined market value. The idiot lenders are New Century (2), Alliance Bancorp, Long Beach (WAMU), & First Franklin. I have started the ball rolling with the FBI, DRE, and local police on the mortgage fraud aspect. It is an O.K. response, but it takes 2-3 calls and personal meetings to make them understand what is happening. I talked to a few folks in the home loan industry and they suggested opening a dialogue with the lenders and their fraud division. Today, I am putting all four lenders on notice, sending them a spread sheet, showing their loans and the market values. Hmmm, we shall see what this brings.

By the way, prices continue to deteriorate in this area. All these fraudulent deals were done at $765,000 to $785,000. Market value last month was about $550,000. The latest deals at JTS’ Estates at Lincoln Crossing were done at about $505,000 net to buyer. So New Century is another $45,000 under water from their approved loan amount in October. And now, I have identified 3 more fraudulent loans and another 7 potential deals, which have not closed yet. This shake out is going to get very interesting.

Sincerely, Palladin … “Have pen will write, reads the card of a man, Knight without armor in a savage land….”

GetStucco: I think it’s the HomeBuilders buying back their stock with their own cash, and in cahoots with their friends at the Mutual Funds and CNBC with Pump and Dump Crammer that
is driving up HB stocks into the face of all this bad news. Nothing else makes sense. KB Homes year ended Nov 30, 2006 and I suspect the managers stock options were based on the price of the stock on Dec 1. If I were sitting on a ton of stock options on one hand, and the company had cash reserves, I would certainly want to use the company funds to buy back the stock and drive the price up, just before on cashed in my options.
And if I can get my “inside” buddies to use the cash from their mutual funds to get onboard, we could effectively drive up the stock price.

It seems to me that they tried to run a business over the long haul and perhaps that they provided a very nice service to their customers. But it sounds like they underpriced their product or there wasn’t enough demand for it.

I started seeing a lot of for-sale signs a few
years ago in the beach areas that we like
to spend time at in the summer and it’s
clear to me that many were early in selling. But I guess there was some good sense in
folks that have lived there for quite some
time in selling properties to those that go
up there for vacation or for a weekend break.

Is this the place near Stonington? Very pretty country.

Prices have retreated and will likely retreat a bit more - particularly where there has been overbuilding and investors - READ: the ski areas, most notably Sunday River.

I’m watching the condo prices there. If the price drops enough I just might buy one.

One thing I’ve noticed is that there are a tremendous amount of quarter shares for sale at the Sunday River ski hotels. I’m tempted, as we like to ski, hike and leaf peep, so we’d get year round use on weekends and some weeks.

On the other hand, the idea of less than full ownership doesn’t quite sit right. Any thoughts on this anyone? We’re in no hurry and I’m thinking late winter 2008 would be a better time to buy than now or Spring 2007.

But But But!! Prices NEVER go down in Portland!

Saw the rent signs all over southern coast in early summer too. That is not good. In one word, it looks bourgeois.

I wouldn’t mind a thread discussing what it means for all of us when the financial sector is making such magnificent profits while the remainder of the country slips into stagnation.

A right-on point, jmf. This is always overlooked. Profits have been great for the debt-shufflers. We’ll see how long that lasts.

Kudlow says: “Profitable U.S. businesses clearly have the resources to grow their operations and continue hiring new workers. This, in turn, is the biggest factor sustaining the historically low 4.4 percent unemployment rate, as well as the strong gains in jobs and consumer incomes. ”

What does Kudlow think? That U.S. Corporations live by the rules of socialism? Their fat bank accounts came directly from our houses. Does Kudlow think they’ll now give it back? They absolutely will not “grow their operations and continue hiring new workers” if it is not almost immediately profitable to do so. They’re retrenching, cutting back on capex and getting ready to ride out the storm.

Strong job gains? That was then, this is now. Let’s see where it goes. Strong income gains? What dope is this guy shooting? Strong for who? For KBH’s CEO who can resign in disgrace and take a 156 mil severance package with him. Must be very reassuring for the nail pounders getting laid off left and right.

A day will come when I will really, really enjoy watching Kudlow’s show.

Crispy,

So he’s wrong because of his association with the White House, or his past illegal use of drugs, or his conversion to Catholicism?

I agree with most on this blog that the economy is going to tank, but surely he has a point. Won’t the financial sector’s profits moderate the recession to a degree?

6-20-05

None of this has happened. The Federal Reserve has effectively mopped up excess cash and calmed inflation expectations. That’s why bond rates are hovering around 4 percent, with most mortgage rates about a point higher.

Meanwhile, the homebuilders index has increased 76 percent over the past year, with particularly well-run companies like Toll Brothers up about twice as much. The bubbleheads missed all this because they haven’t done their homework. If they had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades.

Although year-to-date housing starts have kicked up to 2 million, average new construction since the early 1970s has hovered around 1.5 million to 1.75 million new starts per year. During the same period, the number of American households has increased by 48 million, or 75 percent, according to the U.S. Census Bureau. It is plain to see that the family demand for homes has far outstripped the supply of newly built residences. So it should not be shocking that home prices have tended to rise on a steady basis, averaging 6.5 percent price gains over the last 35 years.

Upward price momentum has kicked into higher gear in recent years for two important reasons. First, housing is highly tax-advantaged. The 1997 tax-cut bill — proposed by a Republican Congress and signed into law by a Democrat president, Bill Clinton — permitted the first $500,000 of profits from the sale of a home to be tax-free. This came on top of existing law that permits mortgage expenses to be tax deductible depending on one’s income bracket.

Since 1997 home prices have been increasing at a 6.5 percent pace on a yearly basis, with a 12 percent gain over the past year. In contrast, stock prices have gained only 3 percent yearly during the same period. Simply, real estate has had the tax-advantage over stocks as an investment vehicle. There is no $500,000 per family tax-free capital gain for shares, nor are the borrowing costs for the purchase of stocks tax-deductible.

It appears that the housing lobby in Washington has been more powerful than the securities industry lobby, as the results clearly show.

Homebuilding also faces another obstacle with the effects of price-hiking. Local zoning and environmental regulations have restricted the availability of land on which new residential units can be built. So while housing demands are white hot, the green lobby has cooled down new designs.

None of this is to argue that low mortgage rates haven’t been a plus in the housing picture. Of course they have. But the imbalance between excess demand over limited supply, resulting from tax factors and land-use restrictions, has made home buying even more profitable in recent years than has been the case in the past.

Which leads to a final thought: Why not apply the same tax laws that have benefited home owners to stock market investors and home buyers? If this were to come about, even more wealth would be created in America, leading to even more new business and job creation.

Tax reform to create a level playing field could boost our economy’s potential to grow beyond almost anyone’s wildest dreams. Homeownership, stock ownership, and small business ownership should be taxed at the same minimal rates as they are all key components of economic growth and wealth creation.

Kudlow conveniently left out the affordability factor in Crispy&Cole’s above link. His supply and demand arguments didn’t take into consideration the lack of match-up to the buyer’s budget or the fact that the housing bubble is based on a credit bubble….and he accused the bubbleheads of not doing their homework. Tsk! Tsk! (finger wave)

‘all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.’

I see this often. First they tell you what other people think and then set out to debunk it. I see opinions on this blog that range all over the economic possiblities. Are the economist at Moodys ‘bubble heads’ when they say prices will fall 10-20% or more in overheated markets?

Personally, the last thing I want is a recession or depression, but these things happen regardless of what anyone ‘wants.’ Keep building straw-men, Kudlow, they are easier to fool.

“So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market”

Dear Larry,

If you are out there, us “bubbleheads” have said that the reduction in consumer spending will happen over *years*, not *minutes*.

Also, it’s really illuminating that you didn’t talk about AFFORDABILITY. But of course, affordability doesn’t enter into the picture, what with job growth and population increases, right? Just like it didn’t matter what price you paid for a stock during the internet boom. After all, it was “The New Economy”.

Take care!

Sincerly, A Housing Bear

I didn’t say he was great, I basically asked for opinions on what he said.

Yeah if corporate profits are up why then don’t they just increase dividends to the shareholders. Oh no better to back date options.

Kudlow’s outrage lies spewed from his fraudulent show on a DAILY basis does nothing more than perpetuate this hollowed out, empty economy. Time and time again, he floats phoney data and uses strawman arguments to foist the warped agenda on the unsuspecting viewer.

Where did I see this? Here? B. Ritholt’z blog? The new equation is:

“As goes Merrill Lynch, so goes the economy”.

Speaking of GM’s fortunes, a few weeks ago a neighbor showed up in a new Sequoia. In Florida is it pretty easy to tell if a car is leased and this is a lease. Then I started seeing new Sequoias all over the place. It reminded me of the blizzard of Lincoln Navigators that were leased in 1999. I went to Toyota’s website and, sure enough, found what looked to be a very good lease deal, particularly since it included 12K miles and 15 cents per mile for overage. And there were lots of them available. It looks to me that maybe Toyota read the tea leaves first and decided to flood the below-premium full-size SUV market before Ford or GM can get presumably similar programs rolled out.

thanks

This is a classic case of “ignore what they are saying, because what they are doing is speaking so loud:” While the Federal Reserve has been reporting rather flat money supply growth in M2 (blue line), in reality they have been dramatically increasing the cash (red and blue line) available for speculation.

Hence, that sloshing sound you heard. They have been providing the fuel for the rally, the huge M&A activity, the explosion in derivatives — even the eye popping Art auctions are part of the shift from cash to hard assets. It is just supply and demand — print lots of lots of anything, and that thing becomes increasingly devalued. It works the same for cash as it did for Beanie Babies.

Its not just the increase in Money Supply that should be concerning to investors — its the misdirection about it. If Money Supply matters so little, as Fed Chair Bernanke has been out explaining to anyone who will listen, why pray tell has the Fed been working those printing presses overtime?

Given M3 increases, its no wonder the European Central Bankers laughed at the suggestion.

~~~

William McChesney Martin, Jr., Fed Chair from April 2, 1951 to January 31, 1970, famously described the role of Central Banks thusly: “The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting.”

It seems the present Fed is not only NOT taking the punch bowl away — they are spiking it with alcohol. I am not looking forward to the hangover that’s to follow . . .

Look what became of the case against Frank Quattrone for another fine example of the limited downside risk taken by bullish analysts who get a bit overzealous…

http://en.wikipedia.org/wiki/Frank_Quattrone

They seem to be trying to dismantle themselves these days…

“…dismantle the Fed.”

Amen.

LOL!

I’m always amazed of the cowardice displayed by the vocal minority of loonies. They come back disguised after their silly theories get sliced and diced.

You misspelled Hitler. LOL!

I’m neither a Hillary fan nor a democrat but holy sh*t, have you ever witnessed a more blatant power grab and consolidation of power than the Bush era? Liberty (as in libertarian)? Ever hear of Posse Comitatus (sp?) or Habeaus Corpus? The friggin retards that are in power now have all but destoyed the constitution and HAVE destroyed the underpinning of the Bill of Rights. Damn man, start reading more and chuck the party line nonsense. Both these groups will sell out their mothers for more power and money.

“I apologize for my rant.”

Read you loud and clear over here; please continue!

“but now that elections are over not another word will be said about it”

Yup, what Hoz said.

I live in the 90275 zip and have been watching the pucker factor increase on two properties close by… In our area you just never know who “really” has the big cheese. Some amazing houses at some amazing prices… Looking to see who blinks first…

Speaking of Tin Foil hat issues. Has anyone read the nuances of the Coin Act of 2006 that is going to get passed? It calls for the FED to take over the duties of the Mint and Bureau of Ingraving.

The bill also calls for the replacement of $1 Federal Reserve Notes with $1 coins as well as a redesign of the commemorative $2 Federal Reserve Note. Still think the money changers are being tough on inflation? If so, why is this bill proposing the $1 Federal Reserve Note being phased out in favor of a $2 Federal Reserve Note and a $1 coin? If they were tough on inflation there’d be no need to phase out a smaller unit note for a larger unit note.

The bottom line is this, the U.S. Mint and the Bureau of Engraving and Printing perform Constitutional functions of the U.S. government. These powers should not be transferred to the Federal Reserve. It is bad enough that this institution has been given a private monopoly on printing our currency. If this bill passes and gets signed by the President, the Federal Reserve will also be given a private monopoly on making our coins and even printing our Treasury securities. This bill takes away power from the U.S. Treasury and gives it to a private banking cartel. They will probably say that this bill will eliminate bureaucracy and make government more efficient but I strongly disagree. Money creation is one of the few Constitutional functions of the U.S. government. Any deviation from our government having complete control over our monetary system makes government less efficient. The Federal Reserve has already turned the American people and our government into slaves of a never ending debt cycle because the power of currency issuance was given to them. They’ve bought off both the Republican and Democrat parties. I’m all for small government but let’s look at eliminating the government institutions that do not perform any Constitutional functions before doing something like this.
http://www.funnymoneyreport.com/article_view.php?id=16

Just when you thought you’d heard it all.

For how many years running has Dean Baker been predicting the housing market would bring down the US economy?

Why should he step down?

That you, Tim?

Mish — that piece is destined to become a classic. I love this line:

“We are hoping but do not know that the ultimate guarantor of these derivatives is not Madame Merriweather’s Mud Hut in Malaysia.”

And I am glad to hear that Bernanke has decided on glasnost — it worked wonders for Gorbachev’s career!

“Chales Lantzman, a real-estate investor here, didn’t find the house particularly appealing but put up a hand and offered $500. That turned out to be the high bid.”

That’s PGH for you. I’ve had an estate property for sale for over a year now, $29K asking price. The only offer we’ve received to date was $20K, which the executor of the estate declined, against my advice.

There are quite a few homes here where the tax liens exceed the FMV. Those are the crack refuges you may have read about in Bloomberg’s piece last week regarding MBIA. And it’s not just in the Hill district, but can be found in Wilkinsburg, Homewood, Duquesne, Rankin … ugh. The list goes on. Really, REALLY nasty and blighted areas. Many of these areas were formerly home to the steel industry.