From Irrational Exuberance To Wishful Thinking
Some housing bubble reports from Wall Street and Washington. The Star Telegram, “Business stinks at the country’s biggest home builder, and the CEO says it may get worse next year. The Fort Worth company is being as aggressive about reining in its business as it once was about growing it.”
“The company reported that 4 of 10 customers walked away from their contracts. If cancellations continue at their current level, ‘then it’s going to be a much more difficult market than I’d want to spin,’ CEO Don Tomnitz told the analyst.”
“With Horton’s high cancellations, half the company’s units are now spec homes. As a result, Horton is spending heavily on incentives and discounting, reducing profit margins by 450 basis points.”
“Home buyers have been pitting builders against one another, seeking more concessions and better prices. And Horton has leaned on suppliers and subcontractors, which Tomnitz said was helping ‘big time.’”
“At a site last month, he said, a framing contractor brought his calculator for the first time in a couple of years. ‘Prior to that, he would just come in and sit around and chew the fat and say: ‘Here is the price. Take it or leave it,’ Tomnitz said. ‘So we’ve definitely got their attention now.’”
From Business Week. “The colorful CEO of luxury homebuilder Toll Brothers, Robert Toll, stepped forward on Dec. 5 with the claim that some housing markets might be stabilizing. His comments came as a slight disconnect from the company’s quarterly news.”
“Toll, the nation’s biggest builder in the luxury-home category, has been taking losses on properties, and its customers have grown nervous and far more likely to abandon new contracts on houses as prices retreat.”
“‘You seemed like a very…I guess broken man last time. And here you are a new man,’ Ivy Zelman, an analyst at Credit Suisse First Boston, told Toll Tuesday. ‘I’m wondering which Kool-Aid you’re drinking because I want some.’”
The Sun Sentinel from Florida. “Toll Brothers Inc. said the U.S. housing market may have reached bottom as the largest builder of luxury homes reported the biggest drop in quarterly profit in 16 years.”
“Area housing analysts aren’t convinced that South Florida will see a housing rebound anytime soon. Delray Beach housing consultant David Levin said the problems that led to the slowdown, rising taxes and insurance premiums and a large inventory of existing homes for sale, are still in place.”
“What’s more, Levin said, the end of the hurricane season will not necessarily translate into more people buying homes, as some observers have predicted. ‘I think that’s a lot of wishful thinking,’ Levin said. ‘I don’t see our market right now being bottomed out. The average guy still can’t afford a house because of things like insurance and taxes.’”
From Reuters. “Experts have warned all year that a slowing U.S. economy and rising borrowing costs would lead to an increase in bad loans by homeowners and other borrowers. Grim comments from Britain’s HSBC Holdings Plc about fourth-quarter trends suggest the experts may have been right.”
“‘We think the sky may be falling,’ said Mark Fitzgibbon, director of research at Sandler O’Neill & Partners LP. ‘Credit quality has been deteriorating for two quarters and we think the pace of deterioration will accelerate this quarter.’”
The Denver Post. “A Texas mortgage bank that employed 50 people in the Denver area abruptly closed its doors Friday, signaling more trouble in the subprime lending industry.” “Sebring Capital Partners notified employees of their termination Friday. Carrollton, Texas-based Sebring employed 325 people, including 50 in the Inverness area of Arapahoe County.”
“Subprime lenders are struggling with rising default rates. Eight percent of subprime borrowers are at least 60 days late on their mortgage payments, according to a UBS analysis of loans packaged and sold as securities. That’s up from 4.5 percent a year ago. Banks are responding to rising defaults by closing or trying to sell their subprime operations.”
“A former employee who requested anonymity told The Denver Post that Sebring, like other subprime lenders, was hurt by rising defaults. A major investor stopped funding Sebring’s loans as a result, forcing the company to seek a buyer, the former employee said. Sebring had to close after a potential acquisition fell through.”
“Sebring made loans of $209 million during the second quarter of 2006, down 11 percent from last year, according to Origination News magazine.”
The Australian. “Renowned US economist Stephen Roach believes the US economy will slow to a near ’stall speed’ next year as the housing market in the world’s biggest economy runs out of puff.”
“‘The first thing you hear when you land in the US is the air coming out of the housing market,’ Mr Roach said at a briefing in Sydney.”
The Chicago Tribune. “The speech 10 years ago Tuesday was called ’staid and unremarkable.’ Alan Greenspan, then chairman of the Federal Reserve, was addressing a black-tie dinner for the nation’s ruling elite in Washington.”
“Pundits forget that he expressed the headline comment as a question, not as an observation: ‘But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?’”
“Economist Robert Shiller says he searched back to 1740 and was unable to find the adjective and noun used in tandem before Greenspan spoke. ‘I like the expression, because it’s a good term for what we often have,’ Shiller said. More sensationalistic terms such as ’speculative orgy’ or ‘mania’ overstate normal human foibles in investing, he said.”
“‘It’s just exuberance. There’s nothing wrong about being exuberant,’ he said. ‘It’s irrational only in subtle ways. It’s only wrong in that we don’t quite see fully what’s happening.’”
“Greenspan’s legacy, which he will help shape in the memoir he is writing, will be framed by the expression and by what Greenspan, as the nation’s central banker, did for more than nine years after delivering it. ‘I think it was instructive. The problem was he didn’t keep saying it,’ Shiller said. ‘If he’d have stayed on theme, we might have had a smoother ride and it would have been better for everyone.’”
“‘The first thing you hear when you land in the US is the air coming out of the housing market,’ Mr Roach said at a briefing in Sydney.”
Like that line…
Roach did the best job of calling the 2000-02 recession. He’s one of the smarter I-bank talking heads, him and Richard Bernstein.
Didn’t he go bullish out loud though right before the market tanked this summer?
I like those guys too though.
If he did, at least in the longer term (ie, up to now) he was right.
Do you know anyone who’s been in this business for more than 5 years who is fundamentally bullish (I don’t mean the idiots who are running stocks right now). It seems like the more you learn, the more bearish you get. I’ll never rid myself of this mindset. It’s cost me money.
Abby Cohen (although you do have to read between the lines with her) and Peter Lynch come to mind.
Actually I meant traders, people who just execute for a living.
Cohen is the worst Perma Bull Shill Cheerleader ever! Bottom Line. If she was thirsty in the desert I wouldnt piss on her!
Cohen’s no moron. As I said, you have to read between the lines with her. Go look at what she said in March 2000, she was dead on about value outperforming growth.
“Traders” are too focused on the short term to care about secular fundamentals. Most of the smart ones know what the stock market’s dome over the years. That said, there certainly is a tinfoil-hat contingency that thinks/hopes the Dow is going to 500 tomorrow.
In 2000 she was saying S&P at 1600! Every day on CNBC and in the WSJ. She said this every year 2000-2006. Just lowered her numbers a bit each year.
Well, let’s start with 5000 then work on 500
crispy, that’s my point exactly. The high on the SPX was 1550 or so. She was only “predicting” a 3-4% gain. Which in context is nothing.
She missed the call though, as the S&P dropped 50%.
bubbly said this:
“Go look at what she said in March 2000, she was dead on about value outperforming growth.”
********
In March of 2000, a monkey in the jungle could have predicted that “value would outperform growth.”
For the simple fact that, at the time, it was *way* overdue to happen.
AJC is a cheerleader-loser extraordinaire.
SF Jack, a monkey COULD HAVE, but very few people DID.
The value guys were throwing in the towel. Guys were closing down their funds.. guys like Julian Robertson. Nobody wantewd to be in value back then, which is why all kinds of stuff had P/Es of 6 back then.
bubbly -
In the case of AJC - a broken clock is correct twice a day.
I have ZERO respect for cheerleader-losers.
The perma bulls and perma bears are the exact same thing. Stopped clocks that are right twice a day. The reason you hear more perma bulls is that: 1) in the long run they are right. 2) bullishness encourages more trading.
Now is not a bad time to take money off the table and stick it into bonds. The US economy is maybe a 3-4 quarters away from slowing down hard.
I posted this question in the last thread but curiuos about any opinions on this subject:
How do we start to recognize people who live within their means, consume less, improve the envrionment and help others? In our society you are great if you have a lot of stuff, consume a lot of stuff and build products that eventually make their way to a landfill. What will it take to end this mentality? Can it be done or are we doomed as a species?
Such people, by nature, neither need nor want any recognition, and in fact any attempt at such is probably counterproductive and antithetical to them.
Or maybe I’m just speaking for myself.
Arizonadude that is the million dollar question. I don’t think we can go back. This country is fixated on bigger, more, more, more, and larger everything. The man who is contented and happy with what he has is just passed over. He is of no use to Madison Ave.
You see improving the environment, consuming less, caring about your fellow man is seen as boring, something others do, but not me. There is no excitement in that. Also, it is hard work. It means finding a contentment within yourself, not contentment in the next thing I buy.
Yesterday, I tried to get at the in another thread and it did bring up some interesting comments. I just think that human nature, esp. as witnessed in this country because of the prosperity, is one where most people want it all and if they can’t have it, they will go into debt for it.
Tragically, for most, it isn’t until they are old and decrepit that they realize it was all a hallow sham. They realize too late that downsizing isn’t so bad. They realize that helping others is better than accumulating wealth. Unfortunately, Father Time will not give them the years wasted spending that time and energy on fruitless pursuits back!
I know I am showing my hand here as a Christian. However, I am not preaching or trying to make converts. However, I will quote the New Testament here just to make the point clearer.
“What does it profit a man to gain the entire world, but forfeit his soul?” I think that sums up the lifestyle of many in this world today. We just see it a lot more in this country because we have the means to try and accumulate everything the world has.
Remember what Mother Teresa said when she came here. You don’t need me here. She was right. Even the poor in this country fare better than most of the rest of the world’s inhabitants.
In the end, Arizondude, it comes down to personal choice. You have to make the choice and draw the line. Last week I shed light on my own situation. Me and my family we lucky. Dad “got religion” at 39. I still have a chance to live a life where I put more into this world than I ask of it.
Ironically, all you can do is what you can do. We cannot change others or their habits. Heck, wives have been trying for centuries and look at the results. (No offense ladies, just trying to make some humor)!
Bottom line is that it starts with you. I know that is cliche, but it has to start somewhere.
“In our society you are great if you have a lot of stuff”
No, you are envied if you have a lot of stuff. You are great if you are a good person, are honorable, help others, and treat others kindly and professionally. I know this sounds hokey, but if the people you hang out with are trying to out-do each other materially, you are hanging around with the wrong people.
Wow - what a great thread.
When I think of a stereotypical “American” - I think of my mother-in-law. In many ways, she is well intentioned. She gives generously when she’s in the mood. She genuinely wants what’s best for us and our kids.
In other ways - well - I just shake my head. She can be greedy and selfish. She’s concerned with making sure that she gets hers (screw the environment and everyone else, especially if they are faceless souls in some other place) Shopping is therapy for her because “she deserves it”.
And she’s scared of everything. In recent discussion about a relative getting cancer - she said - and I quote “It’s like anyone could get cancer at any time.” I just shrugged my shoulders and suggested that’s life. No one on the planet is guaranteed a tomorrow.
It’s odd to say that in some ways I feel like my husband and I are signficantly older than her. How do you explain to a 50 some odd year old that there are no sure things? Or that people without faces matter? Or that time invested into people and relationships matter as much or more than the investments in your portfolio?
*sigh* Of course the answer is, that you don’t. In the end, I let my husband dictate how often and for how long we see the in-laws. He usually chooses much shorter and less frequent stays than I mentally plan on.
“Having food and raiment, let us therewith be content.”
It will take a serious long depression to make any number of people re-appreciate simplicity. Most people aren’t capable of being humble unless they’re compelled to be. But when you’ve been forced to give up a high-flying lifestyle and live more simply, if it lasts more than a couple of years, you either go to pieces, or you adjust. And in adjusting to a simpler life, you might just come to see it’s not so bad. You might even convince yourself that you like it.
Sounds like you learned some of life’s lessons your Mom has yet to grasp…..congrats. I wish I had taken the time to dedicate more of my life to what’s REALLY important instead of frantically adding to a balance sheet.
I’ve asked for a “second chance” with the people in my life who matter and am going to make the most of it; hopefully, your Mom will realize there truly are no pockets in burial shrouds and people, and how we treat them, count; not how many zeros we have in our accounts.
Best Wishes
I think about this quite a bit.
If you don’t think our species is doomed you need to get out and interact with Joe Sixpack a bit.
I am in the we are as a species generally doomed camp, but we might as well try to do good & well while we are here. Similar to Yvon Chounaird and Patagonia’s philsophy.
Here is some evidence that we are doomed. This is from OC, CA.
http://consumerist.com/consumer/burger-king/911-call-burger-king-wont-make-me-my-cheeseburger-199303.php
Wow….. Wow….
That’s all I can say I can’t believe I just heard that. That call had to be a prank Sunset.
Vermonter -
You’re MIL, I’m willing to bet, is not from Vermont.
“That’s all I can say I can’t believe I just heard that. That call had to be a prank Sunset.”
The posters below indicate that Snopes.com has it listed as undetermined. However, some 911 dispatcher wrote in to say they actually do get calls like that. How ridiculous. My libertarian streak is tested by morons like that. Personally I think she should have gotten a $1,000 fine for tying up the 911 call. Alas, that would be more government intervention.
Is it government intervention to refuse to ever answer a 911 call again from a moron who had made a call like that in the past? (As opposed to the $1,000 fine.) Or is that actually government non-intervention?
“Can it be done or are we doomed as a species?”
Nope, doomed. Natural Selection has the numbers continually stacking higher and higher against the good folks - idiots overbreed.
If I was the dispatcher, I’d have sent the cops there and had them ‘dispose of’ the parent and send the kids in for ‘reprogramming.’
Amazing…
How do we start to recognize people who live within their means, consume less, improve the envrionment and help others?
In silicon valley … they wear jeans(Levis only), long hair, look for simple things in life, not into fancy living but making a difference in life, No ego, very interested in what others are doing and learning more. Always helping out others results in coworkers have deep respect…well earned!!!
You know it when you see it!
How about adding another fine quality - humility? It seems that most people want to be famous. Personalized license plates, bumper stickers, and more. Alas, human nature does not necessarily seem to support humility. In order to successfully attract women, men must display wealth. So you see a lot of guys in debt driving $45,000 SUVs. And many women don’t respect guys who are renters and not slaves to the government or the bank in paying for a way over-inflated house. Young people can get away with not having money. They have looks. Young women like young men with good looks, as much as older men with lots of money. Young men know all they have to do is look good, rather than have money and the pressure’s off them.
I am not going to combat human nature, but I find a lot of times where using humility pays off and I can never see any use for bragging in front of people I know or people I see daily. Sometimes displaying wealth can attract con-artists and thieves, anyway!
We are squandering the greatest accumulation of assets in the history of mankind for our own pleasure. And we do this at our own peril.
“The richest 10 percent of adults, with assets of $61,000 or more, own 85 percent of global wealth, the report said. At the same time, the UN said the poorest half of the world’s adult population owns barely 1 percent of the wealth.”
No wonder so many others around the world want to end the “Western” way violently.
And yet IMHO if you cannot believe that there is hope, that there is even the slightest chance that the honest and honerable will prevail somehow, then it is probably time to depart this earthly realm for your days will be filled with sorrow and regret.
As said above, it has to spring forth from each individual and gather into a force with momentum. But we have seen these things rise before and turn to dust because force and momentum are manifestations of power and we all know that power corrupts. Something, somehow, some way must change and though I don’t see it yet, I for one am hopefull that iut sis there. It may spring from the ashes a a Greater Depression or World War where everything of material worth is lost and we start again as equals. Or out of the simple disgust of the current paradigm.
Now with regard to that 911 call … yep, I hear stupid people and I am surrounded by them here in the OC.
txchick57,
I’ve made that observation over the last several years and in principal, I’ll agree. The more I learn, the more bearish I become as well. In the end though we have to remember, bears don’t “create” anything. We don’t. Other than concise analysis about the many defective business models out there, and warning others as S. Roach has. So we’re not without our attributes. But this country wasn’t built by naysayers, it was built by risk takers. As I’ve said before, it’s “o.k” to be bullish. It’s even “o.k” to be bullish on RE. You just have to remember that there are other asset classes and each has it’s moment in the sun. Be bullish when it’s TIME to be bullish. There are sectors and companies that I’ve taken long positions on recently (just not RE).
In ways becoming “snake fascinated” with always looking for something to short can be just as unbalanced as a builder that’s always looking for lots! IMHO.
Well said.
DinOR,
Good points, just don’t forget the valuable service that some bears do provide, which is a huge one. They allow capital to flow from inefficient investments to efficient ones, whatever they might be at the time.
If the Internet bubble had popped long before it actually did, our overall economy would likely be at least a little stronger than it is now, no?
I’m trying to remeber what the world was like when we were not fixated on real estate. I know personally I’m spending lots of time thinking about this subject.
We were fixated on the Nasdaq
and before that we were fixated on the crappy early 90s economy
and before that we were fixated on Japan
and before that we were fixated on the Soviet Union
and before that we were fixated on Iran
and before that we were fixated on Watergate
and before that we were fixated on Vietnam
and before that we were fixated on the Beatles
and before that we were fixated on who shot jfk
and before that we were fixated on the soviet union again
and before that we were fixated on Leave It To Beaver
and before that we were fixated with Nazi Germany
and before that we were fixated on finding something to eat
and before that we were fixated on the stock market
And before that we were fixated on real estate
(Florida specifically)
and before that, Hollywood. . .
Now its britney spears’ crotch.
No, that came before Janet Jackson’s right breast.
“and before that we were fixated on the Soviet Union”
Ahhh, those were the days…
I kind thought it was more like we were fixated on the Soviets and the commies for a long time. Including while WW2 was going on.
That was something that we really HAD to fixate on.
Just like us defense industry guys fixating on WMD and terrorists.
Sept 11 didn’t even make your list.
Kundera would have laughed (The battle of man against power is the battle of memory against forgetting… Book of laughter and forgetting)
Roach would doubtless be a bubble blogger if he were not so darn-well paid…
“The colorful CEO of luxury homebuilder Toll Brothers, Robert Toll, stepped forward on Dec. 5 with the claim that some housing markets might be stabilizing. His comments came as a slight disconnect from the company’s quarterly news.
…
“‘You seemed like a very…I guess broken man last time. And here you are a new man,’ Ivy Zelman, an analyst at Credit Suisse First Boston, told Toll Tuesday. ‘I’m wondering which Kool-Aid you’re drinking because I want some.”
Ivy Zelman, you are my hero.
There is a continuation to the quote:
“You seemed like a very…I guess broken man last time. And here you are a new man,” Ivy Zelman, an analyst at Credit Suisse First Boston, told Toll Tuesday. “I’m wondering which Kool-Aid you’re drinking because I want some. No one else in the industry is willing to stick their neck out.”
Maybe no one else in the industry is willing to stick their neck out because they are fresh out of Kool-Aid ™.
From Toll:
“seems to have stabilized, although at levels much lower than in the past few years”
“also sees the market stabilizing in the Maryland-D.C. suburbs”
“we may be seeing a floor in some markets”
“seem to be dancing on the bottom or slightly above”
Seem, my be seeing, sees, seem…and yet with facts like:
“the quarter’s numbers were decidedly dreary for Toll compared with a year ago: [numbers numbers numbers]”
we have:
“The comments helped to spark a minirally for the sector Dec. 5. Toll shares gained 3%, to close at $32.87 per share”
Is the stock market yet again driven by dreams and ’seems’? ‘Seems’ like 1999 again…
I’d be way more willing to stick my neck out if the financial future for myself and family was currently guaranteed. Mr. Toll is a very rich man no matter how accurate his prediction is. He cashed in, from now on it’s all gravy.
Most CEOs are that way, the first year on the job and they’re filthy rich from then on they’re just working to satisfy their ego or whatever motivates them to continue. CEO compensation, and especially stock options as a “motivator” is a joke the guys would play for poker chips or sea shells too. Most of them love the power and prestige and “the game”.
A “new man” may have been made as a result of the first installment of the earning stream from the newly-invested gains from his sale of his own stock.
D.C. area is stable? I’d hate to see volatile.
Inventory: http://virginiamls.com/charts/FairfaxCounty.htm
YTD home sales: down 34% http://www.nvar.com/market/pressrelease/prgnvoct06.html
Personally, I’m not fixated on it. I’ll buy if it makes sense or not. I just enjoy watching these huge bubbles inflate and then deflate. It’s amazing how similar they are.
“I just enjoy watching these huge bubbles inflate and then deflate. It’s amazing how similar they are.”
I am nothing less than awestruck by how similar they are.
With repitition comes opportunity for those able to recognize it.
Yeah, Ivy, I want some of that Kool-Aid too!
It’s interesting that Jim Jones and his desciples achieved immortality in the American lexicon as an off-color reference to people following a self destructive course of action advocated by ‘wise’ leaders. Probably not what they were seeking.
The small engineering organization I’ve been working with the last few months uses the Kool-aid reference often, in regard to being told to meet impossible schedules, for example.
What I enjoy, is watching fundamentals take over no matter what these idiots spew. The chickens are finally coming home to roost. No amount of spin and lies could prop this thing up. Unless they put their money where their mouth is, and actually made monthly mortgage payments for the masses, it is game over. As more REO properties come online, along with new homes, good luck selling. Aside from the uber wealthy, and move up buyers, this thing is toast.
Anecdotal. In Reno, a close friend is selling his house. It is too late IMO even though he bought early bubble. His next door neighbor has had his house on the market for over 6 months, originally listed for $629k, it is now reduced to $499k. My friend is hoping to walk with $550. I hope he can, but don’t think he has much of a chance. The neighbor got a cash offer in June (would not disclose how much) and refused it. I bet he cut his own throat. He mentioned he has not even had any lookers in many weeks.
I would like to meet Zelman. He seems like a pull no punches, don’t care if I piss you off, I am going to tell it like it is kind of guy. We need more of these in the world today. Too many kiss asses and brown nose suckups, who are yes men because they get paid to do it. A little more intellectual honesty would be good for this country and the world!
Ivy is a woman.
I have met her and she is a straight-shooter and pretty tough too. Nice lady as well
“”He seems like a pull no punches, don’t care if I piss you off, I am going to tell it like it is kind of guy. We need more of these in the world today. Too many kiss asses and brown nose suckups, who are yes men because they get paid to do it. A little more intellectual honesty would be good for this country and the world!”"
Hear! Hear!
BTW, Shiller’s comments at the end piss me off. How many freaking ‘mericans can even define what Greenspan said, let alone restate it or spell it? Irrational Exurberance! Poppycock. More legalise mumbojumbo from the intellectual elites.
zelman is a she
I was wondering who’d name a guy Ivy, but I supposed it was possible . . .
My son had a friend named Ivy. His dad was Trey. Come to find out, that wasn’t their names at all, but for the “third & fourth” in the family ….. (IV, III).
‘I think it was instructive. The problem was he didn’t keep saying it,’ Shiller said. ‘If he’d have stayed on theme, we might have had a smoother ride and it would have been better for everyone.’
Shiller is probably right, but he is ignoring an important aspect of financial mania - anyone who questions what is happening gets clobbered.
There were calls for Greenspan’s head over his comments ten years ago. The Chairman, and especially Greenspan, is a politician first, academic second. He learned from that one comment how important it is to keep one’s mouth shut in the face of unsustainable asset inflation. The participants will kill you otherwise.
I’ll bet there isn’t a single blog participant that hasn’t at some point managed to enrage a relative, friend or acquantence by merely questioning the permanence of 20% annual gains. Anyone?
It’s a great indicator and will no doubt work in the future - ask a financial question that engenders rage and you will know you have a bubble on your hands.
I enraged my best friend multiple times by suggesting that he sell his So. Fla. place for “only” a 50% gain after one year in summer ‘05. Though, to be fair, I though he was crazy buying in the summer of ‘04. Heaven forbid he might have to pay taxes on it. He’s now in hell down there, unable to sell at all.
my old man can’t give his fl place away
on a canal etc……..
And how far under the bubble price is he trying to “give” it away?
Or is he one who says “Lower prices are fine, but I’m just not going to give this place away….”?
Can he sell it for what it went for in 1999?
IF someone wants to give something away, I’ll be glad to take it. Unfortunately, most want me to assume a half-million dollars of debt so they can retire, while I work off the debt. No thanks.
I can’t say that “enrage” would be the word, but I am avoiding a couple of neighbors who are carrying two mortgages right now. They’ve bought another house, and are trying to sell the place they’re living in. Financial trainwreck in the making, IMHO. (But if I were to tell them that, I would be accused of being unsupportive of their quest to follow their dream of living in a more caring, loving neighborhood than this one.)
I avoid them because it’s the easiest way I know to keep The Troublemaker (my mouth) from saying Something Unsupportive.
It’s funny (in a sad sort of way) that a lot of people I come in contact with know of at least one person/family that is paying two mortgages for some reason or another.
Arizona Slim,
I understand where you are. With certain friends, I’ve come to avoid them as I don’t want to be insensitive due to my “bearish tendencies.” However, one who knows about my blog called me last night and we chatted. He knows he’s going to be very underwater on his home purcase.
At least he’s past that and is just resigned to hold on. (Note: 20% down, conventional loan within means, bought in 2004 in OC) Walking away is not an option for him.
Why? His job requires a high credit rating. Twice a year they pull his credit report. Actually, the same is true of my job and I imagine many others.
This bust is going to have many intersting consequences.
Neil
I have a feeling that I’m not going to be invited to this couple’s housewarming in their new, caring, supportive neighborhood. Oh, well. My party schedule is pretty full for the rest of this month.
I think a lot of people are going to find out just how much the negative credit rating affects them going forward. You pretty much cant get a decent job with bad credit, nor can you get an apartment, etc.
“You pretty much cant get a decent job with bad credit, nor can you get an apartment, etc. ”
Wrong about apartments. The guy that literally broke through my apartment (common wall) used his mother for a credit reference to rent the apartment next to me in Scottsdale. I tried to collect from the apartment complex’s insurance company but they denied responsibility. Since that episode, I tend to rent at the most expensive apartment complexes to get away from the riff raff.
Neil,
What’s your blog URL? Love to debate recession vs. depression with you some more.
Roger that! There are three cases where I argued against buying during the 2004/5 bubble run up, at the end they bought around mid 2005.
I was not invited to their first housewarming party/gathering.
And their hurt feelings continue, after they purchased, they were very happy to learn from their broker that their condo was worth 40k..60k..75k more etc,
(and thinking perhaps, without that negative talk from me, they would have bought few months earlier and could have got additional $25k.?)
And as the price is falling, I guess, they will argue that without all the bubble talk may be they would have bought few month earlier, hence now make LESS LOSS!
It is a funny situation, you get hit by very people you were trying to save. Left to their fate, nobody would get a chance to point finger at you. Sounds familiar?
It’s been said, no good deed goes unpunished.
Great point, yes I have pissed off friends and acquantances with bearish housing comments.
“I’ll bet there isn’t a single blog participant that hasn’t at some point managed to enrage a relative, friend or acquantence by merely questioning the permanence of 20% annual gains.”
I sure did. We went skiing with our friends just after they had signed the papers on their new house. All they talked about all weekend was how much money they were going to make. I sent them a spread sheet showing them the truth. We haven’t been out with them since and I can’t say I miss them !
Robert Toll, colorful? I would like to see a picture of him all black and blue after realizing the beating that his company, and the housing market, are going to really take. And a few rounds with Lennox Lewis wouldn’t hurt either!!! LOL
Well, bored here so shorting a few Tolberts in the 33s here with no rationale at all other than they’re just running the shorts off.
Oh, interesting. HGX is coming close to a 50% (fibonnaci) retracement of the down move from mid-2005 to Aug 2006. That would be a logical ending point for this rally in the homebuilders.
Or a breakout if it’s real.
I wish I could remember an old trading-rules name (The Maran? Rule), but the gist of the rule was that when a future/stock/ bond rebounded to within 2% of its previous high/ resistance; it was in the twilight zone and a 1% change either up or down was the new trend.
The Jun 07 XHB 07 puts are a *very good* value. 1Q07 is going to be brutal and the offside chance of a rate hike *POOF*.
Well, Ivy League was a guy.
“Subprime lenders are struggling with rising default rates. Eight percent of subprime borrowers are at least 60 days late on their mortgage payments, according to a UBS analysis of loans packaged and sold as securities. That’s up from 4.5 percent a year ago. Banks are responding to rising defaults by closing or trying to sell their subprime operations.”
Gee… that sounds like a long term solution. If the business is losing money, sell it to a GF!
Credit is about to *really* tighten.
Neil
It looks more and more like the atual RE stats are also being manipulated.
The latest evidence of this in Silicon Valley is posted at:
http://www.viewfromsiliconvalley.com/id284.html
Thanks!
Nice post on faulty stats - good catch!
Maybe we are finally getting to the bottom of why “real estate always goes up?”
‘At a site last month, he said, a framing contractor brought his calculator for the first time in a couple of years. ‘Prior to that, he would just come in and sit around and chew the fat and say: ‘Here is the price. Take it or leave it,’ Tomnitz said. ‘So we’ve definitely got their attention now.’
This is what people are over-paying for, so some fat chewing butt-crack can sit around and name his price.
When framing contractors start using calculators, be very afraid. (After all, a calc is only as good as the data that gets entered into it.)
“enrage”
Well, over a card game at Thanksgiving, to my brother-in-law I remarked something to the effect of:
“I suppose you don’t have to respect money and you can buy that $600K house because your grandfather is leaving you $8 Million worth of land (a few acres) in Annapolis.”
“With Horton’s high cancellations, half the company’s units are now spec homes. As a result, Horton is spending heavily on incentives and discounting, reducing profit margins by 450 basis points.”
How can builders lower price without increasing cancellations? It seems like they are damned if they do and damned if they don’t.
Interesting new angle on the bubble:
http://www.financialsense.com/editorials/kasriel/2006/1205.html
“The “Carry” Trade in U.S. Housing Looks to be Over”
“Former Fed Chairman Greenspan has recently commented to the effect that the worst of the housing recession is behind us. History is not on the side of this view. Chart 3 shows the peak-to-trough percentage declines in the GDP line item, real residential investment. In the prior nine housing cycles, the average peak-to-trough decline is 24.6%; the median is 22.6%. The peak-to-trough decline to date in the current housing recession is 7.9%. Unless this turns out to be a more moderate than usual housing recession, unlikely given the amount of speculation and leverage involved in the boom, then we have “miles to go” before we can put this housing recession “to sleep.” Thus, don’t look for the carry trade in housing to turn profitable any time soon.”
Note that he’s using the real residential investment as a measure of the market strength, not the house prices.
“Area housing analysts aren’t convinced that South Florida will see a housing rebound anytime soon. Delray Beach housing consultant David Levin said the problems that led to the slowdown, rising taxes and insurance premiums and a large inventory of existing homes for sale, are still in place.”
I am really getting tired of these same idiots telling everyone the problem is this and that…….taxes, insurance, inventory, employment, bad vibes, blah, blah ,blah……..EVERYTHING, except what the real problem is >>>>>>>>>>PRICE, PRICE,,,PRICE.
Let’s get the real problem in the news one day!!!
guys- need some help. I have a customer that our bank is offering a 5.875 fixed 30 year loan. He is turning us down to go wth the option arm. Anyone have a clear and consise link explaining the dangers of this loan. The customer is rather simple when it comes to financial matters. Thanks for any help.
I hope this helps: hazards of Option Arms
http://tinyurl.com/88crr
You can’t save people from themselves. Not very helpful, but it’s the best I can do.
Ben,
Want PROOF that Realtors (r) are pulling and relisting their deals?
TALK ABOUT SCUM
http://smhbn.blogspot.com/2006/11/how-to-screw-homebuyer-remax-style.html
“‘We think the sky may be falling,’ said Mark Fitzgibbon, director of research at Sandler O’Neill & Partners LP.
ROFLMMFAO…finally some doomsayers in a market of rampant soothsayers…please i want to hear more about the death and destruction of the ignorant and gullible.
Ta-da!
STATEMENT OF OFHEO DIRECTOR JAMES B. LOCKHART ON FANNIE MAE 10-K FILING
“Today Fannie Mae released its financial statements for 2002 and 2003 and, for the first time, its audited financial statements for 2004. This is a key step forward for the company and represents two years of hard work. We congratulate the Fannie team.
While an important milestone, much remains to be done. As reflected in the 10-K, Fannie Mae faces enormous challenges in fixing its operational and risk management systems, in Sarbanes–Oxley compliance, and in producing audited financial statements for 2005 and 2006. Concerns remain with the speed of returning to full and timely financial reporting, the robustness of the Enterprise’s internal controls (as reflected in the large number of material weaknesses), and the accuracy of its accounting systems. OFHEO will continue to monitor Fannie Mae’s efforts to correct its problems, to operate in a safe and sound manner and to maintain an adequate capital cushion during this time of uncertainty.”
Congratulations indeed, only 3 years and at least 25 missed deadlines late!
Can’t wait to hear how the bodies were hidden…
Actually thereOFHEO is filing criminal charges against former ceo Frank Rains. AHHH Justice will be served.
“More sensationalistic terms such as ’speculative orgy’ or ‘mania’ overstate normal human foibles in investing, he said.”
I personally prefer “orgiastic light.”
“So why has D.R. Horton’s stock price climbed 20 percent in the past four weeks?
Because the Fort Worth company is being as aggressive about reining in its business as it once was about growing it.”
Sorry to be so dense that I am missing the point here, but isn’t aggressively reining in business something that normally accompanies falling profits and an imminent recession?
Have some more bubbly, you are thinking too hard.
I always think too hard to get the drift of these MSM fairy tails.
“‘You seemed like a very…I guess broken man last time. And here you are a new man,’ Ivy Zelman, an analyst at Credit Suisse First Boston, told Toll Tuesday. ‘I’m wondering which Kool-Aid you’re drinking because I want some.’”
Toll must think he is still drinking out of Greenspan’s spiked punchbowl.
“A major investor stopped funding Sebring’s loans as a result, forcing the company to seek a buyer, the former employee said. Sebring had to close after a potential acquisition fell through.”
Listen up, people. Everyone is overlooking something here. Right now the price of a house is set by how much a buyer wants to stick his neck out to buy it. Getting a mortgage is no problem.
That is all about to change and when it does, the bottom is literally going to fall out of the market. I can feel it coming. I’ve been predicting this and waiting for it for a long time.
Here is whats happening. All these sub prime, ARM and IO loans were packaged up and sold off on the basis that they were backed by a secure asset (the house) and the future interest payments were going to make up for beginning interest shortfall. I mean what idiot would buy an MBS when it pays less than what one can get for buying government funds !
HOWEVER, as the above quote shows, investors are now figuring out that MBSes aren’t going to return squat ! First of all, everyone has been refinancing their homes before the upward adjustment kicks in. So the investors are never getting the sweet part of the return, only the poor part.
Secondly, they are beginning to realize that the asset that underlies the MBS isn’t worth the stated value ! Remember all the mortgage fraud that was going on ? Well, that directly affects the bondholder if they have to claim assets to get their principle back. Sure, the paper value of the mortgage (and supposedly the house) was $500K. But the appraisal was over stated and there were $50K worth of kickbacks and incentives, so the WAS worth $400K and is only worth $300K sold at an auction. The MBSs don’t have a decent asset behind them !
The third problem is the default rate that appears to be steadily climbing with no end in site. Defaults are already significant and we haven’t seen $100 oil, the ARMs haven’t ratcheted up and the depreciation has only just begun !
This is an absolute no win situation for the MBS buyers. These people won’t stay stupid for long. You can expect that in the next months the market for MBSes is going to totally dry up at the current rates, if not for any rate !
Whereas currently most buyers can get a mortgage, in the future mortgages are going to be very hard to qualify for. And you can imagine the devastation that will wreak on the market !
And to top it off, its a vicious circle. First the MBSers realize the problem and they start selling or they stop buying them. That dries up the credit for the banks. That hikes the mortgage rate or decreases the liquidity for potential homebuyers. That decreases the number of buyers and increases inventory. That forces buyers to drop prices. Which puts more people under water and makes more people unemployed. Which makes more foreclosures, which kills the MBS people even more !
We are in for a massive, massive correction here.
Maybe I need to say more here.
Most financial mania run until the credit tightens. The current housing bubble appears to be an exception to the case because credit didn’t seem to tighten much, if at all. And if you listen to some of the housing bulls, you can see they keep saying that the economy is doing well and people still have jobs and the mortgage rates are still historically low, so IN THEORY the bubble should continue. It actually appears as though people got wise to the bubble and RESTRAINED themselves and that is what started the downturn.
However, the real downturn won’t happen until the credit dries up. That is when the market will collapse like you have never seen before. That is why Buffet says “you don’t see who is swimming naked until the tide goes out”. People, the tide hasn’t gone out yet !
Remember when the dot com bubble crashed ? It was April. Why was that important ? People had to sell stocks to cover their taxes. Day traders made money, they had to sell. Liquidity started the dot com sell off.
Well, liquidity is going to start the REAL sell off in housing. The sell off we’ve seen thus far has just been balking buyers. Liquidity hasn’t entered the picture yet. As I explained above, when the MBS buyers back out of the market and banks have to underwrite the new mortgages themselves and house prices are falling by 20% per year, THAT is when you will see a mortgage liquidity crunch and THEN you will see who has CASH to buy a house and who doesn’t !
The days of IOs, ARMS, Subs and zero down are OVER. The new rules will be 25-50% down and an interest rate that gives the MBS people a decent return. And expect lenders to fully scrutinize the deal and the value of the home. 25% down won’t be enough if the price of houses is falling 20% per year.
It is going to get very, very scary out there in the near future.
Right on. Regualators always close the barn door after the horse gets out. They will tighten standards as you have said. This will make the situation for the bulls worse. The kicker could be a run on the dollar later in 07 forcing higher rates on the FED.