“We May Have To Further Reduce Home Prices”: CEO
Some housing bubble news from Wall Street. “Single-family homebuilder Standard Pacific Corp. posted a fourth-quarter loss of $98.4 million, compared with net income of $154.9 million, in the year-ago period. The recent period’s results include impairment charges of $290.7 million.”
“‘Our guidance for 2007 does not reflect additional inventory impairment charges or write-offs of land deposits and preacquisition costs for abandoned projects,’ CEO Stephen Scarborough said in a release. ‘If general or local market conditions deteriorate further, or our competitors change their pricing strategies, we may have to further reduce home prices or adjust our discounts and concessions which may, in turn, trigger additional impairments.’”
From MarketWatch. “M/I Homes Inc. Thursday said it swung to a loss in the fourth quarter of $11 million, compared with net income of $41.3 million a year earlier. The home builder said its quarterly results included pre-tax land-related impairment charges of $69.8 million, and $3 million worth of land and lot option deposit and pre-acquisition write-offs. The company said new contracts in the fourth quarter plunged 61% from the year-ago period.”
“Robert Schottenstein, CEO, commented, ‘2006 served as a healthy reminder of something that we have always known, that homebuilding is a cyclical business. We faced adverse and challenging conditions in most of our markets. We employed a defensive operating strategy on virtually every front, making the cuts necessary to right-size our business, incurring land-related impairment charges and write-offs and reducing our lots owned and controlled by 27% from a year ago.”
“Brookfield Homes Corporation today announced financial results for the year ended December 31, 2006. Net income for 2006 totaled $148 million, a decrease of $71 million when compared to 2005. These decreases are primarily related to fewer home and lot closings, and a decrease in housing gross margins to 26% in 2006 from 30% in 2005. Net income in 2006 includes write-downs of $10 million related to finished lots acquired in 2005 and lot options on unentitled land that expired.”
Investors Business Daily. “Growing competition for renters could inflict short-term pain on the (apartment) industry. The competition is coming from several places. Would-be condo converters are returning thousands of units to the rental market in response to the condo-buying binge’s reversal.”
“People who bought single-family homes hoping to soon sell them for a quick profit have given apartment owners perhaps the biggest competitive surprise of late: These now financially hamstrung speculators are putting the houses up for rent.”
“BRE Properties (which) owns and operates about 27,000 apartment units in the West, is facing such competition. A growing number of single-family homes are being rented in markets such as Phoenix and San Diego, BRE executives said. The supply of single-family home rentals is increasing in Sacramento too. In the fourth quarter last year, apartment occupancies fell to 92.5%.”
“Camden Property Trust, a Houston REIT that owns and operates about 64,000 apartments in 15 markets, has encountered a similar competitive situation in Las Vegas. President Keith Oden is quick to point out that the single-family rentals are competing with the company’s three-bedroom apartments.”
“‘There’s no question that in Las Vegas, we’re seeing an impact from the rentals of single-family homes,’ he said.”
The Financial Times. “The giant US subprime mortgage business is displaying a new-found caution with lenders tightening loan standards and cutting ties to overly aggressive brokers, delegates to an industry conference were told this week.”
“An index that measures the health of bonds backed by subprime loans, which are made to borrowers with tarnished credit histories, flashed new warning signals. The index…reached a record 640 basis points on Wednesday and was trading at 625bp yesterday. The spread has widened by about 150bp in the past week.”
“‘Originators have been lulled into complacency by the strong performance of the mortgage market in the last few years,’ said Elizabeth McCaul, former New York superintendent of banks.”
“The risk of default by financially stretched homeowners remains the greatest challenge to the $6,000bn-plus market for bonds backed by US mortgage loans, according to a survey unveiled at the conference.”
“‘With subprime mortgages, you’re dancing on the edge of a razor blade – they’re awful investments,’ said John Devaney, CEO of United Capital Markets, a specialist in distressed asset-backed securities.”
“Tony Hughes, economist at Moody’s Economy.com, told the conference: ‘There’s a chance that the commercial banking sector is acutely at risk if there’s a blow up in housing.’”
From Bloomberg. “Defaults on mortgages to people with poor or limited credit histories in November rose to the worst level since the last recession in 2001, according to Friedman Billings Ramsey Group Inc.”
“The percentage of so-called subprime mortgages packaged into securities and delinquent by 90 days or more, in foreclosure or already turned into seized properties rose to 10.09 percent from 9.08 percent in October, analysts wrote.”
“‘These borrowers are very leveraged and have little skin in the game’ because they took out loans with small, or no, down payments and many of them haven’t seen their properties appreciate, Debashish Chatterjee, an analyst at Moody’s said.”
“U.S. home prices fell from the previous month in August, September, October and November, the first monthly declines since December 2001, according to the S&P/Case-Shiller Home Price index, which tracks prices in 20 major metropolitan areas. The price drops accelerated to 0.41 percent in November.”
“Rates on about $600 billion of subprime home loans will start adjusting this year, according to Bear Stearns Cos., the largest underwriter of mortgage bonds. Foreclosures begun on subprime adjustable-rate mortgages, or ARMs, rose to a four-year high of 2.19 percent in the third quarter as borrowers struggled to pay mortgage bills while interest rates increased, the mortgage bankers’ group says.”
From Origination News. “Second-lien originator DeepGreen Financial, Cleveland, has gone out of business, according to officials close to the situation. Owned by Lightyear Capital, a New York-based investment fund, DeepGreen’s telephones no longer answer, and its website has been shut down. Since its inception in 2000, DeepGreen funded $5 billion in loans. Lightyear Capital declined to comment.”
comment from Michael Hudson’s “The New Road to Serfdom: an Illustrated Guide to the Coming Real Estate Collapse” (Harpers May 2006) Hudson, who may well be the foremost authority on the housing bubble says:
“Although home ownership may be a wise choice for many people, this particular real estate bubble has been carefully engineered to lure homebuyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage; a lifetime spent working to pay off debt on an asset of rapidly dwindling value. Most everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst, and when it does, the people who thought they’d be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom…America holds record mortgage debt in a declining housing market.
Everybody will buy 3 houses and become landlords. LMAO
‘If general or local market conditions deteriorate further, or our competitors change their pricing strategies, we may have to further reduce home prices or adjust our discounts and concessions which may, in turn, trigger additional impairments.’
this sounds like the sliding sound of the axe going through flesh. the axe has fallen ladies and gentlemen.
When I worked at Boeing in Seattle in the 80’s, my supervisor made his yacht money buying apartment houses in the early 1970’s when Boeing employment in the area dropped precipitously. Those that still had a job had quite an opportunity.
Hopefully, the possible secondary effects from this bubble bursting will leave a few opportunities uncrushed.
My father always stated that you could judge Boeing’s (and therefore Seattle’s) fortunes by the number of boat listings in the classifieds.
a lifetime spent working to pay off debt on an asset of rapidly dwindling value.
really? I keep reading about how easy it is to walk away from a home when paying the mortgage is no longer possible. If people have nothing invested they have nothing to loose; increasing rates for bad credit by 1% or so will not make any difference there, there still is nothing to loose (people just have a accept a bit cheaper home for the same monthly payment).
In Netherlands the maximum debt serfdom time if you can’t pay the mortgage is 3 years; after that all debts are cleared and one can start over in the RE game (even your bad credit score is erased). It’s probably similar in other EU countries. On top of that there are a multitude of rules and incentives that limit the risk for ’starters’ without any money. The latest proposal in the Netherlands is a huge fund (paid by the tax office) that will offer free 25-50K euro loans to every starter, irrespective of income. If your income does not increase after you sign, you don’t have to pay interest or payback the loan; only if your income increases, you start to pay back some. Obviously, the loan amount is arbitrary and can be raised by politics to 100K or 1M euros if they see fit to keep the bubble expanding. It’s plain theft of course, but I wouldn’t be surprised to see proposals like that in the US soon as well.
And if a cop stops you in Amsterdam, it’s illegal for them to search you. Oh man, I goin, that’s all there is to it.
NHZ: Just because it’s relatively easy to walk away does not mean everyone will do so.
I have a few friends who, because they are ultra responsible and bought for the long haul, will do everything they need to keep paying the mortgage on their million dollar home. They are the kind of people who, if they lose their good paying jobs in science, etc. would literally work three shifts at some crap job to keep on keeping on, all the while considering it to be a temporary setback.
I’m sure there are plenty more like them out there. If there is any way at all to keep paying the mortgage, they will do it. And I’m sure extended family members will help them if they need it and it’s possible.
The bank will make a windfall off of people like them. There’s the rub though, the only part of the economy that will be seeing any of their money is the bank. Restaurants, clothes, cars, lessons for the kids, forget it. The bank’s going to get it all.
nhz… your description of the EU & Netherlands is an extreme symptom of the real estate bubble. The governement is fully invested in home ownership, assuring that ALL that can’t own do!
This leaves only a handful of buyers & and a monster amount of sellers.
PS, I beleive this HAS occurred here already.fnma,freddie,etc…and all the sub-primes that are now blowing up “Deepgreen” etal.
That was a solid article Melody. I suggest readers get a hold of it.
““Tony Hughes, economist at Moody’s Economy.com, told the conference: ‘There’s a chance that the commercial banking sector is acutely at risk if there’s a blow up in housing.’”
All I can say is…’hooda thunk?’ It’s not like this is new news to anyone paying attention.
Pass the crack pipe…
Are these exec’s must be:
A. Dishonest
B. Clueless
C. really really insulated from the day to day operations of their companies
D. punch drunk on the RE kool-aid
SoCalMtgGuy
Got a NEW post up!
http://www.housingbubblecasualty.com
E. Have an employment contract that leaves them filthy rich no matter what happens to the company.
exactly!
most of these people have sold their integrity to make a quick and easy buck. Yeah, many of these ‘victims’ didn’t do their research, but that is still no reason to knowingly screw them over financially.
SoCalMtgGuy
http://www.housingbubblecasualty.com
Let’s see….as apartments start reducing rental rates (price wars) to get occupants, the cost of renting will go lower, which will make sidelined buyers all the more willing to wait for house prices to go lower because it is currently more economically advantageous for them to rent, which will put more downward pressure on house prices… It’s starting to sound just like the mid-90’s in San Diego.
Yep….
I’m getting ready to look for a new apartment.
Let’s see about negotiation.
(No matter what, I’m moving as me and my fiancee are about to tie the knot and need more space!)
Got popcorn?
Neil
So much good stuff in this post. There sure were a few good prophets warning us about this on Ben’s Blog last year.
Ben didn’t win a REBA (Real Estate Blogging Award) for nothing….
Prof. Piggington got a runner-up as well as other posters here that have their own RE blogs.
SoCalMtgGuy
http://www.housingbubblecasualty.com
“Camden Property Trust, a Houston REIT that owns and operates about 64,000 apartments in 15 markets, has encountered a similar competitive situation in Las Vegas. President Keith Oden is quick to point out that the single-family rentals are competing with the company’s three-bedroom apartments.”
“‘There’s no question that in Las Vegas, we’re seeing an impact from the rentals of single-family homes,’ he said.”
Anyone seen LVLandlord lately?
BayQT~
This site has virtually become trool-proof. I glance at some of the other sties and notice they still have there fair share of trolls. But with the depth of knowledge in the participants of this blog, perma-bull-trolls have vanished. Pity…..I kind of miss royal ass-kickings handed out to those who dared.
nn, you’re probably right. Although some of the trolls may still be lurking, there may be others who step back in under a new name, singing a new tune…making a “bear-ful noise”.
BayQT!
I wonder where Hedgefund analyst is. Wonder if he worked for Lightyear Capital? HMMMMMM . . . . ready to dodge a few brickbats!
So who is the “oldest” housing bubble blogger? Is it GS? I’m sort of a newbie who found this blog in April 06 and have been here everyday since.
Hard to say. I came over around June ‘05 from patrick.net’s site, which is where HARM was, as well. Many people, however, were posting as Anonymous is Ben’s early days, so who knows who those people were/are.
BayQT~
I am glad I did not find this blog until “after” I sold my house-9/05. I had my own feeling things were going to change. If I was reading this blog during my escrow period could you imagine the stress on not being handed a $515,000 check?
I’ve been here since about January 2005, FWIW.
VHB, nice to see you’re still hanging around!
p.s.: June ‘05 here, too.
““‘Our guidance for 2007 does not reflect additional inventory impairment charges or write-offs of land deposits and preacquisition costs for abandoned projects,’ CEO Stephen Scarborough said in a release. ‘If general or local market conditions deteriorate further, or our competitors change their pricing strategies, we may have to further reduce home prices or adjust our discounts and concessions which may, in turn, trigger additional impairments.’””
Everyone has been watching homebuilding stocks rally with amazement. Nobody on Wall Street is factoring in what this guy is saying. The buyers of homebuilder stocks applauded the write off of non-performing assets and they have been buying on the belief the housing market will bottom this year. When it becomes apparent to Wall Street they are in error (probably after the failed spring selling season), they will realize there will be a second and possibly a third round of write downs; housing stocks will likely fall.
I smell hedgefund manipulation.
“The buyers of homebuilder stocks applauded the write off of non-performing assets”
The theory is that all of the bad news is already priced into the price of the stock. Therefore, any bad news is greeted with “yes, we expected that”, and any good news (no matter how tenuous) is greeted with “More good news! It’s all up from here!”
Hmmm, kind of like the general stock market, that goes up no matter what Ben B and pals say.
Until it doesn’t. The current profit/sales expectations of WS analysts are lifting higher daily - merely exceeding your forecast is not enough, it must be outstanding. The volitility within sectors is increasing, and a ‘unexpected’ poor set of reports (read that as ‘head-up-ass-why’s-it-so-dark) can easily send the rats running at this point.
I think it more accurate to say all the bad news they know about is already priced into the stock. If new bad news comes out and the expectation of a housing recover changes, pricing will likely adjust downward.
People (mainly homeowners) still want to believe. I have yet to meet a homeowner who is firmly a bear. I have a lot of them thinking along the same lines as me, but everyone seems to have their pet peeve as to why it’s going to different in some places.
There are plenty pet theories floating around as to why it’s not going to be as bad. All, which, in my opinion fly in the face of the main issue that everyone here sees–affordability problems.
I recently heard someone say that public homebuilders sell about 50% of their product from Superbowl to maybe mid-end of April. By June, there will be far more bears.
I have yet to meet a homeowner who is firmly a bear.
*waves hand*
Or did you mean meet in real life?
I guess I’m in the minority. I’m a homeowner and a bear. If it weren’t such a pain, I would have sold last year and rented for a few years, but it’s not worth the hassle.
Real life. This board is the exception.
People (mainly homeowners) still want to believe.
I’ve come to the conclusion that this is the crux of the matter.
I will hazard a guess that more Americans believe in real estate as a sure-fire money maker than they do in God. Or a Supreme Being, Higher Power, whatever.
“Real Estate always go up..up…UP!”
It is religion. It is dogma. Even the headline on one of today’s posts makes reference to the Sacred Cow (of ever higher prices.) This is why we see so many of our friends’/ acquaintances’/co-workers’ eyes glaze over when we start talking about affordability and price vs. rent ratio.
We are challenging one of their Core Beliefs. Maybe the only one.
I will hazard a guess that more Americans believe in real estate as a sure-fire money maker than they do in God.
That’s because money is their god.
And this blog is their Devil.
My parents 93 year old home has appreciated at an annual rate of almost 6% in nominal terms over the last 43 years. (Factor of 12) It’s not even in much of a bubble area.
Hard for a boomer to shake free of that experience. I “know” inflation was bad during the 70’s, but I wasn’t paying the bills those years, so it is hard to mentally adjust for inflation.
This is why we see so many of our friends’/ acquaintances’/co-workers’ eyes glaze over when we start talking about affordability and price vs. rent ratio.
Yes. This is the same look my robot gives me when he says “Does not compute.”
Can somebody please advise on why I am not seeing significant reductions in land prices on the mls? I thought the consensus was that land would lead the way down. Surely all of the impairments will show up in the pricing of rural acreage, right?
Land is generally the last to come down. It takes longer for the landowners to get it through their skulls that no one is going to pay 2005/early 2006 prices for their acreage.
Patience…remember, many land owners have held their properties for years already. They have patience, or is that a stubborn streak?
These good ‘ol boys made a pot full of money on leverage @ 12% & higher holding costs. Some L.Vegas speculators are having trouble holding out for spring. It is this spring housing market that will make or break these guys.
If spring turns to summer and the 12 month average waiting period extends further for the average MLS listing, { as every sign suggest it will} those good ‘ol boys will be in a big squeeze….Prices will drop hard, as only sellers and no home builders to bail them out!
Keep in mind many of the write-offs from the builders is the “option on land prices the builders had contracted to purchase”. This paid the 1st years holding costs. Now they are spending their own “equity” to hold on to the property they thought was SOLD. A much tougher proposition.
A large speculator / land developer in the Vegas Valley is prepared to hold out for spring 2008. Maybe he is right! He is betting hundreds of millions on that belief.
In my opinion, his stubborness to the market forces will chew him up & spit his assets out like tobacco chew.
The prices will be determined not by the strong but by the weak. They can’t hold out….appraisals will fall, lenders will foreclose and sell assets just to get whole on their 50-60% collateral hard money loans. By then this large speculator will have run through his cash, his assets will be substantially lower in value and his reputation will be all he has left. Which he is now destroying years of credibility!
Patience “Grasshopper” the spring hope of April is on the horizon, and the MLS listings are 30 to 50% greater than February 2006 .
I thought condos led the way down…
yep, confirmed
“Rates on about $600 billion of subprime home loans will start adjusting this year, according to Bear Stearns Cos., the largest underwriter of mortgage bonds.”
Will the real Mr ARM Reset please stand up?
I have seen numbers published ranging from $1T to $1.5T in resets this year, never anything nearly as low as $600B. WHy are these numbers so hard to get straight?
It may be that the larger numbers are total resets, and BS is reporting subprime resets.
Ahhh, if I could only read more slowly. I’m sure you’re correct.
Reversion to the mean…happens everytime.This bubble is long in the tooth,but the vultures are circling…
Looks like Jim’s graph has about completed the second shoulder for the final fall…
http://investech.com/
For those of you that live in CA or the like, this maybe an everyday occurrence, but being as it was from Chicago, I thought it noteworthy. I was driving down one of the expressways when I saw a pretty beat up Chevy Cavilier, the side and back windows were plastered with “Ask me how I made 50K last month”, then the phone # etc.
Pretty obvious that this person took one of those couple hundred dollar weekend “Get Rich in Real Estate” classes, but you got to ask yourself, how likely is anyone to believe that this person made 50K last month, but is still driving around in a beat up Cavalier?
lmfao
50k a month driving a cavalier? maybe $50 a month
Don’t judge a book by it’s cover; I drive a 1989 Chevy station wagon. Runs like a top; why get rid of it? t if you would like to assume I’m poor based on my car, Ok by me. Wish the tax man would.
I drive a 1991 ford escort wagon and I make over 100k a year
I have a Metrocard and I do okay.
I bet the homeless guys at the intersection give YOU a quarter after they squeegee your windshield.
Just for laughs, you might try calling the number and making some rude comments about the condition of the car.
Uhm, yikes. I drive a Cavalier in Chicago. Well, this is a new low.
He ran out of money to print the whole thing. The sign should have read “Ask me how I made $50k disappear last month”
My favorite SC sign is the one asking for a “real estate apprentice” paying $20,000 a month. Wouldn’t someone who really wanted an apprentice go to a headhunter and find someone qualified? I have been tempted to call and see what the scam is. Perhaps it is some guy looking for a pretty apprentice to polish his tool. Or maybe it is a seminar ad. I don’t know.
I’ve seen hand-lettered examples of those signs here in Tucson. They set off alarm bells in my mind.
The scam is they use your good credit to by houses with mortgage fraud, then give you a little “spiff” and take off. You do get to learn a good lesson from a pro……
“Growing competition for renters could inflict short-term pain on the (apartment) industry. The competition is coming from several places.
One of those places is going to be Mommy and Daddy’s basement, as all those smug 20-somethings who just HAD to have a SFH or condo end up bankrupt and in foreclosure. Millions of these fools are going to be re-occupying all those empty nests while they recover from their shattered finances and brood over their foolish mistakes. These empty nest returnees are going to free up a vast, largely uncounted supply of “housing” to further swell the glut.
Add to it the single guy/gal who bought the 4BD house and now their mortgage is going up by $1,000 or more per month. If they live near a junior college (which covers most places), do you think they’ll throw in the towel? Or rent out a room or two in order to attempt to bridge the gap?
My money is (and has been for the past couple of years) on the renting out of a room or two. In many markets, there will be downward pressure on rents.
Everyone talks about supply/demand balance as dwelling units (ie. a house, a condo, or an apartment) relative to jobs or population. When times get tight, the definition of dwelling unit moves to be a single bedroom. And there have been A LOT of bedrooms built in the past 5 years, even in supply constrained markets.
RW, you are right on. One of the most intelligent and wealthy real estate investors taught me this in the 1980’s. He called it “housing elasticity”. It is the hidden vacancy which becomes all too real to apartment owners when they start losing money at 85% occupancy. It creams occupancy rates in a recession. Start adding up the vacant bedrooms you personally know about in your circle of friends. I count 23 without even trying (I am middle aged, with children gone). That is 8 extra houses, if needed.
It’s why rents are almost always tied to incomes in a particular market. Rents get too high, people double up, etc. They don’t want to be “throwing their money away” any more than they have to. Oh the irony for all FBs trying to rent out their homes at ridiculous rates.
Yep. There has been some “excess” household formation in the last few years. All of those young 20 something FBs that we’ve looked at in disbelief are likely to move back in with mom and dad after foreclosure.
Ah, rental watch?…several months ago you were claiming that rents would rise as FB’s rented their houses “inefficiently”, and decreased the supply of units. What’s changed?
And if their parents were smart, they’d say, “Tough it out, kid. But not at our address.”
Sounds more cold than smart. What about: Sure, kid, welcome home, you either pay us rent or start a savings plan now. And none of this credit cards no more.
And mow the lawn and scrub the showers daily!
Wax on, wax off.
A lot of the parents might be turned out as well, if they were stupid enough to co-sign loans for their offspring.
sad but true
That’s OK, their parents may need the care anyway.
Let’s hope the banks and hedge funds who are guilty of setting this up with their partner, the private federal reserve, get buried.Greenspan, adjustables are a great way to buy a house, will have his place remember also. History will not be kind to these greedy devils!
Confirmation on one of the closings:
http://bakersfieldbubble.blogspot.com
Can someone else help me out here? I am not getting any sleep scanning the net for information. I need some ZZZZZZZZZZZZZ. LOL
Noice!
http://www.itulip.com/forums/showthread.php?t=883
From this article
The Fed is clearly already trying to stop it, with the accelerated M3 money growth (as was also done in 2000/2001), but it’s already too late. The stock market is obediently being inflated, but that does little to distribute wealth to the suffering masses in debt, who are the source of these rising MBS defaults
Ain’t that the frigging truth! All that stock money is going into the pockets of Goldman Sachs, et al.
Once again great post TxChick. I read your posts faithfully.
Agree the stock market is marching in the direction “Da Boyz” want it to go. But … oh if I only knew when it will head south! Would love to know when to pull my retirement egg out of there .. but it’s growing so smartly right now.
Iso:
Here is a tidbit for your timing.
What would you say you should be doing right now IF:
Large size specs (hedge funds) & small traders are holding historic large long positions in equities. While large sized commercials hold record SHORT positions.?
{data source > insidercapital .com}
Run don’t walk to the exit! The elephants are not far behind.
When the RMBS loans are tranched, the measily amount of initial ARM income goes to the A rated tranches. The neg am “income” is booked to the higher risk pieces and they hope they get paid at refi or sale. Now it sounds like there may not be enough actual cash flow in the initial loan payments to satisfy the A tranches. And with refi’s less likely, housing prices declining, and the expenses of foreclosures looming, there will be a lot of losers. Not just the “B” piece, but perhaps the “A’s” will not only get no ROI, but may acutally lose principal value. Wow.
‘2006 served as a healthy reminder of something that we have always known, that homebuilding is a cyclical business. ‘
I remember these CEO’s bragging in 2005 about how they had all learned from previous downturns and were now managing their businesses “differently than in the past” to prevent the risk of overbuilding or write-offs. Guess that didn’t work out to well, did it?
Here is a quote from the New York Times article Chasing Ground in October 2005:
“Wall Street has reluctantly come around to the belief that the big home builders, after years of record earnings, are more financially durable than traditional contractors, whose businesses have lived and died by the boom-bust cycle. Several stock analysts told me that they’ve become convinced that Toll and its competitors have the resources to survive (perhaps even prosper) during an economic rough patch like the one that may have begun this fall; the analysts have likewise taken note that big builders put up homes only after signing a contract and getting a deposit.”
Great quote. October 2005 might have been the very last expanse of the bubble’s inflation.
Thanks JF
The thing that gets me about the surge in subprime defaults is that it supposedly “can’t” happen if you listen to some people. I don’t know how many times in the past two years I heard various pundits say defaults wouldn’t surge because A) the economy was strong and B) unemployment was low. But lo and behold, in the same week we hear that Q4 GDP is going strong at 3.5% and unemployment is still hovering around a five-year low (though at 4.6%, up 0.2% from its absolute low in October), we learn that the default rate is now higher than it was in the midst of the last recession.
I’m not saying this is the end of the world or anything. But I am saying that you can’t have the biggest housing bubble in the history of the U.S. … and hand out mortgages on the easiest terms in history … without expecting any fallout when the bubble bursts. Lots of people who should never have owned homes or gotten mortgages in the first place are going to have their financial lives ruined by foreclosure. And lots of investors in this junk mortgage paper are going to lose money.
http://interestrateroundup.blogspot.com
IMO, people wrongly assume the economy is healthy because it appears that way. But the appearance is deceiving. Yes, people are gainfully employed. And sure everyone is out spending at the malls and eating out at restaurants every night. Sure everyone is driving the fanciest car and buying the widescreens for every room. It looks like everything is humming along just fine.
The problem is that people are using every last cent and then some do it. Thus the large negative savings rate.
Like they always say, the guy driving the flashy sportscar looks wealthy, but often times he’s living month to month. Unfortunately, there are way too many people driving flashy sportscars these days.
Not only that, but the unemployment numbers are cooked to work in the government’s favor. You’re no longer considered unemployed if you’ve given up looking for a job. Burger flippers are now “manufacturers”. Nothing is as it seems anymore.
If we started counting everyone who doesn’t have a job and aren’t looking, as unemployed, the number would be useless. How many housewives have jobs?
The key is those who have STOPPED looking. These people used to be counted in the old numbers. If a statistic is to have any meaning, you can’t change the rules used to calculate it.
The real story on unemployment:
http://zmagsite.zmag.org/Feb2004/duboff0204.html
Including all able bodied adults in the employment reports would be a useful figure because it would tell you the real potential labor pool. But of course, the only real purpose of the published employment statistics is to show that we’re better than the european socialists because our number is lower. Rah.
Here in Michigan we have many that have just given up looking.
Do they know they can move? Unless they can’t sell their house.
“An index that measures the health of bonds backed by subprime loans, which are made to borrowers with tarnished credit histories, flashed new warning signals. The index…reached a record 640 basis points on Wednesday and was trading at 625bp yesterday. The spread has widened by about 150bp in the past week.”
Quick question: Who exactly determines the rating of a bond?
Moody’s, Standard & Poor, other institutions.
“The risk of default by financially stretched homeowners remains the greatest challenge to the $6,000bn-plus market for bonds backed by US mortgage loans, according to a survey unveiled at the conference.”
OK, I’m going to show my ignorance here, but does “$6,000bn-plus” represent 6 trillion+?
I believe so. The total US mortgage market is in the range of $10 Trillion or so, it wouldn’t surprise me that 60% of them have been securitized…
Yes.
Unless you’re in Europe.
Aaron’s comments on the Implode-O-Meter today were very interesting. He demonstrates a very real probability of a “self-reinforcing, downward-accelerating feedback loop” and asks “Can anyone guess what is going to happen to the housing market when you forcibly remove at least a quarter of total demand?”
Credit will vanish along with that vanishing demand for housing (subprime borrowers drop out and stop jacking up the prices). The lack of capital, however, means that interest rates will rise in order to attract lenders (and to cover what will then be seen as the *gasp* risk of real estate), and this will keep the downward pressure on for quite some time. It will appear as though equilibrium has been achieved several times only to drop lower as something else breaks. Eventually, everything will stabilize at a much lower level, but I think it will take enough time that the natural attrition rate (death, bankruptcy, forced sale, etc.) will be a factor in resetting much of the market. Nobody will voluntarily admit that their $259,000.00 condo is worth $125,000.00 or less, and nobody will ever voluntarily admit that their $800,000.00 single family home is actually worth about $300,000.
Or less…
I love the graph in that post.
There’s an itty-bitty dead-cat bounce right before the last bit of free fall.
He demonstrates a very real probability of a “self-reinforcing, downward-accelerating feedback loop”…
Count on it — not only within housing, but the economy as a whole.
“Appleton-Young agreed that foreclosures will continue to rise. But she predicted foreclosure rates will not reach the high levels of the early 1980s or mid-1990s when slumping economies and job losses roiled the state. ‘We have a growing economy,’ she said.”
Where the HELL does this bimbo come off by saying we have a growing economy. Maybe in RE licensed agents that produce nothing!!! Hell I bet this bitch never took Econ 101. Cant’ forecast anything but a new RE Boom to bail her ass out of BIG trouble for the next 5 years.