Will There Be A Tipping Point?
Readers suggested a topic surrounding the idea of a “tipping point.” “The last couple of weeks in the world of real estate have sure been interesting. We have all read about new sub-prime lender problems, tightening credit standards, doubts about adequate compensation for lending risk, increased DOM, increased NOD, rising [for sale] inventory, and cautious gloom in the MSM.”
“My question is this: At what point does market frustration morph into a full blown panic? Is it quantifiable? Should we keep an eye on some key numbers/metrics that can predict the tipping point?”
“OR, Is an inevitable panic ephemeral in nature? In other words, will it just arrive out of nowhere, without warning, tsunami style?”
One from New York. “Denial is very powerful. Especially on Long Island. No set of numbers or talking heads are going to effect the way Mr. and Mrs. Jones spend or sell for that matter. They want what they want and housing bubbles don’t happen here. They happen in places that are building tons of houses without secured buyer and hell, L.I. is all used up…hell, they’re not making any more land here. Hence, the tsunami.”
Another said, “I think its about knocking the hamsters off their wheels so they can actually start paying attention and using their noggins. I also believe it’s going to take something that feels cataclysmic for that to occur.”
One had a timeline, “It has to warm up (in areas it is cold) and when that happens more signs will be in the yards. Once the signs are in the yards and people note that nothing is selling, or that the only thing selling is a comp similar to theirs going for 10% less or larger. I say June.”
A reply, “I’m still surprised during conversations at parties, bars, etc., that many people either a: unaware, b: in denial because ‘it’s just a media creation being hyped.’”
“The people on this board, I think, assume that everyone knows what actually, only we know. And those whose business it is to know, but aren’t telling. The comparison made here before to a car crash in slow-motion is appropo. In your cross-section of friends, aqaintances, folks you strike up conversations with, what percentage know what you know?”
And another, “I prefer the continuously zoomed out image of a snail moving toward a buzzsaw accompanied with dramatic music.”
One predicted, “Most buyers in the last two years fell for the line that double digit appreciation every year was the norm. They know their truth and won’t be misled by the facts. Only after they try to refi the loan to find out that the new appraisal is 100K less than they paid for it will they try to find someone to blame for it. Then they’ll pretend to be victims.”
One had a specific example, “Was just talking to a friend who told me about a guy who bought a 500k house at the top of bubble 2005 in Bakersfield. Now does not like it and wants to move but won’t sell because he doesn’t want to lose money, already refusing an offer (and only offer by the way) 60k below asking. Trying to rent it (he moved to Fresno) for $1,600. no takers. Very sad but starting to be more common.”
Another made this comparison. “The situation on the ground brings to mind the period during the December 24, 2004 tsunami between the earthquake and when the waves started hitting the shores around the Indian Ocean’s perimeter.”
“Meanwhile, government scientists puzzled over whether to worry about what they knew was a large-magnitude earthquake, but which they nontheless severely underestimated. By the time the waves were hitting the beaches, it was too late to issue any warnings.”
A reply, “A tsunami happens way too fast. I believe that a better metaphor would be quicksand. The fear doesn’t start until the sand gets to about waist level. I would guess that for most FB’s, the ones that I know anyway, the level is around mid-thigh at this point. They still believe that someone or something will pull them out.”
One pointed to this contradiction, “I would watch how the tug-of-war plays out between the bleating ’soft landing’ mantra raining down from on high and the steady stream of MSM (and non-MSM) evidence regarding the magnitude of the subprime implosion.”
“Also keep your eye on a growing awareness that in the absence of massive government intervention, the collapse of subprime implies residential real estate price deflation.”
“Finally, look for reflation (aka govt intervention) efforts to either never materialize, to result in higher long-term Treasury yields (another stake in the bubble’s heart) or (worst case scenario!) to successfully respike the punchbowl, enabling liquidity-drunk builders to add further to 2.7m vacant homes already for sale.”
One looked at history, “We probably won’t get wholesale panic, nationwide that is obvious. We might get pockets, mainly in heavy investor infested communities. Most will just be too focused on making a living and their families.”
“This will evolve slowly over the next two years into a full fledged meltdown like Austin in the late 1980s. In 2009 (maybe 08, but more likely 09), we will see large numbers of foreclosures advertised at 50-60c on the 2005 $1 in overbuilt bubble markets especially. Some areas will not get hit this hard (most will likely see 20% at least though).”
“This will continue in 2010 which perhaps will be the bottom; thing is in the 50c on the $1 areas, even the 20% down payment people will end up having to walk (or stay till 2015+).”
One saw this progression. “Panic is not the end…(1) Optimism. (2) Excitement. (3) Thrill. (4) Eupyhoria. (5) Anxiety. (6) Denial. (7) Fear. (8) Depression. (9) Panic. (10) Capitulation. (11) Desperation. (12) Hope. (13) Relief. (14) Optimism.”
“Home sellers still in Denial, must wait 3 months to the end of spring non-buying season.”
We have already hit the tipping point,tighter lending standards are here and the forclosures are going parabolic.There is no longer a denial to the fact the bubble has burst.Spring will bring total panic and by fall we will capitulation.Fall of 08 will bring some good buying opportunities but those who wait longer will get awesome deals.
Agreed. the Subprime Grim Reaper, that would be Merrill Lynch, is purposely doing margin calls on all the subprimers that they’ve been in bed with. Buy back your crap loans or face the reaper. Maybe we will buy you out for a steep discount.
The problem that does still exist though is that J6pack is still more or less ignorant of what is going on around him. There still hasn’t been enough MSM stories that connect the dots between the subprime implosion and the RE market…more specifically housing prices especially those in SoCal.
IMO, the media isn’t neccesarily the lynch pin. None of the posters mentioned it, but I assume they meant panic “selling.”
Which needs to be qualtified; 50-70% off, plus in a very short time? But look at the auction in Florida mentioned in my post today. Those properties went for 50% off and the bank just nullified it.
I’m glad the poster from Austins’ bust brought that up. I was living there at the time and it was more of a dull realization.
Another thing to consider; has panic selling ever occurred with real estate in the past? Maybe at points in Floridas’ 1920’s bust. And I believe it may have happened in the South Seas bubble and the Mississippi bubble. But did any Californians ever see such a thing?
I am sure there were fire sales in Texas during the 80’s, but IMO that happened behind the boardroom doors at the banks and S&L’s (and in the smoke filled rooms of the RTC).
Ben, I don’t think there was generalized panic selling in LA in the mid90’s, at least, I don’t remember it. There were a whole lot of foreclosures, tear jerker TV news articles, people moaning about the RE market, people mailing the keys to the bank and stuff like that. I think it played out mostly like a textbook cycle of the market, only it was made more serious by the earthquake. Since I was a renter at the time (God, it’s been so long), I didn’t have a sense that there was a meltdown. Many people were able to hold on to their houses until the market changed, but they had rough times. What makes it different this time is the toxic loan element, which I hadn’t heard of until these past few years. That makes me think this one will play out differently.
Right, I bought a condo in Glendale (CA) in 1996, and was surprised and pleased at how cheap it was (REO). But this was almost accidental. I had not heard very much publicity about the housing debacle, I just saw that the price was not much more than a fair capitalization of the likely rent. I never saw anything that I would’ve interpreted as panic selling.
Northridge was already down 50% from 1990 when the earthquake hit…
I’d qualify the RTC auctions as panic selling. Huge chunks of inventory auctioned off regardless of price. I understand stuff in Arizona and Colorado traded for negative dollars (the “buyer” who received money still had to pay back taxes, liens, fix up the place after it was trashed, etc.)
“I’d qualify the RTC auctions as panic selling.”
I’d only qualify auctions as panic selling if the prices were widely publicized. Do auction prices get averaged into DataQuack’s releases? I think not.
They were public auctions, weren’t they? There was a transfer of deed, you can go look it up, yada yada yada.
But was the RTC so worried that they dropped prices 70% right away, or had the property already fallen when they showed up?
Do you remember the guy who handled the huge RTC sale to the Rockefellers? They paid something like 60 cents on the dollar. But they only foreclosed on a small percentage. How they made their bucks was letting people stay in their homes, but with a mortgage reduced by 20-30%.
“you can go look it up,”
But if you have to go look it up, which 99.9% of the public would not do if they knew how to do so, then you can’t expect auction sales to have much of a psychological effect on the market. Panic requires an information cascade, which is unlikely when relevant information is kept secret.
OK, if that’s the way you define panic selling, then if it happens RE will probably be the last of our problems.
“But was the RTC so worried that they dropped the prices 70% right away or had the property already fallen when they showed up?”
Ben, I was involved with the Houston RTC sales in the early 1990’s. They started by gathering loans into packages of like loans and risks to the best of their ability. Some were very high risk with very high LTV. Others were a pretty good risk.
Investers performed due diligence on the packages. Bids were taken by secret sealed bids in many cases. There was a lot of interest in the packages from the start. If memory serves me they sold for 70-80% of book value as the sales started but as the economy strengthened during the process many of the last loan packages were selling quickly and near or above book value.
As I recall, there were a lot of sweetheart deals in San Francisco and Marin during the ‘90 bust. A lot of REO’s never got listed and were internally sold to Sr VP’s in laws etc. at significant discounts to current market conditions. Also there were banks that placed the sole REO ads in newspapers out of the target area and in an area not likely to produce the assets/income needed to purchase. Then the sale could proceed to any interested buyer. A large number of banks became RE speculators using the 4 year rules. One bank I know spent 100K to fix the house, did maintance then sold three yrs later to break even.
I doubt there will be a lot of owner occupied panic selling in most areas (well in empty new neighborhoods there might be some from those FBs that bought in to the new home American nightmare).
More likely, the prices will be incrementally driven down by foreclosures…but wave after wave as it rachets down 10% at a time. Each 10% down takes out another group of owners and puts them underwater. Most will hang on for quite a while (those that have long term fixed up front ARMs or fixed that is). But, in 2010, if their house is worth $300K and they owe $450K…. well at some point you just say F* it…. this will drive foreclosures and not individual panic selling (at least not a lot of it).
There still is a lot of hope in the system for Spring 2007. Won’t dissapate until July.
“The problem that does still exist though is that J6pack is still more or less ignorant of what is going on around him.”
No matter if J6pack’s friendly neighborhood subprime lender just permanently shut down operations.
True, there will be external forces that will force J6packs hand. However, the media will be the key to when and how fervently false bottoms are called during the reversion to the mean.
“The problem that does still exist though is that J6pack is still more or less ignorant of what is going on around him.”
…at least locally I’d say there are a lot of Missy Chardonnays (and hubbies) in the same boat. They know the market is slowing and that the bubble areas are experiencing trouble….but the rest….
I still see eyes glazing over or eye rolls when I dare to go there. I hear pretty consistently how amazingly successful they are in the market….yet when I trot out basic bubble data I feel I’ve just stepped into unfriendly territory. The ignorance exists beyond Joe6pk.
The panic has already started in California. Look at the “Post local observations here” and you will see people from Cali describing how homes are selling 10%-30% less this year compared to what the house right next door sold for one or two years ago.
It’s the comps that tell the story. The median value of homes sold in an area is inaccurate.
P.S:
I’m an average, maybe below average, Joe 6pack but I can read the writing on the wall. I found this blog site, and I have other information sources. And I’m a couple of years away from entering the market (I’ve got to make more money). If a schiemiel like me gets it then most everyone gets it. They may not like it, but they get it. Greed blinded a lot of people over the past several years, but self-preservation will overcome greed.
‘ but I can read the writing on the wall. I found this blog site”….
That is the key, I believe. The internet has made info instataneous! Info is increasing exponentially ,and the MSM has a vested interest or inside coersion to soften the news..No one wants biz to slow ,but yet this will unravel regardless, and it seems to be gaining steam….
disinformation is increasing exponentially just as well thanks to the internet (like all the stuff coming from the Liarreahs of the world, uninformed or malicious journalists, BLS and similar ‘Ministry of Truth’ offices)
I’m not sure what you mean by tipping point. The market has already peaked and begun to slide, so if you mean the point where it starts to return to reality, I think we’re past it. We’re headed there now. If you mean the point at which it becomes generally acknowledged by the media and the masses, that may never happen.
I’m 55, a RE Broker, Mortgage Broker, Business Broker and RE investor in Central Florida. I bought my first house at 19 and hundreds since. I am your classic flipper. I’ve flipped hundreds.
From experience, this is my 4th cycle and by far the worst, each cycle, bubble, whatever had different causes and different effects. The first 3 had external causes, i.e. High interest, slow economy, roll off in household creation after the last baby boomers were out of the house, the early / mid 80’s, etc. This one is entirely different. .
This one has basically caused itself. It got kick started by Uncle Al and His 1% Prime Rate. (That’s a good name for a Barber Shop Quartette). Historically low interest. That was exacerbated by the most incredibly lax lending standards I’ve ever seen; the greed and stupidity from horribly inexperienced amateur speculators; realtors, mortgage brokers and bankers who encouraged and fed the frenzy and to an unknown extent rampant fraud and deceit.
I have a bad feeling that the real question may be “how bad will this affect the rest of the economy.” This is far worse than the S&L crises and the Dot Com implosion, combined.
I can’t get the image out of my head, of sitting in the dark on a pile of canned goods, holding a shot gun to protect the last of my food supply from the hungry, homeless masses. At that point, who cares what a house costs.
I know, I’m sure I’m over dramatizing the situation, but this thing is like a cancer. I got a bad feeling. At the very least it will be entertaining. It already is.
Back to reality. By examining the causes and working backward, the following has to happen for the market to return to normal:
1- Interest has to be reasonable. It is, presently. That could flip on a dime.
2- The huge excess inventory has to be sold off. By some estimations that will take 2 to 3 years and it’s going to have to be discounted, deeply.
3- Sane lending standard have to be implemented, actually “returned to”.
4- The median income has to be able to buy the median house.
5- For God’s sake STOP BUILDING!!!!!! I cannot believe that there is a single spec house being built at this point. STOP!!! Save for the custom house being built for the guy with good credit and 25% down, STOP!!! It’s like throwing wood on the fire! Pun intended.
6- There has to be a massive write off of debt. Billions to Trillions, depending on who you ask. On that point, if there are a lot of write offs, won’t the Federal Income Tax Revenues take a hit? Meaning that we the taxpayers will have to absorb the lose. Who am I kidding, that’s going to happen anyway.
7- Insurance and property taxes have to get in line with real property values, meaning your local government will have to lower property taxes. Absurd thought, isn’t it. It’s like trying to pull a dead chicken out of an alligators jaws. They ain’t letting go easy, if at all. And you won’t get all the chicken back. In fact, you may lose an arm. Those City/County Counsel persons can be vicious!
8- You’ll surely know it’s at bottom when Leno and Letterman work it into their monologues.
Leno: “Whitney Houston’s back in rehab. In an intervention prompted by her Mother and other family members, Ms. Houston was committed to the Betty Ford Clinic. A spokesman for the family said that “she was delusional and suffering from severe self destructive behavior.”
“It seems she was considering investing in Real Estate!!!! Boy, they stopped her just in time!!” (Huge belly laughs from the audience)
These are the main issues as I see it. What else do you guys see?
WHEN this bottoms out, the opportunity will exist for the wise and observant to make a killing in real estate.
That would be those of us on this and other similar blogs. We’ve been ahead of the curve so far. Let’s stay there and make money.
Oh, I intend to. Just some advice to everyone, make sure you get or have a job that is not remotely related to the REIC and too dependant on consumer luxury goods.
I’ll continue to build as long as the ‘cheap’ money flows. I can under sell the neighborhood and still make money. The F’d borrowers will be more F’d as MY comps hit the market. The cash flow needs to continue for us squirrels in the cages. hehehehehehe
“I can under sell the neighborhood and still make money.”
That’s the part that hasn’t sunk in at all with the used-home sellers. The builders with spec homes on their hands know it, because materials costs are down and they need to dump that higher-cost inventory right now, so they can continue to build stuff at lower cost and selling prices.
It’s like being a sniper — you have to find a good protected position and quietly watch and wait with the patience of Job.
And wait till the builders start turning on each other.
Maybe, maybe not.
You’ll need to sell to first time buyers, most others will be contingent on selling at the price you undercut.
“8- You’ll surely know it’s at bottom when Leno and Letterman work it into their monologues.”
Insightful post, Mike. Don’t count John Stewart and Stephen Colbert out of the group of comedians who will signal the bottom when they start making light of the housing crash.
I think the long term demographics of the US, China and Japan will start to play a role in this. Basically the population growth has been astouding but it should be peaking and then declining in all three nations.
Population decline will be the other shoe to drop. Esentially they are making more land.
Mike M, Nice post. I too have a bad feeling about how this mess will unravel.
–
“My question is this: At what point does market frustration morph into a full blown panic? Is it quantifiable? Should we keep an eye on some key numbers/metrics that can predict the tipping point?”
The most important data is: Foreclosure Rate — an annual rate of 1.5-2.0% of homes being foreclosed, nationally, would trigger a financial crisis. This will create serious problem in high-priced areas like California, NYC, etc.
Jas
We’re almost there already aren’t we?
some areas are at 2% like parts of CO
2%+ is indeed bad
–
I think that we are just around 1%.
Jas
It’s been accurately noted before that everyone feels that the area they live in is different from everywhere else, that it’s unique. Nowhere is this more true than the SoCal beaches, and it can be a persuasive argument. Close to L.A. It’s the beach, and they’re not making any more land. Best weather in the country. There’s too much $$$ here, professional DINK’s will buy here and not care that the markets tanking… and it’s all true to some extent. But other facts are also true. Basic economics/supply and demand. Affordability. Overcrowding (this one especially irks those of us here 30+ years). We don’t have hard data on the number of time-bomb loans have been used to buy at the beach, but there must be some, increasing as you travel east into Hawthorne and Lawndale. Can Torrance tank while Redondo rises? Nope; just as a rising tide raises all boats, the sinking “Asset Bubble” will spare no one.
BTW, thanks Ben for the quote above, immortalized in the most important blog of our time.
I work in the beach area and our showroom is 2 blocks form the Redondo Pier. There are new townhouses near Oak st and Carson Blvd that are going for 600k and selling like hotcakes.
We work with builders all week long and their is some pain. We are running more and more jobs for custom cabinets that over 100k than we have ever seen. I am doing a remodel in Rancho Palos Verdes that has three phases and the fist phase with two baths, mudd room, pantry and office is 104k. The next phase is a 3400 sq foot addition with 3 more baths and Bar. Finally we will get to do the kitchen, entertainment and Bar. There is plenty of money in the South Bay near the ocean.
FWIW, that money is coming from from mom and dad’s HELOC’s.
Since our lease is about to expire, we have been studying the greater Phoenix market in earnest (although we will probably wait some time to buy). Houses that appeal to us in the closer in areas like Chandler, Scottsdale, Mesa, etc are still in the mid$400K range with very few homes for sale. Any less desireable or distant suburban neighborhood is flooded with realty signs and selling at big discounts from a year ago or, more likely, just sitting there.
New home phases and projects are springing up all over in spite of the large inventory of preowned homes. Smaller less expensive models are now much more available than a year ago. Instead of one single level model and 4 McMansions in a project, there are several single level models for each 2-story.
Real estate sales data is now being compared to a year ago and is only slightly lower since Jan06 had already experienced a large drop in YOY sales. I have read that families are moving into the area at a fast rate which accounts for the sales we are seeing. In my neighborhood nothing seems to be selling but 3 families moved into rental houses in the last couple of weeks.
I am at a loss for where we are heading here in Phoenix. There is a large inventory and many new home incentives are available. IMHO there are tens of thousands of houses for sale that no one wants to buy at their current prices. HB’s seem to have decided to move on and are attempting to build a product that is currently desireable and at a price that might sell. Pass the salt shaker for my popcorn. I am waiting this thing out.
Anyone in the Phoenix area have a different view? I would sure be interested.
Kirk set his phaser to stun and hit the phoenix home owners in the pills. Basically phoenix is still in the denial and disbelief stage (excluding HB’s). After 15+ years in the valley, I can only say that IMHO the median income will not support current prices without the toxic loan products.
from yahoo finance
Has housing bottomed?
Yes 29%
No 72%
26071 Votes to date
Will your house be affected?
No, because my house is different, and special, and perfect 99.7%
Yeah, I’m screwed too 0.3%
IMHO, I feel that most people are naive, and have full faith in all the banks, realtors, and peachy fuzzy news reports that all state a small decrease is expected. Take my brother Northern Virginia, for example: he states that a city based entirely on government (and government contracting) jobs will never allow such a crash to take place. Too many people want to move there.
True panic, desparation, despair, and contemplations of suicide will not take place until the media says, “simon says Panic!!”
I just came up with too many analogies of this scenario… the herd doesn’t realize wolves have been eating their brethren in plain sight until the shepherd tells them so, then all of a sudden the mental block is gone and voila !! the wolves exist …
DC area dropped 10% in the last 1990-1993 downturn
NE 30%
Parts of CA 35%
we burn your money here and the sheople never complain
35 new dems all have big spending plans ,same as the gop
so your brother’s right
Right on! We are going to raise federal taxes to compensate all homeowners in the Greater D.C. are (including West Virginia and Pennsylvania) for any difference between their judgement of the fair value of their property and that offered by clueless buyers.
you get 5k to move to DC
thats a credit = to 5K cash
like the limousine lanes in Moscow
People always complain and Democrats had deficits on the retreat until 2000 when single party rule went haywire. Your broad brush revisionism will not stand.
The real truth is far more complex anyway since the start of the bubble process was initiated with banking regulation changes in 1996, and the whole thing relied from start to finish on social forces that drove people to property in a misguided flight to quality and permanance.
Mole, I think I understand what you said and I think I agree.
Well Spoken!
I live in Northern Virginia, but I cannot see how government could prevent RE price deflation. Federal employees have stable jobs but are not paid well enough to support housing prices.
Many agencies are moving away from D.C. During bad weather, government offices close (for at least part of the day) or allow unscheduled leave. Thus, people are moving ever farther from D.C. This relieves some upward pressure from D.C. prices.
If the presence of the federal government, contractors, etc., could not preclude some high-crime areas in D.C., how could government protect RE prices?
average DC fed woker gets 87 K
add pension and benies and you’re at 100k
and can’t get fired unless they say the “N” word or askm the same chick out twice
thats not “well paid”?
On the advisable 2.5:1 income ratio, $87K will buy a nice one-bedroom condo. Add in the SO’s income and you can buy either a small old tract house with yard, or new OSB-crap attached product with two-car garage and no yard.
Federal employees have stable jobs but are not paid well enough to support housing prices.
What part of not well paid enough is hard to understand?
Furthermore “well paid” is a relative measure. While pay in industry lags behind profits, it is well ahead of government compensation for skilled work. This is why you are finding those supposed “high level” positions full of laggards. That is all they are paying for, and the only special benefit are the benefits which attract risk averse losers.
You get what you pay for, and if you can’t manage the going rate then may providence help you.
well said … and this is exactly the kind of people you see in DC area. risk averse, conservative, uncreative, dull, and never would make it a day in industry. the main benefit is job security in gov’t! not pay.
Whhhaaaa. Sounds like flatffplan said the N word once and regrets losing his job.
dim chucklehead overheard at boring northern va party last night; “prices aren’t going down, it’s just that buyers are taking a longer time to buy because there are more houses on the market. but prices are staying the same, and interest rates are headed down, so that means prices stay up [sounded like this is a new concept he learned from money magazine].” oh, and the host of the party has had his house on the market for a year.
my neighborhood is nothing if not typical.
actually MONEY magazine this month has articles on coping with having bought the wrong house and not being able to get out of it … as well as facing reality when you haven’t saved enough to fund your retirement dreams. Funny, 18 mo. ago they were talking about how awesome the US is because of “access to capital”. Tighter lending standards … hmm … what a difference 18 mo.s makes.
…and the average German during WW2 didn’t know Hitler was systematically killing the Jews.
Apparently they thought their neighbors, the Speilman’s, the Cohens and the Leibermans and all the other Jewish families moved to Berlin. I mean, that was the word on the street….everyone was saying, ya know…my brother in laws’s brother’s kid saw them…I think……
Mike you are so sharp, there should be more of you walking around. You are able to encapsusate the main points of this issue and it really is scary and many will not be able to take it in because it is too much.
Actually, it was “the East”, Theresienstadt, or “Madagascar” (really!). Berlin was in fact declared “Judenrein.” (=free of Jews)
Your point still stands, I just couldn’t let that bit slide.
Thanks, Guys.
Nice point Gator. I did not know that.
On C-Span yesterday, Bernanke was getting grilled by some congresswoman about how her constituents have jobs, the economy is fine, but they are losing their homes to foreclosure. I think she might have said she’s from New Jersey or somewhere in NY. Then some other congressman (?) was grilling Bernanke about these subprime, no-doc loans, and how it’s affecting homeowners. I only caught a few minutes of it, can anyone expand?
The one they need to be grilling is greenspan. BB is not going to do anything about saving FBs…he can’t do that without destroying the USD reserve currency status.
“BB is not going to do anything about saving FBs”
He inherited a bad situation from his predecessors, and the best he can for is effective damage control.
he can hope for
I don’t think it’s fair to blame Greenspan. Do low interest rates justify no doc, neg. am., loans? Zero down payments? Loans to illegal alients? Even if he was trying to engineer a recovery from the tech collapse by increasing equity in RE, this has gotten totally out of control and I’m sure way beyond anything he intended.
“way beyond anything he intended” - intent is never an excuse for anything. The road to hell…
lain..whatever girl
I don’t think it’s fair to blame the jailer because the prisoners escaped. All he did was leave the cell unlocked.
Helloooo!!! Greenspan’s and the Fed’s actions have repercussions!! Remember how careful he was about what he said. (Except about ARMs). The markets hang on every word the Fed Chairman says.
Why does the Fed even regulate interest? Because they know it has an effect! He blew it big time with the 1% thing!!
Geeez, do we have to still explain that point to????
Yes, we can blame Greenspan and the Fed, as well as OHFEO (Treasury).
The Federal Reserve has power and mandate to do more than just set interest rates in the Fed Funds repo market!
They can set bank reserves and along with Treasury they can set loan underwriting standards up to a point.
Greenspan made the same dumb mistake as he did with the Dot Com crash. In that bubble (which was obvious at the time) he could have easily pre-empted many problems by significantly raising the margin requirements on stocks. This would have deflated the excess speculation without requiring him to jack up interest rates as he did, and the big burst and crash, which resulted in the lowering of rates to inappropriate lows.
And then as the housing boom was going on (as it was obvious it was bubbleicious) he could have made sure to tighten bank reserves, thereby attacking directly the problem rather than the blunt hammer of interest rates.
D’oh!
I agree with you la. It’s all about the lending standards and the monstrous growth of the MBS/CDS market. The BOJ and the carry trade may have contributed as much as AG.
I’m more concerned with where this thing is heading looking forward, and from what I caught of those hearings, it looks like either more regulation, or some high profile heads are going to roll to publicly pin the blame on someone other than the politicians.
I’m sorry, but it’s the FED we’re talking about here. That is their job. To say that G-Span didn’t know what the potential consequences from reducing fed funds rate to what was effectively a negative interest rate is to ignore much of economic history with regard to asset bubbles. No, he took the risk knowing the consequences the bet went against him. If one makes it to the level of Fed Governor, then I don’t think it’s unreasonable to have a degree accountability for ones actions.
Lainvestorgirl, Greenspan knew what he (as head of the Federal Reserve) was going to cause. In 1994 when the banking regulations were changed by Greeenspan and Greenspan was asked about the formation and risk of “asset bubbles”; he chose to ignore it. In 1995 when the fractional reserve banking system was changed to no reserves for loans less than 1.5MM, the barn doors were flung open. Yes Greenspan is to blame. The links to the federal reserve notes I have posted in the past and If anyone is interested I will post again sometime next week.
Lainvestorgirl, Lets move forward but don’t look to the Gubment to do anything meaningful. In fact, they need to stay out of it. They’ll only make it worse. Watch!!
It’s very constructive to know what happened and who done it! Those who don’t know history are condemned to repeat it….or something like that. You get my point.
Barney Frank wants BB to lower the Fed Rates. Frank says there’s no inflation.
Ah, but how do you define inflation though? M, M1, M2, or M3?
There has been plenty of inflation only it’s in Loose Credit (M3) which leads to asset bubbles, such stocks and…real estate.
fed got rid of pesky M3
TOO MESSY !
Yes, exactly.
Yes, exactly.
I second that.
And I second it again.
I thought there was a Web site that still tracks M3.
yes there is; currently M3 is growning at 12% yoy.
http://www.shadowstats.com/cgi-bin/sgs/data
I think Barney Frank wants BB to lower his pants.
BWAHAHAHAHA!
He may say that … but I don’t think he believes it. His constituency includes a lot of FB’s. For Frank to say there’s no inflation makes him either stupid or a bald-faced liar, and he certainly isn’t stupid. Come to think of it, he does have a record of bald-faced lying. Look, I’m not a playa-hata (I voted for Frank and called his office numerous times when I lived in Mass.–I certainly didn’t mind him batting for my team), but, you know, don’t underestimate a Democratic congressman with long tenure.
Barney Frank is one of those people who seems totally adorable for about 5 seconds until you realize how much is going on under the surface and you start thinking: stand back, I’m going to get burned.
In the buyers’ market the key players are buyers, not sellers. For as long as buyers’ find “bargains” the market will be similar to that of 2006.
What could “tip” buyers? Inability to get a mortgage, word-of-mouth from neighbors/colleagues, RE agents?
If the market will continue slowly deflating, would foreign investors step in? I suppose it depends on the market, but all I care about is Northern Virginia.
Very very soon (if not already) foreign investors (mostly Brits) will be handed their asses on a platter in Florida, Nevada, and Arizona. I’m talking about idiots like this guy. You can bet this will get a lot of publicity in their home countries. Plus the debable in the US may bring on the end of the bubble in Europe. I can’t imagine foreigners moving back into the US market until the dust has settled.
The London tube trains are full of advertising soliciting “property abroad”. So nice of the Brits to externalize their housing bubble to the rest of the world.
Fannie Mae sold the biggest chunk of it’s mortgage “securities” to foreign investors and Governments. The Chinese Govt was the single largest buyer.
There is some justice in this world.
That is pretty funny. Next the FED crashes the dollar then we’ll see how the chinese like their investment ?
Cactus, thats my point!! The Chinese are on the crazy bus right along with us.
The problem is there are a billion of them and 300mil of us….as an aside the 10y treasure had the lowest sale volume in 6 yeras so i think they are catching a clue…
I think that, as a recent article noted, the Chinese may be among those paying “tribute” for our continued purchase of their goods. They’re better off risking big losses on those securities if it means continued support for expansion of their economic/production capacity. But once the Chinese and the rest of Asia can buy enough Chinese stuff, the bets are off. Works slick, because by then, the nature and risk of these securities probably will have changed big-time. Just can’t beat the Street and the Pig Men. Best to stay clear — and rent for a while longer.
I couldn’t believe this UK promotion when I saw it, but apparently this sort of thing is not considered that unusual. Maybe the world hasn’t gone mad, but parts of it are pretty close.
“First time buyers opt for overseas and sell”, Easier Property, February 16, 2007.
“Morpheus Investments has noticed a growing trend of first time buyers purchasing properties off-plan[in southern Cyprus!], without viewing them and selling on completion for high returns.”
http://tinyurl.com/2nyvd2
this has been happening in many EU countries for years (in Netherlands already 10 years ago or so, at that time it was mostly speculation in RE on the Spanish Costas).
I’ma Brit and I know his type: The professional amateur.
The description “punt” used to be applied to a bet on horserace. It says it all : Short on in depth risk analysis, full on bluster. What a wanker.
I was just in the UK there and newspapers are still ‘gaga’ about realestate. Tabloids mainly, but quality newspapers such as ‘the Independent’ are cautioning people in their investment sections. Brits are not ones for manage to take much interest in their finances, so warning in the supplements will generally go unread.
One thing that surprised me was one bank (An ex-building societies now demutualized as a bank, akin to Credit Union going private) is evening offering loans x5 of your income !! My Sis-in law is a manager in an well established bank and she said her company will not offer this type of product as risk are too high. She said they stick to low risk customers who they attract with good interest rates.
Brits are also piling into Southern Europe and Gulf States property speculation.
Probably much of this is funded from Equity extraction not savings so they are doubly exposed.
in Netherlands 10x income loans are already quite normal.
only last month the banks started recommending to cap starter loans at 4.5x income (but if you have a ’special’ job,or some kind of parent piggy bank, or just HAVE to get this special property, 10x is no problem at all).
What is “NOD”?
Notice of default. (on home loan)
Thanks
What is a NOT?
Notice of Trustee Sale. Sometimes abbrev as NOS. This takes place about 3 weeks before a property is auctioned in front of the courthouse.
Duh! I should have figured that out for myself. Thanks
If credit becomes tighter, then the real estate market may freeze.
RE is a tiered market. New buyers buy cheaper houses. Those who currently own those cheaper houses buy more expensive houses. And so on. If new buyers are not pumped into the market at the bottom, that could cause a market freeze.
That will probably cause the RE musical chairs to stop. Whether it will cause a ‘tipping point’, I’m not sure. Motivated sellers will have to reduce their prices.
People who’ve got houses on the market for a year might capitulate and aggressively drop prices.
I wonder if foreclosures affect comps.
Foreclosures affect comps when BANK ASSET MANAGERS understand that the market is falling.
When the banks realize that REOs cannot be sold for top dollar anymore (because the pool of uyers have fled) then they compete against EACH OTHER to get the dead weight off the books.
Right on Mozo.
I think folks were happy to talk when their houses were appreciating so rapidly, because it made their decision to buy look really smart. Now that teaser loans are expiring and the market has slowed/dipped in some areas, people may be a little tighter lipped about their positions. No one likes to “broadcast” that they made the worst financial decision of their lives and are paying 50%+ of their net pay on a declining asset.
Once everyone knows “someone” who’s been shafted by RE, then I think we’ll see true capitulation. Combine that with tighter lending standards and higher rates, and it’s not pretty.
I agree. The key component of the tech bust was when everybody could razz each other about getting cucked into buying Worldcom, Qualcomm, etc and how much they lost.
We may be approaching that point with RE.
In fact, I know two people stuck with houses in other cities they want to sell, and getting no offers, that are trying to complete moves to Charlotte.
Lisa,
Good point.
I think the tipping point will be when we start to see Kafkaesque ads for houses that are for sale…
http://washingtonpost.homescape.com/wpost/washingtonpost/listing_details.jhtml?map_search=true&userId=DAFL2X0OOTAKLLAYYE3SFEY227559&filter_product_id=17766535&searchType=14&sbt=N&search_by_type=new_mls%2Cnew_class%2Cnew_const%2Cresale_mls%2Cresale_class%2Cresale%2Cresale_ecom_owner%2Cnew_ecom_owner%2Cresale_ecom_agent%2Cnew_ecom_agent%2Cresale_ecom_broker%2Cnew_ecom_broker%2Cresale_ecom_bldr%2Cnew_ecom_bldr&onTab=1&filter_property_type=townhouse&filter_min_price=300000&filter_max_price=400000&filter_open_house=N&sort_result_order=site_def_order%2Cattribute_count%2Cprice_desc%2Clisting_age&geo_area_text_lookup_id=84697&areaIdHistory=67111A84697&print=false
seriously, clowns creep me out.
what’s log architecture ? in Alexandria a townhouse ?
Three bedrooms sharing one bath. Nice. Sounds more like a 1960s trailer.
My parents’ home was originally 3/1, before a misguided remodel by the previous owner had it at something like 5/1.75. “Something like” because the back of the house is a bit of a warren; if people didn’t mind having to go through another room to get to theirs, you could call it 8/1.75.
I’m the youngest of five. We managed just fine.
I was born in 1951 and we had to potty in an outhouse until I was 6. That was in Connecticut. You haven’t lived ’til your butt cheecks stick to the toilet seat in winter.
In 57 Dad built a 3/1 for us, parents and 4 kids. Indoor plumbing!
Now days no granite counter tops is a hardship.
Sounds like a family starter house. When I was young (80’s) we lived in a 3/1 c. 1950 ranch, and I had four siblings! Small children don’t take up that much space–two or three to a tub at bath time. We did just fine.
When we got to be teenagers, fortunately we we had more showers … but unfortunately, too, as because of jobs/moves my parents took a terrible hit in real estate.
Only one thing matters to homeowners: their monthly payment.
As long as they can make their monthly payment, everything is hunkydory.
The moment they start their cashflow begins to go negative, they are screwed. The average American household has little, if any, savings. In the past three years, they could always refinance out of their hole.
It is now obvious that many, many people will shortly become unable to support their monthly payments (trillion plus in arms coming up for resets.)
- They stop buying crap to save cash to make their monthly payments.
- They attempt to refi but cannot as they have negative equity.
- They attempt to sell but cannot as they have negative equity.
- Many head to foreclosure.
- Drop in economic activity cause the brilliant bubble-blowing Fed to lower rates.
- Lower rates allow some refis to occur.
- Buyers step in and start some buying.
- There is an uptick in both refis and home sales.
- Pundits calls this point the bottom (Fall of 07?).
- But it is not.
The question is what happens next? Does the dollar crash — forcing up long term rates in spite of the Fed lowering short term rates? Does housing inventory continue to rise in spite of the Fed?
I think this thing may take a lot longer to play out than we suspect. Here are two things to consider:
- Chinese 2008 Olympics are a very big deal. China considers them its coming out party to the world. It is unlikely the Chinese will allow a dollar collapse before 2008 that would rock the world financial system and Chinese manufacturers.
- American consumers are monthly payment sensitive. If rates drop and the dollar doesn’t collapse, they can refi and continue the party. Perhaps this this bubble will keep going for a few more years.
“American consumers are monthly payment sensitive. If rates drop and the dollar doesn’t collapse, they can refi and continue the party. Perhaps this this bubble will keep going for a few more years.”
CentralBanker = clueless w/ writing impediment impediment
Thanks for your insightful and utterly useless response. Aside from my typos, what about my argument do you find clueless?
CB, you make a lot of good points but then arrive at a totally discredited conclusion.
Strike 1: People care about more than just their monthly payment. Ever hear of the “wealth effect”?
Strike 2: The Fed does not control mortgage rates.
Strike 3: Too many people have no equity and no cash, so nothing can save them in an environment of raising rates and tightening credit standards. Those people are screwed, so everyone else is (since prices are set at the margin).
You’re out.
Thanks for your feedback.
I think as the bubble slowly deflates, the Fed will respond by lowering rates. Of course the Fed does not set mortgage rates or dictate credit standards. But the Fed does set the short-term Fed funds rate. And this rate is transmitted out to the long-end of the yield curve through lending institutions and hedge funds.
Your ‘Strike 3′ does not apply. Should the Fed start to lower rates, I think many homeowners will suddenly find themselves able to refi again.
Going back to my monthly payment argument. As long as people can make their monthly payments, I think the following will happen:
a) sellers will not reduce their prices as long they believe they can wait out the market dip without foreclosure.
b) buyers will consider making offers if they believe they can carry the monthly costs.
As much as readers of this board believe that this giant mess should be unwound in a few months or even a few years, I think there is a very real possibility that the unwinding of the housing bubble will take many, many years with a lot of grinding and teeth gnashing as reluctant homeowners do everything possible to maintain their homes and keep prices up.
Is this in any way like what’s going on in Britain?
CentralBanker -
The fault in your logic is that you beleive contradictory things simultaneously. You say the Fed will lower rates, and that will allow refi’s. You also say that lower rates may tank the dollar.
I say that lowered rates will tank the dollar. Period. That means that lowered rates will allow noone to refi. Once we run out of runway on this one, we’re going in the water.
I’m not even going to respond….
You guys (GetStucco and JWM) seem to be reading CentralBanker as a troll. Maybe he is. Before seeing your replies, though, I just saw the assertion that the housing deflation could take a long time. That still seems true to me. I have been watching only a year, but have been surprised at how high the asking prices remain, in the face of falling volume, rising NODs, and all the rest of it. Last summer on this blog, some people were predicting panic by fall. In the fall they were predicting panic by Superbowl time. Now they are predicting panic when the spring bounce fails to materialize. Maybe panic never happens, just a 7% annual RE deflation for a long long time. ????
I’ve been saying late summer 2007 for some time. But as long as the ability to pay is there, people can stay in their houses, new buyers can trickle in and we could just sit here for a long, long time. It wouldn’t be unprecedented; it is precisely what RE in Germany has done for the last 11-12 years.
You’re ignoring the resets that are approaching and the lack of ability to refi becuase of the tightened credit that is beginning to happen. The FBs can’t continue to make their reset payments and if they can’t refi out of it then they NOD and eventually foreclosure.
No, I’m not; read my first sentence. I’m saying it is *possible*. Banks may offer payment plans because they don’t want to deal with all the foreclosures, or the resets may be spread out over time much more than we think, or something. I don’t think this is a likely scenario, but it *has* happened elsewhere, and I don’t think we’ll see 40-50% drops allatonce, either.
Banks??? You mean like Own-it/Resmae and about 20 other subprimes that have popped like ticks since December? Or maybe the MBS holders will give th FBs payment terms..hedgefunds don’t strike me as being that magnanimous.
That’s not what I took issue with. It’s the notion that BB can just lower rates again and the bubble will resume. No, it won’t and he won’t do that because the Fed has to protect dollar hegemony.
I’m in agreement with Lender. I would like to see what Stucco hates so much about Central’s posting. The Banker basically listed my biggest fear of this whole thing going on much longer due to tinkering and toying. Look at how long Goldilocks (that nasty hosebag) has been running wild. I thought she would have been diagnosed with herpes by now.
Stucco, elaborate further. I want to see what you found so offensive about that post. I hope you can ease my biggest fears.
I happen to agree with centralbanker - the party is over but the idea that this is going to be a fine time to buy in 2007 or 2008 to me seems ridiculous. This is the beginning stage of a market collapse - we haven’t even had the DCB yet - and we will have one. I still believe it took 12 years to get into this mess and it will take 12 years to get out of it. It is very hard not to wish to buy the vacation home, primary residence, retirement home with prices having come down from 2005 levels; but I will not buy until prices come down to 1994 adjusted for inflation minus 10%.
Housing may just stay flat while inflation is allowed to run at 5-7% as the FED tries to prevent Deflation. This is what I think may happen.
I’ve got to agree as well. I keep seeing posts by people on this blog that feel that they will buy in 2008.
That is the same wishful thinking that RE bulls have in believing that we are currently at the bottom.
I’m of the same opinion as you and CentralBanker; this will take at least a decade of grinding down and grinding buyers into dust. Just look at Japan-15 years of RE deflation. I think the US$ gets stronger over the next few years.
az,
That would actually be a good thing. Not likely due to the huge oversupply and foreclosures, but possible.
just look to Europe and see how long it can take. The EU housing market was already extremely bubblelicious around 2000, but this didn’t stop it from getting even less ‘affordable’ in the next years. All thanks to the ECB that started pumping money like there is no tomorrow (M3 growth 9-10% yoy and official inflation just 1-2% yoy; the EU statistics offices are doing a terrific job!). Fortunately for the ECB they can do this without any obvious sign, because the dollar is depreciating just as fast (only plotted against gold it is obvious that something is wrong with both currencies).
Central Banker,
really interesting post–but if the Fed lowers rates, the dollar is likely toast before the Olympics. Consider the resets from Octoberare just starting to show up now, given the the time lag. But as foreclosure inventories mount, (Mauldin noted today that whole neighborhoods in Denver are already sinking into foreclosure), subprimes are blowing up, lending standards will continue to tighten, defaults will ravage MBS market…I don’t think many will be able to refi.
You underestimate how many houses are heloced to the rafters…there’s no manuevering there.
Fed will act only to save the dollar as reserve currency. FBs will just be a sad story.
there is no chance for the dollar to get toast even if BB drops piles of money with his helicopters, because the BOJ and the ECB use the same tricks. Competitive currency devaluation, they will play this game until the bitter end, or at least until something unforeseen happens. As long as they play this devaluation game, (average) nominal RE values are not likely to drop by much and FB’s don’t have any problem.
Disagree … wages would have to rise, and so far (with global wage arbitration and economic uncertainty) they haven’t for most people … and you can’t sell a year’s supply of housing to the few that did have their wages go up. There are better investments for them.
Houses were, on fundamentals, overpriced, so, yes, many FB’s are F’d…
None of this mean ANYTHING compared to one simple truth:
Dropping a half million on a 3/2 ONLY makes sense if you are SURE the price will keep going up. I said this probably 2 years ago. The SECOND people aren’t SURE the price will continue appreciating, the party is over. Monthly payments be damned. No one thinks it sensible to spend 50% of your take home on housing - unless, of course, it’ll ultimately give me the leverage needed to make me filthly rich…
People don’t need to think housing will go down to make it so. Just the loss of ASSURED SUCCESS (by way of just a hint of what may happen to me in a downturn) should offer pause before buying.
This, I believe, is where we are today. That, and the beginning of credit tightening, of course.
CB;
Good points. Can’t argue with you. You may be right
CB;
I was drinking heavily at the time of the above post.
“Only one thing matters to homeowners: their monthly payment.”
I banked on that in 1987 when I sold a house for $196K that the agent wanted to list a $165K (Bought it for 125K in 1980). I just used the payment tables to come up with a price that reflected the dramatic drop from record high mortgage interest rates, assuming people would buy at a certain amount-per-month. It worked and two weeks later the agent put his own house on the market at an equivalently-jacked-up price. While I think it is sad that people will buy a house with almost the same mentality they use to buy a car, I wasn’t about to walk away from the extra money if someone would pay it, as they did.
Want to add that I agree about the Chinese need to avoid “losing face,” at ANY cost, prior to or during the Olympics. They remember well how we screwed the USSR when it was their turn. The importance of “face” in east Asia cannot be comprehended fully by anyone who has not spent a fair amount of time there, or at least in doing business with east Asians. Could be a wild ride after the games, so I think I want to be tucked into a house by then and forego the extra profit that is reasonably likely to accrue by waiting longer. Getting far too old to make a big mistake — not enough time left to recover from one.
“not enough time left to recover from one.” Or an exogenous event that changes the value of everyone’s hand.
Maybe. Essentially the fed rate would need to be so low that those affected by ARM resets could refi fixed at their current rate.
I see no evidence the Fed is ready to make such a move. Everyone says the Fed is forward-looking, but honestly, they seem much more driven by the CPI and PPI moving averages and the GDP growth rate. I don’t see the Fed lowering dramatically unless GDP hit some serious negative territory.
“Essentially the fed rate would need to be so low that those affected by ARM resets could refi fixed at their current rate.”
To refi fixed, it seems that the long rates (10 year and 30 year) would have to go drastically down…the fed doesn’t control those, the market does. And if the market interprets the lowering short-term rate to be “inflationary”, then the long rates will go HIGHER.
“I don’t see the Fed lowering dramatically unless GDP hit some serious negative territory.”
And, as I explain below, with a negative GDP, mortgage resets will be the least of homeowners’ worries (job losses, etc.)
Connect this:
- Drop in economic activity (cause the brilliant bubble-blowing Fed to lower rates.)
With this:
- Lower rates allow some refis to occur.
- Buyers step in and start some buying.
If we DO get a drop in economic activity, it will be even harder for the average working Joe to buy or refi a house. Right now, many people are paying 40%-50% of their take home pay for housing in some bubble areas because they still think that things are going “OK”, and will continue to get better (raises, house apreciation, etc.) If we get “reduced economic activity”, companies will start “right-sizing”, unemployment goes up, belt tightening happens, and people are no longer so interested in spending 50% of their income for housing (especially first time buyers that are no longer fearing being “priced out forever”).
It’s not to say that your scenario can’t happen, it’s only one possible scenario.
Good points.
A fool and his (or her) money is soon parted. A fool and their credit is a different matter, especially when credit is free and someone in Asia holding junk bonds will wind up paying the tab. Its the new American way.
The realtor spin right now is that buyers have a once in a lifetime opportunity to get into the home market before it resumes its upward movement . My neighbor actually buys the hype and wants to invest in builder discounts . The REIC is selling urgency as usual .
IMO when buyers see how much stock is out there during the prime selling season they might get the idea that there isn’t any urgency .
Also the REIC is actually starting to refuse to take over-priced listings knowing that they just sit . So this trend of listing refusal might keep many listings off the market .Still the inventory will be very high in most areas especially in high speculation sub-prime lending areas . Volume of listings will increase once FB’s find out they can’t refinance out of their toxic loan and many of those borrowers will head toward foreclosure, which will start sitting the price and that is when panic will set in .
With the fall of the sub-prime low/no down loan market there will be less buyers .
I really think it will take to 2015 to get any appreciation again on homes .
I think that the FB’s will just stop making payments when they get reset. They won’t even bother trying to sell since there will be a huge backlog of foreclosures. So they will just stay for free until they get kicked out.
Demographic trends suggest 2020 at the earliest.
i have two friends, one in construction and one in commercial real estate. in boulder the for sale signs are blossoming everywhere and no less than 900 units from $500K to $2.4m are under construction. my friend in construction is purchasing a fix and flip for $385k after getting stuck with a duplex last year that is currently under water. at his current pace his net worth will be negative (with $1.2 M in debt) by spring. my other friend just paid $1.5M for a 20,000 s.f. lot and is putting 5 condos in the ground for $1.8M plus each (the price you need to sell them at when your ground costs $400k/unit). both should be knowledgable about the market and the risks, etc. but both are charging full steam ahead in hopes of the spring market “perking up”. don’t underestimate how oblivious the public is to what we are discussing here on a daily basis. as has been discussed here over the last few days, we may very well see a dead cat bounce in the market this spring.
I won’t disagree. Some people held out through the winter, and feel like they need to buy.
The problem however - is the inventory overhang from last fall that is being relisted.
I would not be surprised to see a stable spring, with quotes of relief from RE borkers about “things bottoming out” - only to be followed by even more anguish this fall, than we saw last fall.
Then they must not really be paying attention to the market then. When the credit standards tighten who is going to buy those properties??
Very true. That says it all.
Looks like 149 Boulder foreclosures and only 40 sales, but we are reassured in the comments that there is nothing to worry about.
http://boulderrealty.blogspot.com/2007/02/foreclosures-update-valentines-edition.html
After all, it’s different in Boulder, and they aren’t making any more land. Go ahead and get that $750,000 condo with an option arm even though you make 70k/year at the school- it will all work itself out.
boulder;
The reason building continues is that these deals were set in place and financed probably a year ago. The builder has financing and gets draws, therefore he has cash flow.
He is hoping the market turns before he finishes and has to actually sell the property. But, right now, he’s cool. He’s got money….unless the bank panics and calls his loan.
Boulderbo — probably too late in the day for a reply, but just in case — is this $1.5M lot, that would be about 141 feet by 141 feet, right in the middle of the city, maybe across the street from the courthouse or something? I visited Boulder only once, in the early 1980s (had the best hamburger I ever ate), but it didn’t look like you folks were about to run out of land in the next 50+ years.
The tipping point will be some kind of event in the credit markets that causes them to completely seize up, there are $trillions of toxic derivatives out there. By time they are all cleared out some household names will have ceased to exist - JP Morgan? Goldman?
Close Brad, but no cigar
“Merrill aims to catch up with Bear Stearns in subprime mortgage market”, Bloomberg / IHT, February 14, 2007.
http://tinyurl.com/34kusj
I think those guys will be around forever. They will have somehow flogged the risk onto someone else and they are not unknown in Congress.
A friend of mine was about to start looking at RE for a purchase, I told him about the impeding meltdown which he passed onto a realtor he was dealing with online regarding some criagslist listings and he got the following reply:
“Too bad the press is continuing to try to bring down the housing market. I see everything picking up, especially in Silicon Valley where we are back to having multiple offers again. I really don’t see a 40 % reduction within the next two years. I see us having the normal 8% increase each year, over the next few years at least. I would think about the tax advantages that you could benefit from right now and over the next 2 years. Just food for thought! Let me know if you change your mind.”
Realtors like that will be the first against the wall when the revolution comes…
After them, all politicians and tax collectors. Seriously.
I’d invert the order. RE agents don’t have the ability to take your money at the point of a gun.
I’d have dropped that agent like a hot brick. There are lots and lots of hungry ones out there, including many who do not try to BS you for a minute. I’ve been working with one, who is out of state, and she’s been just great. Never tries to convince me that I might have missed the boat — not even close.
I hate to repeat myself, but this bears repeating. The tipping point is past and the avalanche has begun. It began high up on the mountainside, though, and the sheeple in the valley may hear some noise, but they look around and see nothing amiss. For them to panic at this point, they would have needed to see the overhanging snow and ice, to see the undercuts in the mortgage markets, to understand the increasing foreclosure rates, to comprehend the TICs data and capital flight with the inevitable credit contraction behind it. This is beyond the capacity of a sheep. They don’t get it, they don’t care. They will continue to graze peacefully in the valley until they are smashed by the walls of snow, ice, rock and timber carried down the mountainside by forces they do not comprehend.
If they were to comprehend in time, if some faithful shepherd were to explain the danger, or even just try to get them to leave without explanation, there would be great resistance. “See!” they would say “There is green grass here, which will grow back soon, and we will eat it again. There is no danger of starvation, for the grass will always grow here.”
If they were made to comprehend somehow that the grass could be buried, that they could be destroyed by the avalanche, there would be a rush for the exit from the valley. This very rush would cause great harm to themselves. They would trample themselves in their haste to escape doom. Some will make it. Others will not.
There is an inevitability about watching doomed skiiers or houses at the bottom of a mountain as the avalanche closes in. Despite our condemnation for the folly which placed them in harm’s way, we find ourselves rooting for the doomed, hoping that they will evade the fate that they have chosen. Inevitably, they are overtaken by the relentless fury, and are borne down into the valley to be smashed through the walls of the houses and shrubberies, until all becomes quiet once more.
I feel great empathy for the pain which so many people have felt already and for the thousands more who have yet to feel the pain. Nevertheless, that empathy should not be mistaken for sympathy.
Humans have created massive social systems and enormous technological advancement since the Enlightenment because principles of rationality have been advanced and relied upon. When we deliberately abandon rationality, we deserve the consequences.
So I guess your point is that there really no tipping point for the sheople…they just get blindsided. In general, I believe that is probably true.
Good commentary, KIA. Personally, I don’t feel much empathy or sympathy for the sheeple. They made their bed and now will have to lie in it. As you aptly note, those who abandon rationality [not to mention caution and prudence] deserve the consequences.
Nobody has talked about what will happpen when the inevitable terrorist attack happens in the middle of this huge downturn in RE
KIA — what great writing. Usually we are loosy-goosy and that’s fine by me, but it’s nice once in a while to see some very high-quality writing. Are you a writer by profession? Saved your post all by its lonesome. Hopefully my smarmy-ness here wasn’t stimulated solely by the Glenlivet.
Ha! Ain’t that the truth. Very poetic explanation of what’s coming.
Feels like you just stepped in from the 18th century, you know, back when people could wax poetic about literally anything.
I’d love to see that published in a “letter to the editor” somewhere, anywhere.
Yes, very nice work KIA, and totally on the mark.
Here in LA, it’s gonna take more time. The ‘it’s different here’ mantra is repeated confidently on the West Side. But all around — Ventura, inland empire, high desert — the magic carpet is starting to unravel. I see a spring bounce here, then a slow summer, and some contrition in the fall. Rinse and repeat. Was amused to hear an advert on the radio last night with ambulance chaser legal firm looking for FBs who were provided exotic mortgages without ‘full disclosure.’ There will be no single sentinal event that brings this down like predator-style. It will be death by a thousand paper cuts, at least in LA.
A credit event would, no will give what’s happening right now, pull the rug out from under everyone. The Hollywood douchebag dimwits will not be spared. Most of those morons don’t understand what caused the prices to go up in the first place so they don’t recognize danger signs.
I hope broadband does to the Hollywood Left what it did to the music recording industry. They may not be immune to sudden poverty.
Mark — veering OT, I read an article within the past week that said YouTube and similar are threatening to bog down the Internet, because their large files are being transferred in huge numbers. Also saw, maybe in PC Magazine, that servers in the U.S. use a huge amount of electricity, something like the power required by 11 states. Obviously, the 11 lowest-usage states would be the mark, but still that is way, way more power than I would have thought computers consume.
So, I think that for broadband to sink Hollywood, someone will have to invent chips that run much, much cooler than they do at present. Or maybe move them to icebergs, which would REALLY piss off Hollywood.
My employer - multinational electronics co- has banned all employees from viewing any streaming application: radio, video due to bandwidth problems. Said too many people were looking a news sites and watching sports events. Only exceptions are internal sources.
Ben,
Are you located in Flag?
I went to school there 91-95.
I live in Scottsdale after a 5 yr. stint seeing the madness of RE prices that is SF.
Thing about Flag that friends who live there tell me is that a lot of the homes(don’t know the percentage) are owned and vacant, California types as the culprits.
I’m wondering what your thoughts would be on any meaningful drop there in say University Heights area and around downtown given the Cal folks just seem to throw cash there mindlessly.
I mean, it’s not like Flagstaff is a great job engine nor are wages anything to speak of. Actually before I checked out up there the Post Plus maildrop(in the Walmart plaza southern end of town) had an opening for $8 an hour and got 75 plus applications.
Thanks
Charlie — interesting observations about Flagstaff, especially the job market. Wonder how many of those 75 applicants are legals. This is not the sort of blog where the owner (Ben) talks about himself much. He is unimaginably busy reading and posting stuff that most of us hardly have time to read AFTER he’s sifted it. We’re talking 7 days a week. It is, however, the very best blog in the world about the housing bubble. Ben could possibly reply (it’s certainly not my business to try to read his mind or speak for him), but rather than being disappointed by lack of a response, I recommend you enjoy the incredible amount of useful knowledge you’ll gain by reading and posting herein.
The ‘it’s different here’ mantra is repeated confidently on the West Side.”
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Wait till those west siders who have flips in Modesto and Phoenix etc lose the flip and then the west side house they heloc’ed to get the flip. The dominos will fall towards the setting sun.
I think the tipping point will be the holder of a bunch of CDO’s gets a huge bill from a mortgage holder to pay up and they can’t and goes belly up. then mortgage insurance will seize like an engine with no oil
DBA — any guess as to who or when? That is what worries me — how is the “system” prepared to deal with cascading belly-ups.
You may very well be right, at least as far as Wall Street is concerned.
Again, though, most people don’t know what a CDO is. They’ll just see finance types jumping from windows and wonder what the hell happened.
One from New York. “Denial is very powerful. Especially on Long Island. No set of numbers or talking heads are going to effect the way Mr. and Mrs. Jones spend or sell for that matter. They want what they want and housing bubbles don’t happen here. They happen in places that are building tons of houses without secured buyer and hell, L.I. is all used up…hell, they’re not making any more land here. Hence, the tsunami.”
Long Island declines will be all over the map. I would estimate that by summer 2008 some of the lower middle class communities could see price declones of 20%. While the top commutable communities may only see the typical 5% price rollbacks that they historically experience in downswings, some of the huge second home areas such as the Hamptons will likely see declines as high as 30-40%, as investors continue to pull out and go back into stocks.
In my very commutable area of the SF Peninsula, activity has declined considerably, but prices have not. No one in my neighborhood really needs to sell, but the only two homes listed (~$1M) in the past 30 days have already sold. Evidently demand is still stronger than supply here.
I also own a vacation home near Lake Tahoe; its value may be down around 15% from the peak in fall of 2005, but it’s paid off, and I never saw it as an investment anyway. And if prices there continue to decline, that just makes it easier for me to trade-up.
On the other hand, there has been so much overbuilding in the Central Valley and over the ridge in Reno that I wouldn’t buy there for investment, even though it would be easily affordable now.
Nobody has talked about what will happen, when the next inevitable terrorist attack happens in the middle of this major downturn in RE
Dale;
We’re not in any danger. Ask Nancy Pelosie
Hopefully they crash a plane on a couple hundred unoccupied spec houses.
It’s really nothing to joke about. What happened after 9/11? I believe it shaved a points or two off the GDP. Depending on how severe it is, the effect will obviously be negative.
“What happened after 9/11″
Greenspan lowered interest rates? Uh-oh.
dale we cannot live in fear of a terrorist attack
that is what they want don’t give them the satisfaction
either way i ain’t buying anytime soon my date keeps on
moving further out as more major news hits the msm
il just keep saving and watch the carnage
now who has the popcorn?
The popcorn’s at Neil’s. The Cabernet’s at Melody’s.
Oh… I have Cabernet too.
mgnyc has the right idea… right now is just the time to sit back and watch the news. Save your money… invest as you see best.
But for 18 to 24 months the only thing to do is wait.
Got popcorn?
Neil
Would a terrible event really be a tipping point? 9/11 did not kill the housing boom and may have made it worse. Oddly enough the same is true for Katrina. Perhaps the lack of a crisis to excuse continued idiocy might mark the turning of this big ship?
In 2001, downtown NYC got hit pretty hard and some great opportunities were to be had in 2002. However, Westchester Co (and other areas) took off.
will Those MBS tranches rated BBB- going off at 80 cents on the $ begin to have consequences?
“will Those MBS tranches rated BBB- going off at 80 cents on the $ begin to have consequences?”
Finally, an easy one that even I can answer. Yes.
I would say the tipping point of this RE meltdown will be similar to a raging (grown) river after a severe storm. To the uninitiated, the tip of the grown river might seem benign and people will claim that all is well that it is just a soft landing. Unare to this ppl, little swell of the rive water that seemed benign to them is a warning of the powerfull current upstream that willl carry away to doom anyone caught in its path.
It seems that part of the problem of why buyers feel that they are ok is because the re-setting of interests rates is occuring in a cascading manner. When the cumulative effect (the raging river) of the re-setting of most of the sub-prime loans (to that extend most loans in general) hits, there will be crying and gnashing of teeth. Can I join the popcorn?
We’ve already seen the tipping point. That was Fremont General ceasing to offer second mortgages. If you’re an officer that owns stock of a publicly traded company engaged in this practice and you see Fremont trade up 10+% as a consequence of eliminating second mortgages, greed becomes a motivating factor not to offer them.
Additionally, Fieldstone was big news, too. The worst subprime mortgage company got a bid for ~60c on the dollar. Meanwhile, the best trade at book. That oughtta send a shiver down peoples’ spines.
Lastly, Wall Street has been trying to buy these subprime originators so they can package their loans up, sell them, and collect a fee. If I had warehouse lines out to someone and I wanted to get into this business, pulling a line and forcing bankruptcy would be tempting, as I would then be a senior claim and buy the business at a hefty discount.
I think we’ve already reached the tipping point, but we’re not done tipping yet.
imo tipping point is late 2007, but MSM pick this up in 2008 and panic starts at the end of the 2008 spring selling season. The BBB MBS tranches that are toxic now are “only a sub-prime problem” according to the MSM. If I remember right, good credit mortgages got 3/1 ARMS for the most part, so 2007 is the first year of “regular” mortgage resets assuming that 2004 was the first big year of the ARM. So late in 2007, we should see foreclosure rates increase for higher loan amounts, and the FB’s looking at resets will start to consider sale or refi. Also, a flood of housing started in 2005 and 2006 should start entering the market at the end of 2007. I think the 08 spring season will be where panic sets in but the tipping point is happening now to end of 2007.
Thanks for linking and commenting on my blog.
Just to clarify. In my post on Boulder area foreclosures, “nothing to worry about” is not an accurate summation of my post or comments.
If you’re a homeowner worried about your property values, It’s important to look at the relative impact of foreclosures across a region, and in that context, Boulder County is doing remarkably well. If you read the post, you’ll also see that I spotlight where in Boulder County those foreclosures are concentrated. It’s not impacting all areas in the same way.
Still the trend itself is troubling and, according to volume data on originations and the likelihood of a general economic downturn in the next 18-24 months, I expect foreclosures to get worse before they get better. I don’t think we’ve peaked and foreclosures will continue to be a major problem for Colorado.
The good news (if you live in Boulder) is that our County is holding up better than others in the region and it seems as if the foreclosure blight is concentrated in one area and price range: the low end of Longmont’s housing market.
In Miami Beach prices seem to keep going up slightly. I have been watching specific areas very closely and noticed that a number of units that were on the market for over a year with dropping asking prices all of a sudden sold for much more than the asking price. In the building I rent , one unit last monht that was on the market for over a year sold for 100K over the asking price and far higher than any of the comps. Last week I noticed that 2 units that had been on the market for over a year, one for over 2 years. The asking prices had gone down over this period to 279K from 350K and now are listed for 425K each. The units have different owners but the same realtor. I emailed the realtor and asked why he thought these units that did not have any view would sell for 425K when even the penthouse does not sell for that amount. He sent me an email back in caps asking me who I was and why I was contacting him. I smell fraud and have called the local FBI. Will wait and see and if these units go into pending sale, I will contact them again. The seller obviously will receive 146K back from the buyer and the unit will eventually foreclose. If nothing gets done I guess this indicates that the government could care less.