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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Is the Sh*t finally hitting the fan………..
From Roubini’s blog.
http://www.rgemonitor.com/blog/roubini/
The BBB- rated portions of ABX contracts are “going to zero”…And the “Subprime Carnage” Worsens…
Nouriel Roubini | Feb 22, 2007
The two panicky statements above (The BBB- rated portions of ABX contracts are “going to zero” and “subprime carnage”) are not mine. The “carnage” metaphor was used today by the usually sober and not panic-prone Wall Street Journal (and used interchangeably in recent days with the “meltdown” term by other mainstream media and analysts). While the former statement comes from the head of a securities brokerage cited today by Bloomberg:
The BBB- rated portions of ABX contracts are “going to zero,” said Peter Schiff, president of Euro Pacific Capital, a securities brokerage in Darien, Connecticut. “It’s a self- perpetuating spiral, where as subprime companies tighten lending standards they create even more defaults” by removing demand from the housing market and hurting home prices, he said.
Taken literally the statement above is an obvious and clear exaggeration as ABX prices are nowehere close to zero. But from a substantial point of view - and as a metaphor of that ABX market - the statement is actually correct as prices of ABX BBB- indices are literally in a free fall. At the current asymptotic rate of fall (see charts here) they could in principle reach zero in a short time. For example the price of the ABX-HE-BBB- 06-2 - that was trading close to par (100) between August and Nobember 2006 - is now down to 72.71. The price fall since November could be well described by an exponential hyperbolic function (a “free fall of the cliff” in the layman’s language of those who do not have a Ph.D. in finance). And at this rate of price fall of course - as argued by Mr. Schiff - prices are “going to zero”.
But you do not need to reach zero to have an sub-prime “carnage” or “meltdown” (the latter term used - among many others - by the smart and still bullish Richard Berner of Morgan Stanley): even at the current price of 72 the cost of insuring against default on the riskiest tranches of subprime mortgages is already literally astronomic, having surged from the 50bps over Libor of a few weeks ago to the 1200bps plus (and rising by the hour) in recent days. To cite Bloomberg:
Subprime Mortgage Derivatives Extend Drop on Moody’s Reviews
By Jody Shenn and Shannon D. Harrington
Feb. 22 (Bloomberg) — The perceived risk of owning low- rated subprime mortgage bonds rose to a record for a fifth day after Moody’s Investors Service said it may cut the loan servicing ratings of five lenders.
An index of credit-default swaps linked to 20 securities rated BBB-, the lowest investment grade, and sold in the second half of 2006 today fell 5.6 percent to 74.2, according to Markit Group Ltd. It’s down 24 percent since being introduced Jan. 18, meaning an investor would pay more than $1.12 million a year to protect $10 million of bonds against default, up from $389,000.
Moody’s said late yesterday that it may cut the so-called servicer ratings for affiliates or units of lenders including Irvine, California-based New Century Financial Corp., the second- largest lender to subprime borrowers. Declines in the ABX-HE-BBB- 07-1 and similar indexes accelerated this month as New Century and HSBC Holdings PLC, the biggest lender, said more of their loans were going bad than they expected. London-based HSBC today said the head of its North American unit stepped down.
“I do not think it is surprising we have trouble in this sector of the market; I think the surprise is the speed at which it has unfolded in the last couple of months,” said Mary Miller, director of fixed-income at Baltimore-based T. Rowe Price Group Inc., which manages about $335 billion in assets…
Moody’s Review
“Protection-sellers largely have stepped away until the market settles down,” Peter DiMartino, asset-backed securities strategist at RBS Greenwich Capital, wrote in a note to clients today. “Recent mini-rallies were just a few brave souls hoping they could actually catch the falling knife.”
Moody’s said it also may reduce servicer ratings of affiliates or units of Ameriquest Mortgage Co., Accredited Home Lenders Holdings Co., Winter Group and NovaStar Financial Inc., which this week reported a surprise fourth-quarter loss of $14.4 million. The ratings affect how much protection for mortgage bond investors ratings firms require. Potentially weaker servicing at the companies may hurt existing bonds, Moody’s said…
The level of delinquencies and defaults on subprime mortgages made last year is the highest ever for such loans at a similar age, according to New York-based Bear Stearns Cos.
`Taken a Hit’
Concern about low-rated subprime mortgage bonds have caused yield premiums to rise on low-rated bonds of so-called collateralized debt obligations backed by the debt. Yields on typical BBB bonds from such CDOs widened 1 percentage point relative to benchmarks in the week ended Feb. 15 to 5.50 percentage points, according to JPMorgan Securities Inc.
“Liquidity has taken a hit as market participants wait for the dust to settle,” Christopher Flanagan, an analyst at New York-based JPMorgan, wrote in a Feb. 20 report. CDOs buy loans, bonds and derivatives, and resell the cash flows in new bonds, some of which have higher credit ratings…
Low-rated subprime bond prices are getting to the point where Kirby said he may need to “reassess” whether the yields are high enough to cover the risks.
`Going to Zero’
New series of ABX indexes are created every six months by securities firms including Bear Stearns, and Goldman Sachs Group Inc., and London-based Markit. They indicate prices for default swaps linked to 20 bonds, not prices for swaps on each.
Besides bondholders, stock investors have used ABX contracts as a way to bet on the declining fortunes of subprime mortgage companies or the housing market.
The BBB- rated portions of ABX contracts are “going to zero,” said Peter Schiff, president of Euro Pacific Capital, a securities brokerage in Darien, Connecticut. “It’s a self- perpetuating spiral, where as subprime companies tighten lending standards they create even more defaults” by removing demand from the housing market and hurting home prices, he said.
Not to worry. This has all been modeled, hedged, etc.
LOL
I am though going to sell my Countrywide stock which I’ve held in my IRA since 1994.
“has all been modeled,”
I am wondering how well their modeling assumptions are holding up?
Editorial suggestion:
hurting home pricesenhancing home affordabilityGood point Stucco. we should indeed use phrases like “increasing home affordability” for falling prices, and should have long called “home price appreciation” what it really was: home affordability destruction.
spin It ?
‘But you do not need to reach zero to have an sub-prime “carnage” or “meltdown” (the latter term used - among many others - by the smart and still bullish Richard Berner of Morgan Stanley): even at the current price of 72 the cost of insuring against default on the riskiest tranches of subprime mortgages is already literally astronomic, having surged from the 50bps over Libor of a few weeks ago to the 1200bps plus (and rising by the hour) in recent days.’
This is a real-world crash, not the straw man the MSM keeps looking for. The Black Monday event on Wall Street (500pt. / 20% 1-day drop) was an anomaly thanks to the hot-wire effect of modern computer program trading; crashes normally play out over a much longer time horizon of days, months or years, and are largely invisible thanks to the apparent inability of MSM and high-level government officials to see them through the windshield. They only eventually become visible through the rear-view mirror.
Indeed, a real-world crash!
Too bad nobody could have predicted something like this. (ahem…like the posters here at Ben’s Housing Bubble Blog)
The bears are finally waking up from their hibernation. This is going to be a doozy.
“At the current asymptotic rate of fall (see charts here) they could in principle reach zero in a short time.”
Brings to mind that old (bad) math-geek joke based on Zeno’s paradox –
A mathematician and an engineer both notice a naked lady across the room.
The mathematician decides to ignore her, reasoning that if he goes half the distance across the room, then again goes half the remaining distance, and so-on ad infinitum, he will never make it all the way across the room.
The engineer goes for it — ‘I may never get all the way across the room, but I can get infinitely close.’
“exponential hyperbolic function”
Is this for real, or just a PhD metaphor? (I looked up “exponential hyperbolic function” on mathworld.com, and all I got was cosh, sinh, etc.)
The Relationship between Hyperbolic and Exponential Functions
Roger B. Nelsen
http://links.jstor.org/sici?sici=0746-8342%28198801%2919%3A1%3C54%3ATRBHAE%3E2.0.CO%3B2-Q&size=LARGE
Without reading it, that sounds a lot like what I saw on mathworks.com. My question is more specific: Is there such a thing as an “exponential hyperbolic function,” or was this just an instance of mathematical hyperbole?
hyperbolic functions are sums and differences of exponential functions.
This may be some “economics-speak”. As a mathematician, we would just call this an exponentially decreasing function.
That was my guess. Thanks for confirming.
P.S. Most economists are wannabe mathematicians…
I will try to explain in simple graphical defintions instead of mathspeak:
Exponential - the graph line has a curved shape (curved up or down) versus a linear shape (straight line). The effect is multiplying itself over time.
Hyperbolic - The shape of the curve is a quaudrant ( or one-quarter) of an oval. The rate of curve is either progressively increasing or declining.
The combination of the two separate adjectives was simple a creation of the author and the use of hyperbolic in this kind of description is rare and akward, but not inaccurate. Walker is correct that exponential is the only word really needed of the two.
f(t) = K exp(- rt),
with t g.e. 0, K = g.t. 0 and big, and r g.t. 0
NO It’s the way how natural world functions. Regrettably our little primitive mind, included the little chimpanze brain of Alan Good Greenspan and Ben Bernie cannot think or even imagine what hyperbolic exponential function is. Financial phenomenas work a lot like bacteria population. You start with a small population with a lot of food. Then population litterally explodes. The food dissapears. The bacterias die and eat the dead and the living. The population crashes. BOOM and BUST. Mother Nature ain’t a nice gal.
just some thoughts:
- why is nobody in Europe interested in this, we do have very similar subprime mortgages (mostly from the last 5 years or so, although probably smaller % than in US) but no sign of a change in easy lending or a repricing of risk.
- what was the risk premium on this subprime stuff 5 or 10 year ago? 1200 bp still sounds very cheap to me for this kind of buyers who have nothing at stake.
- where are the lawsuits against S&P, Moody’s etc?
- where are the lawsuits against S&P, Moody’s etc?
————————-
Been saying this was coming for a long time now. No doubt the lawsuits will be flying in a year or two.
———
Have you tried calling around to different lenders to see if anything might be changing “on the ground” but not in the MSM, yet?
As you know, this credit bubble is global. I have the distinct feeling that what happens here will ripple across the globe in time.
Please keep us informed as to how things change (or not) over there.
Don’t you just love this blog?
Where is Neal? I just purchased 4 tons of popcorn kernels, 2 tons of bon-bons, and 3,000,000 gallon of Coke.
Why did I purchase these items? I am preparing for a party that will take place on a cliff overlooking the Subprime mess. The Titanic just hit the iceberg and is sink fast. There is no rescue insight for the FB. The stock market does not care and the Feds are thumbing their nose at this disaster.
So please join me on the cliff over looking this mess and please bring your sleeping bag, because it is going to take a long time before any help arrives.
http://www.prudentbear.com/articles/show/355
Similar stories about the “carnage” are being posted in many places on the net, from financial sites, to lifestyle sites, to conspiracy theory sites, so the cat has clawed its way out of the bag.
What I would like to know, perhaps as a topic, what do the fellow bloggers feel we should be doing personally to prepare for this? Because as much as we think we may have dodged a bullet by not buying a house, or residing in one purchased pre-2000, the fallout from this will affect us, too, probably in ways we can’t even being to imagine. We can joke about “keeping our powder dry”, but seriously, what should someone do to insulate oneself from the fallout?
And maybe, before we even discuss that, what exactly would the “fallout” be, both financially and in everyday life? Would banks close, and might it be prudent to have some gold and silver coins under the bed? Should we be buying gold and silver items cheap on ebay? Will we be vulnerable to attacks by less fortunate neighbors?
I’m looking for practical advice for an average, prudent person. Call it what you will, but I’m looking for survival advice. All suggestions will be gratefully accepted.
I don’t mean to sound like a typical paranoid survival nut, but I just installed my holographic sights on my Beretta .40 cal entry weapon. The only thing I fear are the sheeples reaction to the whole economic collapse, probably by then though the gov’t will have created a diversion(attack Iran) to get everybody looking left…
You don’t sound like a nut, Jake. “Hope for the best, prepare for the worst” is one of the best pieces of advice I’ve ever heard. Below, Russ talks about protection as being part of preparation.
Here in bubble country (Florida) we have a large population of illegal immigrants who are already out of work due to the slowdown in housing. Their behavior, when pushed to desperation, is already evidenced by the way they react to being pulled over by the police. Unlike American citizens, they don’t just docilely comply with requests to “come out with your hands up” or “get down on the ground” or even “license and registration, please”. Nope, they fight back. They’ve been known to shoot, to try to outrun the cops and failing that, have even attempted to run over cops with their cars, or ram a patrol car. Does anyone think these same folks will say “Please and thank you” if they need to feed a family or a habit?
I think some prudent advice would to have sturdy doors, good locks and lighting. What you will realistically see is an increase in crime(theft). If you are a woman I always recommend some sort of pepper spray or personal defense item. If you want to go the extra mile you can train at a gun range and get a license for concealed carry, the only downside to this is getting sued every time you shoot someone, and if are carrying a concealed firearm you have to be ready to use it. At any rate I think a less urban area would be safer, the further you can seperate yourself from the “have-nots” the better off you are.
Jake — From what part of the US are you posting? I am curious why you are worried about a crime spike — do you see it happening everywhere, or only in your own hood?
GS,
The rising crime rate seems to be evident across the country. Surely you’ve seen it here in SD already, no?
The gang crimes, especially, are on the rise.
Hate to sound like a nut as well, but my mother lived through WWII in Europe, and my father grew up during the Great Depression in the U.S. Personal protection is a given. Agree with the above: get good outdoor and indoor lighting (there are devices where you can control lights remotely), have secure locks (research lock “bumping”), get an alarm and a dog or two. Otherwise, have some cash on hand, and a gun (or two, or three…). Train everyone in your family to use the guns and practice different scenarios (groups of individuals try to break in, forced entries, night & day scenarios, etc.).
I know it sounds over-the-top, but agree that one needs to prepare for the worst & hope for the best.
I would like to hear a bit from the gold bugs on the blog as I have been considering the purchase of a bit of the yellow stuff over the past month or so.
Some of the questions I have for the gold bugs include the following:
1. Physical vs. paper
2. Attractiveness of gold mining companies
3. What kind of physical is the best (which type of coins, wafers, or bars, and sizes)
4. Storage
5. Typical acquistion and liquidation costs
6. Where and how to sell physical
7. Gold strategy for the following allocation amounts:
a. less than $25,000
b. $25,000 to $100,000
c. $100,000 and greater.
The acquisition of gold is more or less clear however the resale procedure is not clear. Where do you sell gold and how does the buyer get comfortable with the product you are delivering on the secondary market? How does the buyer confirm the gold being sold is not gold plated lead or pirate Maple Leafs? How to keep your gold from being scratched or damaged? Any other useful tid bits from real life experience.
Since I am in Europe I have considered the use of a safe deposit box in Switzerland for long term storage of any gold I acquire. Is this a practical storage option? It seems to me that the conditions necessary to send gold to the stratosphere are the same conditions under which it is most likely to be confiscated or stolen from the owner.
I know Ben has Money and Metals and many of us will probably move over there in the next year of so but for now most of the traffic is on HBB so I am posting up here.
Please note that I am not an “End Timer” and based on my experience in Russia in 1998 I do not believe for a minute the States will collapse into lawlessness however something in between the 1982 recession and the 1930’s depression is a real possibility.
The guns and ammo option is not a bad one however I do not see a lone gun in the house contributing much to one’s safety. There are a number of reasons people had twelve kids in the 19th century. Labor for farming was one of them as was extra rifles to setup good cross fire for the kill zone. I suggest that people of modest means invest in practical books of knowledge which may assist them in learning a trade or skill when the “fry guy” and “wal mart greeter” positions become obsolete.
Your questions could consume the whole blog but I will tackle a few points. For ongoing information check Bens’ gold blog.
Physical vs. paper - paper can be created and confiscated with ease. I have both; physical for keeping and paper for trading.
Gold miners - research companies individually or buy gold indexes (HUI, etc). I prefer companies with mines in western countries due to less risk of government appropriation.
Storage - bank vaults if you trust the government not to steal it as FDR did. Otherwise, dig hole and make map, or store overseas through internet dealers/ETFs. Your swiss vault would work.
Buying/selling - easy and cheap for paper, but subject to capital gains. You can buy physical from internet or coin dealers with varying markups less than 5%. Cash transactions so capital gains are on the honor system.
Coin or bars - personal choice. I prefer bars because there is less premium.
Resale- sell back to dealer
Authenticity - gold bars come with assay certificates from the big houses.
Welcome to the world of gold investing. See you on the metals blog.
Authenticity - gold bars come with assay certificates from the big houses. So does housing ( appraisers certficate) diamonds the same. Fraud is present everywhere. Buyer beware!!!
“Since I am in Europe I have considered the use of a safe deposit box in Switzerland for long term storage of any gold I acquire. Is this a practical storage option?”
Hell yes! And Switzerland has the best buying/selling opportunities (outside of India) for small individual ownership. The cost of the lock box was ~1% of the value of the gold, but then there were no dings (surcharges) when you wished to sell the gold - tests for purity etc were not required. If the gold is something you might take with you, then the $$ value you wish to spend will dictate the investment. e.g. with a $1,000,000 to invest buy 400 oz standard bars , these bars are stamped marked and less expensive to test when you sell. If it is a $1000 then you might choose to buy a marginal gold producer stock. A marginal gold producer is one whose cost to produce an oz of gold is the same as the current price of gold. The reason is that a $100 increase in the price of gold is a 100X increase in the marginal producers profits. Marginal producer publicly traded stocks can be found by the handful on the Australian exchanges among others.
Thanks Watcher and Hoz.
FYI, Ben stated that Popper’s post will be the weekend topic at M&M. Come one, come all!!! M&M is the HBB of the future.
“Because as much as we think we may have dodged a bullet by not buying a house, or residing in one purchased pre-2000, the fallout from this will affect us, too, probably in ways we can’t even being to imagine. We can joke about “keeping our powder dry”, but seriously, what should someone do to insulate oneself from the fallout?”
I absolutely agree with you! If we truly believe that housing melt down will take us into a recession then to what depths will we be affected? Even government workers who may feel safe may be looking at pay cuts or loss of jobs and a decrease in retirement pay. What about about pension plans, are they safe in a melt down? What about savings, where will your money grow and be safe? It probably won’t get to those levels but a plan is better than no plan at all.
we may have dodged the bullet (avoided quick death) , only to find ourselves suffering a more painful one from the toxic environment.
“The living will envy the dead.” - Physicians for Social Responsibility
A nice, big dog — preferrably a shepherd. Best security system ever made: intelligent, instinctive, highly mobile, innately protective, great deterrent value, able to operate directed or independently, and works around the clock for love and kibble. Oh, and one of the best companions you’ll ever have.
Just to expand more on my request for preparatory advice, just take, for example, an average prudent person who doesn’t own a home, had little or no debt, but maybe not a whole lot in savings or investments (and really, if there is a global depression, what would happen to any savings or investments anyway? Wouldn’t they go “poof”? After all, it is really just paper. How would you even get that “paper” from a bank that closed its doors or an investment house that suspended activity?).
Anyway, what sort of checklist would you give this person to prepare, if they were someone you cared about?
Inflation linked government bonds, preferably in countries with low Debt:GDP ratios.
The reason being that the ultimate exit if it really goes horribly wrong is to let inflation devalue the mountain of global liquidity and debt so it is not worth anything any more.
Somewhat ironically, physical assets such as gold, silver and (dare I say it) property will actually stand up pretty well too.
In this scenario, the Fed / BoE would not increase interest rates to hold inflation under control but would let it run for a while, and the currencies of the countries with a problem would devalue in relative terms.
Regards,
Loafer
Loafer, thanks. These are the sorts of advices that are important. When I read this blog and people are talking about this and that financial situation or move, it’s like watching a game of chess with many players, with different folks arguing for and against the wisdom of various “moves”. But how can you really play any game if the rules are not fully known or if the gamemasters are constantly changing the rules? Someone is bound to get mad and kick the board over or sweep off all the game pieces.
Using the paradigm of a game, I want to know how to prepare if the board is swept and your statement “the ultimate exit if it really goes horribly wrong is to let inflation devalue the mountain of global liquidity and debt so it is not worth anything any more” would be a sweeping of the board.
I see sort of analogy between the mess in the Middle East and the mess in financial markets. Both have been so gamed, there’s no way out but to sweep the board. Question is, what method will be undertaken to “sweep the board”?
I think you need to get away from the tin-foil scenarios.
I am not one of those who see a wholesale collapse of the banks, or governments. I think there will be repricing and a possible recession, but not a depression (if you see what I mean).
What I do think, however, is that we are 12 years or so into a growth curve, and that is too long.
If I look at the Banking, Hedge Fund & Private Equity markets in which I spend my days, I see lots of very clever people, a significant number of which have never worked in a recession because they are too young.
I am proud of the fact that I work for a global top-10 bank where ALL of the senior staff have grey hair or none, and think about the risks of everything we do.
Some of our traders, given access to enough cash to play with, would scare me. Thankfully they are kept in check. Not sure about the investment banks, though.
To go back to my original post, I think the reason why governments may be attracted by a bit of inflation, is that it is politically reasonably cheap to do, and it seems to me that cheap politics is what it is all about in both the US and UK at the moment.
Regards,
Loafer
“I think you need to get away from the tin-foil scenarios.”
Loafer, your posts are wise and demonstrate stability, so although I am tempted to bite back on the above comment, I’ll bite my tongue instead. But I am disturbed about the wide use of this “tin foil hat” business as a sort of put down to people. A Depression (with a capital D) DID happen here once and it is not beyond the realm of possiblity that it can happen again. Your post above says:
“Some of our traders, given access to enough cash to play with, would scare me. Thankfully they are kept in check. Not sure about the investment banks, though.”
So, you must have some idea of what those traders would do. I would suggest those are the ones with the genuine tin foil hats.
And to expand, ask some of the better off folks of New Orleans to take off their tin foil hats when they were guarding their property with their own arms. When the National Guard came through, they disarmed them, leaving them vulnerable to attack, although the residents works around it. Was New Orleans a “tin foil hat” scenario? Was Long Term Capital Management a “tin foil hat” scenario? Only intervention prevented LTCM from sinking the economy. And that’s a shame, because it should have been allowed to go to hell in its own handbasket and drag everything with it, so to teach us all a lesson. Because we just might be staring down the barrel of a bigger gun than LTCM right now and the blast could be a whole lot worse.
Yes of course, banking and private equity pose no risk to the system. They haven’t been irresponsibly creating risk and credit with derivatives and leveraging the carry trade. Amaranth was good for the energy market and Goldman Sachs are missionaries. There will be no depression and the markets will rise to infinity. It is a new era and anyone who believes otherwise must be wearing a tinfoil hat.
palmetto
Fair response!
What I mean is that I do not think a Depression is likely, less still the breakdown of civil society, and it worries me when posters on here talk about burying gold and buying guns and sound like they actually want it to happen.
If you want my honest view, I think the US and Europe have been at a party, it’s time to go home and we are going to have a big hangover. I do not think we’re going to die of alcohol poisoning…!
HAGW
Loafer
“What I mean is that I do not think a Depression is likely, less still the breakdown of civil society, and it worries me when posters on here talk about burying gold and buying guns and sound like they actually want it to happen.”
Fair enough, Loafer. I would argue that civil society is already beginning to fray, however, as a result of insane monetary policy. Is it a civil society when so many have been swept into mortgages they can’t afford and the fraud has been so rampant? We haven’t yet seen wholesale riots or roving bands of unemployed, just the odd case of road rage, unless of course you count the massive illegal immigrant demonstration that took place in streets of the US last year.
I DON’T want a breakdown, I have my doubts as to whether I as an individual could survive it. But I DO want to be prepared for the possibility. I recently spent a couple of very cold weeks in Connecticut. We’re talking boneass cold. For a Floridian of over 25 years, not a comfortable scenario. I kept thinking, what if the heat went out? Or more likely, what if we couldn’t afford the heating oil? There was a fireplace in the house, but even then it was difficult to imagine everyone huddled around it, trying to stay warm.
Some of our traders, given access to enough cash to play with, would scare me. Thankfully they are kept in check. Not sure about the investment banks, though.
So does that mean NOBODY’S traders will do anything similar?
PDX
I think it highly likely someones traders will do something stupid.
That is why I look at blogs like this…
Regards,
Loafer
Loafer,
What makes you think it can’t or won’t happen again? Based on everything I’ve learned we’re in far worse shape, not better.
Unfortunately, Loafer’s scenario has had a real world test: Japan.
You can add liquidity but if no one wants to lend or borrow in a delfationary situation all the liquidity in the world won’t help. Maybe it would be different in the US….then again, maybe not.
It is different in the US. Unlike Japan, where people saved money during the deflationary period even when the government pleaded them to buy, Americans will buy until they are hauled off to jail!!
Also, Japan has a more homogeneous population, with strict moral/ethical guidelines.
Without a core system of beliefs, U.S. residents do not have the same incentives or motivation to “do the right thing”. We are fractionalized and, without adequate resources, could easily fall into a situation where we have warring “tribes” (Latin immigrants vs. “whitey”, for instance), where one group will feel compelled to steal from the others.
In Japan, the geography (relatively small island where people tend to stay in local areas for generations) necessitates civility and social responsibility, as one cannot easily disappear into a crowd as easily as we do here.
The U.S. has long attracted adventurers, risk-takers, rebels, etc. to enter our country. We have a very different social dynamic here, IMHO.
palmetto,
When things get really bad, you will want the basic necessities.
1. Water
2. Food
3. Shelter
4. Protection (gun)
In short you will need to be on your own farm somewhere
and be able to be self-sufficient. Many people were like this
in the 1930’s.
Like the song said: A Country Boy can Surrvive!
Remember that was the thinking back in 2000.
This is good, Russ. Basics, always basics. I recall my father giving me that same advice starting out in investing. He told me people will always need to eat, to drink and bathe and to have a roof over their heads. So after providing the same for his family, he urged investments in utilities, food companies, etc. And when you think about it, defense stocks do pretty well, don’t they?
Like the song said: A country boy can survive, but can a city boy survive in the country?
One of the easiest things to do is move your funds out of USD denominated assets and keep as little cash in dollars as possible. Depending on how bad you expect things to be the range of possibilities extend from foreign currencies to precious metals, farmland, even dried food…it depends on you, really.
In your example however the person has no home and not much savings or investment; in that case there seems to be little a person could do because they have little to protect.
That is assuming you are expecting the hyperinflationary outcome. I hear good arguments for both it and the deflationary outcome. The problem is that the financial preparations for these two outcomes are totally different.
“The problem is that the financial preparations for these two outcomes are totally different.”
So, how to hedge?
Take this from a gold bug on the lunatic fringe of the gold bugs. I think if we are seeing a credit implosion what we will see is the demand for cash become astronomical. So when does gold become very “dear”? It is when the minority, the creditors and the informed feel they are getting ripped off by being paid back in in dollars. (The old saw about creditors being chased by debtors demanding the abilty to repay) In my mind that happens after a deflationary crash and an inflationary response by the powers that be. How do you know when that is going to happen? According to some it will be when the futures price of gold trade lower than the spot price. Essentially meaning people value the real over the paper. What I am doing right now is developing a cash liquidity moat around my precious metal holdings. Some guns and tinfoil aint bad either. Please google Dr Fekete for some more ideas on the future and spot prices.
“futures price of gold trade lower than the spot price”
The Last Contango in Silver…
The trigger will be a simultaneous real estate and stock market crash. My moat is complete fellow lunatic.
“in that case there seems to be little a person could do because they have little to protect.”
True. But they have the most important thing to protect, which is their life and that of their family, if they have one. In which case, Russ’s checklist is a good one. Simple preps. Not owning a property at the present time is a plus, since they would be mobile and could move from an apartment to a more secure living situation in a better area. Small towns might be good places to be. If they are mechanically inclined, their services might be in demand to keep cars running or to devise manual methods of pumping water from wells. And they should have something to trade as well.
Hey, the locals are putting out to sea in small boats, maybe the passengers of the SS RE BUBBLE will be saved. Wait, they’re not picking up struggling FBs, they’re salvaging flotsam and jetsam (BMWs and Sub-Zero appliances). I guess the FBs who can’t swim to shore will drown.
Massive haircut in Poway, California on a bank owned propery!
Zillow Sale History
12/28/2006: $732,431
08/19/2004: $976,000
03/17/1997: $295,000
Current list price : $710,900.
That is better than a 25% drop without considering sales costs!
I had a realtor tell me a few weeks ago that Poway was one of the only areas in San Diego that didn’t drop in price. lol
2004 in San Diego was an absolute mania. I hope historians were
taking notes because I don’t think we will see anything like that again
in my lifetime. Houses were going up 5+% a month.
You must not have been around in SD in 1987 and 1988 then. Same thing. I had realtors knocking on my door asking to list the house and it wasn’t even for sale.
I wasn’t around during those years … I know we have to adjust for inflation and all but the prices were SO much lower back then. In March-June in 2004 a lot of owners saw there equity increase 50+k a month. My god that is better than a 600k annual salery … no taxes if you took the cash and ran! I think maybe a better comparison would be to the overnight millionaires say a Qualcomm or similar tech company made in the late 90s. Its amazing to me how being in the “right” place at the “right” time can have such a profound impact on your life.
pemeliza said……..
“That is better than a 25% drop without considering sales costs!”
Is that a “exponential hyperbolic function”?
sounds similar to expensive houses in Amsterdam around 2001: prices dropped around 30% in a short time (actually very little drop after a price runup of 500% or so), but they have quickly recovered and now sell for nearly double the price from 5 years ago. It’s all about easy money (surging money supply, artificially low rates, free stock market and housing put options etc.).
‘It’s all about easy money (surging money supply, artificially low rates, free stock market and housing put options etc.).’
It’s also about easy building, as nearby Santaluz has seen a ton of new inventory added over the past five years in the $1m+ range, which creates some big problems for owners of $1m+ homes in Poway, in the form of natural air conditioning — Santaluz is 5 miles closer to the ocean than Poway in the middle of a lovely valley which funnels in cool coastal breezes. The same breezes feel more like a blast furnace by the time they reach Poway.
30% of 500% is quite a lot!
If the start value was €200k, the peak was €1m and the dip took them back to €700k, it is not insubstantial!
How much are the canal houses in central Amsterdam - say on Singel - now? I guess €2m - I’d be intrigued to know…
Now this is what I call a decent petty cash book.
http://finance.yahoo.com/q/it?s=MSFT
To be fair, he is giving away the proceeds…
yeah, but about $280 million in 11 days is still a chunk of change, not including everything else over the past two years.
There appears to be a widening gulf between pronouncements by high-level Fed staff (”I’m sleeping better at night now,” etc.) and the situation on the ground (subprime moving from subsiding to sinking status).
What’s up with that?
Multiple choice question:
The Fed
1) is missing something important, thanks to the blinders of the neoclassical economic paradigm;
2) would rather avoid becoming the messenger who gets blamed (and killed);
3) has developed a Smart Bomb which they will drop later this year to save the day when the SHTF;
4) all of the above.
My vote is for 2. Lots of railing against Greenspan right now on the more bearish, conspiracy theorist sites.
Ah, for the days of the French Revolution (or Alice in Wonderland). “Off with their heads!”
3) has developed a Smart Bomb which they will drop later this year to save the day when the SHTF;
Nyet! I think they’re all out of material.
(subprime moving from subsiding to sinking status).
(5) No problems ……….it’s just a flesh wound
I include your answer (5) under my answer 1).
Seriously, Stucco, I don’t look to the Fed to do anything. When you think about it, looking to the Fed is like being a bunch of superstitious ancient Greeks looking up to Mt. Olympus for pronouncements and signs from the gods.
Screw the Fed. If there is REAL carnage accompanied by a societal meltdown, members of the Fed will be at an “undisclosed location”, shaking in their boots and hoping to avoid the anger of the masses. And I have some advice for them: Don’t ever come out!
Nah, just release a couple of pictures of Britney Spears wearing no underwear and they’ll be distracted for months.
ROFTLMAO! Sad but true. Interesting that Britney and Anna Nicole are at the top of the charts right now.
3 years ago we were discussing Miss Spears and a friend believed that she would be great as a grade ‘B’ porna actress. I wish I could call the stock markets that well!
YUUUUUUUUUKKKK!
“superstitious ancient Greeks looking up to Mt. Olympus for pronouncements and signs from the gods”
This is pretty much what I have been suggesting…
http://en.wikipedia.org/wiki/Cargo_cult
Fantastic, Stucco, I like it! Now, we’ve just got to stop propitiating the gods on Wall Street and in Washington. You know, I’ll just bet that gods mythologies down through the ages were nothing more than simplistic explanations of economies and those who held much of the wealth. I once told a friend that Christmas was nothing more than a marketing scheme that had evolved over hundreds of years. For example, the colors red and green are known to stimulate buying by those who study the psychology of color. I would suggest this knowledge has been around far longer than we realize.
I love this one:
“Famous examples of cargo cult activity include the setting up of mock airstrips”
That solves the mystery of those ancient markings that look like airstrips when seen from the sky in South America. Cool!
Stucco, you’re a dangerous man, because you get people thinking and to the powers that be, “thinking” is a dangerous activity. I was reading an article by Jane Smiley on HuffPo this morning about what would be the result of a declaration of martial law. I loved her last line:
“Our armed forces can’t subdue Iraq. I can’t imagine that Bush thinks they could subdue New England or the West Coast, much less the whole US. To imagine himself commanding such a thing seems like magical thinking at its most obvious. So, what would you do if Bush declared martial law, laugh?”
OK, this is not intended to be a Bush bash, but to examine what and who we set up as “gods”, particularly in the area of finance. Imagine what would happen if folks just decided to ignore or even laugh at the Fed? How about laughing at Wall Street? Because I would suggest that if martial law does get declared, it would be only to protect the “gods” as embodied in the central bankers and Da Boyz of Wall Street.
“… cargo cult activity include(s) the setting up of
mock airstripsvirtual helicopter landing pads”“virtual helicopter landing pads”
Fantastic! Time for a remake of the old Tommy James song “Hanky Panky”: “My baby does-uh Ben Bernanke”.
Oh, heck, who’s the blogger who puts bubble lyrics to popular songs? Love to see what they could do with “Hanky Panky” and “Bernanke”.
Yes, my knowledge of anything by Tommy James and the Shondells dates me as an arse-end curmudgeon boomer. It was a great time to grow up, even if you did have to duck under the chair at school during air-raid drills.
Christmas started as a marketing program by a Roman Emperor in the 3rd century AD (I think) after he converted to Christianity. He merged the Roman pagan Winter solstice celebration with the birth of Christ to attract Romans to Christianity.
Palmetto, as I recall it was sm_landlord who put together those musical treats.
Thanks, P’cola. Paging sm_landlord!
Where are you going with this line of questioning GS? According to BB’s congressional testimony, “It’s contained.”
P.S. I smell fire. Is that a controlled burn? Nevermind.
OK, so subprime is toast. But I don’t think investment losses on stupid loans, and foreclosures of deals that should have never been done to begin with, will sink the economy, do you? No one else seems to think so either, judging by the financial markets.
The question is whether there is any evidence that the pain is shifting out of subprime, and is that likely to happen in the future. Mortgage rates on traditional mortgages are still low. So are default rates.
In fact, I just saw a chart I hadn’t seen before in the WSJ, that shows that risk spreads over Treasuries are less than 1.0% across the board — mortgage backed, corporate, municipal, whatever. And Treasury bonds themselves have a NEGATIVE inflation risk premium relative to cash.
Is subprime the canary in the coal mine or the whole problem? And is there some proof, even if anectdotal?
I think it just might be the canary.
I was discussing this issue this morning, and the problem is the whole system of pension & hedge funds that invests in these securities, especially the higher yielding ones.
These vehicles are themselves geared, and then investors in them can also be geared, so you have gearing on gearing on gearing.
It can’t be healthy, and means you get a domino effect if only one link in the chain fails.
But then again, I am a bit “glass half empty” on this subject.
Regards,
Loafer
“OK, so subprime is toast”
As I understand it the “bear” theory is that
“subprime is toast” => “real estate is toast” => “consumer is toast”
=> “economy is toast”.
Many “bulls” refute this chain of implications as follows:
1.) Real estate doesn’t depend on subprime (o.k. maybe in
S. Florida)
2.) The consumer is robust and will keep buying Hummers and
Plasmas even as they lose their home equity. (after all they are
making a crapload in the stock market to make up for it right?)
3.) Even if the “little” consumer stops buying the super rich will keep
right on going. After all the top wage earners account for
“most” of the consumption anyway.
I don’t buy argument (1) one iota although I have to admit
arguments (2) and (3) may yet prove to have some truth behind them.
So yes the economy may well come through this but the real estate market is an all together different story. Ironically the economy stabilizing may yet be the final nail in the coffin for real estate as it may keep the BB helicopters grounded. My theory is that this is exactly the outcome the fed’s want … and likely what most bulls
on wall street are counting on.
“o.k. maybe in” California???
Don’t get me wrong GS I’m as big a bear as they come. I wanted to “present” the bull argument as I understand it and yes there is a remote chance that they may be correct. I think the housing fallout will be far greater than most people expect. On the other hand I expected the fallout of the Nasdaq crash in 01 to be far greater than it turned out being in hindsight. The people who rode JDSU from 300 to 1 basically just lost money and then everyone moved on and made money elsewhere.
That’s because the recession of 2000 was halted by the credit bubble. The “soft landing” was enabled by the credit/housing bubble.
Now, IMHO, we will likely experience the fallout due in 2000 plus the carnage created by the destruction of the credit/housing bubble — unless they’ve got another bubble on the way (have to wonder about that stock market).
“super rich will keep right on going”
The super rich will save us all, thanks to trickle-down (aka voodoo) Raygunomics.
“The super rich will save us all, thanks to trickle-down (aka voodoo) Raygunomics.”
Yes, well, we all know what “trickles down”. I have relatives who live in hedge fund country (Connecticut suburbs of New York, Fairfield County). Trickle down is BS. These folks have NO desire or intention to invest in productive enterprise. They’re all about holding money OUT of the system, looking for profitable places to put it. God forbid they should put a little cash into their communities. At most, they employ a few administrative people and some mathematical eggheads. Oh, and some architects and designers and a builder for their faux palaces.
Maybe the trophy wives drop some cash in the overpriced boutiques.
re. Subprime vs. prime :
Even the commentators on CNBC, you know, the same ones who hadn’t said a word about problems with subprime until last week when it was no longer possible to ignore - even those guys are saying it’s going to eat into prime.
Yesterday and today it was talked about quite a bit. Sorry I’m being so lame with details. ie. I have none except to say it’s being talked about now by people who have studiously ignored all the problems in the past.
Why would it be confined to subprime? Seriously, how many Amerians can trully afford a 400K and up home? Yet in many areas of the country, that’s all that’s been available for several years.
Also, in the Seattle area, and I’m sure many others, realtors and brokers have been encouraging people to borrow outside of their comfort zone- it was an agenda of theirs really for several years now.
Buyer: “I’d like to buy a 400K house, that’s my limit.”
Realtor: ” For what you want, there’s not much in that category, you really should be planning on 475K.” or “Well that property’s just been bidded up”, “You’ve got good credit, we can get you approved for more”.. etc.etc.
It was a racket really, to stretch people in all income categories past a rational limit.
Ahh…here’s something else:
They were pushing ARMs like crazy a few years back to prime borrowers. One friend, who can be stubborn to an almost obnoxious degree, sat with a lender for almost an hour making the guy explain to him in detail just why the ARM loan he was insisting my friend sign up for was better than a 30 year fixed. The lender finally gave up in disgust and gave them a fixed loan.
Another couple, again Prime, but unfortunately for them much more trusting and naive people, *had* a 30 year fixed and were talked into changing it to an ARM a few years into their purchase. When the rate changed and the payment went up, they sold the house. The key point being this was 3 years ago, the market was still buzzing, so they were *able* to sell the house and get out from under quickly.
Both of these are in WA. State. I would not be at all surprised if Prime is a fairly sizable mess in the big bubble markets.
“The question is whether there is any evidence that the pain is shifting out of subprime, and is that likely to happen in the future. Mortgage rates on traditional mortgages are still low. So are default rates.”
You are looking at the wrong market. Subprimers (poor credit and/or highly leveraged borrowers) are unable to quickly sell property for the amount they owe. As a result, they are defaulting. These defaults are being reflected in the subprime paper market. IOW, the value of the real asset is falling and that affects both prime and subprime borrowers alike.
Who loses in the end on defaulted mortgages turned into MBS?
There is the originator. There is the “issuer” like a Bear Stearns. Then the holder of the MBS like a pension fund or hedge fund.
In the first year, apparently the originator (like CFC or New Century of Wells Fargo) have to buy back defaulted mortgages. Or for some relatively short time.
OK how about after that? FNM and FRE issue a guarantee on timely repayment of principal. But they don’t issue sub-primes AFAIK. The MBSs issued by Bear Stearns or whomever…are they GUARNATEED by Bear Stearns? Or does the end holder of the MBS have the principal or credit risk?
If MBSs are guaranteed by a financial institution, I could see it really gumming up the works. If not MBS holders will take the losses, for which they will raise their required interest rate…which would cripple segments of the market but not result in bankrupt financial institutions like the SL crisis.
increasing rates acually invites more risk- this time it won’t work
China is smart in raising margin requirements- that works well
“Who loses in the end on defaulted mortgages turned into MBS?”
That’s the 64,000 question and when are they going to announce…
If you could ask Paul Volcker one question about the housing market situation, what would it be?
Former Federal Reserve Chair Paul Volcker is often lauded on this blog for having the gumption to crank overnight rates up high enough to crush inflation in the late 1970s. He is also a board member of my graduate institution. We are a very small school, and I have had the pleasure of his company on a couple occasions.
If we can develop some cogent and appropriate questions, Ben, I’ll be glad to email Paul the top choice. Obviously I can’t guarantee a response (or, perhaps, a public response), but I have always found him to be frank on other topics. Maybe we can get an exclusive over the main-stream media.
BM
Whither the symbiosis?
Obviously I get the better end of the deal. But I’ve found that well-crafted letters with an honest intersection between their responsibilties (being on the board of a public policy school) and personal interests (money policy) often get a response. I’ve successfully tried this strategy with other members of the board. Figure it is worth a try.
GREAT idea, BM. There are a number of financial minds out there with sane ideas and advice.
I’d just like to hear Volcker’s predictions on what he sees as the outcome of all of this.
Well of course he has a better view of how the fed comes to decisions and the political pressures that are put upon it tha we do. So: “What does HE think is the most likely fed RESPONSE (short and long term)to a RE disinvestment caused recession.”
What a great idea!
I would love to know where he thinks the rates should be right now/near future and why.
I think he actually was on Charlie Rose about a year ago speaking about this (?) but I missed it.
How long before all the home improvement shows that have hit the airwaves over the last 2-3 years (i.e. Flip This House, Flip That House, Sell This House, Property Ladder, Extreme Home makeover etc…) start getting pulled off the air.
the shows are 2 years old now- my wife watches anyway
hot markets !!!!!!
HIVtv
Only to be replaced with “Lifestyles of the Broke and Brainless”
Like that idea Hoz. Honestly, when that show “Lifestyles of the Rich and Famous” came on, I knew it was the beginning of the end. The beginning of the financial mania(s) and end of life as we knew it - at least for a while.
Ben, let’s add some more spice to the HBB gallery - including some pictures of the biggest cheerleader shills and other scamsters in the Bubble blog. I would really love to see these people given their rightful place in the HBB Gallery: Bob Toll (dumped TOL shares like crazy in 2005-2006), David Lereah (incl. his book covers side by side, changed from 2005 to 2006), Leslie A.-Y., Casey Serin, Gary “15% is in the bag” Watts, the NAR ad with the absurd headline (”great time to buy and sell”)…. you get my drift. It’s time to complete the bubble’s epitaph properly and comprehensively.
Also, if some kind soul in SF Bay area could locate and photograph for the HBB gallery the original “Feed the Squirrels” house Linda Gao sold, that would be awesome.
As soon as their advertisers cut their (shrinking) ad budgets……
“…I think the surprise is the speed at which it has unfolded in the last couple of months,’’ said Mary Miller, director of fixed-income at Baltimore-based T. Rowe Price Group Inc.,…” My suprise is how it took this long to get this far. While many expected the IF, the WHEN is the only difference of opinion. As long as, “the when” was forever later, “the if” would never happen now. People wondering who the sucker is who will be left holding the bag, the wondering people is who.
How does Get Stucco get labled a pessimist? I thought Get Stucco is an optimist? My sledom heard crowd is the pessimist - 64% off from the high prices at minimum, all assets (momentarily including gold) loose value accross the board relative to the dollar. The Greater Depression hits, the people become unstable from emotional stress and depression, compounded when the rule of law breaks down and the banks start taking upside down solvent properties selling everything to the Reds.
Unlike the worst bubble areas, flyover country used no money down loans to buy houses eventhough they did not have to in order to buy. The homebuyer in flyover country spent the downpayment on consumer goods because home sales prices always rose slightly. An invisible price increase, perhaps prices should have fallen, meaning prices are very high relative to income, population and wage growth, and future tax liabilities. While a homeower would not make a huge profit they could always depend on selling at close to a break even point, even without adding the downpayment to equity. For the last 40 years, a “dependable sale” has been the norm. Flyover country is now sinking into the same liquidity trap as the bubblest areas. If downpayments become required, the pyramid collapses and consumer spending is sunk The number of homes sold would no longer be as significant an economic indicator without no money down loans, et al., thus a Fed overshoot.
The wildcard is the FBs currently living the American consumerism credit-debt lifestyle on a diet of steak who now face a new lifestyle of being broke and eating less than ramien noodles while living in an empty cold/hot house. A devastating change of lifestyle which could be violently resisted and/or result in roving bands of the unemployed, thus the push to : fence in the US borders, put up steel travel gates on the Interstate Hyway system ramps, require a National Real ID, require installation of locator GPS and remote disablers in autos, the creation of massive expansive databases with a nationalized centralized law enforcement assisted by a camera on a satilite, on every street and in many homes. Then hyperinflation kicks in leading to a crack up boom, and a replay of the French Revolution, only it fails.
Already the Military Commissions Act grants - in principle - full dictatorial powers to the executive, ushering in the absolute controls needed to fully realize the potential of our outdoor prison cities with only two economic and social classes resulting, the ultra-priveledged and the poor. How wonderful huh? America - in principle - is destroyed, but at least the trains run on time.
http://www.atlanticfreepress.com/content/view/1033/81/
Interesting take on the Second Depression. Comments are interesting, too.
Good site, thanks!
How low will home prices go?
I put together some facts and made some assumptions last night in my sleep and built, to me, what is a convincing economic argument to predict how much home prices will drop.
Supposition 1: The loans packaged into ABX.BBB- are evenly distributed geographically (I think the coasts are obviously more represented, but I recall that ABX tranches were also geographically diversified to “eliminate” risk).
Supposition 2: In any given neighborhood there are homes with loans in ABX.BBB-.
Fact: Housing is priced on the margin on the way up and on the way down. Given supposition #1 and #2, so goes the homes represented in ABX.BBB–, so goes every neighborhood in America.
Fact: The value of MBS in ABX.BBB- must trade at the value of the homes they represent, with a cap at par. Obviously the MBS are capped at 100 because the lender doesn’t get any of the profit if the home sells for more. Obviously the security won’t trade for less since it is asset-backed and the asset can always be sold. Why trade for less than the asset is worth?
Fact: ABX.BBB- is trading around 75% of par.
Proposition 1: Given the facts and suppositions, I believe the secondary market is already pricing in a 25% haircut on average home values.
Good comment. That’s what I call value added for people who might actually be looking for something to buy.
Is there an arbitrage opportunity between the ABX index and the Shiller CBOT Housing Index?
That’s what I’m suggesting. ABX is prospective whereas CBOT is retrospective.
Thanks Tx. When I put all the pieces together I felt satisfied. I think there are problems with the model, but it gives us a place to start. If anyone can comment on the validity of my second fact that would be great. Implicitly I assume that the owner of the MBS is the owner of the mortgage, so he could foreclose and sell off the underlying asset through the servicing bank. I really want to explore whether the value of the underlying asset sets a lower bound on the trading of ABX.BBB-. If, like in the first article posted here today, ABX.BBB- goes to zero, I might be the first to buy the paper!
People have been trying that already apparently. I admit, I can’t resist knife catching either.
Sorry, but you are assuming way too much to be quoting “facts”
BBB- forms only part of the overall securitisation of the underlying loans.
The actual proportion will vary depending on the underlying pool of assets, but let us assume it is 10% (which would be large in the world of CMBS), your formula would imply that property values would only dip by 2.5% over the whole loan stack. Even if BBB forms 25% of a securitisation because of a very nasty pool, it would still only be a drop of 6.25% under your forumla!
You and I know it will be more than that (it probably is already). What I am sure about is you can’t predict the quantum from the BBB- market.
So call them all suppositions.
I don’t understand what you are saying. If the underlying asset of ABX.BBB- securities are houses, and people are trading them at 75% of par, then doesn’t that imply that traders believe that the underlying asset is worth 75% of the original amount? At the very least in aggregate (total pool value)?
What’s scary to me is that the underlying assets in ABX.AAA are essentially the same as the ones in ABX.BBB-. Now as an investor in ABX.AAA you are only riding on the promise of people to pay their loans–the underlying asset is declining at the rate of the worst tranch.
It is complex!
Let’s say I lend $100m of loans with an average of 80% LTV.
I package them into a vehicle, and sell rights to different layers of risks, so the safest $50m is AAA and the actual losses (note not value) of the underlying real estate can drop by 50% before I get touched.
If we assume the BBB- is the lowest 10% of risk, it will be from 70-80% risk, therefore value drops can of 20%, and then foreclosure, can happen before first loss occurs and the BBB- investors lose money.
The important point is the pooling. Whilst some properties may lose 50% in foreclosure, others will lose nothing (they may have been lower gearing in the first place). This is why the first loss piece of BBB is the most volatile and why the tranches below are much less affected.
Regards,
Loafer
Fair enough, but my point I believe, is still valid. ABX.BBB-, as crappy as it might be and regardless of how unaffected ABX.AAA+++++ is, still points to a 25% haircut already on the houses they represent. So people who are looking to buy should note that!
The interest rate haircut does not point to underlying value of the property but only to the mortgage payments that may/will be missed. Banks do not wish to own non performing loans. If I invest in a higher rate of return it is taking into account that moneys will be spent to collect unmade payments. It does not indicate price of the liabilty (property). The amount of foreclosures is not in the markets, however the market is anticipating foreclosures and the market is anticipating problems. Should the subsequent unraveling of these foreclosures be less of a problem than currently appears then the MBS rally will be on.
Let me clarify.
The value of a MBS is composed of two things:
1) The promise of the borrower to pay his loan.
2) The value of the underlying asset.
There are no other components to the MBS that contribute any value that I have thought of. If you know of any, please enlighten me.
If the value of component number 1 goes to zero, then all that remains is the value of component number 2. Houses will continue to exist even if the borrower disappears. Therefore, component 2 is a lower bound on the value of the ABX.BBB- tranch.
Ergo, given that ABX.BBB- is trading at 72, only two things are possible: the value of component 1 is either zero or it isn’t. If it is, then the market is pricing in a 28% decline in aggregate of the houses in the pool. If it isn’t, then the market believes the underlying asset is actually even worth less than that.
Even if BBB forms 25% of a securitisation because of a very nasty pool, it would still only be a drop of 6.25% under your forumla!
BBB- will ’set the comps’ - these are the ones that will become FC/REO/Short sales. I don’t see how AAA loans will become a support to the market when a BBB- REO sets the prices (at the margin).
Bingo, exactly my point.
No, I think you and PDXRenter are both wrong. Possibly you are confusing BBB loans with BBB tranches.
Read carefully through what Loafer has written, which is the same as previous posters from or knowledgeable about the loan securitisation industry.
Basically, if a loan in a pool goes FC/REO/Short Sale, it may or may not get returned to the originator/insurer. Whatever; at some point an amount of money will be returned for distribution just the same as if a loan is paid off early.
Now while the loans are obviously distributed symmetrically across the tranches, this return of principal is NOT symmetrical. It is instead based on what can be a very complicated formula, but is in general steeply biased towards the prime tranches.
So if all the loans in a subprime pool went belly-up and asset sales returned 75% of principal, the AAA tranch could well still get 100% principal repayment while the BBB tranch gets nothing.
(Even this is a simplistic analysis. Interest payments made can complicate matters further, as some of the money gets used to build up ‘buffers’.)
Glad you understood it.
I’m in the industry and it made no sense to me.
Regards,
Loafer
would you buy farmland or timberland right now?
Farm.
Farm.
I would not buy any farm land that needed water to raise crops.
I would buy timberland that was not priced as standing lumber. I would not buy southern timbers (Mississippi etc.) that wood is pulp. I would look for northern hardwood 10years until harvest.
I would also buy Christmas tree farms - anywhere!
my dad’s friend actually owns a christmas tree farm. he actually sells some trees to…landscapers. housing bubble is everywhere.
What I found amusing was that while credit in housing and CC’s was expanding rapidly and unabated with lower qualifications to the borrower, that the money lenders went to Congress to fortify BK laws as a hedge against their wreckless policies while the public slept. I think that Congress should rethink their decision, rescind it, and let the banks and lenders become victims of their greed lest a large segment of the population become victims akin to those old coal miners who ‘owed their souls to the company store’.
Oh yeah. We discussed that at length here in da early days. It’s my “Truman Show” conspiracy theory. The numbers are in the lower end but they’re too easily distracted by American Idol and Britney Spears to worry about things that might actually mean something to them down the line.
Sorry if this was posted…
Sales of vacation homes sink 37% in ‘06
http://tinyurl.com/2ozuq4
Figuring Out the Housing Market Puzzle
Kiplinger’s Personal Finance
http://tinyurl.com/2rb44o
Will business cycle historians reviewing AG’s tenure reach the conclusion that it is better to allow the economy to take the occasional bloodletting recession, then to try to inflate your way out every time? Because it seems like continually respiking the punchbowl is about to soon fall back out of favor (IMHO)…
Maybe philosophically, but the politicians will always favor intervention.
Here’s something I’d be interested in discussing:
Hypothetical: Only California (and maybe Florida) are really “bubbles” as far as RE is concerned. The rest of the country is actually priced at a “reasonable” level.
Question: What would the effect be on a) Real Estate in the rest of the country, and b) economy in the rest of the country if the Bubble markets (CA (one or the 5 largest economies in the world)and FL ONLY) have their RE prices deflate 30-50% in a 2-3 year period?
(CA(oneof the five largest economies in the world) ? Got stats?
It hasn’t been the fifth for years, but it is the eighth.
No stats, but news link listing the current standings:
http://www.signonsandiego.com/uniontrib/20070113/news_1b13eight.html
I stand corrected.
close enough
which states would be ranked 2,3,4,5 behind cA for gdp ?
You would have a lot of trouble getting most of the posters here to accept that hypothetical.
I don’t accept it either. But I wanted to use it as the basis for examining what such a meltdown would have on the rest of the country.
Not sure if this is the week to do it, what with the mortgage mess coming to a head now. But at some point, I’d love to know more about banks calling loans on homes. Frankly, it’s something I never heard about before this year and, as the market implodes farther, I’d like to understand it better.
- When/Where has it happened in the past?
- How prevalent was it?
- Who did they choose to go after? (I assume they go after the folks that they have a reasonable expectation of actually getting $$ out of- the financially responsible ones!).
ETC. Lots of questions about this.
Good questions, and I have no direct knowledge, but from what I’ve read, etc., I believe most mortgages cannot be called today — UNLESS fraud is detected, which makes it callable, IIRC.
I believe many mortgages were called during the Great Depression, and this caused housing prices to lose about 80% (??). After that, a rule/law was enacted to protect mortgage debtors from callable mortgages.
Don’t have time to look it up right now, but will if you are interested.
I AM interested! Perhaps you can throw it into the bits bucket at some point this next week. Thanks.
So, will arson be the next bubble?
I think the perfect business would be to hire illegals to start arson. This way, the owner gets their albatross removed, illegal will get a free ride home (felony means they will be deported) plus some bonus when they get safely home, and the business makes profit.
If this can be done synchronized (say per city or county basis), the fire inspectors would be so overwhelmed that several/many illegals might get away [and keep going until they get caught as their bonus builds up].
Granted, this will work only if the insurance companies are strong enough to take all these hits and not go under….
[Disclosure: I do not own such a business (I suppose such a business would be a RICO target), nor am I a homeowner, nor have I shorted any insurance co stocks. (grin)]
Subprime lending, anyone?
—————————————————————————————————
Real Estate Intelligence
Getting The Subprime Shakes
John Dobosz 02.23.07, 6:00 PM ET
Related Quotes
AHM 29.04 - 0.97
NEW 15.52 - 1.02
NFI 8.48 - 0.86
Choose whatever adjective you want: Awful, brutal, crippling–any of these will do and are quite appropriate to describe the action in the subprime mortgage lenders over the past week or so. The swift and severe descent in the sector has a lot of investors swearing off these stocks the way recovering alcoholics would the bottle.
“It’s amazing how many people were so addicted to this stock,” says Minneapolis patent attorney John Berns, referring to NovaStar Financial (nyse: NFI - news - people ), the Kansas City, Mo.-based mortgage REIT whose shares are down 68% year-to-date. NovaStar has lost more than half of its value since Feb. 20, when the company dropped a bombshell, announcing that it expects to show no taxable income from 2007 through 2011, and that it’s considering dropping its status as a real estate investment trust.
http://www.forbes.com/personalfinance/2007/02/23/novastar-subprime-mortgage-pf-ii-in_jd_0223personalfinance_inl.html