New Home Sales, Prices Down
Some housing bubble news from Wall Street and Washington. “Sales of new homes plunged 16.6% in January to a seasonally adjusted annual rate of 937,000, the Commerce Department reported Wednesday. It was the lowest sales pace in four years, and was the biggest percentage decline in 13 years. Sales were down 20.1% compared with January 2006.”
“The inventory of unsold homes fell to 536,000 from 537,000, representing a 6.8-month supply at the January sales pace, the highest since a 7.2-month supply in October. The number of completed but unsold homes rose to 175,000, up 47% from a year earlier.”
“Regionally, January sales fell a record 37% in the West, 19% in the Northeast, 10% in the South and 8% in the Midwest. Most of the pain has been felt in the largest markets: the West and South. New-home sales are down more than 50% year-on-year in the West, the largest percentage drop in the region since 1981. In the South, sales are down 11% in the past year. Sales are down 2% in the Northeast and are up 1% in the Midwest.”
From CNN Money. “The median price of a new home fell 2.1 percent from a year earlier to $239,800. The latest median price is down 6.7 percent from the record high reached in April 2006.”
“The prices have seen downward pressure from the glut of completed homes on the market available for sale. The report shows a record 175,000 completed homes for sale in January, the eighth straight month that reading has risen to a record level.”
“The median time it takes a completed home to sell now stands at 4.8 months, the longest wait for builders since July 2001, when the nation was in a recession.”
From theStreet.com. “At a pace of 937,000 in the month, home sales fell from the revised December rate of 1.12 million, the Commerce Department said Wednesday. The sales were down 20% from a year ago.”
“Phillip Neuhart, an economic analyst with Wachovia, cited the buildup of completed homes in inventory as a troubling sign for the housing market. ‘There are more homes in the inventory that are actually completed, not under construction anywhere, that are empty,’ Neuhart says.”
“During January, 32% of the new homes for sale at the end of the month had already been constructed, up from a low-20% range during the housing boom, Neuhart says.”
From Reuters. “Fremont General Corp., one of the largest U.S. mortgage lenders for people with poor credit histories, said on Tuesday it will delay releasing fourth-quarter results, and not file its 2006 annual report by the March 1 deadline.”
“‘Most investors understand that the subprime industry is under siege after 17 interest-rate hikes, an inverted yield curve, and flat home prices that have reduced refinancing options,’ said analyst Richard Eckert.”
“Anticipating a rise in defaults, Fremont began tightening its lending standards in last year’s second quarter. It had expected to see benefits, as measured by the impact on loan loss reserves, by the current quarter. Earlier this month, Fremont stopped offering second mortgages that can help borrowers afford homes when their primary lenders won’t cover the entire purchase price.”
“‘It can take several quarters for tightened lending standards to work their way through the system,’ Eckert said.”
The LA Times. “Fremont General has beefed up loss reserves and backed away from its riskiest lending practices over the last year. As home prices soften and lenders adopt more stringent standards, consumers who once used ’serial refinancings’ to extract cash and get new low ‘teaser’ rates are finding themselves stuck with loan payments that will soon shoot higher.”
“With foreclosure rates on the rise, some analysts warn that woes in the sub-prime industry could spread to the prime market and affect the entire economy. ‘More people who already own their homes and can’t refinance are likely to lose them,’ said analyst Zach Gast. ‘Think how that’s going to ripple through the economy,’ he said. ‘It could really affect home prices.’”
“The effects of mortgage layoffs already are being seen in employment data for Southern California. In Orange County, ground zero for the sub-prime industry, year-over-year figures for financial services employment showed job losses beginning last summer for the first time since late 1999 through mid-2000, after the last big industry retrenchment.”
“With short-term interest rates back up, big banking firms are charging more for money to loan. Also, they are paying less for loans and forcing the original lenders to buy back huge numbers of new loans that have fallen quickly into default, analyst Matthew Howlett said. Such early-payment defaults occurred at a faster pace in 2006 than ever before.”
“‘You’re relying on people who are willing just to run any time there are fears of credit losses,’ he said. ‘It’s a weakness in the business model.’”
The New York Times. “In a sign of that wariness, Freddie Mac, one of the largest buyers of mortgages, said yesterday that it would tighten lending standards and stop buying certain kinds of risky home loans.”
“Even as the market was growing in recent years, the agencies were pulling back; they bought $119.8 billion of subprime bonds in 2006, down from $169.4 billion in 2005 and $175.6 billion in 2004, according to a trade publication.”
“But Freddie’s announcement is confirmation to other investors in mortgages that a segment of the market that was once Wall Street’s darling finds itself in the doghouse. ‘Freddie is giving its stamp of approval to what the market has already done,’ said Dwight Jaffee, a real estate finance professor at the University of California, Berkeley. ‘Already consumers were going to be finding these loans harder to get.’”
“‘You have to come back to the question: Do you want someone that is in a difficult situation now to get themselves into an even more difficult situation later on because they have postponed a day of reckoning?,’ Richard Syron, Freddie’s CEO said.”
“Concerns about the deterioration of the subprime market have weighed on financial stocks. Those concerns persisted yesterday amid a sharp sell-off in stock markets around the world.”
“The U.S. central bank has some concerns about the domestic subprime mortgage market and is monitoring it closely, Federal Reserve Board Chairman Ben Bernanke told the U.S. House Budget Committee on Wednesday.”
“‘Our assessment is that there’s not much indication that subprime mortgage issues have spread into other mortgage markets,’ Bernanke said.”
“When asked by one lawmaker whether a liquidity crunch was what roiled Tuesday’s global equity market, Bernanke replied: ‘No, I don’t think so.’”
From MarketWatch. “Bernanke said the economy could even strengthen if the housing market hits bottom and the inventory correction eases in the factory sector. He said worries about the subprime mortgage market was one factor in the unease in financial markets, but said he did not think the trouble in the sector was having a significant impact on the U.S. economy.”
“Reacting to increased foreclosures of mortgages in the subprime market, a subcommittee of the House Financial Services Committee will hold a hearing next Tuesday to examine possible predatory lending practices, Rep. Carolyn Maloney announced Wednesday.”
“‘The trend of increased foreclosures is certainly troubling, and it is important to understand the potential root causes,’ said Rep. Maloney in a press release.”
In Orange County, ground zero for the sub-prime industry, year-over-year figures for financial services employment showed job losses beginning last summer for the first time since late 1999 through mid-2000, after the last big industry retrenchment.”
I wonder where I heard this last year…
Thornberg’s quip….
“It is different in OC, it is gonna get hammered.”
I agree. I see a perfect storm brewing in Orange County: prices are severely inflated based on income, and income and employment are going to suffer with the implosion of sub-prime and the slowdown in construction. The local economy will almost certainly lapse into a recession. What happens when prices revert to 3 or 4 times income, and income has declined? Could the median drop from the peak of $640,000 to the $400,000’s? $300,000’s? $200,000’s? The foreclosure rates will be breathtaking.
and just wait ’til all the immigrants get pissed at the major reem-job that is handed to them. Oh my, revolution indeed…..
revolution demands blood and the guillotine. Greenspan to the guillotine. then all realtors, mortgage brokers. when the streets are red with blood, that’s when I buy real estate.
You guys nailed it with this one. Have worked in the county since the bubble started and have rented here for little more than a year. Things are not going to be bad here. THEY ARE GOING TO BE REALY BAD, AS IN FUGLY! We are so ready to become toast it isn’t funny. Everyone who has owned for many years tells me that they can’t afford to buy their own home at these prices. Considering they make about what I make and have more debt, i.e. cars, CCs, HELOCs, what does this tell me? RE in OC has nowhere to go, BUT DOWN and in a very big way.
However, I will still be gun shy since I am not one for HOAs. WHen you pay my mortgage, taxes, insurance and upkeep/repairs, then you can tell me whether or not I can put in a pool/fence, etc, esp. when I pay you clowns 300/month to meet, have dinner, and then tell me off, all at my expense. What a pile of crap!
I for one would never buy anything under the control of an HOA. That may rule out Irvine and the other relatively new suburbs, but I’m sure the majority of housing stock in OC is still HOA-free, including much of the most desirable towns such as Laguna Beach and the more established sections of Newport Beach.
Decent indicator for HOA-free zones: look at a map and focus on any neighborhoods or cities where the streets meet at traditional right angles in a grid, instead of pointlessly winding curvy streets. I haven’t done any analysis, but my instinct is that there is a strong correlation.
I work in Foothill Ranch. Between it, RSM, and Lake Forest, we are covered with it. I hate them. They use are facilities to meet and some of the members are the most arrogant effers you have ever met. MAke them wait a minute and they are on your a$$. It is also funny to watch how they have food delivered to the meetings while debating what Christmas lights to put up for the holidays.
There are actually a number of HOA-free housing tracts in Lake Forest. A pal of mine used to live in one, and he was able to park surplus military vehicles in his driveway, refuse to maintain his yard, paint his house whatever color he liked, all that good stuff, without any hassles. Honestly I’d much rather have a neighbor like that than the fascist stepford zombies in an HOA tract.
Watch over the hedge for the archetypical HOA president steroreotype.
My aunt and uncle live in Lake Forest, and my aunt’s hobby is reporting people to the HOA board in a really passive agressive way, “Oh, I see we got a new color to that we are allowed to paint our fences. Oh, we didn’t? Well that’s funny, the house at 123 Blank Street is painted the wrong shade of blue…”
I plan to avoid any place with an HOA if at all possible.
My aunt and uncle live in Lake Forest, and my aunt’s hobby is reporting people to the HOA board in a really passive agressive way,
Melsky - is it OK if I punch your aunt? Then you can punch mine if you want.
You guys have all but convinced me to avoid an HOA community at all costs.
“when I pay you clowns 300/month ”
Boy, that sounds like cheap HOA for OC. My grandma pays $345 per mo here in sh*tty Council Bluffs, Iowa. And, surprise, they don’t do anything but complain.
HOA in VA,
We have a 3/4 acre lot, and I put in a very small vegetable garden. Oh, the HORROR. We sold and moved. Our neighbor, who had a perfectly legitimate playset (cedar and brand-new), still had to go door-to-door to get the neighbors to sign a paper and say they didn’t mind it.
Many years ago I rented a condo from an owner who hated the community HOA president, in part because he had a run-in with her over parking regulations. I think it became a major spat at one time because it was public record (I later looked it up).
In any case, not knowing any of this, I obtained his permission to put up a DirecTV satellite dish in our patio area. Thanks to the ‘96 Telecom Act (can’t recall exact name), in order to encourage competition on an equal basis with other communications technologies like those thug cable companies, it was completely legal if attached in your private access area, even in those types of communities with strict regulations about such things.
This really bent the HOA president and board out of shape. But there was nothing she or they could do - score one for heavy handed Federal regulations! I later learned that it pleased our condo owner/landlord so much, he chose never to raise our rent.
So for a few years it was a “charmed” life… of better, cheaper TV and fixed rent.
Ah the Land of the Free. Maybe some day you’ll see that the models for the HOA’s are the “Committees for the Defense of the Revolution” that you will find in every neighborhood in…. Cuba!
What an oxymoron. If you can’t exercise reasonable freedom in the enjoyment of your property, you are not the “owner”.
And no, I don’t think anyone should be allowed to use their yard to store junk or whatever. I believe in regulation at the municipal level with professional enforcement, not petty vigilantism.
“The foreclosure rates will be breathtaking.”
Could last time offer a hint into what the future will bring?
https://www.ucpress.edu/books/pages/8246.html
OC median household income was about $60k in 2003 according to census.gov. Let’s generously assume that it is $70k today.
Let’s also generously assume that at the bottom of the market decline, the median house will sell for 5x household income. That would be $350k. As the current median is somewhere around $650k, this would constitute a 47% drop.
If anything, I think my numbers are conservative, but even with those conservative assumptions, OC is going to be a freaking bloodbath.
I have been arguing for a while along just those lines. Homes have to go down to 300-350K, max for anyone to buy. I know we argue the old 2.5-3X annual income, but in some ways, you do pay a little extra for the sunshine tax. Hey, you don’t want freezing cold in the February, you are gonna pay, that’s why more people, even w/o the illegals, live as compared to the rust belt. I am not saying we are better, just warmer and gentler weather is going to drive the cost up a little more. SO, when we get back to 5X income then things will be closer to normal. Even then, I think bargains, i.e. 3-4X income, will be available, but you will have to look.
I would be happy if the OC median goes to $400-$450k. OC will be so bad in foreclosures if a recession hits it will be a ghost town. ATMs using your home is over…..
5x income is probably a stable number in a healthy market in OC, but I suspect the tsunami of foreclosures will temporarily drive prices down to the 3x-4x range.
I suspect you are right.
However, it might actually be tough to ascertain the true multiple…
Due to layoffs. How many of those subprime brokers will have a job in 12 months?
Yea… Love Thornberg’s quote. The way he drags out “Hammmered…” is priceless.
I’ll believe otherwise when I start seeing the ABX index go up significantly. As long as 07-1 BBB and BBB- are blow 85… nope. Heck, I’ll be curious as to the spread above LIBOR 07-2 is forced to offer.
Got popcorn?
Neil
I suspect the tsunami of foreclosures will temporarily drive prices down to the 3x-4x range.
I think you’re right. My 5x assumption was deliberately optimistic, predicated on the assumption of a “soft landing,” or as soft as you can have when prices drop that far.
In reality it’s hard to imagine how we will avoid a very nasty regionwide (and probably statewide) recession - and how realistic is housing at 5x median household income in such circumstances?
But it’s pretty sobering to consider that a nearly 50% drop from current prices is the conservative, optimistic scenario. This situation is without precedent.
It’s the equivalent of what happens when a star dies. When the fuel required for a nuclear fusion reaction in an old star dies runs out, the core turns into almost pure iron and the nuclear furnace slows. The sun begins to free fall in on itself until it either turns into a white dwarf, a nova, a nuetron star, or a black hole.
Since OC was massively inflated, I vote for the Black Hole theory.
Nice metaphor.
Nice metaphor indeed.
However, iron implies substance…
I’m thinking Red Giant (flippers thrown to the 4 winds).
Got popcorn?
Neil
Or when a ’star’ dies (a la Anna Nicole). Lawsuits, tears, media frenzy, families ripped apart, etc…
Pardon my French:
http://www.youtube.com/watch?v=CABGPFV8OwE
A good video needs no translation.
Une vidéo vraiment délirante
“It’s the equivalent of what happens when a star dies. When the fuel required for a nuclear fusion reaction in an old star dies runs out, the core turns into almost pure iron and the nuclear furnace slows. The sun begins to free fall in on itself until it either turns into a white dwarf, a nova, a nuetron star, or a black hole. ”
I’m astounded at the wealth of knowledge in this group. Very clever.
I wonder if the new luxury condo towers going up in Flower Mound, TX will have that glorious view of the trailer park communities in town.
The funniest one yet are the condo towers going up in Lubbock. I wonder how it will feel with those 50mph dust storms that are very common out there. The buildings wil be swaying and creaking if not falling apart in a few years.
Condos in Lubbock! Hah, that’s rich. Is that where are the Texas Tech profs will move?
you gotta be shattin me, A condo in the hub city?
next thing you know, your gonna have to be a member of a private club to get a drink at the bar, not to mention not benig able to buy alcohol at the local 7-11….uhh sorry thats already the case round those parts.
made a bunch of dough on rental in Lubbock in the late 90’s.
‘When asked by one lawmaker whether a liquidity crunch was what roiled Tuesday’s global equity market, Bernanke replied: ‘No, I don’t think so.’
‘Merrill Lynch & Co. analysts cut their ratings on five U.S. and European investment banks, saying earnings will probably decline after the first quarter because investors are becoming more cautious. ‘We see a broad deterioration in customer risk appetites, which generally leads to a moderation in profitability,” wrote Moszkowski, who was ranked the No. 1 bank and brokerage analyst for the Americas last year.’
‘HBOS Plc, Britain’s biggest mortgage lender, said profitability may decline in 2007, driving the shares to their biggest drop in almost four years. ‘With rising interest rates in the U.K., concerns over subprime lending on both sides of the Atlantic and margin pressure in 2007 due to the highly competitive market, it comes as no surprise that’ the shares are falling, said Rupert Cecil, who helps manage $13.4 billion.’
To this point, I have not been particularly bearish on the economy of the US or the global economy. I am starting to change my mind. The housing market simply cannot collapse in a vacuum. The ripple effect of the housing collapse as it makes its way through the global credit markets will lead to a tightening which will cripple the global economy.
It is like seeing a cop on the freeway when you are speeding: maybe you didn’t get the ticket, but you are probably going to slow down for a while anyway. The free flow of money will slow until the full impact of the deterioration of the housing market can be assessed, and as its impact bleeds over into other forms of credit (anyone think the credit card industry won’t get hosed?), the liquidity spigots will probably get turned off. This can’t be good for the economy.
I am fitting myself for a tinfoil hat.
Irvine, you make a good point about CCs. Get all the debt you have off of them. Times are a comin when one late payment will be a disaster, like 35% interest. I know some already do that, but this will become the norm. Also, more of them will go to universal default. When times get tough the lenders really nickel and dime everyone. I have also noticed lately how I get my bill 2 weeks before it is due. Therefore, I keep the mailing address with me and just mail it in when I have a balance. I have been in the seat many of these with the 30-50K in CCs are now in. It will be painful as they try to keep servicing it along with the ARM, HELOC, and Escalades w/rims.
As I fit myself for my tinfoil hat, I paid off my student loan. I am not completely debt free
Part of the reason I think credit cards are going to be very hard hit, along with second mortgages, is because as homeowners get in trouble, even those who haven’t maxed out their credit cards before, they will borrow money from every source available to preserve their lifestyle and save their homes. Each person slipping into foreclosure and bankruptcy will have maxed out their credit cards before it happens. Wouldn’t you?
I am now completely debt free
To your point about credit cards, just yesterday I received notice that Discover card was raising my rate 2%. I’m waiting to see whether other CC companies do the same in short order. If they are smart, the CC companies are anticipating what is coming, and they are trying to squeeze out more money in the near term before the spike in cardholder bankruptcies whittles down their income.
I always pay my wife’s CC off each month, it’s a visa rotary card that several months ago was aquired by BOA. This last month they recorded the payment two days late (never happened before and she’s had this card for about 8yrs). They charged a $39 fee which they deducted from the full payment and then preceded to charge interest on the aveage daily balance plus a higher interest rate. I called in and got the update value of the card, added the daily charge and mailed off the check. Then I cut up the card and will be mailing BOA an angry letter. The only reason she carried the card was a kick back to Rotary International which you never knew whether they got or not.Now the only CC cards I carry are low interest credit union cards.
You may want to do what I do, which is view my charges everyday (on the web, of course), and then pay on the web (bank draft). A few years ago I too got stung by the “delayed mail” tactic. On the web, you can see the payment post the next day.
I use a no-fee local bank cc, that way I can pay it directly at the bank and have them date stamp it PAID.
“Merrill Lynch and Co analysts…saying earnings will probably decline after the first quarter because investors are becoming more cautious”.
What an attitude. Since when does caution equal lower profits? In my line of business caution pays big dividends, recklessness kills people.
The problem is becoming clearer to me every passing day. A bunch of greedy suits, thinking that reckless behaviour is a way of showing everyone how tough they are, flew to close to the flame with wings made out of investor’s dollars and burned their client’s money to ashes.
“forcing the original lenders to buy back huge numbers of new loans that have fallen quickly into default”
Lots of chatter at BO and BU about the actual retail lenders being forced to choke down loans that went bad. Indymac is trying to make the retail “fraudsters” eat these.
What is BO and BU ?
Brokers Outpost and Brokers Universe.
What is BO and BU ?
Body Odor and Baggy Underwear
Thanks ’stucco. I neeeded the laff.
“‘Our assessment is that there’s not much indication that subprime mortgage issues have spread into other mortgage markets,’ Bernanke said.”
His assessment a few months ago - no problem with lending at all…
It’s a rolling assessment…
lol
That seems to be the plan. I finally see it. They just want an orderly decline that wipes out 1/2 of the worth of US$ denominated assets-that is needed. Everyone knows whats comming, but plainly saying it to the sheeple would cause a system wide collapse that would benefit nobody.
As long as they can keep breaking the bad news a little at a time the declines will be orderly and cause less trouble for the econmy. The end is inevitable, the road the it is the only thing in question.
‘Our assessment is that there’s not much indication that subprime mortgage issues have spread into other mortgage markets,’
Yet…
Bernanke as a weatherman: “We don’t see that the cold has impacted the fact that it was warm last summer, nor do we expect that the cold will produce that impact. Our assessment is that it will remain cold until it is no longer cold.
Greenspan as a weatherman: “If the currently disturbing drift toward precipitation is not contained then the portion of the public that leaves their abodes and places of business must remain sufficiently flexible, changing modes of dress, footwear, headwear, and possible using moisture deflecting implements to reduce the need for drying devices and reversing the trend of the past whereby exposure to outdoor, sky-borne moisture would produce the unacceptable condition of dampness. If, however, the pernicious drift of the sun toward the northern tropics, the United States, and elsewhere is not arrested, the clothing adjustment process could be unnecessary in time”
Good one, Backstage!
Reacting to increased foreclosures of mortgages in the subprime market, a subcommittee of the House Financial Services Committee will hold a hearing next Tuesday to examine possible predatory lending practices, Rep. Carolyn Maloney announced Wednesday.”
“‘The trend of increased foreclosures is certainly troubling, and it is important to understand the potential root causes,’ said Rep. Maloney in a press release.”
Let me help you out Rep. Maloney. The root causes of these foreclosures is due to lending standards dropping to “do you have a pulse” or “can you fog a mirror” type levels. When that happens money is lent to people with shitty credit (subprime). These people cannot pay their cable or cell phone bill on time. What makes you think they can paydown a $350K mortgage? They can’t, which is why they go into foreclosure. There is nothing wrong with banks lending money, just make sure you lend it to people who can pay it back. It is a pretty simple concept to understand.
The scary thing is “normal lending standards” will feel like a massive credit crunch to those still drunk from the cheap credit binge party of the past few years.
Very well stated..
Actually, just don’t bail out lenders who make bad decisions and we’ll be fine. I see this as predatory borrowing, not predatory lending. If someone is dumb enough to borrow money under unfavorable terms then they deserve what they get. You do not have the right to be an idiot. Although, I think some people would advocate such a read being read into the ‘living, breathing, constitution.’ If that happens, I’m going to quit working and start shooting.
I agree this is probably akin to predatory borrowing. For a lender to be predatory, they would have to profit from the borrower’s demise. Instead, they are going to be stuck with real estate that is worth less than the loan and declining in value. If that is predatory lending, it is pretty stupid.
It’s predatory lending because many of these lenders make insane profits, reward their ceo’s and other management handsomely, then they are forced to eat their loans and they go BK.
but the CEO’s and management walk away with millions.
I wish I had set up a subprime lending organization… sigh.
That doesn’t make any sense. Characterizing profits as “insane” suggests some anti-capitalist bent. If you are rejecting the system then we disagree on first premises. Someone who accepts our purported capitalist system will accept any level of profit so long as there is no fraud or coercion. Offering someone disclosed terms constitutes neither in my opinion. Offering someone a loan that you know cannot be performed is not coercive or fraudulent or ‘predatory’ - whatever that means. Besides, in California, where most of this stuff is happening, lenders cannot get a deficiency judgment on a first purchase money mortgage. This is hardly the equivalent to some 30% credit card rate or payday advance loans w/ APRs of 100% or more.
But playing along, you say that the lenders will become insolvent and file for bankruptcy protection. So, the “lender,” meaning the organization, will be liquidated, employees fired, equity shareholders and unsecured creditors left with nothing and the secured creditors taking less than full value for their notes.
The CEOs and upper management walking away with millions has to do with corporate governance laws and nothing to do with their lending practices. The same can be said for every company in the U.S. that has failed. Where is the outrage over the former upper management of the airlines, the auto industry, whip and buggy companies, smith-corona, and so on and so forth?
Moreover, other than pure envy, I don’t see how that effects you unless you are a stakeholder of some sort. The people who are screwed are the shareholders, creditors and employees. If the “CEOs and management” didn’t get the money, the employees, creditors and shareholders would - not you, not me, not the government.
And, by the way, if any entities are guilty of making ‘insane’ profits then they are the wall street firms. The banks have the highest historical profits if I’m not mistaken. Their ability to receive cash straight from the Federal Reserve allows them to reap the profits on the way up while their political power to avoid the losses on the way down. New York City’s largess is a testament to their preferred position on the economic food chain. They are the ones securitizing the loans and selling them to the Asian investors.
After all, who do you think is going to force the lenders into Chapter 11 or 7? The financial intermediaries (and their NYC lawyers) who will shove non-performing loans back on the retail lenders.
I think you should rethink your position.
wow, you’re very high on yourself to take one of my paragraps and expand it to your diatribe.
where to begin. i’ll start here:
“Someone who accepts our purported capitalist system will accept any level of profit so long as there is no fraud or coercion”
— there IS fraud. the subprime lenders are qualifying people based on NINA and SISA standards, and have been shown in many cases to be ALTERING the loan documents afterwards. They are then packaging them up inappropriately in new bundles and selling them to investors. this is fraud. Hence, I object.
“Offering someone a loan that you know cannot be performed is not coercive or fraudulent or ‘predatory’ - whatever that means. ”
—True, but bundling that loan that you KNOW they cannot repay and selling it to an investor as a loan that was “qualified” is fraudulent again. I also question the MORALITY (yes, I can discuss morality if I so choose) of selling a person a loan that they cannot repay. Yes, per capitalism this may or may not be fine, but for MORALITY it is not. I prefer not to just “make a buck at any cost” You go right ahead.
Besides, in California, where most of this stuff is happening, lenders cannot get a deficiency judgment on a first purchase money mortgage
—- this is happening in many places, not just CA. And even in CA, if the borrower has a HELOC or a second mortgage (which most do), then there CAN be a delinquency judgement on the first mortgage too so you err in your statement
“The CEOs and upper management walking away with millions has to do with corporate governance laws and nothing to do with their lending practices”
—you can’t be serious. CEOs and upper management DICTATE corporate governance leading to their millions. Using your logic, Jeff Skilling, Andy Fastow, and Ken Lay had nothing to do with their millions. The CEOs and management work in concert with their board of directors to be paid based on stock price and/or lending targets. The management team then relaxes lending standards, to make SHORT TERM profits which lead to bonuses in the millions. Then when it all unravels, they have their millions. Are you serious with your comment????
“Where is the outrage over the former upper management of the airlines, the auto industry, whip and buggy companies, smith-corona, and so on and so forth?”
— who said there isn’t outrage there on my part! This is the true downfall of the American economy. ALL is beholden to short term stock performance so that CEOs can reap huge rewards, regardless of long term success. this is the new mantra. sigh.
“Moreover, other than pure envy, I don’t see how that effects you unless you are a stakeholder of some sort”
— DUH. I am a shareholder in many of these companies, either directly or indirectly. So when these companies are POORLY run it DIRECTLY impacts MY personal wealth.
And, by the way, if any entities are guilty of making ‘insane’ profits then they are the wall street firms.
— I agree with you totally.
—-
Overall, you misunderstand my statement, who I am, and my position. I am all for capitalism, but not for the current economic system we use in America, which is far from Capitalism. I could write tomes and tomes of what is wrong. But also tomes and tomes on what is right with our system.
I am not envious, at least not on an economic standpoint. I make more mone than I ever thought possible. But I still don’t like losing TONS of money due to the STUPIDITY and the ARROGANCE and the GREED of the lending institutions. I also dislike the idea that we COULD end up with severe social disruption due in part to the global credit bubble.
I really don’t want to live in Brazil.
and although I am high income earning (probably top 0.5% in our nation or so), I am not yet wealthy (I’m still young). So I will easily be able to withstand any recession, but I’m not sure about a second Great Depression. there are also those that I care about and love, who will NOT be able to withstand a depression or recession.
Faulty lending practices are what propelled this real estate into a mania. This is partially what will cause the coming “correction”. which will negatively affect EVERYBODY in our country in some way.
I have no envy. I have HATRED. Big difference. The “i wish i had set up a subrpime lending organization” line was tongue in cheek.
“Offering someone a loan that you know cannot be performed is not coercive or fraudulent or ‘predatory’”
I think when people say “predatory” they are referring to the broker who collected the fees and simply sold the loan to someone else, no? That process, in and of itself, isn’t necessarily predatory.
It does become “predatory”, IMO, when the broker is telling the client exactly what they want to hear with the intent of getting them to sign on the dotted line. All they see is the ability to collect a fee and pass along the responsibility.
Of course, that still makes the term a subjective one, and not necessarily legally enforceable.
HIC -
You did not have to spend so much time responding. The guy’s premise is simply wrong and badly put: “Someone who accepts our purported capitalist system will accept any level of profit so long as there is no fraud or coercion. ”
Such a strident, sophomoric, logically flawed, unrealistic, cartoon-like statement does not even merit a point-by-point response. It’s trolling. A simple lesson in logic would suffice.
Do we accept any level of profit if the system is actually capitalistic, not just perportedly capitalistic? Or if it’s actually capitalistic can we control such greed?
I’m sure that someone will accept any level of profit (greed), but will anyone? Will everyone? I accept our system, but I will not accept any level of greed. Am I no one or just someone else. Or perhaps I’m just fooling myself that I accept our system, when subconsiiously I don’t.
I don’t think jdd is trolling. He did however, hit a raw nerve. First, insane profits (monopolistic pricing) are short-lived. Competition moves in too quickly. Doubt it? If you do, then you’ve NEVER owned a business - profit margin compression is a fact of life. So even if you ACCEPT any level of profit (which is different than pursuing or defending a level), the reality is it will be whittled to “hope” in a short period of time as competitors move in.
I am not supporting greed by any stretch of the imagination. My experience with greedy investors makes me wretch. First, they’re in it FOR the greed - a disease really - a compulsive sickness that they can’t help. Secondly, once in, they try and infect you with it. Greed is different however from “accepting any level of profit” in that the former is an illness, and the latter is purely a market outcome. My experience: accept the best legal, moral, and ethical level of profit that the market will bear. Unfortunately, not everyone will play on the same field.
As for those who don’t understand loan terms and conditions, or worse, are blinded by their OWN greed (kind of a MAD spy-counterspy scenario - don’t you think?) there’s one word for that: Darwininsm. When both parties are acting out of greed, it sucks to be lower in the food chain. The banker is going to take the baker’s money every time.
dd
You are both right. The predatory lender is Me. None of my borrowers is in default (at least, not now, and not in the past 40 months). They send me Christmas cards because they don’t recognize the one-sided nature of our relationship.
I don’t get your sarcasm
If I recall, you’ve stated many times before that your group does subprime, but you actually really qualify your borrowers. This is fine IMO, but also decidedly different from many/most of the subprime operators out there (and probably much of the prime operators as well).
The issue is really these lenders who lend using NINA or SISA standards or more complex financial instruments using only the teaser rates, or who lend to a person who clearly cannot repay. In the end, I wouldn’t care except their negligence has impacted MY financial wellbeing.
Clouseau, my remarks are not at all sarcastic. I am not a group, I am an actual lender, lending my own money, and charging usually 9% and up. What makes my lending more “predatory” than that of the institutional lenders is, I actually do my best to ensure I will be paid back. I do NOT qualify my borrowers, except by telling them what the monthly payment is and asking them if they can make it. I DO make sure I am not lending excessive LTV, so the clients have plenty of skin and muscle and bones and guts in the game.
Maybe I am wrong, but I didn’t interpret sarcasm in his post: just a simple truth.
Oh, I thought it was sarcastic because you called yourself “predatory” lender. what’s predatory about lending to someone and expecting to be repaid?
If you can lend at 9% and get it all back plus the interest, and your counterparty understands to and agrees to your contract, godspeed.
what irks me are the PREDATORY lenders, who purposefully mistate their product and/or put people into loans that cannot be repaid. And I only care about this because I know in the end it affects me. (those people caused the bubble which has put my financial future in jeapordy. not to mention the bailouts and increased taxes I’m gonna pay for sure)
I know that THEORETICALLY the borrowers understand their product. However, in my own experience, 0% of my friends/family that took out option ARMs and IO loans from 2001-2005 understood them and the consequences.
This pisses me off.
Right, I actually do know that I’m not the kind of lender who has caused a problem for the world at large. I’m just questioning the premise that other actual lenders are more “predatory” than I. Certainly LOAN ORIGINATORS are liars, if they are not the real lenders. They don’t give a damn if anyone can repay. They victimize both the borrowers AND the lending institutions (who, however, are responsible for their own stupidity). What works for me is that I don’t HAVE to lend all my $$ to homeowners, I can lend it to the government of Brazil if/when that suits me better. My Brazil bonds have been doing fine lately.
HIC,
Your points are well stated. You are correct. We will ALL be affected by this credit bubble. And, yes, there is such a thing as insane and unethical profits.
Guess that makes me a socialist.
I don’t get your sarcasm
If I recall, you’ve stated many times before that your group does subprime, but you actually really qualify your borrowers. This is fine IMO, but also decidedly different from many/most of the subprime operators out there (and probably much of the prime operators as well).
The issue is really these lenders who lend using NINA or SISA standards or more complex financial instruments using only the teaser rates, or who lend to a person who clearly cannot repay. In the end, I wouldn’t care except their negligence has impacted MY financial wellbeing.
az_lender,
I remember seeing you post that you are a 9% hard-money lender. You must have a good screening process that has enabled you to get repaid consistently. Interesting that you have such clarity of the situation. It reminds me of when my grandparents bought a house and they kept in touch with the realtos as if the realtor actually gave a $hit about them. They never did recognize that relationship for what it was.
Sure, people have the right to be idiots, so long as they take responsibility for their actions. People have the right to gamble and fail, but they just can’t be rewarded by getting govt bailouts for stupid decisions. As long as people take personal responsibility for their own actions, they can make as many bad decisions as they want. Eventually, most will learn from their mistakes if they are forced to suffer the consequences of their actions.
Exactly. But the problem is, we are living in society free of personal responsibility and accustomed to having no negative consequences for bad decision making. If a large voting block of idiots with a common cause (FBs) screams loudly enough, the government steps in and “helps” them at the expense of everyone else. And they will.
“If a large voting block of idiots with a common cause (FBs) screams loudly enough, the government steps in and “helps” them at the expense of everyone else. And they will.”
I hope you are wrong; I am afraid you are right.
You guys put that perfectly, that is exactly my fear out of all of this too. Can’t you just imagine all those campaign ‘08 commercials in which sympathetic pols vow to protect the “American Home”?
Can you forward this to Dr. Bernanke and explain that not only subprime loans go bad? ALT-A and prime will be next.
Quarantine measures are in place to stem the contagion (right???).
Will all of the fat cats who made their big “commissions” on toxie loans have to return their money? I think not. The set up was well designed and only the “insiders” knew the real outcome of their plan.
Excellent. I hope someone on Capitol Hill notices your lucid and succinct explanation.
You ever hear of the whipsaw effect? It’s what banks will be experiencing soon with their lending standards. From one extreme to the next…and it’s coming to a theater near us all.
is there a way to see the average/median price of the defaulted loans?????
Think of it this way. How many prime loans were made to people who depended on subprime workers to pay their prime loans.
I personally know 20-30 people who owned bigass companies doing drywall, plumbing,electrical, and so on who are now classified as subprime borrowers in $1 million plus houses.
Good point. We’ve also been reading of mom and pop businesses that feel the pinch when nearby mortgage and Realtor offices close down. It’s a domino effect.
How about predatory taxing? What makes you think a grandma on SS can afford to have her property taxes go up by a factor of 4?
A tax lien is just a foreclousure by the government - AND the tax payer never got to see the terms of their agreement ahead of time like the “mortgage victim”.
Precisely!
Not to mention the mortgage originators who assured the borrowers that they were qualified (read: able to afford/pay back) for these loans.
Straight-up fraud, IMHO.
‘But, but ….that would mean some people couldn’t buy a house.
What would become of Bush’s “ownership society”???
He bragged that under his leadership more people owned houses than ever before. Now, more people are going into foreclosure and losing their houses than ever before.
Good work, Alan G. And………..great vision George! You’re a real idiot. Try getting some border guards down south, or was it your intent that illegal migrants will be the new “ownership society”?
Lehrer news hour last night started with a segment on yesterday’s stock market decline. Lehrer interviewed some professor of economics from [i forget where], who attributed the decline to (a) correction of a manic run-up in the Chinese stock market and (b) Greenspan’s mention of the “R” word, “recession.” Not one word about housing if I recall correctly. Not one word about subprime mortgages. Hmm.
I noticed in Greenspan’s comments, at the end, he did make note of potential problems in the housing market, but he did not make any connection of these problems to the possible recession he was warning about. In fact, his stated cause for the recession was simply that we were due; as if recessions happen without cause if enough time passes.
I suspect he will make the connection between housing and the recession in future speeches, and it will sound like some profound realization that nobody considered before.
“Bernanke said the economy could even strengthen if the housing market hits bottom and the inventory correction eases in the factory sector.”
OK, I get it now. Ben B.’s job description is CHEERLEADING. What happens to the economy if the housing market DOESN’T hit bottom and the inventory correction DOESN’T ease in the factory sector?
Our leaders just don’t get it. They ask Bernanke about the subprime mess and he replies that the Fed is concerned and monitoring the situation. Just like they were monitoring the stock market yesterday.
The real question, yet unasked, is why should housing prices bottom when price-income ratios and affordability are still at such extreme ratios? How can California’s home prices bottom when the median home price of $550,000 is still about ten times median household income? We all know the credit markets are drying up. If the marginal buyer is now faced with tighter credit standards, he will need to pony up a downpayment and Freddie Mac won’t buy the loan unless his income is sufficient to service the “real” debt. That works out to the old rules of putting a 20% downpayment and not using more than 28% of your gross income to service your total housing payment.
The markets have now sounded two major warnings which most participants want to ignore:
1. Feb 8th HSBC/NEW subprime meltdown.
2. Feb 27 stock market meltdown/increase in volatility (the VIX skyrocketing was probably more important than the decline in the averages).
I guess we really need to see strike three to make people get it. Strike three will be indisputable evidence that the mortgage malaise has spread to prime.
It shouldn’t take long.
Here’s the linkage as I see it:
1. The housing market relies on the first time buyer to allow everyone else to move up.
2. Late in the cycle the only potential first time buyers available were deadbeats who normally could never qualify.
2. These turkeys were financed to bubble proportions because:
a. Easy money was available using carry-trade currencies.
b. MBS allowed the risk to be off-loaded and spread around
c. Credit default insurance allowed the risk to the MBS holders to be eliminated for a very small premium.
And the pool of money on both sides of this came from the same sources!
So in essense, investors could borrow almost any amount of money and have a GUARANTEED yield because of the above. No wonder there was plenty of money available. You were better off to borrow a billion dollars rather than 10 million since there WAS NO RISK and your profits would be amplified. 5% yield on 1 billion is a lot better than 5% on 10 million.
Every extra point of yield was worth going after hence the preference for anything, no matter how risky. Because it was INSURED.
So you were better off to borrow 1 trillion rather than 100 billion since there again WAS NO RISK. That is what happened.
Now this is turning around. For 2007 MBS, the risk premium to ensure through swaps is now 15% PER YEAR and counting. So there is in effect no insurance since you would be guaranteed to lose money if you paid this. Unless the cost of mortgage borrowing was around 20%. How many houses do you think would be financed for that?
That is why this market is tanking once the gun went off.
What is leveraged on the way up is equally leveraged on the way down. If carry trade currencies (ie. yen) go up in price, your loan just got more expensive. And even if only small number of borrowers default, your margin is gone fast unless you can collect on the insurance. Surely this will become difficult.
So future borrowing is pretty clear. Implied credit crunch for new borrowing since it will have to go back to fundamentals. This would normally be healthy but unfortunately there is a huge inventory overhang to move, and the normal first-time buyer who would keep things moving is already toast. And the normal lenders will have to conserve cash in any case.
Only if all the insured MBS investors could be make whole as this thing is unwound could there be any stability. But this seems unlikely given the numbers involved and the speed that it is taking place.
So it is a vicious cycle. The subprime meltdown is too large and is happening too fast.
Alt-A will soon become an equal problem since they are not really much better of a risk.
As home values drop, even prime borrowers who did ARM financing will get crunched when they try to refi. So all and all a liquidity crunch.
It sure looks like a big crisis in derivative credit swaps, crisis in the MBS markets, and knock-on crises in any market driven by liquidity (can you say stock markets?)
Bernanke is just sucking some last minute sucker money into the system. I think he thinks that by doing so, he can slow down the coming of, and the impact of, a recession.
“Ben B.’s job description is CHEERLEADING.”
He ought to take a hint from David Liareah’s situation and stay away from that line.
OK, I get it now. Ben B.’s job description is CHEERLEADING.
I don’t think so. He is a very accomplished person with a powerful intellect. I strongly doubt that he would leave his Princeton post to take a job of willfully misinterpreting data.
I think a more productive line of reasoning would be:
What are we seeing that he is not? (and why?)
Also, what is he seeing that we are not? (and why?)
I think the Feds are fully aware of what’s going on. Bernanke is a very smart man, as are most people in the Fed. They know full well what’s happening and how it will unravel. But they can’t come out and say that real estate values need to fall and that a credit crunch is coming. This would absolutely devastate markets and create a panic. So they really do use a “rolling assessment” because they have to.
My point is that they’re trying to foster an orderly return to normalcy without causing a crisis. The ship is way off course and moving quickly. If they hit the brakes and turn the wheel by 45 degrees, everyone on board will fall over and get injured. So they slow the ship down and keep nudging the wheel a few degrees so that we get back on course slowly without the passengers ever noticing the moves.
Either that or I have too much faith in the government.
I agree. Funny how Greenspan, now that he is not an employee, is talking about a recession and the lack of risk premiums. Lets not forget, Greenspan went from Austrian, Misean to the mouth of Sauron.
Bernanke is a very smart person. He knows how the game is played and is trying to do his best to balance reality with the system. He did not get hired to undo the fiat central banking system. His words are meant for public consumption as opposed to any opinion he has.
At some level, there is nothing the Fed can do. The Asian savers control interest rates. If the Japanese, Chinese, Taiwanese, Koreans, etc all decide to shift their preferences more towards spending and less towards savings the carry trade will disappear, interest rates will spike and the whole house of cards will come crashing down. But there are very rational reasons why those people save so much, so, I don’t look for that to happen in a sudden way.
I’m prepared for the worst and I’m getting punished because idiots spent like crazy and ran up debt. Who are the feds trying to protect? The idiots or the people that work their asses off saving money and spending responsibly.
Big criminals will protect the little criminals as they need for them protective cover in their future scams - the next bubble.
Imagine if Bernanke were to come out and say ” well folks the party is over and a full 40% of you out there are probably going to face either foreclosure, bankruptcy or some form of litigious credit issue that will effectively wipe out your supposed wealth.” For those of you who saved your money we thank you for your diligence in forecasting the coming need for your government to relieve you of most of it in order to maintain domestic tranquility through taxation and homeowner relief for your less fortunate fellow citizens and illegal aliens.
It is hard to imagine anyone in the government telling the truth, isn’t it? The “talking heads” were already blaming Greenspan for yesterday’s market drop because it came the day after his recession warning. If Bernanke were to tell the truth, pandemonium or bedlam would result.
Unfortunately that is what is needed. BB should come out and say game over, koolaid will now be replaced with fruits and veggies. It well nigh time for our leaders to speak the truth. Too much PC bulls*^t in this country. Heck, I don’t have a problem with everyone owning a home. My problem is with those that cannot afford a home, but think they can. As Clint Eastwood said, “A man has got to know his limits.” Sure, I would like to play major league baseball. However, never gonna happen. Does that bother me. AN EMPHATIC, NO! Telling people what they want to hear, rather than what they need to hear has become an epidemic in this country and will be a mjor contributor to us going the way of the Roman Empire.
As has been said before, you can call me anything you want, just don’t call me late for dinner.
Too bad BB doesn’t call it like it is. It might actually help clean up this mess a lot faster.
Although you could be right, JP, the way I see it is, he can spin the data to promote an orderly (rather than chaotic) decline, and he need not actually lie. The “if” in the statement makes the statement automatically true when the “if” clause turns false.
That’s one of the Fed’s functions, spin. It doesn’t look good by looking at these indicators:
“After all, the spate of economic data hitting the wires before Bernanke even took the podium today was disappointing on the whole. At 8:30 ET, Q4 GDP was revised lower, as expected, checking in at 2.2%. The advance read a month earlier showed the U.S. economy grew at a 3.5% pace. At 9:45 ET, the Chicago PMI fell to its lowest level (47.9%) in February since April 2003, serving as a reminder that the manufacturing sector is struggling. Then at 10:00 ET, new home sales in January plunged 16.6%, the biggest drop in 13 years, adding insult to the ongoing injury that is housing.”
“What are we seeing that he is not? (and why?)”
He looks at 6 month lagging aggregated data while guys like me drill down to real-time behavioral trends.
“Also, what is he seeing that we are not? (and why?)”
Goldilocks skipping through the meadows…
Try, “What are we
seeingsaying that he is not?” out for size…“What are we seeing that he is not? (and why?)
Also, what is he seeing that we are not? (and why?)”
He’s not in the dark…in fact, it will come down to this:
What didn’t Ben know…and when didn’t he know it?
Sound familiar?
Understand that the Federal Reserve is a private corporation, just like Federal Express. It’s not at all “Federal” in a public sense. It operates with unprecedented priveleges for a private company (Fannie Mae doesn’t even come close). Bernanke has a job just like David Lereah, and his job is to protect values just like David Lereah. Lereah works for housing, brokers and the real estate industry. Bernanke works for the private banking system and for public perception of the value of otherwise worthless paper strips called “Dollars”.
We have a fractional reserve banking system which only works at all because of public trust and public perception. A failure to maintain the belief system that surrounds the US dollar and private banks *will* result in a collapse of the banking system because the banks don’t actually have in their possession any of your money: they’ve lent it all out. If Joe Sixpack starts to think the banks are in trouble — then the banks really *are* in trouble. (See: Argentina).
If Joe Sixpack starts to think that foreign investments, foreign currencies, gold and silver are more attractive than the dollar then the dollar is *really* fucked.
So Bernanke is a cheerleader. Fed Chief’s are chosen for their credibility, their pedigree and their status because most of all, they need to be ‘convincing’. The Federal Reserve is named with a “government-sounding” name for similar reasons: it needs to sound legitimate and non-corporate even though its a private corporation. And guess what? It TOTALLY WORKS. 99% of Americans believe that the Fed is a government organization that is out to defend the dollar, even though the dollar maintained its value for 100 years before the Fed launched, and then proceeded to lose 96% under the so called “protection” of the Fed.
You don’t think a man with his “powerful intellect” would join the ranks of the banking system? Well that’s exactly what he did.
Added to that, they are the private notes from the bank where he has been chosen to represent as the Chairman. It is the best monopoly you could possibly draw up. I get the license to create the trillions in credit that fueled the housing debacle. I get a cut from all that new credit money. When it goes south, so what. It is still my notes. As long as I can keep my charter and monopoly, I’ll still make a killing trying to reinflate the mess. It is better than herpes. It is the gift that keeps on giving, forever– even long after we’re all dead and gone.
Now if we all could only get jobs working for the central bank, we’d all get rich. Wait a minute, that isn’t possible. Who would make stuff? We do have the foreigners, but what if they realized we don’t do anything but create more paper money? Bingo.
‘Understand that the Federal Reserve is a private corporation, just like Federal Express. It’s not at all “Federal” in a public sense.’
Just like the Federal Reserve, Federal Express was created by Congressional charter, right? (Sarcasm tag off…)
If any of you watched Ben B’s comments, you would see that he wasn’t really cheerleading. Some of his comments were positive, many were not. His overall messages as I saw them:
he sees very modest slower growth for 2007 IF housing stabilizes.
1) there was no single cause for yesterday’s selloff,rather a confluence of problems/issues/data
2) the revised lower GDP was more in line with the Fed’s projections than was the original GDP estimate, (which is the truth actually, I saw him say that prior to the revised numbers coming out)
3) there is little difference between projections today vs yesterday solely due to the losses yesterday, so he’s keeping his projections
4) subprime is a problem. poor lending has occured there
5) he sees no bleeding into prime for now, but they “are monitoring this”.
6) there is NOT a credit liquidity now
7) he does not foresee lowering the FFR anytime soon
9) longterm financial security in the US is in jeaporday
10) congress needs to EITHER continue spending increases but then increase revenue (ie taxes) to spend for it, OR decrease taxes but then decrease services/entitlements
11) the longterm outlook is very poor due to demographics/entitlements. (he basically bitchslapped congress in his speech on this)
the soundbites you see on CNN and CNBC and bloomberg made it seem more positive than it really was IMO, but this is due to their biases. overall, the market responded positively to his comments, which were somewhat reassuring but didn’t seem too much cheering to me.
in the end, I agreed with much of what he said EXCEPT I feel that subprime will bleed significantly into prime, I feel that housing will continue to downtrend for 3 more years minimum, and that our economy is more shaky than he feels.
what do you expect, for him to say “Oh my god! the end is nigh! go buy gold and tobacco and canned goods and guns right now!!!” Ack!
“… you would see that he wasn’t really cheerleading.”
Agreed. The man is just doing his job, which is to provide the long view and leadership through short-term adjustments in the markets. Imagine what would happen if the Fed Chairman reinforced every short-term move in financial markets by minute-to-minute commentary, and you can see why he does not…
Or to summarize: “We’ve got a long one hanging and we’re afraid that if we pinch it off it will drop into the bowl and splash cold water on our bunghole. Therefore we’ll continue trying to push more out until we get a soft landing.”
LOL
Thank you for the summary.
Regarding all the above posts, I’m surprised at the number of posters that assume (without cause) that Bernanke is dishonest, unintelligent, deceitful, or etc.
C’mon people, the guy went through life, worked his butt off, became successful in his field of study, and suddenly everyone here is more expert than the guy? We must have a lot of MIT PhDs on the board.
Yea you are soo right dude. Don’t forget to add flipper surgeons, phd electrical engineers, and lawyered politicians to your esteemed group. Hope you understand while BB muses over Goldilocks’ hair and you cheer his academic achievements, the sheeple are going to get slaughtered on the street. Enjoy the carnage!
what do you expect, for him to say “Oh my god! the end is nigh! go buy gold and tobacco and canned goods and guns right now!!!” Ack!
Of course not. That’s Bush’s job.
Bernanke’s comments will always carry disproportionate weight in the media, and realizing this fact, he will always temper his remarks (so as not to cause a panic). For this reason alone, we should look elsewhere for meaningful analysis.
agree. didn’t see this when i wrote my similar remark just above
Yeah, I’ll accept that.
The tempering is the problem. Bernanke tempers them for public consumption, then the MSM spins them and edits them to sound bites. Sure, he said what we heard, we just did not get the whole story.
The man inherited a real mess. I disagree with some of his thinking, but I’m willing to give him the benefit of the doubt. He needs to be judged by his actions, not his words.
But it’s still amusing to make fun of him.
“New-home sales are down more than 50% year-on-year in the West, the largest percentage drop in the region since 1981.”
This jumps out at me as much as anything I’ve read lately. Somebody do the math. That sales figure decline in $$$ is absolutely enormous. If a decline like that doesn’t have devesating ripples through the econmy, nothing will. Holy crap.
Ask Kudlow…
“devastating” not “devesating” (although that sounds bad too)
I agree. Take everyone that works in residential construction and half of them are unemployed. I can see why the prices for copper and lumber are falling - or should be.
And the ones that still are employed are scrambling for whatever work they can get.
A lot of my clients are small contractors (hw floors, framers, painters, …) and this year their business had been dead. There’s a glut of homes in Whatcom County (another famous “it-can’t-happen-here” area), other than high-end custom homes and the ripple effect is only beginning through the economy. One guy worked on 60 homes last year, so far he has none this year. Similar stories with others.
I have been thinking about this. What percentage of these displaced workers are illegal aliens? Now hearing stories of mass exodous of illegals back to mexico from the hotter bubble areas. I am no bleeding liberal, but most do come here for the work—-no work = go home.
What affect will this have as far as US citizens have. Dunno, but a very large ammount of the comming employment pain will not show up in governmental economic numbers (LMAO, kinda like inflation) due to the cash nature of much of this employment.
Thoughts?
Well what is accurately reflected in the government numbers? Unemployment figures are a joke. Same goes for the CPI/inflation and GDP.
Are you hearing these stories from people on the ground in the affected regions? I would be curious to know what areas and how they would know such a thing. Not doubting, becuase it’s a logical conclusion to a slowdown in construction, just looking for more information.
Actually, No work in home construction for illegals = they go back to the farms where they used to work for peanut wages. They will go back to the fields, because they need the money. Any $ is better than the prospects they face at home in Mexico. I know our growers here in the Central Valley have faced serious shortages of workers, as they ran over to build all the shitboxes for the builders.
Or they are going to wait for the amnesty from the White House and Senate, in order to freeload on welfare at the taxpayer’s expense. On top of that, illegals earn in cash and send most of their earnings back home, instead of putting back into our economy and infrastructure. Lots of illegals committing mortgage fraud too and leaving the mess for us to pay. Hey, if car insurance fraud was a favorite of illegals in California (I was a victim, BTW), imagine mortgage fraud that pays much more. A little 100k cash back here, another there…
RE employment 05 9.5% + of total
mean is 6%
talk about mean reversion
It looks like 35% of the REIC will be back at Mickey D’s
Must be the weather!
Oddly, with all the incentives, the builders are underbidding the resale market. So how does the news that resales increased jive with the news that new homes sales are tanking?
One could argue that this is due to a loss of speculators from the demand side of the equation, but hadn’t speculation declined significantly prior to December?
???
Good question. Makes you wonder about accuracy of the resale numbers.
the builders are unbderbidding compared to COMPARABLE older homes.
However, in many areas (such as here), the mix is different.
In my metro market, the new construction is way out in the boondocks, or is conodos in the metro. The semi new construction is the same. But the older stuff is a very different type of product, usually SFHs closer in.
example:
NEW condo near my house: $550,000
2 year old condo near my house: $600,000
(so the builder is underbidding the COMPARABLE resale)
but on same block,
Old 75 year old SFH home in good condition: $400,000
Some of what is happening is that people are switching back to “end user” demographics.
A lot of the crap put up in the last 5-10 years has been either 1) close in condos or 2) far out exurban mcmanssions.
Neither of these were necessarily appropriate/desired by end users, but PERFECT for speculators
That (at least around here) is what was bid into the stratosphere.
But a lot of the real end user stuff are the older more modest homes closer in. (and they are cheaper than the more recently built stuff since they are either smaller or don’t have granite countertops and travertine tile etc)
so people are buying differently, and the recent construction ISNT what they want or can afford.
“‘Freddie is giving its stamp of approval to what the market has already done,’ said Dwight Jaffee, a real estate finance professor at the University of California, Berkeley. ‘Already consumers were going to be finding these loans harder to get.’”
I personally find kicking drunks lying in the gutter to be a highly distasteful activity.
Sales were down 20.1% compared with January 2006.”
and jan 06 was the time of the INSTANT FREE GARAGE
today only
now incentives are like an old shoe
I guess after Greenspans Recession..Recession..Recession speech, their ARE few more important things than Location..Location..Location.
RUN for the HILLS !
The tsunami sirens have definately gone off, and if your stuck loitering on the beach instead of heading for higher ground, well, it’s your own damn fault.
What will the bottom look like when we finally see it?
Median house prices are at 210 right now, having hit their peak last summer around 230. That’s good progress. When the US median slips under 150, I think that will be about the bottom, and we’re probably 3 years away from that.
210 = median home price to median rent ratio?
P.S. Still roughly 260 in my hood…
Barry Ritholtz had an interesting chart showing housing bottoming when housing starts dropped about 50% from highs. I think we are off about 30% right now. As for where pricing will be when this happens…?
“Barry Ritholtz had an interesting chart showing housing bottoming when housing starts dropped about 50% from highs.”
Interesting, but I suspect that would be a leading indicator (by a few years) rather than a contemporaneous one, as the builders are always the first to know what is going down.
Around 300 here in the SF bay area. Median home price of $750K, while you can rent for $2,500/month.
Market forces may not matter much in Communist city states.
Hey, make that a rich Communist city state.
The place I just rented was offered for sale before I moved in at a ratio of 315.
LOL! I think he means the median US home price is 210K. California is so far out of whack that you guys assumed he meant rent ratio.
Bottom will look like significant reduction in new home starts to a level below 900K/year. It might go as low as 500K/year. Until that happens there won’t be any significant progress in working through the vacant homes currently out there.
…and they’re simultaneously going to be making it harder for people to qualify for loans to purchase the bloated inventory that they’re trying to unload.
There are so many variables in play it’s sometimes mind-boggling to keep track of it all. What’s easy to spot, though, is the end game —–> much lower housing prices.
Change “might” to “will” go as low as 500K/year and I agree with you, dude.
There are some interesting corollaries with this housing market and the commercial office market in the Bay Area in ‘99/’00. Namely that the construction activity was driven by speculative demand of consumers.
For commercial in ‘99/’00, it was businesses trying to lock in what they thought were scarce rental properties to plan for projected growth. For residential in ‘04/’05, it was individuals drunk with cheap and plentiful credit buying housing because they thought it was going up in value.
Both were driven by easy $ given to the consumers. Developers accommodated in both cases by building to that perceived demand.
The difference with housing though is that population growth in many markets is a much more steady than job creation. Ultimately population growth translates to more housing needed. That housing need will lead to the recovery in the number of housing starts in the US.
The real estate mess in the late ’80’s/early 90’s was different altogether, where the free money went to developers, who built without a whole lot of regard to demand or perceived demand.
In a nutshell, I think that builders slowed late, but sooner than they did in prior cycles. I think we’ll likely bottom on housing start numbers sometime in the next 3-5 months. I don’t think that starts will drop to the 500k level (my money is on something in the mid 700’s/low 800’s). I do think though that prices will continue to erode until we get to a more sane income/interest rate/price balance.
The US is growing at a rate of approximately 3,000,000 people per year. The housing machine will slow considerably off it’s peak, but, at a million new households per year, every day a few thousand households are created–those people need a place to live.
The price at which those people can afford to buy…well, that’s a different matter altogether. What I do know is this, there is a price at which builders CAN sell an affordable house and still make a profit and have a business.
For what it’s worth, seasonally adjusted housing start data:
http://www.forecasts.org/data/data/HOUST.htm
The lowest monthly, seasonally adjusted number going back to 1959 was 798k. The longest stretch of sub-1MM numbers was 9 months in 1981. The real estate mess in 1991 was sub-1MM for 4 months.
220 rent to own here in 22151 N VA w a bus ride to the Pentagon
110 when I bought
100 whne my parents bought
80 when my grandfather bought in the depression
“‘You’re relying on people who are willing just to run any time there are fears of credit losses,’ he said. ‘It’s a weakness in the business model.’”
No, it’s an integral part of the business model. The ability to force lenders to buy back the loans is precisely why risk premiums were so low for these crappy subprime mortgages.
How do you force a lender to buy back the loan when they have gone bankrupt?
And that is precisely the hole in the business model.
Ben Bernanke - liar or fool?
or Puppet
The emperor has gone mad and is removing his clothes in public. Everybody look away!
Lets face it, a naked emperor is not a pretty sight. What is now happening is that the courtiers are trying to cover him up but he keeps yanking everything off. And you know what? There is very little they can do about it. Pity.
‘More people who already own their homes and can’t refinance are likely to lose them,’
Ummm… ’scuse me, but if you already “own” your home, why would the inability to refinance cause you to lose it? If it’s fully paid off, then all you have to worry about is property tax, insurance and maintenance, which should not be that big a deal compared to paying P+I as well. If you are still paying on an existing mortgage, then why would you “need” to refinance –unless it was a bad loan to begin with?
Did our parents have to serially refinance every six months? Grandparents? Great-grandparents? Where exactly is the “right” to serially refi written in the Constitution?
Can’t have a shell game without shells.
When you begin to freefall everything looks small and avoidable. Once you reach terminal velocity and the ground is growing definable you see, wires, trees, boulders and water. The trick is to put them out of mind and look only at the circle of sand and imagine that the only place you could land.
Oh did I put on my chute?
Who cares what the fed says, if you see a storm coming why wait for the weather channel by then it is to late, we all see the earmarks of a major US recession if not depression coming.
People get your affairs in order now, dump what is dragging you down and sit back and watch all the soothsayers cover their rear ends when this title wave hits just be lucky you did something early about it and didn’t buy into the Enron type lies?
I am surprised that inventory of unsold home fell. Why?
Sellers are asking for smaller increases or are actually lowering prices versus prior years’ prices. This results in more sales, less inventory.
Also, a lot of people don’t want to sell at a discount so the ones who don’t have to sell simply don’t enter the market, waiting for price restoration. This has a big effect on inventory.
The battle then becomes largely one of the must-sellers (job transfer, etc.) with the must-buyers (pregnancy/nesting oriented wife, etc.).
One might say just sell your home at a discount, because you will buy your new home at a discount. However, this argument only fully applies if you are upsizing or moving to a more expensive market. If you are going to a smaller house or cheaper market (or both), you can’t offset your full “loss” with the smaller savings on the smaller/cheaper house.
The natural checks and balances are amazing.
Builders slowed their starts sometime last year. Since whenever that was, the US population grew by approximately 250k people per month, and approximately 100k households per month. Combined with price reductions, more people + less housing starts = reduced inventory.
Also, a lot of sellers have said “why bother” and have put their selling plans off into the future.
“The median price of a new home fell 2.1 percent from a year earlier to $239,800. The latest median price is down 6.7 percent from the record high reached in April 2006.”
I wonder how much of this is builders dropping the size of the homes to put less investment at risk. By early 2006, many builders knew demand was easing.
The comparison with April doesn’t say much other than the fact that people generally pay top dollar in the spring.
Nevertheless, a national price drop of 2.1% is very impressive and obviously means it’s a lot bigger in the Bubbleopolises.
Meanwhile in Florida…remember that Hispanic lady who was trying to sell that overpriced POS down in Kendal, because she was following her entire family to Atlanta? Here’s the outcome:
“But in large part, sellers have clung to a strategy of some price declines — though nothing too drastic — with a variety of incentives to lure buyers. The result is slow sales, but in some cases, it works.
Take Olga Alvarez, whose bid to sell her West Kendall home in the tough market was recently chronicled by The Miami Herald. She listed her three-bedroom house in October for $399,000, then reduced the price to $389,000 and offered to pay up to 3 percent of closing costs. She lowered the price once more to $379,900.
On Sunday, a buyer signed a contract for her home.
Alvarez and her husband, Zabdiel, will still walk away with a tidy profit. The couple, who are moving to Atlanta, bought the house in 2000 for $147,500.”
http://www.miamiherald.com/460/story/26312.html
Even if they would pay 10% for realtors and closing costs, they’d come out of the deal with 342k, about 2.32 times as much as they paid. It would be about 13% per annum: they bought at the right time - lucky them.
If anything, I think my numbers are conservative, but even with those conservative assumptions, OC is going to be a freaking bloodbath.
No question about it.
I have lived in Irvine for 28 years. There simply are not enough
really wealthy households to sustain the current median price.
As matter of fact, many households are taking in
roommates or room renters to make ends meet.
In fact, this issue has been a topic in our
recent H/O association newsletter (Woodbridge).
You would be amazed in how many households rent rooms
in the so called ‘wealthy’ areas (Turtle Rock, Woodbridge,
Northwood)..
How do I know all this? I have helped multiple friends who are
room renters move!
I often wonder whats going to happen to local governments who
depend so heavily on (declining) property tax revenues.
As an interesting side factoid, I track very carefully real estate
activity in Shady Canyon (zip 92603) which is one of the pricest
areas in Orange County. As of today, over 50 homes are for sale.
Many have had multiple / substantial price reductions. Further,
as far as I can tell, based on many personal open house visits and other
information sources, the majority of these homes have been
constructed ‘on spec’ and have never been lived in.
“‘You’re relying on people who are willing just to run any time there are fears of credit losses,’ he said. ‘It’s a weakness in the business model.’”
The observation of a genius….