The Housing Bubble

Mortgage Defaults Spread Beyond Sub-Prime Loans
The Wall Street Journal Online

yahoo marquee
Cramer says no big deal

Bloomberg: “Housing Rebound Elusive”

http://www.bloomberg.com/apps/news?pid=20601103&sid=a8d4MWhHmDN0&refer=news

http://money.cnn.com/2007/03/01/magazines/fortune/nar.fortune/index.htm?postversion=2007030113

AMAZING this guys gets the space to spew his stuff anymore after such a poor track record!

Just sent this response to the so called “interviewer”:

Good Morning,

Really shameful to give this guy a venue to continue to intentionally deceive regular Americans……No one short of Ebbers, Lay et al has done more harm by knowingly providing false information to the masses. The “it’s a great time to buy”, “we’ve reached the bottom”, “up in 2007” influence buying behavior that will haunt folks for decades. He is a lobbyist and proven liar NOT an economist and did not deserve the “Larry King” kid gloves interview you gave him. He told you that he knew there was trouble brewing a couple years ago and yet continued the non-stop cheerleading. Why not question him regarding his past way off the mark predictions and conflicting statements? In a few months when the housing crash pain really hits main street (take a look at nationwide foreclosure rate of increase yoy for a preview) you can think back to your missed story. His mother should be crying because she did not raise a quality person. Your mother should be crying because 26 year old bloggers are doing better journalistic work than you.

Thanks, Darryl Randall Owner
http://www.swissluxury.com

Someome needs to write a letter to the editor response to be published in their next issue.

where are the “exits”

is private equity the new “flipper” in town?

http://immobilienblasen.blogspot.com/

“Toll’s Flip-Flop” will replace the Spring bounce…….

Gotta love it.

http://www.marketwatch.com/news/story/mortgage-applications-jump-two-month-high/story.aspx?guid=%7B6A19DF97-9522-4DEB-84A2-897206582755%7D

“Patrick Killelea & Ben Jones: Psychics or Super-Geniuses?”

http://patrick.net/wp/

Answer: both

I have three questions going into the spring time.

1. How long does it take to get a house listed?
2. What is the avg. time from signing the contract till closing?
3. If there is no spring bounce (due to tighter credit) then what happens next?

Back from a couple of days skiing @ Sierra Summit, near Huntington Lake, in the High Sierra and the snow was most excellent…

The wildflower season is starting in ernest, seas of yellow everywhere, in the Sierra foothills~

It takes us 3 hours drive to get to Sierra Summit and it makes for a most excellent drive by tour of utterly ridiculous real estate, in places that make no sense, and we are seldom disapointed. This isn’t the realm of big builders, it’s more like “hey, let’s build 5 houses smack dab in the middle of nowhere” little guys, that have done their damage.

5 houses here, 5 houses there… In the duration of a 3 hour drive, we saw thousands of spec homes that “appeared” empty.

This is a repost from late yesterday.

Lots of people commented here about the dependence of newspapers on real estate ads, having lost auto and help wanted classifieds, and how that might affect coverage. Well, evidently the bust in slamming real estate ad revenues. See here:

http://therealestate.observer.com/2007/03/housing-woes-cut-into-newspapers.html

Jobs grow by 57,000 in February, ADP says
Weakest private-sector hiring since July 2003, survey says

http://www.marketwatch.com/news/story/jobs-grow-57000-february-adp/story.aspx?guid=%7B2875CC8D%2DF38B%2D4591%2D9AC2%2D7582BD329646%7D

Rodrigo Rato, International Monetary Fund Managing Director

“I don’t think they (carry trades) are a danger in the sense that they reflect investors’ analysis of opportunities in the market. I think what investors need to be aware of is that the carry trade has downside risks. I think investors should be aware that even in a very benign scenario, downside risks exist and they appear once in a while.” – March 1, 2007

“A disruptive unwinding of carry trade positions occurred in October 1998, when the U.S. dollar fell by 15% against the Japanese yen in four days. I am concerned that investors and the countries into which funds are flowing are not sufficiently attentive to the risks.” – February 27, 2007

I was thinking yesterday about a post from another person pn this site. Their thought was that if the meltdown gets widespread enough, foreclosure/short sale/late mortgage payments will be so common that, if one’s other credit lines are kept in good shape, it really will not count against someone too badly in the future. It will just look like ‘another victim of the meltdown’-or at any rate lenders will have to ignore it if they want to lend out money. If true, could this actually lead to the opposite of what lenders normally expect-that the last thing people will let slip is a mortgage, and let their cc debt, car, student loans go before they would let themselves be foreclosed upon. Instead, a person would work to keep these up, and let the mortgage go first–accelerating the default rate on mortgages?

Debt Pyramid Threatens to Topple Markets
By Jim Jubak
MSN Money Markets Editor
3/7/2007 6:54 AM EST

After Federal Reserve Chairman Ben Bernanke’s Feb. 28 testimony, one member of the House Budget Committee asked him whether the selloff in global stock markets a day earlier — and in particular the 416-point drop in the Dow Jones Industrial Average — had changed the Fed’s thinking.

“There is really no material change in our expectations for the U.S. economy since I last reported to Congress a couple weeks ago,” Bernanke responded. “If the housing sector begins to stabilize, and if some of the inventory corrections that are still going on in manufacturing begin to be completed, there is a reasonable possibility of strengthening of the economy sometime during the middle of the year.”

Absolutely true, as far as it goes. But it doesn’t go very far. Yes, nothing that happened on Feb. 27 changes the U.S. or global economic picture. But this time it’s not the economy, stupid.

What’s more important is what Bernanke didn’t say: that this time, the biggest potential danger isn’t from a slowdown in the U.S. or Chinese economies. It’s from the pyramid of leverage in the debt markets created by traders and speculators using cheap money from around the globe, and in particular from Japan.

The selloff of Feb. 27 demonstrated how a panicked unwinding of that pyramid of debt could send financial markets into chaos.

His answer on Feb. 28 was reassuring to the markets in the short term, but I worry that all it does is extend the complacency about risk piled on risk in the debt markets that got us into this fix in the first place.

Let me first run through the evidence from the market action on Feb. 27 that shows that the problem is in the financial markets and not in the economy.

Just about every asset sold off. Emerging-market stocks down. Developed market stocks down. Commodities down. Some of those assets are normally good hedges against declines in other asset classes. Gold often goes up when stocks fall, for example, but not this time. The coordinated selloff was evidence, I believe, that speculative buying had driven up the price of just about every asset class. And prices fell across all classes as traders unwound those speculative trades.

Why did a 9% plunge in a small and unimportant market such as Shanghai, largely off-limits to any but domestic Chinese investors, set off a global selloff? Leverage. If you’re using borrowed money — lots and lots of borrowed money — to buy assets, you can’t wait to see if prices will stabilize. After borrowing 10 or 20 or even 50 times more money than their actual capital, very few investors are willing to bet the future of a company on the hope that a manageable 1% decline won’t turn into a disastrous 3% retreat.

Of course, all the automatic computerized selling programs designed to cut an investor’s losses just trigger more selling, which, in turns, sets off more selling. The result is the kind of downside cascade that swept the New York Stock Exchange on Feb. 27.

While everything else, except for safe U.S. Treasuries, fell, the Japanese yen rallied by about 2%. The most likely explanation is that the traders and speculators who had borrowed in Japan at 0.5% interest rates to invest in everything from New Zealand bonds to U.S. stocks were selling those assets in local currencies and then buying yen to repay their loans. The move on Feb. 27 certainly doesn’t mark the end of what’s called the yen carry trade, but it does illustrate the role of cheap money in the current rally in all kinds of assets and the increased volatility of a market where “everybody” is making the same bet.

But the evidence isn’t limited to the market’s plunge on Feb. 27. The use of derivatives to insure against risk actually increases the amount of risk-taking behavior, which means that when something goes wrong, it will go wrong in a big way.
Don’t Stop, Just Insure
Investors don’t change risky behavior — they just insure against it. So on Feb. 28, the premiums on derivatives to insure against default in risky corporate junk bonds soared on the European markets.

About $100 billion in derivatives, four times typical volume, traded on Feb. 27 and Feb. 28, and premiums to insure junk bonds against loss for five years climbed by about $80,000 in just those two days. The prices of the actual junk bonds fell much less than the premiums rose: Investors weren’t selling the risky asset, just buying more insurance.

This works as long as there are deep pockets willing to take both sides of a bet.

The subprime mortgage market is a good example right now. Banks with exposure to the risk that borrowers will default in larger-than-predicted numbers are buying derivative insurance to protect against losses. Hedge funds, other banks and some insurance companies have been selling that coverage because they think the banks are overestimating the dangers of default.

That works to keep the subprime mortgage market liquid and functioning — no bad thing — since some lenders will continue to lend as long as they can get insurance in the derivative market. But it does set up the possibility of a swift collapse of the subprime market if the bet starts to go against the sellers of insurance and either a big seller of insurance can’t honor its derivatives or enough sellers of derivative insurance pull out, suddenly persuading subprime lenders to stop all lending.

You don’t have to look to the mind-numbingly complex world of derivatives to see evidence that the financial markets are too complacent about risk — and that it could be starting to catch up with the markets and us. The world is building up a long list of ticking financial bombs that are only kept from exploding by the continued supply of cheap money around the globe:

Latvia: This is my favorite example right now. Its economy has been growing at 12% a year, relying on the current flood of cheap money. Credit growth has been running at 60% — meaning there are 60% more loans outstanding today than a year ago — and inflation at 7%. Consumers, like their counterparts in the U.S., have kept cash registers ringing even when the country wasn’t producing the wealth to pay the bills. Latvia’s trade deficit (current-account deficit) came to about 18% of the country’s GDP in 2006. The current account deficit in the notoriously spendthrift U.S. amounted to less than 1% of GDP in 2006.

India: India is on the road to an economic and financial hard landing that would send the Mumbai stock market plunging — certainly taking other emerging markets with it as hot money flees these stock markets. Tiny Latvia is too small to inflict much global damage if it goes into crisis, but India is big enough. Its Mumbai stock market is much more important in the world financial markets than Shanghai’s.

Interest rate increases by the Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan haven’t significantly cut the global supply of money or raised its cost. Too much money continues to chase too few good opportunities.

These that I’ve named — and the others I haven’t — take us to the same place: an old-fashioned credit crunch that marks the turn in the credit cycle from cheap, easy-to-obtain money to more-expensive, hard-to-get credit.
When and Where?
I can point to this evidence and these big trends and say “danger ahead,” but I can’t tell you what catalyst will trigger a turn or on what schedule. India seems likely to hit its tough patch later this year. The Japanese yen carry trade could be unwinding now — thanks to a legion of currency traders who all read the same technical charts and who have all started to get nervous because the charts show the yen at major support against stronger currencies and in an oversold condition.

But despite my inability to call the timing of this shift, I think you ought to be preparing for it now. The risk is high enough, and the reward of staying the current course low enough, that I think that getting cautious now is just prudent. No need to panic. No need to undo all your positions. I think there’s still a good chance that the Shanghai selloff will turn into a bounce and then a limited, seasonal rally running into the spring.

I think this advice from my Feb. 21 column still stands: “If I can’t find bargains right now, I’d be perfectly comfortable selling into this rally whenever a stock hits my target price. I’d certainly like to have some cash on hand as we head into the second half of the year.”

But this is the time to take action, especially if a rally gives you a chance to rearrange a portfolio without taking big losses. Notice I haven’t said a word about the economy. Currently it’s the least of my worries.

I just wish Fed Chairman Bernanke would take some time off from reassuring investors about the economy and the short run and start flagging some of the growing longer-term risks from cheap money and complacency about risk. The Fed could even do something about the problem before it bites us all.

Squak box-

Bob Toll came out and said they will burn off 4-5 months of inventory by summer.

Anyone think this is possible with slowing demand and the high cancellations they have had?

I find it funny Lereah blames last month’s slow numbers on the cold weather. You don’t see him talking about January one year ago versus this, but December vs January.

When things improv, you will here him say that things are picking up (no mention about the weather).

SPIN SPIN SPIN.

Anybody here ever read Barbara Tuchman’s masterpiece?

“The Guns of August”

How World War 1 got rolling, the unexpected consequences of alliances.

Same thing here, just the unexpected consequences of business alliances.

“The current account deficit in the notoriously spendthrift U.S. amounted to less than 1% of GDP in 2006.”

The problem is that The Current Account Deficit is a running number now in excess of 7% of GDP and showing no signs of coming down. More plasma TVs anyone?

Great write up txchick. I agree with so much of what you wrote, but let me ask you this: Don’t you agree that the Fed will raise rates soon, not cut them? This is the source of a heated argument between myself and my BIL who is chief economist for a bond house. It seems to me if the Fed eases thay are saying the $ doesn’t matter and neither does inflation - totally contrary to what BB has been saying since he got the job.

From JL’s blog…

March 06, 2007

71% of investment pros see U.S. housing woes likely continuing
A new semi-annual survey of investment advisers from Charles Schwab find that 71% of those polled think it’s likely that the nation’s housing market will continue to soften while 15% think that such a scenario was unlikely. The remaining 14% felt somewhere in between.

Schwab’s poll also found that investment pros polled “are less enthusiastic about (real estate investment trusts) REITs and real estate: 25% of those who now invest in REITs plan to invest less or discontinue their investments in the next six months; 17% of those who now invest in real estate express the same sentiments.”

The poll got responses from nearly 1,400 independent experts at companies supervising $347 billion in clients’ money.

Impac: We’re no subprime lender

Impac Mortgage Holdings of Irvine said media reports are crimping its stock by tossing it in with subprime lenders. In a statement this week, Impac said 99.8% of its portfolio of loans at the end of 2006 had better credit profiles than subprime, although generally not as good as prime. Impac is a player in the in-between category known as Alt A. Joseph Tomkinson, CEO, said “It is unfortunate for our stockholders that the Company continues to be put in the same category as subprime lenders, when essentially we have no exposure to subprime loans.”

The real estate investment trust also downplayed the late filing of its annual report and its disclosure that something was wrong with its 2004 and 2005 cash flow statements. It said:

The restatements for 2004 - 2005, as previously described in our Form 8-K filed on February 23, 2007, has no effect on the Company’s net earnings, cash position, stockholders’ equity or taxable income.
The stock closed at $4.87 on Tuesday, up 20% for the day but still close to its 52-week low of $4.03.

As per the employment numbers, remember that the hardest thing for the Current Employment Survey to do is call a turn. Later, when the unemployment insurance taxes come in and we see what actually happened, we get a revision.

Well, the big revision for 2006 is coming out in a few days. Download that BLS data for 2006, and watch for a change.

How vulnerable are RE buyers, who’ve been approved for sub-prime mortgages, to having the loan pulled prior to settlement because the lender can no longer provide the money? I would think that the mortgage commitment is only as good as the lender’s ultimate ability to access the required capital. With the recent sub-prime implosion, aren’t many upcoming sub-prime settlements at risk?

If housing kept us afloat during the last recession it’s going to pull us down this one. The economists can’t have it both ways. Subprime borrowers are going to be out of the market, people who paid too much are going to be out of the market, people who used their houses as a personal bank are going to be out of the market, and people who can’t afford the prices now are out of the market. The pool of buyers are growing smaller and smaller. There’s not enough rich people to buy all the houses for sale in this country. As the market declines on housing so does the market for home supply stores, furniture stores, and even utilities as houses sit vacant. No way this is not going to snowball. They can spin all they want.

My Dad is selling his house in Marrietta and my sister asked if I wanted to go in on it with her.

I told her homes were still too expensive but she replied “they haven’t gone up there”.

We live in CA (me in San Diego, her in Ventura).

Guess we all need this

http://www.amazon.com/exec/obidos/ASIN/141959608X/thebigpictu09-20

For our English friend:

http://jeffmatthewsisnotmakingthisup.blogspot.com/

Looking to pick up some stuff in a year or 2…

Eagerly waiting a 2 or 3 year old toyota tacoma 4×4 truck, that i’ll buy from somebody in el lay for either $2,000 or $500,000.

The vast price difference?

deflation vs hyperinflation

Has the PPT lost its heft?

http://www.marketwatch.com/tools/marketsummary/

For what it’s worth…

I keep in touch with a number of coin dealers in el lay and can pick their brains, quite freely, in terms of asking what the public is doing and the past couple of days have been very interesting~

All my friends tell me, that after last week’s margin calls came calling, they were pretty much net buyers of physical gold bullion, and now this week, nobody’s selling anything.

The few people that have physical gold, probably have a small percentage of their worth (5-10%) in the yellow metal, and it looks like we may have blown out all the small timers, that were responsible for the downturn.

Full speed ahead on the gold ship lollypop.

It’s all Al Gore’s fault!

http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20070302

Why Not Grade Borrowers Like Meat?
http://www.businessweek.com/the_thread/hotproperty/archives/2007/03/why_not_grade_b.html

The 5-year T-bill yield is signalling recession, but the stock market still finds cause for rebounding. What gives?

http://www.bloomberg.com/markets/rates/index.html

housing bubble news from the Netherlands:

Dutch Rabobank, the biggest player in the Dutch mortgage market, announced today that it will start offering a new type of mortgage for ’starters’ later this year. Because homes in the Netherlands are now unaffordable even for starters with a good job (despite 6x-10x income loans, multi-generation loans etc.), buyers can now buy only a part of the home and the bank will buy the other part (apparently sharing the risk, but they are sketchy about the details). If the buyers income increases strongly in the future, they will be able to buy the other part of the home from the bank. Let’s add it all up: 10x income, multi-generation loan, 1% energy efficiency discount (idea from the same bank): how much more idiot ideas are available to keep Dutch home prices from falling?

After some questions a spokesman from Rabobank said that they think it is extremely unlikely that homeprices in the Netherlands will fall like they are doing now in the US (!! first time someone from the RE mob mentions the US housing problems in public over here …).

SUCKS TO BE A HB CEO

“D.R. Horton said closings will likely drop below last year’s 53,000 and it will probably continue writing down land through 2008.

“I don’t want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year,” D.R. Horton Chief Executive Officer Donald Tomnitz said at a Citigroup Inc. conference in New York. “Our future is not as bright as what we would like it to be.”

http://tinyurl.com/3ymwwu

I am so so so so tempted…

*/MBA Event/*//

*March 7, 2007*

*
**The Big Idea with Donny Deutsch featuring Donald Trump*

On Thursday, March 8, The Big Idea with Donny Deutsch will be taping a
special Town Hall edition with Donald Trump. There will be a small
audience who will have the opportunity to ask Mr. Trump questions during
the show.

Stern students interested in attending the taping …

FBI says number of mortgage fraud investigations have almost doubled in past 3 years

By Christopher S. Rugaber
ASSOCIATED PRESS
2:31 p.m. March 7, 2007

WASHINGTON – The number of mortgage fraud cases investigated by the FBI almost doubled the past three years, reflecting a problem that is “pervasive and growing,” the bureau said Wednesday in its annual report on financial crimes.

The bureau said its mortgage fraud cases increased from 436 in 2003 to 818 in 2006, and acknowledged that its case load likely represents a small piece of the problem.

The FBI said mortgage fraud is difficult to track for a variety of reasons. For starters, the industry is not required to report fraud. Moreover, the sale of mortgage loans on secondary markets can “conceal or distort the fraud,” thereby reducing the number of cases reported.

“The true level of mortgage fraud is largely unknown,” the agency’s report said.

The bureau said fighting mortgage fraud is a priority due to the impact of mortgage lending and housing on the broader economy.

http://www.signonsandiego.com/news/business/20070307-1431-fbi-mortgagefraud.html

Luxury home builder Toll Brothers said on Wednesday it could “burn off” its inventory in many markets in four or five months if its lower cancellation rate persists, suggesting the weak U.S. housing market may be at a bottom.
http://money.cnn.com/2007/03/07/news/companies/toll.reut/index.htm?postversion=2007030715

Here is a “snip” from a daily market update I subscribe to…….a comment on housing.
-snip-
March 7, 2007 — March 7 (Bloomberg) — U.S. Treasury Secretary Henry Paulson said global economic growth is solid: he played down investor concern that wiped out $3.3 trillion of world stock-market value in six days. “We have solid growth, low inflation and high levels of liquidity,” Paulson said to reporters. “I feel very good about the global economy and the fundamentals.” Russell Comment — Paulson is a savvy guy, but now he’s working for the government. So what else is he going to say? Oh he could come out with something like “Sorry to tell you this folks, but we’re in big trouble. As a matter of fact, I’m thinking of relocating with my family to New Zealand.”
………………………………………………….

The so-called experts are acting as though the housing “adjustment” is about over. I’m afraid that’s wishful thinking. When housing booms (bubbles) of the past topped out, the aftermath has tended to last eight to ten years or even more. The aftermath of the recent housing bubble is about one year old. The odds are that there’s more to come — probably a lot more.

From the end of the year 2000 through the third quarter of 2006, mortgage debt increased by $14.7 trillion (that’s not billion, that’s trillion). As much mortgage debt was created in the most recent six years as all the mortgage debt of the last 50 years.

With subprime lenders now in trouble, the normal reaction by the Fed would be to lower rates as quickly as possible. But that’s not feasible today, not with the dollar on the edge, not with the US dealing with massive trade, budget and current account deficits.
-end snip-

Hamptons Summer Rental Season off to a Strong Start
http://tinyurl.com/2vpwge

What the article fails to mention is renrals are strong because NOBODY is buying.