Fed ‘Pulling The Rug Out From Under Speculators’
A check on Wall Street for housing bubble news. “Two senators on Thursday filed a measure to require congressional investigators to study whether lobbying activities by Fannie Mae and Freddie Mac further the companies’ federally mandated mission of supporting homeownership.”
“The U.S. Treasury Department has not seen any acceptable legislative proposal to curb Fannie Mae’s and Freddie Mac’s $1.4 trillion portfolios short of a Senate bill viewed by some as too strict, Treasury Undersecretary Randal Quarles said on Thursday. If a bill is not passed, Quarles said Treasury would consider the tools it has available to deal with what it perceives as a systemic risk posed by the portfolios. Those tools, he said, include limiting Fannie’s and Freddie’s debt issuance.”
“The National Association of Realtors reports that last year an ‘eye-popping 43% of first-time home buyers purchased their homes with no-money-down loans.’ Meanwhile, a foreclosure monitor has announced that nationwide foreclosures jumped 24.5% between the first and fourth quarters last year.”‘
“In somewhat ominous fashion, our Housing Bubble Bellwether Index is now testing its support level. If this bellwether composite of homebuilding, mortgage and real estate stocks breaks sharply to new lows in the next several months, it means the housing bubble unwinding is about to turn ugly.”
“Bubbles usually require an external event to create the first pinhole. For stock market bubbles (1999, 1929 and Japan in 1989), it was central bank tightening. For the housing bubble, it may be a combination of rate hikes (14 so far), plus the U.S. Federal Reserve pulling the rug out from under the speculators.”
“After two weeks of declines, long-term mortgage rates turned sharply north in the week ending Thursday, with 30-year rates hitting the highest level in over two and a half years. The increase put the benchmark 30-year mortgage at a national average of 6.37%. Last year at this time, the loan averaged 5.85%.”
“Frank Nothaft, Freddie Mac vice president and chief economist, said stronger-than-expected gains in manufacturing and service industries, coupled with higher labor costs, ‘ignited inflation concerns,’ which led to higher mortgage rates this week. ‘Financial markets are beginning to think that the Fed will hike rates three more times this year, instead of two, putting upward pressure on mortgage rates,’ he said. ‘Although the signs are mixed, the housing industry is now beginning to shift into slower gear, and higher mortgage rates will only strengthen that change,’ said Nothaft. ‘However, we see no signs of a bursting bubble.’”
“Mortgage loan fundings at Countrywide Financial totaled $31 billion in February, up 15 percent from a year ago but down for the second straight month, the company reported today. In January, mortgage loan fundings came in at $33 billion, which was a large decrease from December’s fundings of $44 billion.”
“Operational highlights included the following: Adjustable-rate loan fundings for February were $16 billion, an increase of 11 percent from February 2005. Home equity loan fundings for February rose by 30 percent from February 2005 to $3.4 billion. Nonprime loan fundings in February were $2.8 billion, up from $2.6 billion for the same period last year.Pay-option loan fundings for the month were $5.6 billion, up from $4.6 billion in February 2005. Interest-only loan volume was $6.3 billion for February, up from $4.6 billion for the same period a year ago.”
“The PAD System Report comes out when editor Daniel A Seiver, a practicing finance professor, feels he has something to say. In his current issue, he recommends a new short sale: FirstFed Financial. It’s a mortgage company heavily exposed to the Southern California market. which Seiver describes as ‘one of the bubbliest and riskiest in the nation.’”
“Plus, he dislikes the company’s significant exposure to option ARM loans, where the borrower can elect not to pay interest but instead increase debt. Seiver predicts there will be defaults in a down housing market. He warns that FirstFed may be difficult to short.”
Thanks to the readers who sent these links in.
NTR is having another bad day.
The biggest oxymoron ever created was “I’m from the gvernment and I’m here to help”, as evidenced by the latest quote by Fed Governor Poole. ” If you have a direct financial interest, I can’t help much, you’re on your own.”
Just a side note here: I have to disagree that the line “I’m from the government and I’m here to help” is an “oxymoron.” As Hurricane Katrina’s aftermath shows, there’s no way society can operate without an effective government. The idea behind “I’m from the government, and I’m here to help” seems to me not only necessary, but ultimately the noblest thing a government can say to its citizens.
I remember one of our great presidents once saying “Ask not what your country can do for you but what can you do for your country”.
When people take charge of themselves they will no longer have to wonder about the government who by the way is you!!! Take charge,get an education,act on your knowledge and never get into a loan or financial situation you cannot handle. it is your choice not the government.
It is the responsiblility of the government to provide that basic education.
Throughout history when governments have been forced to educate its wayward subjects it was usually limited to a brief dancing lesson at the end of a rope.
OT, buuuuuttttt…
“It is the responsiblility of the government to provide that basic education.”
I don’t remember seeing that in the constitution…was it ammended recently?
When was it ever the “responsibility” of the government to give anyone an education? I would contend that it is the parents’ responisibity to provide an education of some form or another. The fact that some governments (try to) provide this service doesn’t mean they are “responsible” for it.
“Some governments”? Who would that be. I surmise you’re so young to be foolish enough to think that the founding fathers never wrote about providing an education to its citizens. Guess again.
>the founding fathers never wrote about providing an
>education to its citizens. Guess again.
Fine. Educate me (obviously the government did a poor job at this). Links to citations please?
You’re kidding right? You actually believe the founding fathers never endorsed or subscribed to educating citizens of the new republic????
“You’re kidding right?”
Thanks for the citation. Unfortunately, when I did a search for “you’re kidding right?”, I didn’t see references to education or the founding fathers. Perhaps another citation would work better?
Well, here is a link to the constitution.. http://www.law.emory.edu/FEDERAL/usconst.html.
NO WHERE does it talk about the FEDERAL government providing education. I guess that is why it is left to the STATES. Never try and confuse a liberal with the facts.
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
The endorsement for educating citizens is slightly different then claiming its the “goverment’s” responsibilty to educate everyone.
Public education indeed was endorsed by some of the founders but never written into the consitution. Infact the biggest reason given to educate children was so they could read the “holy bible”.
Some of the founders believed a citizen could gain most of what was needed to live a successful life from reading said bible.
I tend to believe its in society’s best interest to always encourage education. But the desire to learn is fundamental. You can’t really force feed an education. Apathy is the problem here not the lack of ways to educate one self.
We live in a time when information is virtually free and limitless. Yet most of the public only cares about what’s the hot new CD, who is winning american idol and what size rims they should buy for their SUV.
Careful now. We a few rightwing freaks here but of the facts never compelled them. Nevertheless, beating the senseless is always a joy.
Laws for the liberal education of the youth, especially of the lower class of the people, are so extremely wise and useful, that, to a humane and generous mind, no expense for this purpose would be thought extravagant.”
John Adams, Thoughts on Government, 1776
The freaks may now tear apart a founding father. Proceed.
The Lingus,
I challenged you assertion that I was “foolish enough to think that the founding fathers never wrote about providing an education to its citizens.” You then provided a citation.
Checkmate on me. I was wrong.
Congradulations, you were successful in having me attack your straw man.
Congradulations = Congratulations…there has GOT to be a way to edit these after posting…
It’s always a pleasure.
guys–take it out into the parking lot. In case you didn’t catch it, this is a housing blog.
As Hurricane Katrina’s aftermath shows, there’s no way society can operate without an effective government.
The problem was that people assumed the government would come in and scoop them up. Gigantic bureaucracies don’t work well and work even less well when they have to coordinate with eachother. This wasn’t a government screwup it was just business as usual.
The biggest oxymoron ever created was “I’m from the gvernment and I’m here to help”, as evidenced by the latest quote by Fed Governor Poole. ” If you have a direct financial interest, I can’t help much, you’re on your own.”
How about “I’m big business, I’ve bought congress and president, and I’m here to HELP the consumer”.
Nice to see Ralph Nader poste here…
Clearly, ShrubCrony was bought and paid for long ago. It’s great to see that their monopoly will end in Nov.
“Meanwhile, a foreclosure monitor has announced that nationwide foreclosures jumped 24.5% between the first and fourth quarters last year.”‘
Yum, I’m starting to smell blood in the water.
and in the latest survey americans believe houses will continue to rise 5 to 15% over the next 3 years.
channel 9 news last night, a realtor was featured in front of a nice los angeles suberb home openly proclaiming it will be worth $1,000,000 by the end of this year.
connect my first two paragraphs together and things begin to make sense. americans economic opinions are formed by the short soundbites they hear on tv. i remember thinking myself about a year ago this “soft landing” thing sounded good.
boy, turn over the rock and look what’s really crawling around underneath
channel 9 news last night, a realtor was featured in front of a nice los angeles suberb home openly proclaiming it will be worth $1,000,000 by the end of this year.
Well, it might be true if the home is worth $1,200,000 today.
here we go - a repost from keith’s hp blog (thanx keith!)
“Anonymous said…
No trouble here in Phoenix.
Restaurants remain packed, with 1-2 hour waits on the weekends. The malls are packed.
I even stopped by some builder models late in the afternoon Sunday and they had traffic. ”
now this guy is far more sophisticated than your average tv couch potato. he actually drove to the mall and back before giving his commentary on the state of the local economy.
I know this guy - Phoneix Bob (distant cousin of Baghdad Bob)!
*phoenix (need spell checker)
I forgot to mention that there is a great bubble chart comparison at the Forbes link.
Anon1,
Please tell me you were kidding about Katrina..
Am I the only one that remembers the Superdome? People DYING? Hundreds of buses sitting in parking lots flooded? FEMA?
Put down the crack pipe fella.
Name ONE thing the government does BESIDES the military that private industry cannot do better, cheaper, and faster. Spend us into oblivion? LIE? not solve any major problems such as social security, health care, poverty, drugs, immigration, crime?
(steps off my soapbox)
Your faith in private industry is misplaced.
Many of the entities entrusted with Katrina response and civilian evacuation were private companies, contracted by FEMA.
Being more concerned with maximizing profits than saving lives, they failed miserably.
Make no mistake - the recent failures of governmental organizations like FEMA are intentional. The Bush administration inherited a highly functional and competent organization in FEMA, then promptly purged FEMA of its experienced leaders and intentionallyinstalled incompetent cronies (”Heckuva job, Brownie”) in their place so that people like you would draw the conclusion that government must be incompetent.
It’s only incompetent when the White House wants it to be incompetent. And they’ve suckered you into believing just what they want you to think.
Amen…. This insane notion that corporate slime does anything better than government has crumbled under the weight of its own stupidity.
Right, sorta like how Walmart was handing out drinking water when FEMA was nowhere to be found, maybe because they have distribution down to a science.
From the not-exactly-republican NYTimes..
Normally I wouldn’t post about politics but GSEs (including FAN/FRED) are seen as a good thing by the left and bad by libertarians/republicans/economists.
Thats real cute. Gut FEMA, ask them to perform a task and wonder why they couldn’t do it. Try again.
Lingus,
The next time you try and parrot off talking points from Moveon.org, try and read up on the subject.
Here are the facts from an MSNB news article http://www.msnbc.msn.com/id/9460436
Many of the entities entrusted with Katrina response and civilian evacuation were private companies, contracted by FEMA.
Absolutely, there are fewer and fewer government workers, and more and more contractors. Think Halliburton.
Kidding, no. Doesn’t Katrina show what miserable, unjust shape we’re in without an effective government? The private sector isn’t going to, and here didn’t, help a group of poor people who couldn’t pay to get out. Which means that government must step in and help people.
Yeah, i rmember how the federal government had to swoop in and take care of everybody after the Loma Preita and the Northridge quakes here.
Oh wait, it wasn’t the federal government, it was local government, private relief agencies, and volunteers that did the job. Never mind.
Great. It’s good to know that the citizens of those communities benefitted greatly from local government.
Doesn’t the government of the state of Vt spend tons of your tax dollars to attract tourists from NJ, CT, NY and what was the other one that you hate?…….. Was it Massachusetts? Every time I’ve been visiting VT i get the feeling that the State government is bending over backwards to welcome me. I think “government” is busy using your money (Lingus the Mingus) to build an economic vision of your state that pisses you off?
I notice how all of the left leaning posters failed to address LBJ’s war on poverty that failed so miserably, or the war on drugs, or Clinton’s “end of big government.” You also fail to address the fact that the private sector can deliver goods and services cheaper and more efficient than the government. The state of LA is run by a democrat, New Orleans is run by a demcratic mayor. Any wonder why the people in Ga and the other areas that have been ravaged by hurricanes- including ,my state of FL- did not have the horrors of New Orleans? Because the LOCAL governments in these area are not comprised of incompetent, whining, morons.
Gee, the government agencies like the IRS, DMV ,FEMA , USPS, FNMA, Welfare, Education,Chidren’s Family Services, Immigration, and law enforcement are all such models of efficiency and cost cutting.
Government is NOT supposed to protect you from cradle to grave, that is communism. Government is to provide a nation with services that otherwise would not be feasable- defense being the main one. Most everything else can be provided better and more efficiently through private sectors.
I agree, BigDaddy. When people think that the Federal Government is a sort of parent that has to take care of every problem, they stop learning how to take care of themselves, or think for themselves.
For instance, most people have no idea of what kind of financial instruments their banks invest in or whether their banks are sound and safe. Is that because most people are incapable of finding out about the safety of their bank? No, it is because they think it does not matter if their bank makes good investments or not because the depositor insurance will keep them from losing money if their bank fails. This makes it much easier for banks to follow unsound practices.
I’m grateful California seems to have a handle on what needs to be done in emergencies. We’re not perfect, but I trust state and local governments more than I do the Federal Government to do the job.
No, Katrina showed what happens when you have an inept bunch of Democratic politicians that are more concerned in playing the race card than they were in actually soliving problems. Mississippi, Georgia, Florida, and Alabama were all ravaged an none of these states had the problems associated with New Orleans. Because the local and state elected leaders were too busy pointing fingers and moving to Houston.
Being the utter failure that shrubco is, the freaks can only blab about LBJ, blowjobs and Carter. Sad…..
…….and state government of the Green Mountain State spending your tax dollars to attract all those visitors that you call “slime”. And another thing, don’t mention blowjobs, it causes me to carefully reread all the previous posts trying to find the creative genius on the housing bubble blog who can work in a real-estate bj reference and stay on topic.
Quit your handwringing. You’re just angry because the slimer label fits. Shoo.
Yo soy Slimer…..oh yea Now I have to waddle out to my Porsche Cayenne Turbo and blast down to the liquor store and buy some egregiously expensive organic hand rubbed free range Scotch, come home and finish my financial reading.
As a famous Vermonter once said “It’s the syrup baby!” Good night Mr Lingus
PS; us slimers are way too self absorbed to be angry.
Lingus,
typical. Can’t address the issue so you go back to the stupid bumper sticker answer. Boy you sure are a cunning, Lingus.
You do that rabbi. Make yourself feel better.
All that bitterness and anger you muster can’t change Shrubs failures. Katrina, Iraq, the crumbling economy, eavesdropping on telephone conversations. Yo go girl!
The New Orleans mayor spent years as a Republican. He even donated to Bush’s campaign. What the heck are you talking about?
it all depends on who is running the government.
has anyone noticed that people are really mad about property taxes this year? 2-3 articles I’ve read.
Yep. Several articles. No one was all that concerned with the buying frenzy was on. It wasn’t part of the braggin’ rights conversations. Now that the interest only/ARMd-to-the-teeth people have gone through a few interest rate resets, they are finding that they are having trouble with the gi-normous tax bills. Hmmm….so how would they dress THAT up in the watercooler chit chat? Would they all collectively say , “I’m screwed??! Might as well….’cause they are.
BayQT~
Shocker, restuarants remain packed in Phoenix?? WTF, what else is there to do there!!
Last night on the 11.00pm news, they showed a 2 BR I Bath house (with a backyard) listed for 529K in Albany. They got 23 bids on it and eventually sold for 679K.
Whats wrong with these people? It seems the school districts are nice. The difference between asking and bid price 150K was enough to send kids to private school, I would think..
Anyways I am a renter and will be one for some time…
For a minute I thought you meant Albany, NY. $679K for a house in Albany, NY? A very disorienting thought.
From what I remember of Albany, CA, $679K sounds like a bit much for a 2/1 there as well.
I have too. Either pay the property taxes or sell the house already, why do people expect a free lunch? Now I say this while living in CA and wishing prop 13 would disappear somehow >; )
test
All of the upside, and none of the down. Prop. 13 is doing EXACTLY what it was intended to do - restrict the inflation of property taxes to those owners who willingly assumed a higher assesment, instead of penalizing those (originally seniors) who frankly choose not to assume a tax penalty due to SOMEBODY else’s debt.
I bought in 1987. I have invested capital in improving that house and I choose to live there many more years. I also pay happily pay a property tax about 1/5 as much as my neighbor. His debt, his tax, not mine.
Your point is 100% correct UNLESS you’ve taken a home equity loan or refinanced with cash out…My opinion is that your property taxes should then be re-set. I’ve argued this for decades and everyone seems to think it is “fair” but why don’t the politicians? I’m all for saving granny some money, but the minute she uses it as a piggy bank then she should play by the same rules….
Actually, that’s a great rebuttal. And I agree. Any loan (re-fi) that increases capital debt above the original purchase price should trigger an assessment re-set. I haven’t done so, but the logic of such a proposal is solid.
“but the logic of such a proposal is solid”
How so? Just saying it doesn’t make it true!
So, under that proposal, would your taxes reset back down after you paid off the home equity loan?
“Prop. 13 is doing EXACTLY what it was intended to do…”
If it was intented to drive working families out of state while crippling local economies then yes, it is working as planned. In my LA Coastal neighborhood, nobody under the age of 50 can afford to live there anymore. Our schools are filled with nothing but poor kids who live in apartments nearby. All SFH’s are occupied by retirees (or 40-something DINC’s) unwilling to “trade down” because there is no economic incentive to do so.
Upper-middle class families are being chased out of LA in droves (Nissan, etc.) and they aren’t coming back. So all of these boomers that are borrowing against their homes are going to have a helluva time selling their places in 10 years or so to the only people left in CA - poor immigrants and celebrity wannabees.
No, it’s not prop. 13 that’s driving them out, it’s high housing prices that are doing it. As for the schools, I firmly put the blame on illegal imigration; how many kids in LA schools are also in English as a Second Language classes? 25%? 45%? 60%? How much time are the teachers going to have teaching lessons if the kids can barely understand the lessons?
“All SFH’s are occupied by retirees (or 40-something DINC’s) unwilling to “trade down” because there is no economic incentive to do so.”
Maybe you can pass a law to force them out at gunpoint…then you could have nice availability for the type of people you want living in your nice little coastal enclave.
LA schools are mostly Hispanic because the only people that can afford to live in LA proper anymore are the rich (private school) or the apartment dwellers (mainly poor Hispanics).
Prop. 13 is partly to blame for driving UP property values! A ton of people that live in my neighborhood could not afford to do so if they had to pay “market tax rates”. Less demand = more supply = lower cost.
Look at Beverly Hills and Century City. A huge percentage of the residents there are retired, even though they are two of the largest business hubs. Wouldn’t it make more sense if grandma went to the exurbs and the workers moved in closer? Instead it drives people out of the city and eventually the state.
>LA schools are mostly Hispanic because the only people that
>can afford to live in LA proper anymore are the rich
>(private school) or the apartment dwellers (mainly poor
>Hispanics).
If you are from the area, then you know that that is a load of steer manure…the latest housing price boom happend WAY after the “latinization” of LA, and you know it! Economic opportunity and lax immigration enforcement is why illegal immigration is so rampant. Give me a freakin’ break!
>A ton of people that live in my neighborhood could not
>afford to do so if they had to pay “market tax rates”
>Wouldn’t it make more sense if grandma went to the
>exurbs and the workers moved in closer
Oh, so I see your true agenda…you want to force long standing residents out so that you can repopulate the area with more “desirable” and “deserving” people…correct? Hey, maybe you can just use eminent domain and TAKE the houses from the undesirables (“grandma went to the exurbs”).
RE Prop 13. How back lower taxes for everyone? Politicians always say they want to help working families. Taxes are everyone’s largest exspense. Income, SS, medicare, property, sales tax, gas tax, utilities taxs, the list goes on and on.
“Our schools are filled with nothing but poor kids who live in apartments nearby.” This is the kind of thinking that contributed to this bubble that somehow living in an apartment you could afford is less desireble than living in a SFH - many time the “owners” of which cannnot afford.
That should be: how about lower taxes for everyone?…
RE: external factors accelerating house price declines, see this article from the NY Times today discussing the Japanese central bank’s plans to raise rates: http://tinyurl.com/mjea7
To quote, “A reversal of these huge flows of cash could have even broader ripple effects in the global economy, some economists say. If money grows scarcer in the United States, interest rates could rise there, too. Economists say this could lead to a situation — far-fetched but not entirely implausible — in which the Bank of Japan deflates the American real estate market, as homebuyers face more expensive mortgages.”
No, not ‘far-fetched but not entirely implausible ‘. The JCB has been the prime source of world liquidity for the past 10 years in an attempt to beat back their own deflation. Removing this huge amount of stimulus will force long-term debt yields to rise to a place, that absent that easy money, is significantly higher than current yields.
Many RE bulls talk about the need for an external precipitating factor to set off a bubble burst; well, how about the Japanese central bank’s plan to tighten money supply: http://tinyurl.com/mjea7
A choice quote: “A reversal of these huge flows of cash could have even broader ripple effects in the global economy, some economists say. If money grows scarcer in the United States, interest rates could rise there, too. Economists say this could lead to a situation — far-fetched but not entirely implausible — in which the Bank of Japan deflates the American real estate market, as homebuyers face more expensive mortgages.”
OT - Check out the NoVa market numbers on nvar.com (market reports) Arlington County, among the hottest in the region, SFH’s took a 10% decline in prices YOY. Condos down too.
That’s for means, not medians (a similar thing is being shown in the Alexandria charts). What that’s showing is that the high-end has collapsed and is not selling.
But the detailed stats for Fairfax, Loudon, and Prince William counties, where the real volume is, show the opposite. The numbers for “Contracts” show a real falloff in the 300-399K$ range, but much less change above that. As I suspect that much of what’s been driving this market has been speculation and panic buying by younger people, who either were sure real estate is a “can’t-lose investment”, or terrified of being “priced out forever”, this is important. With fewer first-time buyers to sell to, existing-home owners will be less able to move up. Since the ownership rate among under-30s (and especially among under-25s) has risen enormously over the last decade, that depletion of the first-time buyer pool would have slowed housing demand even without rising interest rates and inventories; together with those influences, it means the end of the bubble. The nvar stats show inventories now at many months even relative to the current sales rate, which surely will be much lower as the glut becomes evident to all.
http://www.nvar.com/market/marketstats/feb06/index.html
i’m curious what site you can go to in order to view this data in a “non spin” format. i know there are sites out there that tear the #s apart, but i don’t have them bookmarked. i’m especially interested in DC, as i sold last june (and people laughed at me, taking me for a fool). nice to see that i’m being proven correct.
http://www.nvar.com/market/mktstats.lasso
and in the latest survey americans believe houses will continue to rise 5 to 15% over the next 3 years.
Do any of these people in the survey even know what they are saying? If they did they would be in asking their bosses for a hefty raise in the neighborhood of 15% to 20% as houses are leveraged but not their wages.
in my country (NL) home prices have risen by an average 15% per year for nearly 15 years now, while wages rose only 1-3% yearly.
No need for rising wages in a free credit society. Maybe even no need for wages at all, because a lot of ‘clever’ people here make more money will sleeping in their home than while doing their job
Its a little late to be clamping down . THey should of started clamping down mid 2004 . Neg. adjustible should never be made on low down loans . Are these people nuts . Being a x-lender underwriter from years ago , we would only allow those type of loans on low loan to value ratios so no chance we would get hurt given normal inflation . Since when did the risk sift to the LENDER /Investor in loans /,instead of the borrower the way it use to be . This gives me the creeps . Hope that a lower % of the loan packages are this high risk stuff than its looking like .
One bright note however . In the old days , owner occupied people would do almost anything to save the house . They will let the car be taken before they default on the house or loose it . Shelter does have value . Have people changed in the last 20 years or am I just out of touch ?
If you are stretching your budget to just barely afford a house in California with an “exotic” loan (neg am, interrest only, etc.), and rates go up, well…you can’t get blood from a stone.
You are out of touch.
I got into an argument with a CL moron the other day because I said I look forward to having my mortgage paid off, like our parents and grandparents did. I told him I wanted to burn the mortgage papers in the BBQ pit like we’ve all seen in those old TV shows.
He didn’t understand why I would do this and give up the benefits of paying a mortgage.
I think it makes a lot of difference if people have a 20% downpayment invested in the home; that is what has changed in the last 20 years …
“Bubbles usually require an external event to create the first pinhole.”
This simply isn’t true.
If people believe the future price of an asset is greater than its current price, they will buy more of it. This increase in demand causes the price to rise, and the prophecy is self-fulfilled.
Eventually, even if everyone believes that the future price is greater, they cannot beg, borrow or steal enough money to buy more. With that drop in demand, the price falls. When people see the price of the asset continue to fall, they believe that the future price is less than the current, and they buy less. This decrease in demand causes the price to decline further, and the new prophecy is self-fulfilled.
At no point was an external event required to burst the bubble. That’s not to say that an external event can’t help the bubble end before its natural demise, but it certainly isn’t required.
However, an external stimulus may be required with housing…
Houses tend not to be perishable, so if your house is not selling at the price you want, you can just keep it on the market (forever?) until inflation gives you that price…you’ve reached the “legendary permanently high plateau”.
Rising interest rates can force the hands of the lowest hanging fruits, the marginal buyers and the specuvestors. Job loses could (would) force everyone’s hands. And when you have enough downward momentum for a panic, all bets are off, as psychology plays an ever-increasing role.
But if no one’s hand is forced, you could end up with high asking prices, low bidding prices, and sales going to (near) zero, as housing has double value: the value as a pure commodity, and the value as a place to live. If no one can agree on a price for exchange, the seller can still reap the value of just being able to live there.
but transaction volume never goes to 0, so a market price is always being set. There is always someone moving, dying, outgrowing their one bedroom condo or whatever.
Farmers can eat their crops too.
But in this case we have large numbers of speculators in a number of areas who cannot make ends meet unless the prices continue to rise. The market cannot remain level, because these people cannot have a positive cash flow by renting, and they will have to dump their properties, lowering prices for everyone. When there is a bubble, which implies that there has been a great deal of speculation, because without speculation there would be no bubble, there can be no simple leveling off, the prices have to correct.
you don’t know how many speculators really have to dump. That is only true if they are leveraged to the max and have no other capital or sources of income. My guess is that many of them have made enough money to wait 1-2 years, and if they believe the price correction is temporary they have no reason to sell now.
But the $64 billion dollar question is, how much and how long will they correct?
If the number of people that have their hand forced per unit of time is small enough compared to the rest of the housing market, the market could absorb the failed units, prices would dip, and then eventually flatten out (for a while, probably a LONG while). Prices could even bounce back to the previously high levels and flatten out there as the remaining sellers wait for the prices they expect/deserve.
However, if the number howmowners who have their hands forced (per unit of time) is big enough (a recession would do the trick), and with the deck stacked for trouble (the amount of exotic loans, affordability at insane levels, the number of second and investment homes, interest rates looking like they will finally go up) you could end up with a worst case scenario; a cascade of factors reinforcing each other, for a cataclysmic slide of prices below the “rational value” of houses.
Fed Appartachek Timothy Geithner Figures it Out?
http://www.xanga.com/russwinter
Russ,
Thanks, always, for your insightful posts (and blog)!
The Fed’s way, way behind the yield curve. When Greenspan jacked rates 10X in ‘94 he pushed long mortgage term rates from the mid-6’s to low 9’s, virtually shuttin’ down the show. And in ‘94 there was no where near the speculation of today.
Anybody connected to real estate starved to death from that Fed action.
Now with 14X hikes the long term rates have barely moved from 5 to 6.25%.
WTF? Who’s riggin’ the game here?
Whew-when this all gets unstuck and rates move back into the 13% range, people are gonna remember what it was like back in the dark days of Jimmi Carter.
Think is 13% unreal????
US government is broke today.
Yesterday they borrowed all the federal employee pension contributions in order to keep the doors open.
“Yesterday they borrowed all the federal employee pension contributions in order to keep the doors open.”
I’m sure they invested that in ink and paper. Soon the deficit will start to mysteriously shrink.
Long rates have been kept down by foreign central banks monetizing our debt for us. Despite the vaunted rate hikes, liquidity has only continued ballooning the last two years. You might want to check out http://www.wallstreetexaminer.com. It covers these issues as well as the ones you mentioned (the Fed being behind the yield curve, Treasury evasions of the debt ceiling, etc).
I just wonder when all investors from the Caribbean will turn up to buy all the flipper properties that are for sale…
I don’t believe for a minute that the FED will just let the housing bubble burst or deflate after all the efforts they have gone through in the last years to nurture the bubble.
Two things contributed first everyone knew that the rate cuts below 4% were very temporary so long term rates didn’t follow short term rates down as far. Second, foreign (mostly Asian) central banks have to do something with the dollars they get from trade (and they can’t sell dollars) so they buy lots of treasuries and MBS. This has also limited the increase in long term rates.
http://www.ofheo.gov/media/pdf/4q05hpi.pdf
Check out page 7 - effect of refi data on the HPI - about 2% of the supposed increase in the housing price index was from non transactions. I.e. people refinancing were claimng their houses were worth more than they would have fetched on the free market by enough to distort the HPI by 2%.
You know back in the old days of lending on adjustables ,( in late 80″s early 90″s), the underwriters would qualify the borrower on the adjusted up payment potential . I cant believe that modern day underwriters would of qualified loans based on the begining rates of !% or 3% .
We make an assumption that there is “Intelligent Design” in the Feds practices. My experience in life is that people normally in power become so enamored with their reflection in the mirror that serious blunders are made. A major recession is coming, and Americans are going to scream to use their military might to get out from under it because we have lost all sense of fair play. We smugly think we’re the best thing going and that may have been true in the past, but the feeding frenzy of real estate is just one symptom of the overblown greed festering in our collective unconscious. No charge for the Jung.
I think your right
The world has become such a insecure place that people started chasing real estate as a emotional reaction to 911 , wars , oil shortages , social security shortages , higher medical costs . We all just want a home to go to to get out of the cold .