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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Wall Street says NO to helping restructure Bad loans
Millions of subprime loans, which are higher-priced loans to borrowers with impaired credit, aren’t held by the initial lenders. Instead, most U.S. mortgages are now put into trusts, repackaged as bonds and sold to market investors.
That can make it more difficult for borrowers to restructure their loans.
In many cases, trust rules bar servicing firms that administer the mortgages from modifying them, according to the Mortgage Bankers Association. In others, servicers can follow standard industry practice, which the group says can spell legal trouble if market investors protest.
Some servicers have modified trust conditions, with the consent of bondholders. But because bonds can be sliced and diced into various offerings, getting consensus can be tough.
“We have consumers calling and saying, ‘My neighbor across the street was able to (get) forbearance for four months while he found a job,’ while they can’t,” says Marietta Rodriguez, director of housing services at non-profit NeighborWorks. “One potential lender could have a dozen different security instruments (with) different terms.”
Robert Pulster, executive director of Boston non-profit ESAC, says when working with borrowers it can be hard to figure out who owns a mortgage, let alone what changes might be possible.
“It’s very difficult,” Pulster says. “You could talk to (a servicer) for several weeks and not get an answer.”
Servicers are caught between legal documents and a “huge wave” of consumer advocates, lawmakers and others talking about changing the rules “to force them to do something that might be contrary to what these documents are telling them,” says Diane Pendley, a managing director of Fitch Ratings.
Pendley says mortgage-backed securities issued in the past several years generally give servicers a lot more flexibility to keep a borrower in a home. Still, changes can have a negative impact for investors. “It changes the cash flow. … It’s a scary subject to some because deals used to be so specific,” she says.
The Federal Reserve is looking at the issue.
“We’re very concerned about keeping people in their homes,” Fed Gov. Randall Kroszner said Tuesday. “The Fed is assessing the incentives in the contracts and the structure of the contracts and how covenants and requirements vary.”
State and federal lawmakers have been seeking ways to help borrowers, including bailouts, now that 14.4% of adjustable-rate subprime loans are delinquent. Market complexity could affect efforts. For example, some mortgages assess penalties for paying off a loan early. The so-called prepayment penalties may be difficult to deal with depending on how the bond is structured.
“If the thought is that there can be a simple law passed or regulation instituted that would affect everything equally, that’s probably an unrealistic hope,” says Doug Duncan, chief economist of the Mortgage Bankers, which plans a meeting of lenders, consumer groups and other parties on the issue. (c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.
State and federal lawmakers have been seeking ways to help borrowers, including bailouts, now that 14.4% of adjustable-rate subprime loans are delinquent. Market complexity could affect efforts. For example, some mortgages assess penalties for paying off a loan early. The so-called prepayment penalties may be difficult to deal with depending on how the bond is structured.
Huh? What does prepayment penalty have to do with the inability to pay a mortgage? Looks like they’re just looking for an excuse to not help people. Which is fine with me.
“What does prepayment penalty have to do with the inability to pay a mortgage? ”
It doesn’t. The prepayment penalty affects the ability of govt/private lenders to restructure the deal.
A lot of the bailout plans are looking at coming up with a way of refinancing for the FB… perhaps using a Federal Entity or another Govt supported private entity (like Fannie Mae).
Much of this is predicated on the idea that it’s not going to cost taxpayers anything (except stealth inflation, like the S&L scandal), instead it’s going to be the govt helping lenders and borrowers figure out a solution.
The prepayment penalties are often super duper sky-high, depending on the loan. This would add signficant cost to the program, making it unfeasible.
Got it, thanks.
Ironic that the loans are “Unbailable”, to coin a term. The prepayment penalties, that I assume made these loans easier to bust up into tranches and securitize, are now working to make a bailout much more difficult.
Financial engineering at its best
“We’re very concerned about keeping people in their homes,” Fed Gov. Randall Kroszner said Tuesday. “The Fed is assessing the incentives in the contracts and the structure of the contracts and how covenants and requirements vary.”
Translation: We are very concerned about keeping our parasitic lending industry constituents’ hosts fat, dumb and financially solvent.
What if im renting a house I can’t afford - where is my bailout?!?!
That’s what I want to know. Why don’t priced-out renters warrant assistance, as we are the ones who may never share the highly-touted benefits of the Ownership Society, thanks to highly unaffordable home prices.
http://www.ocregister.com/ocregister/money/article_1651128.php
Supporting a tax bailout is akin to supporting higher taxes, higher interest payments and ultimately serfdom. If the market is allowed to run its course, prices will fall and homes will once again be affordable.
IMO, this stuff doesn’t have much support. Here’s an editorial:
‘There is one evolving issue we urge the agency — and all levels of government — to avoid: using public money to create emergency funding (read: bailouts) for the increasing number of Minnesota homeowners facing foreclosures.’
‘Why? Because while buying a home will be the biggest financial investment most people make, it is still a personal choice involving a myriad of factors that all impact personal finances. And the truth is some people will make bad financial choices.’
Hooray for the St. Cloud Times!
Now lets see if we can get this type of editorial into the 2 big papers! (The Star Tribune and Herald, aka the “Strib” and the St. Paul Pioneer Press)
I suggest that we in the Twin Cities write letters to the editor of those two. Over on patrick.net, they had some ideas how to write a letter to a representative under
http://patrick.net/housing/contrib/nobailout.html
some are good arguments for a letter to the editor, too. So far, the Pioneer Press seemed a little bit more open to the reality of the housing markets; the Strib with its Jim Buchta and the Harney column were more on the cheerleading side.
It is good to see some folks understand that when the Fed (with their notes) buys debt from the gov’t-and then charges them interest on the money they create to buy the debt-is (in a covert manner) a direct tax through inflation. Let folks pay their income taxes in something other than the Fed’s notes, and it wouldn’t be a direct tax.
> Let folks pay their income taxes in something other than the Fed’s notes
… which would immediately devalue the Fed notes. The ability and duty to pay taxes with it is THE property that gives a fiat currency value.
“tax bailout is akin to supporting higher taxes”
I doubt they will find political source for a bailout explicitly financed by taxes. What will happen is they will issue debt, thereby handing the tab to our children and our foreign creditors.
Think of the trio of tranches like a 3 legged chair…
The subprime tranche was whittled down, a slow death by bankruptcy~
To paint a picture…
What’s left of our chair looks suspiciously like a ocean liner, somewhere in harm’s way, listing to port @ a very dangerous angle.
2 legged chairs just don’t work.
The Finance Insurance Real Estate (FIRE) economy is in trouble. First RE peaked and started falling, Aug-05. Subprime finance followed a year later, Oct-06. Yesterday’s MGIC (symbol MTG) news indicates insurance is next, Apr-07. The stool hit the fan and now it’s headed to the inferno.
Looks like F is soon to be effed…
Why a bailout to keep people in ‘their’ homes, when the only out-of-pocket equity they have invested in it are the curtain rods? What right to an enforced transfer from taxpayers do they deserve?
Why a bailout to the first mortgage companies if they are already out of business?
And so we follow the money trail back upstream. And we see the bailout is to the banks themselves.
It’s even better. In fact, it’s beautiful: The US government borrows money from the banks to pay the banks back money they lost. The banks win twice: their “losses” are covered on one hand, and on the other they earn additional interest from the US government (read: our children).
You have to admit this is brilliant.
I’m feeling a little sick now.
Hey, Ronin. Do you work at Ronin in Chicago?
Wheatie, I don’t know what Ronin in Chicago is. Like the ronin of old, after the dissolving of my old company I’m just a masterless wandering consultant flitting from odd-job to odd-job
Ronin: kind of a mercenary samurai?
Do you use your precious water resources to fight fire or drink water?
http://news.bbc.co.uk/2/hi/americas/6550911.stm
San Fran bay area residents are told they have to cut their water usage 10% next year. Doubtless the follow year this cutback will increase through the SW states. Parched tongues will cause heads to turn toward the great lakes.
Taxes will increase in the SW to pay for water for the ‘poor.’ Business will follow the water.
In 50 years people will have remembered that once in a lifetime opportunity to have bought houses in central Detroit for only $10K. The regentrification of Cleveland will be complete. Buffalo will be a big destination resort.
http://www.mercurynews.com/localnewsheadlines/ci_5648637
My wife claims that if the Buffalo Bills left town for another locale, there’d be dozens, if not hundreds of suicides, as a result~
We went to the Ralph in October, 4 years ago and were treated to sun, rain, hail and snow, in 4 segments of the game.
The telling moment for me was…
During a break in the game, the fans started booing.
I couldn’t figure out what they were doing and then I looked up at the big screen and the then coach Gregg Williams, was doing a United Way charity spot, and the long knives came out, amongst the die-hard long suffering faithful…
Tough crowd.
Alternately, they’ll just have to quit selling the water to farmers at a nickel a ton (or whatever the el cheapo price is) so that they can grow lettuce in the desert. This way the whole country pays for it through higher food prices rather than just the residents of the SW.
One of the dumbest things going in the Central Valley of California, is the growing of oh so thirsty Cotton…
It’s profitable only as a result of large government subsidies.
We export middle class jobs by the cordload and keep growing something that really needs to be grown somewhere else.
And the rice paddies. Don’t forget the rice…which we sell to Japan.
I remember back in the early 80s you could buy ag water in the Salton Sea area for a few bucks an acre/ft. This in the middile of a southern desert.
I also recall - maybe it was the early ’80s - when residents of Marin County were forced to drain their Jacuzzis. Much wailing and gnashing of teeth went on.
And of course, the mother of all California water wars:
http://en.wikipedia.org/wiki/California_Water_Wars
“The aqueduct was sold to the citizens of Los Angeles as vital to the growth of the city. However, unknown to the public, the initial water would be used to irrigate the San Fernando Valley, north of the city. A syndicate of investors (again, close friends of Eaton, including Harrison Gray Otis) bought up large tracts of land in the San Fernando Valley with this inside information.[3] This syndicate made substantial efforts to the passage of the bond issue that funded the aqueduct, including creating a false drought (by manipulating rainfall totals) and publishing scare articles in the Los Angeles Times.”
Some things never change…
The scare is the other way around, now.
Cadillac Desert by Marc Reisner is an incredible look at water through the history of the west. Highly recommended reading.
http://en.wikipedia.org/wiki/Cadillac_Desert
Unbelievably as it is…
There are used copies of this masterpiece on amazon for the princely sum of 96 Cents~
if your lookin for the feature film,
its entitled “Chinatowm” Jack Nicholson is fantastic.
You have the right idea.
I suspect that like so many other things, water conservation and cost increases will be an area that our esteemed government representatives will foist upon us first rather than the true profiteers and consumers of the commodity.
Agricultural water usage in CA in 2000 was approximately 80%.
(http://tinyurl.com/2vo7h3)
Now why in the world would one look to finding meaningful conservation in the 20% segment rather than the 80% segment?
Could it be that the 20% has no voice or influence with policy makers?
Can you say enough already? Who is John Galt?
Wall St says no to bad loans. Not enough vig. Wall St says yes to a helicopter drop to distribute new loans at a higher (secret) vig from gov’t. (you and me)
Just a guess.
Here’s a new development, yet discussed here ages ago:
‘Bankruptcy Laws Hurting Subprime Borrowers? A group of bankruptcy attorneys and consumer advocates are petitioning Congress to modify existing bankruptcy laws to make it easier for borrowers to escape skyrocketing payments on risky subprime or ARM loans.’
Ha. Well what a shock.
Look for this issue to tank Hillary’s presidential bid.
campaigns were once decided on who was soft on crime…
The next may hinge on who was soft on SUB-PRIME.
Based on that CNBC poll the other day (not randomized, I know), voters will be strongly against a bailout, and for that reason the various presidential candidates from the senate will likely shy away from writing bailout legislation. You could probably cherry-pick candidate senators’ past voting records regarding the housing bubble, on such items as the bankruptcy bill. Despite the common wisdom “It’s the economy stupid”, America will vote on Iraq again in 2008.
I’m referring to her voting record on the bankruptcy law changes. Going to be hard to flipflop now and say they were wrong.
Hard to flip-flop?
We are talking about a politician here, right?
Im not so sure its difficult to flip-flop on the sub-prime bailout issue for Hillary. If it gets more votes, she will flop for flippers, and grandma, and uncle Earl, and cousin Lois….. and all the other JULS who were “preyed upon by those dastardly financiers.” The ethical standard Politicians hold themseves up to is the flavor of the day, if it gets votes, ALL ABOARD!
I am going to go out on a limb here and posit that the actual number of fiscally prudent voters will outnumber the FB’s seeking a bailout nationwide. But, with states like NY, FL and CA carrying so much electoral college weight the FB’s may be able to entice our Ripresentatives into creating a bailout. Plus, as some have pointed out, it may not be the FB’s that benefit, but the banksters in a dark and sublime scheme to further seperate us from our money.
All we can do is make a lot of noise and hope politicians realize that it is too risky to try the bailout option so close to an election. Well that or go offshore.
Gee, what a shock. Look for this issue to tank Hillary’s campaign.
Couldn’t see that coming like….18 months ago.
maybe too off-topic and might have been done before, but it would be interesting to me to hear how most everyone ended up here, what’s their personal situation in regards to housing (i think we’re all standing in the same place now, but what about next year or in 2 years?). There are a number of regular commenters here that i’ve grown to respect and would like to find out a little more about who they are.
I used to follow a thread on SI about the housing bubble but those guys weren’t bearish enough for me. This blog was mentioned there. I liked the more open dialogue here. Don’t have time to really contribute to more than one so this is it.
I knew that the housing bubble would in the end, destroy this country, and Ben has the best blog by far~
Nothing wrong with a virtual front row seat, to better watch the proceedings unfold…
Curious, aladinsane…
I know you’ve positioned yourself geographically and financially for the coming depression. Given that the power was out here for half the day today, I’m wondering what moves you’ve made to “get off the grid”. Care to share?
If I was a resident of the city of angles, i’d invest in a generator that can power up your house, when the rolling blackouts come this summer…
Do it sooner than later, as you’ll want to figure out how it works and how much gas it consumes.
About gas?
Starting now, keep a minimum of 15 gallons of gas in 3x 5 gallon plastic containers.
Use the gas once a month and replace it.
When the grid goes down, so does your chance at getting gas.
Be smart.
I’m a newcomer, but I’ve read Ben’s posts since late 2005. It was a relief to hear from like-minded people, since I’d been preaching the bubble since 2002 to friends and family (who thought I was nuts.) This blog gave me hard data and insight into why the bubble was so prolonged. Now as we move forward, it helps me plan for the future. As far as our own housing situation, we’re settled in, mortgage nearly paid off, plenty of retirement savings. We’re lucky to have well-paying, interesting jobs. And I realize, thanks to the HBB that there’s no need for my kids and my niece and nephew to buy for at least five years. That gives all of us plenty of time to continue saving.
The housing bubble is the biggest financial news of the past decade, and until 4-5 months ago, the words were never mentioned in MSM. I finally stumbled on this blog about 1.5 years ago and found ALOT of people who not only thought the same thing I did about housing prices, but also had the data to back it up.
Being a data junkie, I was hooked immediately.
A minor correction - two of the better business magazines, Business Week and Fortune, have been on this for a couple years. Granted, the stories were of the “could there be a real estate bubble/burst?” nature, but still, there were definitely folks in the more thoughtful segments of the MSM who could see the storm clouds gathering.
Of course, the main idea is still correct — a larger segment of the MSM should have seen it coming. As complicated as the underlying economic and cultural shifts are that engendered the bubble were — it was nonetheless awfully clear that housing prices were going nuts relative to economic growth and people’s ability to actually afford this stuff. It’s really amazing there wasn’t more skepticism in the later stages of the run-up — in retrospect, it’s truly hard to believe.
I have been saying for some time it’s not going to get REALLY interesting until late this summer.
Yeah throw a couple of hurricanes into that mix. This time maybe in the “bubble-less” areas of Texas.
I have a sh*t load of money saved up and started looking at buying but it didnt make economic sense to rent. I saw all this irrational exuberence around me. I had to start donig research to make sense of it all and I landed on Ben’s blog and been here ever since.
I will continue to save and wait for the tides to turn. When home ownership makes more sense than renting. : )
Right now, it’s not even close.
I had been reading Marinites Marin Housing Bubble Blog, posting only rarely and anonymously, but Marinite had life developments that temporarily led to fewer updates per week. But, Marinite had a link to Ben’s site and so I went there. And I was pleased to find more thoughtful commentary, down-to-earth good sense, and great humor as well. I learned a lot from both blogs.
Why did I go to either? I had planned to buy back in 2002 in the bay area but any neighborhood I’d be willing to live in would be prohibitively expensive. So, I decided to rent, and wait out the market. I eventually went online to see what others were saying about the bubble, and that’s what led me to Marinite.
I am now no longer committed to staying in the bay area, lots of things have to align to stay or move. And, I am not committed to owning unless and until the deal pencils out positively for me. But, I also follow the blog because I care about others, friends and family, as well as other people I have never met. This bubble, and other economic dislocations on the horizon, poses major problems for this country. This blog, and Marinite’s, have been invaluable for helping me analyze and understand what is now occuring and what is coming down the pike. SO, thanks to all of you who have contributed mightily, and with some wit and style, to my education.
IAT
Geeah - here’s a quick personal potted history.
Me and my husband moved to Los Angeles from London in 2000 - just in time to watch the housing prices skyrocket…Despite us both working in well paying jobs, and getting a decent pay rise (roughly 5%) a year, property prices were simply going up too fast for us to keep up. So, we just kept the idea on a back burner, while we watched places in Santa Monica go into the $1milion + range.
Then, my mother died last June, and I was left a sizeable inheritance, after I sold her apartment in London at the height of the boom. Suddenly, buying was an option again. However, having never bought a house before, I thought I’d educate myself in the intricacies of the buying process.
Having always been a bit of a Web junkie, I went online and read the ‘accepted’ view of the housing market…and soon wondered why anyone could afford to buy. It wasn’t long until I stumbled across Pigginton’s, Patricks and this fine blog, and found out I wasn’t the only one shaking my head in disbelief!
So, I’ve been reading here, and other more localised blogs, and getting myself an edumacation! Thanks to everyone on Ben’s, Patrick’s and Rich’s blogs (plus a whole slew more) for your insight and explanations - the husband still vaguely believes the hype, but I now know in my bones that its going to get horrible. My mum’s inheritance is now sitting in various accounts both here and in the UK, doing nothing more shocking than acruing interest, and won’t be touched until buying makes sense to us, the ‘old fashioned way’.
So, thanks to you all again from stopping me from being a newbie FB!
I think thats a good topic. I sold a townhome in CA last year , moved to a rental house in Phoenix and started reading this blog because everyone else thought I was crazy foolish to sell, move and rent. I thought it was way to risky to rent back in Ventura county ( TO newbury park ) the land of 10% yearly rent increases and 3000 a month SFH rentals.
I’m kind of the Average Jane on here. Far less financially knowledgable than most. Have never owned so definitely naive about the whole buying process. However, I do have a decent amount of money saved, no debt, and believe I should be able to buy a house. Can’t in this market.
I found this blog a couple of years ago by googling housing bubble (can’t really remember when I started posting - used a different name early on though I don’t remember what it was). Like I said, I feel I represent an average person on here. I make an ok salary, but I’m not rich. I’m conservative and frugal. I save. I owe nothing. I happen to be a single mom so that makes it a little harder for me financially. However, in my heart I really feel that I can and should be able to be a homeowner. I don’t believe only the very wealthy can own a home. Nor do I think only married couples can. I’m bound and determined to prove to myself that this is an attainable goal.
The market of the past several years had me severely depressed. This blog has been better for me than professional therapy. And it made me realize I’m not a freak for thinking, years ago, that this madness had to end. Everyone around me thought I was in denial. No one talks about it now.
Once again - thanks to everyone on here. Especially to Ben.
After experiencing the dot-com bust and watching the exact same crowd mentality stupidly running toward housing, I decided to learn as much as I could about what was happening on the many different levels - crowd psychology, lender activities, wall street securitization (and pass-off) of risk,
mass ego manipulation (you are your house), etc.
I visited and lurked on many bubble blogs, and this one is certainly the (pre-Chrysler) Mercedes-Benz of them all. Worth posting to. Great thinkers posting in real time, not only about the housing debacle, but on history, psychology, wisdom, and ideas. Congrats Ben.
One of my sons asked me for money to buy a house in 2004 in a suburb of Chicago. I asked how much the house was and when informed it was $240,000 - I thought he was buying a mansion. When I learned it was a normal 2300 sq ft 3 bdrm, this, in a town that I thought $240K would have bought the whole town. (It had been a long time since I had looked at the price of houses. ) Something was wrong, higher paying jobs were vanishing, factories were shutting down and a house was $240K?
In 2005 I got a temporary job, which was then became permanent, which led us to the question: should we buy a house in our new town? I like to research the internet, before making decisions in unknown areas, especially such a big one. When I read different pages, patrick.net made more sense to my than slick realtor speak. I came to read many bubble blogs and also bearish blogs about the economy. We haven’t bought a house yet and won’t do so, before traditional lending has become the norm again (our credit is good). Last Christmas, I even rebalanced my 401k, away from the traditionally recommended emphasis on stocks, to more cash and foreign exposure. I have not regretted that so far.
I got here via Patrick’s Bay Area Bubble blog. Moved to Silicon Valley in mid-2004 and real estate was all everyone talked about. Lots of construction arounf my apartment complex (Rivermark in Santa Clara) and astronomical prices for particle board boxes. Seeing those condos built and priced outrageously in front of my eyes, all it took was a google search on “housing prices”. It was just unbelievable.
The biggest chunk of money wife and I have ever spend in our 30-35 years is $7.5K on a used car. NFW we are going to sign up for a $500-$900K mortgage (NORMAL for my colleagues back in Silicon Valley). Moved to Portland for a better job and cheaper cost of living. Only debt we have is her remaining $20k of law school loan @ 3.25%.
Over here in PDX the construction quality of the new houses is dismal. We rent from the builder and within the first year they’ve spent more on maintenance alone than our rent for the entire year. I do not envy the homedebtors in my neighborhood who bought these places.
PDX-
Dont worry prices will drop by 50%. Homes today are over 300-400% higher than 8 years ago. The $500K was really only $75K in 1997-98. No justification for the prices. And dont believe all the hype you hear. I been here three decades. The Vested interests have been proven wrong time and time again.
We had prices decline by 35% in 1991. We will see once again prices correct….
Are people going to want to be saved from their home by people like Schumer if their homes are worth less than they paid for them or would they rather walk away?
You see BK reform which makes it harder to do a Chapter 7, many won’t be able to even afford after a Chap 13 rearranges their finances. Things will still be too high. But they will help you to stay in their homes.
This is not a bailout for FB’s, this is a bailout for FL “L meaning Lender’s”.
What is the number, something like 600 billion in ARM’s reset this year? That is just the tip of the iceberg. Schumer and his millions in bailouts for FB’s will not even make a dent in this bubble. Sorry.
Funny you see Paulson and Bernanke saying things are ok, yet you have Senator’s holding hearings and promising money to bailout these FB’s. So who is right? Bernanke and Paulson or Congress? Either way, Bush is dumbfounded.
This is a good read.
Bill Gross from Pimco
Grim Reality
Such complexity is also evident in the financing of the U.S. housing market. Long ago and far away there used to be an old “20% down” reality that morphed somehow into a subprime/Alt A cyberspace free-for-all (literally “free for all”). Talk about a second life! U.S. homeownership has expanded from 65% to 69% of households since the turn of the century, in part because it became so easy, and so cheap to finance a home. No avatars in that bunch – they were living, breathing U.S. citizens who yes, might knowingly or unknowingly have taken advantage of “low doc” or “no doc” applications, who might have taken out a “liar loan” in the face of “full disclosure” documentation required of their mortgage lenders, or who simply might just have jumped on board the 1% Fed Funds financing train of 2003. No matter. They bought a house, began living the American dream by making money with someone else’s money, and expected to live happily ever after. Well, not so fast, at least for some of them, it seems. Home prices, as measured by the National Association of Realtors, have gone down by 2% nationally over the past 15 months and there’s fear in the air that it could get worse. It most assuredly will.
The problem with housing, however, is not the frequently heralded increase in subprime delinquencies or defaults. Of course write-offs, CDO price drops, and even corporate bankruptcies of subprime originators and servicers will not help an already faltering U.S. economy. But foreclosure losses as a percentage of existing loans will be small and the majority of homeowners have substantial amounts of equity in their homes. Because this is the reality of our U.S. housing market, analysts and pundits now claim we’re out of the woods: the subprime crisis is or has been isolated and identified for what it is – a small part of the U.S. economy.
It will not be loan losses that threaten future economic growth, however, but the tightening of credit conditions that are in part a result of those losses. To a certain extent this reluctance to extend credit is a typical response to end-of-cycle exuberance run amok. And if one had to measure this cycle’s exuberance on a scale of 1-10, double-digits would be the overwhelming vote. Anyone could get a loan because shabby credits were ultimately being camouflaged within CDOs that in turn were being sold to unsophisticated foreign lenders in need of yield as opposed to ¼% bank deposits (read Japan/Yen carry trade). But there is something else in play now that resembles in part the Carter Administration’s Depository Institutions and Monetary Control Act of 1980. Lender fears of potential new regulations can do nothing but begin to restrict additional lending at the margin, as will headlines heralding alleged predatory lending practices in recent years. After doubling over 18 months between 2005 and the first half of 2006, non-traditional loan growth has recently turned negative, and lenders’ attitudes are turning decidedly conservative
To read more, click below.
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+April+2007.htm
It’s a few weeks old, but I agree it’s a good read.
With failure comes opportunity to reinvent. Let’s turn the page and list some potential postive outcomes of the housing bubble debacle.
– Will people start saving again?
– Will risk as we knew it return?
– Will the REIC be forced to earn the public’s trust?
– Will the underwriting process change?
And, in many metros we’ll be able to house all the homeless out in the suburbs.
I like this topic.
Will this bust lead a return of many to a more simple life?
Will we all learn again the joys of a penny saved?
Anyone remember Bernankes first speech after he became head of the Federal Reserve?
Here’s the line that impressed me most: “Americans will start saving again”. He actually said that with conviction, unlike the shakey voice he usually exhibits. Pretty shocking, considering where we’ve been recently. I figured then that he knew the only way THAT would happen is if they burst this stupid bubble. Bring. It. On.
How has your community/neighborhood changed because of the bubble? Empty houses? Foreclosures? FB’s buying houses they cannot afford to maintain? Increased crime?
My NYC neighborhood has been changed by the bubble, but not yet by the bust. People who grew up in the neighborhood have been priced out. Those buying are very house poor.
How about a nostalgia post? Take a post from a year or more ago and repost it and the comments. When I arrived here at the HBB the world was a lonely place for a housing bear. We could relive the bad old days when RE only went up and only really stupid people paid down mortgage debt. An old post or two might help show how much the RE market has changed over the last year or so.
My views didn’t change all that much…
My eyes have always been rather wide open~
And you could point out your old posts and do a major, “i told you so” and maybe throw in a “I was right, they were wrong, woo wooo”.
You know how there’s “ESPN Classic” that reruns sporting events from the past? It would be really cool to have “CNBC Classic”.
how about personal anecdotes post, it helps to see thru other people’s eyes what’s happening on the ground. esp here in socal where data is not reflecting what I see. people are cutting their prices by 100-150k at least while data say prices are flat or rising……………total BS.
Mktmaven in Fl asks about possible positive outcomes of the housing crash. I am hoping for a drop in consumption which saves our planet, and perhaps our values. Optimistic, I know. But bubbles lead people to become wild gamblers looking for get rich quick schemes, as pointed out by Kindleberger in Manias, Panics, and Crashes-a great read. Speaking of which, I must disclose I am rooting for a Gold Bubble. I promise I’ll use the proceeds to make the world a better place.
Geeah asks how we all came to be here. I am like a full time lurker, very sporadic poster. I was buying, rehabbing, and selling properties since 1999 in the LA area. I held a few too. I knew what was coming. I had charts of yearly foreclosures in California since the seventies. I sold my long term holdings and my home (I rent-wife went along with it-three kids) in 2004.
I’d be curious to hear from realtors (you know there has to be several lurkers on here) about submitting low offers. I mentioned earlier this week that I’m considering submitting some low offers on a couple of townhouses. I, personally, don’t believe they’re insulting. In both cases, the sellers would make a little money (even though one bought in 2004 and the other in 2006). However, I think I’m getting a chill from my present realtor about it. She hasn’t shown me the places yet. I told her I’d like to see them, but did inform her that I wouldn’t be making full offers. I’m probably going to have to part ways with her. I’ll be asking her point-blank today if she’s uncomfortable with my tactics and, if she is, I will move on.
JB’s lowball is so eye-opening. I’d love to know the whole story on some of the biggest lowballs he finds. My offers are not what I consider grossly lowballing.
Anyway, I’m curious how realtors feel about this subject.
I think I’m getting a chill from my present realtor about it. She hasn’t shown me the places yet. I told her I’d like to see them, but did inform her that I wouldn’t be making full offers. I’m probably going to have to part ways with her. I’ll be asking her point-blank today if she’s uncomfortable with my tactics and, if she is, I will move on.
Why are you waiting on her to thaw? REIC worker bees are dying to get business and you can easily replace your current agent with any of several BETTER ones. It’s kinda like dumping a lousy girlfriend or boyfriend. All you need to do is go out and grab a better one. Heck that will, if nothing else, trigger the envy in the current one and make them shape up!
I’m curious as to how many people know someone who is actually looking to buy a house right now.
My wife’s best friend and her husband are looking to sell their house in Huntington Beach and buy another place in HB because their boys are growing and they need more space. They want a million for their newly upgraded house (they paid $400k 10 years ago; realtor says it’s “worth” $950k) and are looking at a larger house at $1.4 mil and a *smaller* one at $1.something (because the husband thinks it’s a “good investment” and will be worth $2 mil in 10 years). I tried to tell her that now is NOT the time to buy, and that they certainly should not count on any appreciation in the next 10 years.
It seems neither one of them is particularly happy about moving, but for some reason they keep pressing forward. She said she was sick to her stomach. I said, “Trust that feeling. It’s what’s called a gut instinct.”
So. Anyone else know someone who is ignoring the ugly realities of the market and acting like it’s 2004?
Me:
Looking at prices and sales of individual properties, yes.
Having a plan in place in the unlikely event I am unwilling or unable to renew my lease when it comes up, sure.
Looking to actually BUY? You gotta be kidding.
The foreclosure lists are not even tempting me yet. And there are some *unbelievable* deals on those lists. Like 1996 prices. BUT, I figure once this thing really takes on steam, there will be much more to chose from. I’d like to wait til the MLS is exhibiting sanity before seriously looking.
In the meantime, it’s really fun to watch the prices fall. Love going to open houses and then track the home on the MLS for price drops. Fun to go to open houses and spread the cheery news that prices are coming down too!
There was a hysterical post by somebody a few weeks ago who goes to open houses with his check book and makes 50 - 60% off offers. When they say no, he makes out another check dated three months going forward for 70-80% off. (something like that)
At one place, they called the cops on him. The police arrived and informed the RE agent or owner that it is not illegal to make an offer on a house.
Is your landlord is a FB?
I’m interested to know if anyone else has had the experience of a landlord facing foreclosure. How did you deal with securing your deposit? If you withheld the last month’s rent, were you able to provide references for your next rental? Are you adding any kind of foreclosure contingencies (like advance notification) to your new lease?
Daisy in AZ,
unhappy renter
Me–Full time lurker seldom poster. Full time tax assessor. (Lots of misinformation here at times of tax assessors but not here for that). My job is easier if I can predict the future but by law I have to rely on the past for assessment valuations.
Surrounded by rosy Realtors (even an ex-wife who does this but in another city) daily who won’t tell the truth about the marketplace and appraisers (also looking historically for data) who truly hate to be definitive.
I lurk here for the common sense spoken, and the feeling I get from knowing I’m not alone in these bearish thoughts.
Let’s face it. We feel miserable about our country’s economic prospects and as we all know: Misery loves company
Full time tax assessor. (Lots of misinformation here at times of tax assessors but not here for that).
It’s probably nothing in comparison to the misinformation here about hedge funds.
Good stuff here today
http://www.minyanville.com/articles/Morgan+Stanley-S%26P-REIT-Dollar/index/a/12596
Egon,
I am currently trying to talk a friend out of buying. Of course, she has to sell her little 1950’s chitbox in Watsonville, CA first––priced at 655k! (which of course, she thinks is “reasonable.” I explained that for a family to find this price affordable, with 20% down, they’d need an income around 180k.) Anyway, I sent her here, to Ben’s Blog, with strict instructions just to read it once a day, every day. Sent her to Patrick’s Why It’s Not a Good Time to Buy page > and this anomaly, a Bay Area realtor painting the picture black. >
She’s swallowed Dr. Hawkeye’s bitter pill, asked me if she should drop her price (I dodged that one, told her to consult her realtor and make her earn her money) and is now looking to rent. Unfortunately, she lost her teaching contract in the area and needs to move, so if her house doesn’t sell, she may soon be a FB.
Haven’t been so successful with my in-laws out in West Palm Beach, FLA. They’ve been dabbling in RE for years, and think they know it all. Last May, when I was trolling the bubble blogs, I tried a couple times to tell Sis-in-law about the scary things I was reading but she poo-poo’d it. She owns a house and 2 condos in West Palm, and they ain’t cheap and they’re damn hard to rent. Not only that, but she talked her 40 something daughter into buying an apartment/condo conversion down there last year (yikes!), which last I heard, wasn’t yet finished. I would not be surprised if this soon becomes an abandoned construction project. My bro-in-law’s been selling mortgages as well, which I suspect are sketchy. To keep the family peace, I no longer talk RE with them, because now that the rabid tiger’s out of the bag and everyone in Fla RE is bleeding with festering wounds, especially those frothy West Palm, I think they may have wished they hadn’t put their egos ahead of some fair warning from the CA sis-in-law.
GAS/OIL/NG: How high before it affects your behavior??
Gasoline, heating oil, natural gas… at what point do you cut down driving, carpool, buy an economy car; turn down the thermostat, consider alternative heating/cooking sources; etc.???
My behaviour? Not at all. I’ve always bought fuel efficient cars, carpooled when I could, under-heated/AC’d, etc. Except for gasoline, my energy expenses do not even register on my radar.
And for gasoline… I’m doing lots of driving for work… so its (partially) reimbursed. Partially=current reimbursement rates do not fully represent my costs. Cest la vie. The company has made it up to me in other ways.
I would argue though that for most people the only change is to try to sell a gas guzzler (if they drive a lot).
Got popcorn?
Neil
36mpg here.
Before that? 51mpg on the bike.
It will affect my behavior when it breaks over the 2004 high. At that point, I’ll sell half my holdings
I don’t a car. I walk to work, the grocery store, the bank, to go out on weekends and everywhere else. Heat is included in my rent. What behavior is there to be affected?
I don’t have a car, but I have three bikes. And they even have their own room in my house, which, surprise, is called the bike room.
It’s high enough now that I’ll be using my wife’s little Ninja 250 to commute to work instead of my V8 pickup. (I did the same last year with my own bike, before I sold it.)
I’d love to do the same, but that’ll get you killed in L.A.
I’m hoping that $5+ gas will clear the freeways sufficiently to change that.
with auntie visa and uncle mastercard to the rescue, I dont think people will cut back until they cross 5$ per gallon for gas at the very least.
As we head toward retirement, we moved last year to a more energy-efficient house that’s closer to work (3 miles for me; 1 mile for my husband). We’ve always owned cheap, fuel-efficient cars - a great way to save money. It’s funny, when I was young I really wanted a fancy car. Now the desire is gone.
Weekend topic suggestion:
YNYAAFB when you finally get mean on the table, the same day you told your child that “fluffy ran away.”
Ok, Ben, we had way too much fun with that yesterday!
Got popcorn?
Neil
Weekend topic: How about exploring whether the distinction between sub-prime, Alt-A, and Prime buyers is even meaningful? It seems to me that the “risk of default” has less to do with one’s credit rating and more to do with “affordability.” I know too many friends/married couples that are prime borrowers (and making 200k+) that used these exotic loans to buy more house than they can afford.
It seems to me that getting a bead on the % of “prime” borrowers that are teetering on the edge is obviously tricky, but it is the 64k question, isn’t it? We know the % of loans that are “exotic” and we know the % of those that are taken out by sub-prime vs. prime. While we can surmise that the vast majority of sub-prime borrowers are going to default, we don’t know how to forecast the % of prime borrowers that will do the same, do we?
Anyone have any ideas?
I like that question. We had a Prime Borrower on the other day who discussed his escape strategy. It was interesting. Wonder how many Prime borrowers are lurking here and whether they would like to add to such a discussion?
I’m a “prime borrower”. I owe less than 1x my salary, and could pay off my mortgage next week if I wanted to. I don’t, because I have a 5% fixed-rate 15 year loan, which is a good hedge against the “dollar” going down the chute.
I believe I’m a prime borrower, not sure what there is to discuss. I feel like a vulture waiting for the prey to throughly rot before picking flesh. Waiting till the comment that RE always goes up makes 90% of folks throw up.
Now that the bubble has popped, the housing situation really needs a new moniker. Which of these fits best?
- A slowdown?
- A downturn?
- A correction?
- A bust?
- A panic?
It was a housing bubble (or boom, at least): housing bust seems the appropriate alliteration to me. Slowdown, downturn, and correction don’t capture the substantial decrease in prices, when including inflation. A panic seems more suited to the fast fall at stock markets. That shouldn’t happen with housing prices, barring some major event. Housing prices get depressed instead for many years (that’s at least what I have seen in the graphs).
The War on Savers is being fought on multiple fronts, from politicians proposing to bail out people who bought way more than they could afford on credit, to a Fed which keeps talking like inflation hawks but behaving like inflation doves. Meanwhile, the stock market keeps going up, while the U.S. national housing savings rate remains negative and the dollar slides.
How will the situation resolve? Because contrary to assertions from some high-level policymakers, a negative household savings rate is not sustainable.
Does anyone have a spare $120b to chip in for bailing out FBs? No, you say? No problems — we will just have to print it…
——————————————————————————–
Subprime bailout? $120 billion
More than 1 million borrowers may be at risk of defaulting on their mortgages. Assisting them all wouldn’t come cheap.
Money Magazine
By Stephen Gandel, Money Magazine senior writer
April 13 2007: 2:50 PM EDT
NEW YORK (Money) — Want to pick up the check for every homeowner who got saddled with a risky mortgage? It’s a big one - on the order of $120 billion.
Lawmakers and consumer groups in recent weeks have been calling for assistance for those at risk of defaulting on their mortgage.
(Quick Vote
Should subprime borrowers be bailed out?)
(Comedian Kathleen Madigan has a reality check for subprime lenders hoping to get bailed out by the government.
Play video)
On Wednesday, Congressional Democrats led by Charles Schumer (D-N.Y.) advocated steering hundreds of millions of dollars into nonprofits to help the growing number of homeowners who are having trouble paying their mortgage.
But economists and industry experts say the cost of a bailout would be significantly more than that.
Christopher Cagan, director of research at First American CoreLogic, says rising mortgage payments on adjustable rate loans will force 1.1 million homeowners into foreclosure over the next 6 years. He estimates the cost of paying off the debt for those borrowers would be $120 billion.
http://money.cnn.com/2007/04/13/real_estate/subprimebailout_cost.moneymag/
That estimate is way off. I expect the final bill would be more like $1 trillion. After all, that’s only 10 million houses at $100,000 each. I could be wrong… it could be more.
“Should subprime borrowers be bailed out?”
No, by 91% to 9% (and CNN Money readers are all voters!).
http://money.cnn.com/POLLSERVER/results/31275.html
Weekend topic suggestion: What will end the downward spiral of home foreclosures and job losses resulting from American consumers hitting the wall & being unable to consume?
Although we have just started the downward slide, I have not read anywhere about what precisely is supposed to end this cycle. It seems that we are approaching the perfect economic storm with no viable solutions & no brakes. Please note that I am not merely talking about “the bottom” for house prices–I would like to know if anyone has ideas as to how the economy as a whole can survive this bubble burst.
What will end the downward spiral…
Hitting bottom, of course.