When Is This Recession Going To Get Here?
Readers suggested a topic on personal consumption and the economy. “When is this recession going to get here? Gas prices are going up, housing market is in the dumps and there beginning to have major job layoffs. The ever resilent consumer keeps spending, something is gonna have to give here soon.”
A reply, “I think that depends on the degree to which mortgage equity withdrawal (MEW) lead or lags the consumer spending that it supports. Do people borrow against the house and then go out and buy the Escalade, or do they use the money to pay off maxed out credit cards?”
“As MEW dries up, is this future spending that they’ll have to forego, or past spending that they’ll have to pay high rates on? The degree of each will affect the timing and degree of the consumer spending slowdown, and the likely recession that it leads to.”
“Early on, it looks like it’s the big ticket items (cars etc.) that have been affected. It will probably take a while for moderately profligate consumers who are living beyond their means on their credit cards hit their credit limits and can’t use a REFI to roll their debt into their mortgage.”
“How long it takes before they burn through all their available credit depends firstly on their burn rate, and will later be affected IMHO by credit contraction, which we haven’t seen.”
One asked, “How can you tell a recession is not already here, but just unreported?”
A reply, “Exactly. I work at the ground level of the economy these days, at a nonprofit that assists those with low to moderate incomes. This month alone my clients have included an aerospace engineer, an orthotist, several software engineers, and a hydrologist, not to mention countless realtors, two mortgage loan officers, two furniture sales people–both of whom were earning in excess of $100K before the housing bust; and a new car salesman.”
“All are either newly unemployed or marginally employed (significantly reduced income due to lack of sales). They all report that they are currently living off of their savings. I’d say that the recession is here.”
To which was said, “At least your clientele apparently had enough sense to save some money for the lean times. It bodes ill for the rest of the national economy that the national savings rate has recently remained in negative territory for the longest period since the 1930s.”
From Money Magazine. “Newlyweds Erik and Brandi Quam can’t really afford their home. The monthly carrying costs on their two-bedroom condo in Arlington, Va. run about $2,500 a month, and they fear the bill could go higher still as their adjustable mortgage resets to higher interest rates. It’s already a tight squeeze: They’ve taken in a roommate to help pay the bills.”
“Unfortunately, they can’t afford to sell either. Thanks to a falling housing market and a prepayment penalty of about $11,500, they’d owe the bank more than their place is worth. The irony is that the Quams should be able to afford their place: It cost just $219,000 when a still-single Brandi bought it.”
“The primary mortgage on the Quams’ condo was fixed at 5.25 percent, but Brandi had also taken out a smaller variable-rate loan. As rates rose in 2005, she went looking for a better deal.”
“Shortly thereafter, she says, she got a call from broker Robert Hoover of CPA Mortgage in Maryland. He found her a new loan with what she says she understood to be an initial 1 percent rate, with only small increases in the first five years. And since she had equity (her condo had appreciated), she could even take a little cash out to pay off some bills. The transaction earned the broker and his firm about $12,600.”
“It took a few months before Brandi realized what she had done. The mortgage was something called an option ARM. It was true that Brandi could make initial minimum payments of about $800.”
“But those weren’t enough to cover the interest she was actually being charged, which was higher than the rate used to calculate required payments. The unpaid interest was added to the loan balance, a phenomenon called negative amortization.”
“Barring a market turnaround, they’re stuck for at least another year and a half until the prepayment penalty phases out. They’ve had to turn down job offers because they can’t move.”
“Who is to blame here? Yes, Brandi should have asked more questions and scrutinized the fine print. The idea of a mortgage with a 1% rate seems, on its face, too good to be true. Brandi says she did know she’d eventually have to make higher payments, but she planned to move before that happened.”
One thing I watch here in Arizona is how busy the construction trades are. I can say it is much slower, with less weekend work, guys complaining about shorter hours, etc. The remodelers are reportedly also easier to schedule.
In addition to MEW, I wonder what amount of past-years flipping profits have been taken out of the GDP?
I has to have my pool replastered. There is a HUGE split in the industry right now.
I got an estimate from a national company. Many new home builders are advertising “buy now and get a free [insert company name here] pool”. They gave me an estimate oh $6K+ and told me they couldn’t get to it for a month.
A local company that focuses on replasters… They bid $3500. They said that last year it would have taken 2 month before they could start work. Now it should be less than 2 week to start on it.
I wrote them a check on a Saturday. Monday they had the old plaster chipped out. Tuesday they put in the new tile. Wednesday they came and picked up the check for the second half of the job. A big wind storm hit so no work could happen Thursday or Friday. The next Monday they had the new plaster in.
They did the work before the checks even cleared…..
you were lucky Darell_PHX.
Paying for the 2nd 1/2 before the work is complete can often mean it doesn’t get done! Conut your blessings.
I used a company recomended by two other people I know.
Yeah, there were some estimates that were a bit lower, but there was no way I was cutting them a check before the work was done.
I sell to SIC code 1711 service contractors and am forced to develope a new bus
it’s over for a long time
will your new bus be hydrogen powered?
lol
WTH did you say?
I wonder how the expensive vacation packages/locations will do this year? In my weekly letter from Countrywide (!) begging me to take a HELOC, it touts cars and vacations as good uses (!!!) for the the money. How much of that money was used for vacations? Note that cruises, etc, are booked well ahead, so the pain should be showing up about now.
If I was in charge of Walt Disney World I would be very worried. That place is built on the assumption of families dropping 5 grand to spend a week an overpriced Disney hotel, eating at overpriced Disney restaurants and buying overpriced junk. The only thing that is reasonably priced are the theme park passes.
“That place is built on the assumption of families dropping 5 grand to spend a week an overpriced Disney hotel, eating at overpriced Disney restaurants and buying overpriced junk”
Forget Walt Disney World…try LAS VEGAS. They are planning on building the tallest building in the western hemisphere there. It won’t be an office building…it’s a hotel! Hedonism has it’s price. For everything else, there’s Master Card.
Vegas spending has fallen recently and MGM is blaming it on the NBA allstar game. Apparently rich asians are scared of all the gangsta element. Nothing to do with all the gamblers putting their money on a flip and letting it ride.
Forget Walt Disney World…try LAS VEGAS. They are planning on building the tallest building in the western hemisphere there. It won’t be an office building…it’s a hotel!
Las Vegas, the king of self-promotion, is conveniently ignoring that this building has lots of hurdles to overcome; namely getting approval to build from a dozen agencies. Not least of which is the FAA, who may not be so impressed that this building is right on the flight circling line for McCarren International. You also have to wonder why the developer keeps missing installment payments on the lot (missed the most recent $40 million payment).
But ignore all that and you have a taller building planned in Chicago that has but 1 single approval remaining (which will be simply a rubber stamp), a developer that owns the land outright, and has been getting the site ready for digging for the last 6 months. Still in no way guaranteed to be built, but I give it a better chance than the Las Vegas Tower.
Finally, the last element for the stock market top, and an oncoming recession/ depression.
The “world’s tallest building” ….i.e.Empire State, Sears tower, and I have forgotten the 2000-1…one.
Only thing left is Donald Trump planning one, writing a book, on the art of the deal{or something}, or having a TV show …oh yeah The Donald does have a TVshow!
Of course we can’t have a recession when we have full employment …and that won’t happen as long as more people are born in the USA then die….
Except when the crisis a debt bubble such as 1890’s or So. Sea Company of 1711-1720’s
john law is the name speculaiton my game game.
A.Greenspan’s, the name the bubble maester my game.
There is a new hotel/casino proposed in LV that is planned to have 10,000 rooms!!
Actually, Colorado Walt Disney World is a big foreign tourist destination, so I would predict it does OK. The dollar is worth squat now, so tourists can enjoy all of the places Americans can’t.
Foreign visitors to our country now need to have a mug shot taken upon arrival, along with all 10 fingerprints, by U.S. Customs Officials…
Just the way you’d be treated upon being booked into a police station.
As a result, visitation to our country has declined rapidly.
You reap what you sow~
Except that the Homeland Security boogyman has made entry into the US such a hassle for so many foreign visitors, tourist visas are down nearly 50%.
Every time a foreign visitor gets the tough treatment at a US airport, it gets into their news back home. That discourages other regular folk from wanting to go to the US only to be harassed and humiliated when all they wanted to do was come here and spend some cash while having a good time.
I forgot about that homoaner. At a meeting in Toronto last year, a lot of the foreign attendees remarked on how welcoming Canada is, and how humiliated they are on entering the US in recent years. What price security? They make me feel like a criminal every time I forget to put my little 3 oz bottles in one quart ziplocks on the belt.
If I remember correctly one tourist attraction in NY is no longer standing because we weren’t more careful regarding the U.S. entry of some foreign “visitors”.
Steadykat, you might want to do something about that porous border to the South then. Why bother closing the front door when the side door is wide open? I guess it would hurt our economy, fine priorities.
We recently went to costa rica for vacation and were pleseantly surprised at how courteous the airport security was. They were thorough, yet polite and smiling. Flew back through miami and seemed like everyone was yelling and basically treating travelers like cattle. Is it that hard to ensure security without being downright rude?
Consumer spending actually fell in March by 0.2% after showing a lot of strength in recent months. If the trend continues things will get ugly fast:
http://premium.econoday.com/reports/US/EN/New_York/personal_income_and_outlays/year/2007/yearly/04/chart_1.gif
How about the news that new car sales are off for every firm except Chrysler. An artical abou new car sales index is at, http://www.nytimes.com/2006/08/19/business/19charts.html This Index has predicted every resession except the 1981-82 one, because it was part of long downturn that really started in fall of 1979.
“Brandi says she did know she’d eventually have to make higher payments, but she planned to move before that happened.”
“Never make predictions, especially about the future.”
–Casey Stengel
That was the plan for many thousands of closet speculators, assuming that credit conditions would stay the same indefinitely.
and it still is the plan for many speculators in Europe. Despite the internet, people seem to be slower than ever in learning.
The problem is that though information travels faster and is more readily available on the internet, the same applies to propaganda.
Yep, Brandi was a gambler. But those of us who were reasonable shouldn’t have to pay for her mistake.
“That was the plan for many thousands of closet speculators, assuming that credit conditions would stay the same indefinitely.”
That may be have the plan for anyone who bought in the last few years. No one thought that the gravy train would ever stop.
The current credit contraction was fairly predictable and many here posted on it. Happens every cycle. I can’t tell you how many boom-time articles had statements like, ‘my teaser rate goes up in xx years, but I’m going to sell before then. And notice that this VA couple would sell if they could.
I am sure that many in high level government positions fervently believe that the best remedy for the situation at hand is to restart high rates of housing price inflation at whatever cost, forgetting that we already have a glut of 2m vacant homes on the market that the country apparently does not need. Respiking the housing inflation punchbowl will inevitably add to the McMansion glut, as we are far from out of land (even here in San Diego!).
Maybe absorbing all those vacant homes is where the idea of big bank loans to illegal immigrants comes into play?
(Aside: I still don’t understand how it can be legal to make a mortgage loan to an illegal immigrant household, if it is illegal for them to work here?)
you and me both
“(Aside: I still don’t understand how it can be legal to make a mortgage loan to an illegal immigrant household, if it is illegal for them to work here?)”
Yea, makes ya wonder doesn’t it.
Oh, it should be LEGAL, it’s the shear stupidity of entering into a 30 year contract with somebody who could be deported tomorrow that should prevent it. Is that going to be the ultimate in “jingle-mail”for illegal immigrant FBs : walk into the Homeland Security Office and say, “Send me home, and mail these keys to my mortgage company while you’re at it.”
It’s legal because no one ever bothered to make it illegal before. Behavior is generally legal unless it is made explicitly illegal. However, the reason no one ever bothered to make it illegal before is because lenders used to require that you verify your employment (and they really checked) before lending you enough money to buy a house. Heck, I had to have 2 years of employment history before I could get my USAA credit card, and that had a rather low limit at the time.
It is interesting that I haven’t heard any of the politicians taking a tough stand on immigration suggest that loans to illegal immigrants be made illegal. Perhaps their constituents in the banking industry would be peeved.
I know that as a lawyer I have a biased view, but when people refuse to pay for compliance (with either the law or just the basic rules of prudence) things get out of whack. They can be internal controls, not outside regulators if the business people are willing to do it, but when you have people with an incentive to push the limits (like mortgage brokers on commission), you have to have oversight.
“many thousands”, millions sir!
lol. Thought you were quoting Casey Serin.
~Misstrial
My mind played the same trick…quote from Casey Serin.
“Shortly thereafter, she says, she got a call from broker Robert Hoover of CPA Mortgage in Maryland.
After Brandi committed to a fairly sane mortgage, Bob Hoover of Reamz-U-Good Lending cold calls her. Who even gives those tools the time of day?
then this, from same article -
It’s already a tight squeeze: They’ve taken in a roommate to help pay the bills.”
Three adults in a two-bedroom condo in Arlington, VA.
“Cozy” living - it’s the New Paradigm!
Hey, gwynster if you’re out there, this is for you:
How many Knob Bonnets can you fit in a 2 BR condo in Arlington, VA?
“It’s already a tight squeeze: They’ve taken in a roommate to help pay the bills.”
I want the IRS to audit their 2006 tax statement to see if they reported the income from renting out a room. Illegals in the bay area by into ‘low income’ housing for a price you and I can’t and then rent out rooms for cash not reported to the IRS. They sure manage to drive nice cars, etc.
Har! You know, it comes down to I can handle a roommate or I can handle the DH. Having to deal with both and baby would leave me completely batsh!t. I’d be tossing the keys, leaving the baby with the parents, ditching the DH and the roommate, and renting a red convertible to drive into the sunset a la Thelma and Louise.
“You can observe a lot, just by watching”
-Yogi Berra
Someone with a name like “Brandi” should be twirling her hair and popping bubble gum, not making major financial documents or, heaven forbid, signing legal documents.
Oops, I meant “making major financial decisions.”
I would think ‘do I pole dance this week’ would be a the major financial decision for someone named Brandi…
That in itself could be a major financial decision for someone named Brandi…
Since their last name was Quam, maybe they should of had a few more about this deal…
Oh come on, Brandi is a fine girl-what a good wife she would be! (apologies to Looking glass)
I gave my girls their great-grandmothers’ names, also of traditonal English origin. Evidence from this thread tells me that that was a good idea.
Girls need sturdy, salt-of-the-earth sounding names just as much as boys do.
When is the recession going to get here? When the herd creatures realize, despite the best efforts of the MSM media border collies, that the REAL economy is tanking, contrary to the faked statistics and rosy forecasts of “leading economists” with a vested interest in keeping the Ponzi scheme going. At some point, the escalating rise in M3 (money supply) and commodity prices is going to HAVE to translate into inflation, which in turn will HAVE to translate, at some point, into rising interest rates. When that happens, friends and neighbors, it’s game over - we are going to see real fear, and a major pullback on credit and spending, as the grim prospect of a collapsing debt and credit pyramid can no longer be ignored or wished away.
just check shadowstats where everybody can see that the recession has already arrived. Probably in Europe as well, but I don’t have the numbers to prove it (EU M3 growth and real inflation are very close to the US numbers).
http://www.shadowstats.com/cgi-bin/sgs/data
Europe is riding on very high export led growth. The growth is not the same in every country, but my former country had last year the highest growth rate since 1970’s. Other states had very successful 2006 and the lowest unemployment rates in decade. Many governments are cutting corporate and income taxes; combine it with low interest rates, the economy will growth there for this year and next one as well. This economic boom translates to increasing real estate boom. This morning I red on my old country news, that the real estate is one the largest contributor of employment growth and income in this year. The economic cycle in Europe and USA is not synchronized, so when USA goes down, Europe or Asia will not necessary have recession.
according to official data, Spanish real estate investment alone was responsible for 30% of total EU GDP growth over the last years. You can probably imagine how it looks when you add RE related investment from other countries, I think US GDP growth might look benign compared to that.
Regarding the booming economy: there might be big differences between EU countries but at least in my country GDP increase is mostly inflation. Nice increase (in euros) e.g. for turnover in the port of Rotterdam: big deal, with higher oil prices … I agree on cutting corporate and income taxes, that seems to be a race to the bottom for all of Europe; and we know how well that worked in the US.
There are differences between EU countries, and each has own unique sets of problems. The central Europe, where I am from, is different from western or southern Europe. However, current boom there, largest in 30 years, is fueled by investment and export. The real estate is trailing the overall economy, but it is not the main contributor to it. Any case everybody is buying, building, or renovating homes there. The inflation is very low, but the economy may overheat by end of this decade. The taxes are going down, so does the welfare support. Nonetheless, since 2000, the economy had grown 35% and the result is visible there from construction of new highways, to office parks, factories, and suburban homes.
Yes, there are big differences from country to country. For instance, it can cost more to buy a parking space in London than a flat in Berlin (about $300k US). :0
Many European companies aren’t happy with the falling dollar, it’s starting to hurt exports. The Fed may even feel that a weak dollar will boost exports, helping the U.S. economy. So many foreign countries depend on the U.S. to be the chumps of the world. Running huge trade deficits paid for with debt. I for one would welcome strength in the economy, fueled by export growth. That would be real growth, not growth from encouraging everybody in the U.S. to mortgage their future with debt, to give the temporary illusion of prosperity.
Many large European corporations have facilities in USA. For example Morris county in NJ has several of them. They are not concerned with the dollars. Secondary, USA does not export much that would be interest on the world market. Who will buy Motorola, when Ericsson is far better? or Ford over BMW…Failing dollar so far did not help the export as it would usually help. The problems with US economy is far more deeper than could be solved with exports of goods and services.
Just as a falling dollar is helping US multi nationals. Recent earnings reports have shown a big influence and a stock market rally as a result. European multi nationals with US operations are getting the reverse effect. I did hear a news story this past week that European companies are starting to complain to their leaders about the weak dollar. The US is still a big cow to be milked. The milk is starting to run out.
“USA does not export much that would be interest on the world market.”
Intel, Apple, IBM, Microsoft, Blizzard Entertainment, Qualcomm [powers those Ericsson phones], Boeing, Cray, Prat & Whitney, McDonalds (need I go on?). The world loves to buy American.
sigalarm, how many of those companies actually manufacture most of their components in the US? McDonalds sells the “concept” to franchisers overseas, IBM, Apple & Intel rely on Asian suppliers, and so foreigners do the work for low wages, American names are slapped on their work and sold to other poor foreigners, while the big profits come back to execs & shareholders in the US. Why should the foreigners put up with this when they can make counterfeit US goods with the same workers & factories & keep the profits? Boeing and Pratt are defense contractors whose civilian success was built on Pentagon subsidies - America’s defense budget is as big as the rest of the world’s put together, and our federal airline safety regs are the toughest in the world, so everyone wants our jets.
Now can we keep an 11 trillion dollar economy going on that? Let’s nuke Iran and see how popular American cultural trinkets and weapons will be then.
If the economy tanks and no one is spending…where is inflation going to come from?
Sure, with enough demand, the Fed lowering rates will stimulate the economy and inflation. But if demand is stiffed at the gate; too many underwater homeowners, too many resets, too many foreclosures etc…..where is “enough” demand going to come from to stimulate inflation?
If you assume just printing money will result in (immediate) inflation you need to look at what happened in Japan for the past 20 or so years.
“If the economy tanks and no one is spending…where is inflation going to come from?”
China, India, Thailand, Indonesia, Poland, South Africa, Germany etc.
Just because the US economy has gone nowhere over the last decade does not mean the rest of the world has stopped.
Oil is soaring because China and India need it, look at the price of copper, Cobalt, rare earth metals, pig iron - Brazil is selling all it can produce to China. China is the worlds largest producer of rare earth metals — they have stopped selling. The US has no rare earth metal mineable deposits. Uranium has gone up 9 fold in the last 5 years. The US isn’t building any reactors, but China and India are. China for the first time is importing coal!
We exported the dollars and those holding the wealth are buying every tangible commodity available. This is inflation.
“This is inflation.”
This is also diversification out of a long position in the $US.
“The US has no rare earth metal mineable deposits.”
Maybe not much, but we’ve got some. I know the mine at Mountain Pass, CA, between Baker and Vegas, produces rare earths.
Yep and it supplies about 5% of the US use.
USGS Rare Earths 2002 -2006
caution 2 pg pdf
http://tinyurl.com/2eghud
And according to the USGS the US did not mine any Rare Earths in 2006.
Hoz, the United States has mineable rare earth minerals at a place between Baker and Las Vegas north of 15 called Rail Road Pass. All sorts of rare earth minerals are available.
Then we should mine it! According to the USGS, we import $950M and produce $50M. For those of you not aware of Rare Earth metals, all hi performance batteries (Prius etc) all TV and computer monitors, all X Ray, Cat, and sensitive electronic monitoring devices need it. The USGS is holding a series of meetings with to determine the US needs (last one Mar 17, 2007; next Oct, 2007) results are 9 months away. The problem is the US sold our strategic reserve over the last 7 years. We also sold our strategic reserves of Cobalt during the same time frame. Cobalt has the same high tech uses as well as being necessary for the production of jet engine fan blades. We have also sold our reserves of Rhenium - only available as a byproduct of Zinc mining, which the EPA has said cannot be done in the US at this time. The Dept of defense is meeting on securing more Rhenium.
There is a possibility of a new Cobalt mine going into production in Idaho. It has met most of the regulatory hurdles, but…
The Prius is a piece of crap. Who’d buy one of those ugly things?
Looks are still everything…
for now.
“If the economy tanks and no one is spending…where is inflation going to come from?”
Don’t you remember ’stagflation’ from the Carter era?
Stagnant economy (including unemployment) with high inflation.
Precisely. People may not be buying houses, but house prices don’t factor into inflation anyway. The fact is that people still have to buy all those products that make life possible, and those prices will rise. Look for food prices to rise next near, when ethanol-corn crops cause shortages of staple crops and prices surge.
Hey, printing money worked in Weimar Germany. For a few months, at least. A few bad side effects, though…
If the economy tanks and no one is spending…where is inflation going to come from? The money is already here, it’s just been circling ’round Wall Street and the stock market. Yes, it it likely that Billions and Billions of it will go *poof* and dissapear, but M3 (the money supply) has doubled far faster than prices over the last few years. All that money has pumped up stocks and properties. Does anyone have a good idea of what happens when the money merry go ’round stops?
Sammy — You need to develop more faith in the manipulation skills of our government social planners and the social engineers who execute the game plan!
the only remaining question then is how long it will take for the disparity between CPI and real inflation to become so big that even the sheeple notice.
Maybe those clever politicians can include free food, gas and flatscreen TV’s with the new FHA mortgages? (nothing new, just suggesting they make it official for everyone)
Check Thornberg and Shiller’s latest. They are wiping the lip stick off the pig.
I would go so far as to say that Shiller is roasting the pig on a spit.
“Is owning a home—one of the staples of the American Dream—becoming a nightmare?
According to data just released by Standard & Poor’s, the once-booming housing market now displays all the symptoms of a classic bear market. The S&P/Case-Shiller Home Price Index, released Tuesday, reports that the decline in home prices shows no signs of abating.
The Index’s February 2007 20 City Composite (a value-weighted average of 20 metro area housing indexes) and 10 City Composite are down 1.0 percent and 1.5 percent, respectively, over year-ago levels. The S&P/Case-Shiller Index, which is one of the best gauges of the housing market out there, hasn’t recorded monthly declines on this level in almost 15 years. Robert Shiller, who’s Chief Economist at MacroMarkets LLC, and one of the leading authorities on real estate in the country, said that month-to-month declines are also persisting, with 17 out of the 20 cities down from their levels in January. If the chart below was a roller coaster, riders would now be holding on for dear life.”
Check out the price graph. Maybe this time is different, but the last time prices were diving the way they are at the moment was right around 7/91 (onset of the early 1990s recession).
http://usmarket.seekingalpha.com/article/33748
Sorry — meant to type 7/90 (the date the 1990-1991 recession officially began).
My father has worked for the Railroad in the SF Bay Area for 20 + years. He is telling me that this is when their busy season starts and time off from work is very hard to get from their bosses.
He is only working three to four days a week for the last month as Manufacturing in the Bay Area is slowing. He has fewer train cars he pulls with the engine also. .
Not good for the economy when less Cement, Cars, Steel etc are being shipped.
At work we have two guys who bought bubble houses.
They are constantly on the phone with Ditec and other lenders, getting home equity money. One is blowing the money on frivolities. The other I don’t know. This over-borrowing train has not stopped in the least. The frivolity spender is also normally a very fiscally responsible guy, having had to pay his own way through college by working hard. I gather it must be his new wife extracting sucker cash.
Mind you, in both cases there can’t be that much equity to extract as both their houses were bought near the top. This is Inland Empire in Southern California.
I think they are both leveraged to the brim. Fill it to the rim.
I gather it must be his new wife extracting sucker cash.
Wait until all the muni budgets start really gettin’ busted by exploding health care costs and contract COLA’s for the public employee crowd and all those empire building’ molly coddle the spoiled brats special ed./ guidance education jobs go down the crapper.
Let the Depression begin.
This gets to a worry of mine. How many state pensions are loaded with junk bonds and mortgage-backed securities? If they go under, guess who is going to get to finish paying those defined benefit pensions. Perfect timing- raise taxes heading into a recession…
The thing that still confuses me is why there are so many lenders that basically give away money when there is a high probablility of it not being paid back. A little off topic, but I was watching some show on A&E this morning, where a debt counselor trys to help idiots. This episode had some stupid chick (gay couple) who was $90,000 in credit card debt, spending an average of $2400 every month MORE than she earned! He made her cut up the cards and she had at least 25 of them. How can the companies continue to offer credit cards to someone with this type of finanical situation? I just don’t get it.
it is all very simple: these companies don’t lend their own money. They just make the deal, grab their fat commissions and couldn’t care less what happens after that.
the people who’s money is being burned (foreign investors, tax payers and pensioners to name a few) have not really taken notice yet, although it is starting to trickle through to some parts of the market.
When GAAP allows you to move loans as income, then companies would do this to inflate income to show “profit” in hope for higher stock price so the management can get rich. That’s why. PS: I saw that episode too this morning, people are so clueless and ignorant about their financial situation. Unfortunately this is the society that we have today in America.
GAAP policy on that needs to change then….that is a source of this debacle. Trace to the source(s) then plug the hole(s)
About 5 years ago I was fortunate enough to become a stay at home mom. One day I was shopping in the mall and the sales girl asked me if I wanted to apply for a credit card and save 10%. I said no thank you, then jokingly said “I don’t have a job, I am sure I wouldn’t be approved”. She perked right up and said “Oh, don’t worry about not having any income, we can just qualify you on your past credit history”. I was blown away that they were offering me credit when I flat out told them I had no way to pay it back!!
Lend or die. That’s the problem most of these lenders have. They’ll keep lending till losses put them them out of business.
“I think they are both leveraged to the brim. Fill it to the rim.”
Yea, I saw that when I was looking at the foreclosure sheets yesterday. Mostly all of them were to the top. I was amazed to see 3rd mortgages so prevelant. I mean every drop of liquidity drained to hold onto something you probably should not have purchased in the first place.
FHA subprime loans to the rescue!
Your reaction is beyond reasonable measure. The worst of the subprime debacle came from the nodoc junk. The FHA program is of paper pusher pedigree and requires extensive documentation. This alone must filter a large percentage of the worst of subprime properties. Do you have evidence to the contrary? Reacting strongly can be a good thing, but you are just hyping without bringing value. Being more precise can only help your argument.
He’s not talking about the past. He’s talking about the FHA reform bill that the house is working on.
http://www.house.gov/apps/list/press/financialsvcs_dem/press050307.shtml
Any institution that puts up a $75K bond can cut as many FHA loans as they want, $0 down, sub-prime, blowing out the old max, to just about anyone, even illegals.
Check it out!!!
“…The FHA program is of paper pusher pedigree and requires extensive documentation…”
misconception, urban myth.
Not too long ago, people on this board would attack you if you mentioned that the GSE’s were buying subprime loans. It turns out that they bought 40% of the subprime loans from 2004-2006. Now that the GSE’s are insolvent, Congress will use the FHA to prop up this ponzi scheme. Charles Ponzi never had it so good
CAL FHA in California is not that easy to do. Going through there list of local banks I could only get a hold of one person out of 5 banks. And then they requested a lot of documentation. Some of it I didnt really understand, but I assumed they were verifying my W2’s against my paystubs. Either way a normal loan through e-loan would have been cheaper. Rate wise and closing cost wise. The only real use for the FHA seems to be for people with low FICO scores and no down payment. Then the buyer can get a good interest rate. But then the FHA limits are really weird for what they will loan. Basically there is very little available property in the under $400k range they will lend. And in certain cities you get this special hidden $40k+ money thing that doesnt get paid back until you sell the place. Which I assumed just pumped up the prices in those cities $40k just because of this. But imagine you go to Monrovia looking for a $350k place and then learn if you qualify that the FHA will give you $390k now. Amazing.
Not necessarily the wife. I know some guys who were very fiscally responsible until they got their first well-paying job, who then went off the deep end buying sports cars, boats, etc. They fool themselves into thinking they’re better off than they are.
“Brandi says she did know she’d eventually have to make higher payments, but she planned to move before that happened.”
So which is it? Did she plan to move before the payments increased because she knew that would happen, or did she not know? A lot of these stories reek of untruths.
My apologies as I read it as “she did not know she’d eventually have to make higher payments”…
By any standards that one wishes to employ, the US have been in a recession for the last 7 years.
Personal Income, GDP, Stock market, employment are all down since 2000 when adjusted to real world prices. The US dollar is down over 30% to the Euro, The DJIA has gone from 11,500 to 13,300 (its worse for the S & P 500 - which is unchanged), CPI is reported at 2.4% for the last 7 years but income is unchanged since 2000. Manufacturing has shed 3.3M jobs in the last 7 years, but Walmart is still hiring.
What part of the recession are we missing? That for the last 7 years we have burned through our assets and now the free flow of moneys have stopped! Now the pain starts.
Right! We have been eating our seed corn for the past 7 years
Right, and now they’re trying to find a way to eat their neighbors stash… (hence, the bailout attempts)
Don’t leave out the negative savings rate, for the most protracted period since the Great Depression.
Careful on this ‘negative savings rate’ stuff, GS. It’s hard to tell how accurate that statement is. Are you aware that “negative savings rate’ does not take into account 401Ks and housing? Remember, what the government doesn’t see you declare as income on your tax forms is hard for them to locate. As a consequence of that, it also cannot “see” a good portion of what citizens are squirreling away in tax-deferred accounts and undeclared profits from the sale of real estate.
Granted, housing’s in the crapper in most places nationwide, and the stock market looks increasingly shaky. So, yeah, savings is likely near or at negative now, and most definitely will be soon.
Eudemon: Could one argue that retirement savings should not be counted in the savings rate? The retirement equation is changing from defined benefit plans to savings plans. If we started counting 401K money, after never counting defined benefit contributions for years, it would make the savings picture look rosier than it deserves to. Actually I’m surprised the government isn’t counting retirement savings, since they usually don’t pass up the chance to make the economy look better than it is (i.e. inflation and unemployment stats.)
‘Are you aware that “negative savings rate’ does not take into account 401Ks and housing?’
Absolutely aware. Also aware that housing and stocks (much 401(K) money) are seriously overvalued, in part due to irrational exuberance which accompanies negative savings rates, and in part due to subconscious awareness that dollar savings are an iffy proposition when there is a War on Savers underway.
Eudemon — Also important to bear in mind that historically, stock prices and housing prices are positively correlated. I realize that it is different this time, as the stock market so far is rallying strongly in opposition to dropping home prices, but these things have a way of equalibrating over time. And given the concentration of 401(K) assets in U.S. stocks and MBS on U.S. home loans, I don’t see typical 401(K) investments as a very good diversification strategy in a globalized economy.
Good points made by all — including myself.
For me, the takeaway from all this talk is reaffirmation that terms like ‘negative savings rate’ are so nebulous as to be ignored. Since they are so ill-defined and tracked, why take them into consideration except perhaps in the most general way possible?
Kinda like “inflation rate”. Talk about nebulous - data points are consistently non-inclusive and inconsistent.
GS, re: your last post, we all know it’s not different this time re: real estate vs. stocks. If the real estate continues to crater, the stock market will get hit. What’s interesting to me personally is the extent to which the high-rising stock market has been IGNORED the past four years - until the past 2-3 weeks.
Incidentally, have you noticed the sharp increase in the number of paid television spots hawking ‘Get Rich in the Stock Market’ methodologies and products? It seems these commercials have been in the can for two years, and the producers have been simply waiting for the real estate market to tank.
I’ve never attempted to see how many of these TV products are sold relative to market cycles (stocks/real estate). I wonder if such information is available.
“A depression, not a recession . . .”
http://www.financialsense.com/fsu/editorials/2007/0503.html
http://www.dailyreckoning.com/Issues/2007/DR042007.html
(author wrote the book: Empire of Debt)
A recession is when the guy next door gets dumped from his job. A depression is when you get dumped.
You know, bubbleglum, I would feel better about these financialsense guys if they weren’t selling the depression to make money for themselves.
RE: Recession…
Housing values have been inflated 50% in 4 years.
The only people really fooked are speculator’s those stupid enough to have bought in the boom and future generations.
Greatest Gen’er’s and older boomers can hold out for a pretty long time borrowing in dribbles and drabs to hold up their standard of living in the face of the coming apocalypse of an aging populace and peak oil.
It’s when the FED government’s Ponzi Pyramid of wealth transfer to rathole welfare programs, SS, Medicaid, and Medicare collapse because the dollar ain’t worth squat to foreign bond buyers that the proverbial shit will hit the fan.
The US mantra-Gimme the largesse of government-but make sure the other guy pays for it.
Question here. As it is said that the richest 10% of the country are paying 90% of the taxes (or some comparable ratio), is it possible that the richest 10% can somehow be responsible for a “good” economy, where those who have lots o’ money live fine and those without do not? Economic indicators such as the unemployment rate and average salaries can mask the fact that while people are employed, jobs are paying much less on the lower income levels and much higher at higher income levels. Consumer confidence can be inflated by the ability to purchase Chinese goods at the price of dirt, etc… And, of course, the old DJIA is at its highest point ever due to the average Joe putting his “savings” in a 401K, to the richest of the rich pumping excess cash in. I sense that things are bad in the economy, yet, living in a prosperous area outside of Philly, I don’t see anyone struggling; indeed, it’s onward and upward out here.
I truly beleive that the ultra-rich elite and power brokers have the stock market rigged (in a big picture sense). Ever since the advent of the internet and discount brokerages which made stock investing available to the uneducated masses, the price that stocks are traded no longer mirror the fundamentals of the associated company and is often pure speculation. Mikey(2) just posted “the old DJIA is at its highest point ever due to the average Joe putting his “savings” in a 401K”. The puppeters make it appear that the stock market is doing well until they feel they have sucked in all available Joe Six-Pack money into it, then they start dumping everything, walk with thier new profits (i.e. Joe’s hard earned investments) and create the next crash, say DOW down to around 10,000. Wait a short while and repeat the whole cycle. This is a sure fire way to constantly drain more money from the working class into the elite rich’s pockets. This type of wealth transfer didn’t happen 25 years ago because it was difficult and expense to “play” the stock market, thus Joe Six -Pack’s usually had any investments in safer vehicles.
on another note: according to a recent brokerage report, the average private internet investor in my country looses money at a rate of 2% per month, despite the fact that the Dutch stock exchange is up 148% over the last 5 years (for an average 20% yoy). That sounds like a massive and very clever redistribution of wealth; I guess it won’t be much different in the US (but I am told that figures like these have never been published for other countries).
I feel the same way you do, OutofSD. I started my retirement savings late (grad school, med school, seven years of surgical residency) in 1993, and watched it melt when the tech bubble burst. Mind you, I had the money in good old “safe” mutual funds, but every fund was heavily invested in tech. I was lucky enough to be able to buy heavily in 2002 at the bottom, but the accounts that I started in the late 1990s, such as the college accounts, only recently climbed back to where they were in 2000. So in more than ten years I broke even. I’m afraid we’re heading in the same direction again, and countless responsible savers will get screwed again.
‘Mind you, I had the money in good old “safe” mutual funds, but every fund was heavily invested in tech.’
Watch for deja vu all over again with “safe” 401(K) asset classes loaded to the gills with toxic MBS.
Would MBS end up in stock mutual funds?
look at your prospectus pie chart. Even my stable value fund has almost 30% in MBS - also, look at the grade of the MBS…not that all of them aren’t fvcked
Thank you. One more reason that I’m glad I reallocated my retirement money away from stocks.
Um, I think it is closer to the truth that the richest 10% pay about 55% of INCOME taxes. Payroll taxes and other taxes are considerably more regressive. I don’t know how you would apportion corporate taxes among taxpayers. But the ‘10% pay 90%’ does not seem reasonable.
Ive recently seen the stat that the top 10% pays 37%…up from a 10/26 ration 10 years ago. Think it was the WSJ a few weeks ago. I’m sure any publication can make the #’s what they want based on assumptions.
Don’t forget about capital gains, estate and sales taxes not to mention the employer matching on all the payroll taxes. A lot of people (a majority or super-majority most likely) consume more than they create. I mean, I pay more in taxes than the average family has in gross income. So I am supporting 3 people. If I figure out who those 3 people are, I’m going to kill them and keep my money.
Your instinct is correct, though. The income tax is to screw over the upper middle class wage earners. The wealthy don’t have “income.” They pay capital gains and only when the rate goes down. If the rate goes back to 28%, they’ll just sit on the paper wealth and/or move it aroudn to a country that doesn’t tax capital gains at all (most European countries, I believe).
Bottom line - the working man is a chump.
DOW Jones is growthing, because many companies get profit from overseas. They are less dependent on US economy. If they get money from Europe and China and translate to failing US dollars, their profit growth significantly. DOW had very little to do with health of US economy. In 1929, Dow soared, while economy was already in recession or some segment of it. Agriculture production declined in 1928, car sales, radio sales were declining for 9 months prior october crash… yet Dow jones was shooting up.
The Florida Land Boom of the 1920s went bust in 1926, but the headless chickens on Wall Street kept the party going up until October 1929.
Maybe I should change the name that I post under to Prinz Valdemar.
It doesn’t matter what the Dow was in 1929 because the Dow is rigged. It is always adjusting its mix of DJIA entities. If a company is not doing so good (G?) it gets fired, and another one looking good takes its place.
DJIA is a cooked number. It is not composed of a fixed set of enterprises that can be tracked over time.
Which is probably why for some reason it is the media’s darling, although not that pure an indicator of market temperature.
I agree on that. I am watching S&P 500 index than Dow Jones. PPT may pump money into 2-3 indices, and the Dow goes miraculously up on every bad news.
Well I watch the S&P ’cause an index fund invested there is one of the few options for my retirement money in the Thrift Savings Plan. (the 401(K) equivalent for federal workers)
I sense that things are bad in the economy, yet, living in a prosperous area outside of Philly, I don’t see anyone struggling; indeed, it’s onward and upward out here.
From your posts, I’m going to guess you live somewhere on the Main Line (Radnor, Gladwyne, Villanova, Bryn Mawr) or in Bucks County around Blue Bell or Newtown. I’m in Delco bordering Chesco…the land of the “wannabe” invasion and corresponding explosion of residential and commercial development. There’s some real money around here, but most are mortgaged to the hilt, to keep up appearances, doncha know.
My guesstimate tells me that there will be a 60-40 split in these parts…60 feeling the financial hurt, 40 not. The squeeze will affect the folks in the middle the most. The poor will always have entitlements, and the rich, well they just skate along no matter what. The peeps around here who are playing rich, who knows how TF they’re going to cope. So much of their self-esteem seems to be based on what material status symbols they can acquire (on credit), not only will their bottom line be impacted but their mental health may also be affected.
Also, bear in mind that even in Phila’s posh burbs, a lot of “fronting” is going on. My friend’s husband is a financial planner in Berwyn. He’s been in the biz 30 years. She told me they’re always surprised when their Main Line clientele who appear to be well-heeled confide that they’re stretching to make ends meet. (Lately due to equity taps on real estate.) Friend told me the most unassuming and outwardly simple clients turn out to be sitting on millions of $$$ of liquid assets.
Ironically,
To look rich one must spend money.
To be rich one must not spend money.
Whenever I think about how the economy is doing, I think about sick birds… (why?)
A vet once told me that birds are the worse animals to work with. In the wild, if they show any sign of illness, they get eaten. So a bird will act hale and healthy right up to the time it drops off its perch- by that time it is usually too late to save it. The economy (and politics) is the same way. Every possible mechanism will be employed to make things look good. Anything that can be borrowed against the future to shore up problems now, will be borrowed. The end result will be that when the end comes, it will come with shocking swiftness.
Usually, individuals fail quickly, but when we aggregate over lots of idiots foreclosures and bankrupcies are a low background noise. If we remember the Credit Suise chart of reset dates, we can see that the perpetual refinance crowd has been herded together and sold suicide loans that explode within the next 24 months. Just as this national credit bubble has meant that geographic diversification will not limit risk in the way that it historicly has; the fact that a HUGE percentage of loans are of very recent vintage means there isn’t as much temporal diversification in the national loan pool. In English: all the idiots have refi’d into loans that reset within the next 24 months. ‘07 and ‘08 are going to be UGLY.
Wages at least in RE industry are depressed and those in it have to be feeling the pain of a big cut in pay.
I was dropping of a car for reapair and overheard a lady, Realtor RE/Max, who was trying to return a leased benz. She was saying something about being a single mom and their is no money to be made in realestate until the market turns etc… I really felt sorry for her.
I have a couple of close friends in RE and they all are getting worried because it’s starting to look like the spring selling season will be pretty soft and their worst nightmare may be coming true.
When you go from making pretty good money to very little, it’s like taking a job for half the pay or less. After a year of that and a uncertin future, at some point it’s got to drag something down with it.
That’s one of the problem with the newly minted real estate professionals (ones who have only been in the business for the past 3 or 4 years). A lot of them jumped onto the gravy train, and then expected the good times to last forever (kind of like day traders in the late 1990s). They saw their new monthly income as lasting forever, so they hooked up a huge pipe to it to shunt their monthly income dirrectly into consumer items and leveraged real estate. They never thought to ’save for a rainy day’. Why should they? It was going to last forever.
You know, I’m not too cheap when it comes to buying stuff, but I’m paranoid about anything which has a monthly obligation. I’ll drop a couple of hundred dollars for something that I know that I want, but tell me that some service charges $25/month and it better change my life.
That made me think of GM’s OnStar service. IMO it has no value whatsoever, yet they want something like $16 a month for it.
I say f* the RE professionals, at least those who decided to lease high-end vehicles and purchase big homes and other luxury items based on their inflated incomes. If you’re going to go into business, and that is what realtors are - business owners as opposed to employees, then you better well know that your income is subject to fluctuations in your revenue stream. Not sure what they teach in clown, er, realtor school, but I’m sure they must teach the fact that home sales are subject to change. F* all of ‘em.
“…but I’m sure they must teach the fact that home sales are subject to change…”
You would be surely wrong.
“…If you’re going to go into business, and that is what realtors are - business owners as opposed to employees, then you better well know that your income is subject to fluctuations in your revenue stream…”
That’s twice today you’ve made me laugh stop it I’m spilling my coffee. Most think they are still employees. It’s why you have such an intense fall off and part-timers in the industry. That’s why I also tell people if your looking for an agent try to find one thats been in the game at least 10 years full time.
If you were running the realtor school, do you think you could attract more business if you told your prospective students “this business is a sure thing, because California real estate always goes up” or if you told them “the market is strong for the moment, but we will probably be in a real estate bust by the time you start trying to sell homes”?
I’m enjoying all the comments. California RE agents only need to take three online courses and take a simple exam to be licensed. Brokers need more. But they’re amazingly uninformed. And mrincomestream, the older agents are sharks who are only interested in their own commissions. But they’re good salesmen, to be sure, and will always sell a house for more than it’s worth, and tell any lies necessary to do so.
“… And mrincomestream, the older agents are sharks who are only interested in their own commissions. But they’re good salesmen, to be sure, and will always sell a house for more than it’s worth, and tell any lies necessary to do so…”
We’ll agree to disagree, I know of quite a few who have been advising clients against buying, or at the very least suggesting to them not to buy unless they planned to stay in excess of 10 years.
You’re right - I’m exaggerating. I’ve gotten in the habit of demonizing all RE agents, despite the fact that I know some very nice ones. I must admit that I was thinking specifically of a couple of sharks I know in my area who are “high producers” but use very suspect methods to sell houses.
I dont understand this. If I talk to a realtor and tell them that prices are coming down. I work as a civil engr and see the jobs slowing down a lot, blah blah. I say this is why I am being really picky right now. This is going to stretch me a lot and I make good money for my age, so I need to be careful.
The market is going down and I am giving reasoning as to why. I find it insulting when the different realtors try to tell me well this is the best time to buy, prices will go back up. I think these people should feel honored that new home buyers arent just getting their own license and skipping the useless middleman. Probably will be what I end up doing when it is time for me to find my future place.
The rule of RE jobs: if your job pays a lot of money and requires no apparent talent or education, you had better be saving most of your income and working on plan b because nature abhors a gravy train. Hmm, this rule covers most politicians, too
Most people would rather pat themselves on the back for being so smart and talented than keep looking over their shoulder wondering when somebody was going to take it all away.
I’m still saying that Christmas ‘07 (hey, that’s this year!) will be the ’shot accross the bow’ for the goldilocks economy.
This year growth was above 1%, so US economy is clearly heading to recession. I would not be surprised, if economy would stay around 0%, because government will pump enough money into economy from falling of the cliff. They will sacrifice dollar and price stability for positive economy, even if it will mean 1% growth rate.
How will “they” deal with the propensity of bond yields to rise when inflation goes up? Or is the plan to balance bond yields on the razor’s edge of stagflation (deflating housing prices balanced by helicopter drops of $US)? I think I nailed it…
Crash in bonds (high inflation) will kill RE.
That’s why I think the Fed and Treasury are working collaboratively to keep the l-t Treasury yields from spiking through the roof. There is a razor’s edge between inflationary pressures (due to excessive money supply) and deflationary pressure (due to 2m vacant homes on the market) which is the target of current monetary policy.
A family member works at a publicly traded furniture chain in the Inland Empire in Corona. The newly opened store has not performed in sales. The store’s grand opening included radio disc jockeys and all kinds of major prizes. 2 prizes and hour and only 3 people waiting for names to be picked. One of them already won a prize last hour. Sales to say the least is down. Down in all the other stores as well. The store’s computer indicates that sales all over the nation are down. Down over 40% from last year and that sales are continuously going downward. Many sales people are leaving due to lack of sales and not wanting to owe their draw on commission. Rancho Cucamonga used to be the biggest sales leader. The sales are down there as well as the fact that new stores in Victorville and Corona eats their sales numbers.
What does this all mean? Hell, all I know is that people are not spending as much on furnishing their homes as they used to and even with cost cutting deals, they are now clammering down and preparing for the economical downturn IMHO. Management is estimating that 50% of their sales staff and office personnel will either leave or be let go.
I’m sitting in the local coffee shop, sorta listening to the folks around me, and one guy’s talking about how his friend got into a cult recently - has become very religious. Seems to me the harder times get, the more people turn to religion… and it seems like there are lots more religious people around these days. Not sure there’s a correlation, just speculating. (BTW, I am VERY religious - I go to church every day, The Church of the Holy Redrock.)
(And please, not trying to trigger any rants on religion, it just seems religion and hard times do go together.)
Church of the Holy Redrock? Is that a euphemism for masturbation or something? If so, we’re belong to the same church!
The chicken choking thread was a couple days ago.
Bwwwaahhhhhaaaa that made my day. Thanks…
one guy’s talking about how his friend got into a cult…
In Utah this could just mean he went from Mormon to Methodist…
What is the Church of the Holy Redrock. Are you referring to an actual rock, a place to climb, or what?
Redrock that’s all over Utah and oh so beautiful…
Keeping UP with the Jones in America has NEVER been so Easy.
They’re all BROKE TOO ! ha ha ha
lol
robert reich the other day was on NPR we have decoupled from the world economy. if you think about it, the purely american homebuilding/REIC sector is in outright depression. the companies doing well are multinationals. if the world sneezes, america will catch a cold.
Three pieces of anecdotal evidence…1. A friend owns a large lumber company here in Fl. He said business is off 50% this year.
2. I have a friend that owns a cement company that pours footers and driveways…He said he has not had a job in 2 months…3. I rent a car every week for my business…The gal that owns the rental company said business is way off…She said April was 20k lighter than last April and May is looking worse…I could tell she is worried.
4. Residential construction was off 40% from the peak (2005?) level the last time I checked.
Seven previous times out of seven since 1955 when residential construction contracted by over 25%, the entire U.S. economy went into a recession as well. But so long as the stock market keeps hitting new highs every day, we have nothing to worry about.
I read an article the other day which said that the smart money on Wall Street was selling, and the amateurs were buying, just like in real estate the past several years. How long can the new stock market bubble last?
..From the strong hands to the weak hands.
And lumber futures continue to drop (what a nice linear function over time)- they are down 1/3 YOY:
http://chartsrdc.cme.com:443/cs/charts.jsp?_symbol=LB&_month=-1
good, I’m waiting for my 3 season room to cost 8,000, not 30,000!!!
From PIMCO -
“The bottom 20 percent of U.S. consumers generate only 8 percent of consumer spending. These are the very consumers that are caught in the sub-prime lending squeeze and could lose their homes.
Conversely, the top 10% represents about 40% of consumer spending and these consumers are unaffected. The subprime debacle will effect will cause dislocations in the housing market but won’t deliver a crippling blow to the economy. It is just another road hazard that the economy and financial markets will need to navigate around.
“…these consumers are unaffected.”
The jury is out on that, IMHO. Big incomes generate big appetites, and with HELOC money freely available, many high earners will prove in retrospect to be as screwed as the subprime loan crowd. The test will come about four years from now, when prime and Alt-A resets peak. We won’t know who is swimming naked until the tide goes out.
There are all kinds of loans(sub and prime) that will reset in the next 5 to 10 years. Most of those loans will be under water…It should get interesting.
The bottom 20 percent of U.S. consumers generate only 8 percent of consumer spending.
As GetStucco suggests, the downturn will not be contained to the class designated ’subprime’. Economic class distinctions are arbitrary and academic; in practice, there are no such boundaries.
Further, in an economy based on consumer spending, you don’t have to have much of a percentage change to go from healthy economy to outright recession. Anyone who thinks 8% is nothing is going to be in for a rude shock.
“The bottom 20 percent of U.S. consumers generate only 8 percent of consumer spending”…..”Conversely, the top 10% represents about 40% of consumer spending.”
Well that accounts for 48% of consumer spending.
Shouldn’t we be worried about what’s going on with the other 52%?
The Suicide Loans, Flipping and Fraudualant Housing Assessments MAY NOT HAVE put the “flyover” states into the Big League of California, Florida and DC, but the widespread Mortgage Equity Withdrawals ( MEWS) and their massive EXPOSURE are going to make their local economies BUTTS PUCKER just as TIGHT.
Unemployment is rising. Wages are flat. Lending is contracting. The Fed does not control the money supply, banks do. So this news is bearish for all assets like housing and commodities. Stocks are too high, but the reason for their strength is they have actual cash EARNINGS, commodities do not. Your best bets for the future are assets with predictable cash flows in the future.
http://www.signonsandiego.com/news/business/20070504-1335-dollar.html
“assets with predictable cash flows”
Like stocks (?!)
My biggest concern for those of us 1.) with decent incomes 2.) not caught up in the recent RE debacle is LOSS OF YOUR JOB.
Even if you have $ socked away, if this is truly going to be a bad time, it WILL NOT BE ENOUGH….
“The Fed does not control the money supply, banks do.”
Errrrrrr….. Wrong answer.
The foreign countries (China) that hold all the dollars that we’ve exported over the last 50 years, control the money supply. The choose to, or not to, buy the bonds that these banks use to lend.
If those people with the dollars stop buying those bonds, realizing they’re never really going to get paid back….. game over for the money supply.
“Newlyweds Erik and Brandi Quam can’t really afford their home. The monthly carrying costs on their two-bedroom condo in Arlington, Va. run about $2,500 a month, and they fear the bill could go higher still as their adjustable mortgage resets to higher interest rates. It’s already a tight squeeze: They’ve taken in a roommate to help pay the bills.”
This might be exactly the kind of family who other families who cannot afford to buy homes will be forced to “help out” if the Demo-rats’ FHA bailout proposal flies.
“This might be exactly the kind of family who other families who cannot afford to buy homes will be forced to “help out” if the Demo-rats’ FHA bailout proposal flies.”
Nope. That bailout won’t help these people. Does tieing them to a $250K-$300K mortgage, because you know they did cash out in that refi, count as helping them?
Nope. As soon as they realize they are paying out the arse for a place they could rent for a fraction of the price, and are losing rather than building, they will walk.
The FHA reform is to bail out the banks, that get repaid the full $250K+ out of the treasury when these fools finally get smart enough to walk.
by august we will know if we are heading into recession. the great marketing ploy known as the back to school shopping season is starting soon and we’ll see what consumer spending is like. if this is a bust then the christmas season is the next hope, but don’t hold too much hope.
mortgage resets start next month. give it a few months for enough people to decide they will foreclose so by christmas sounds good.
Didn’t the cheerleaders for real estate think about how much of a persons paycheck had to go to the mortgage payments and taxes with these high prices ? People are cutting back on purchases because they know the gig is up with real estate and they don’t feel rich anymore .They are having super sales at furniture stores right now compared to 2 or 3 years ago .
“…how much of a persons paycheck had to go to the mortgage payments and taxes with these high prices ?”
It got worse for some. Think of the guys who liberated home equity to buy an SUV, and now they have a home they cannot afford and a gas tank they cannot afford to fill.
Economic chill curbs new hires, pay rates
By Jeannine Aversa
ASSOCIATED PRESS
May 5, 2007
WASHINGTON – The U.S. unemployment rate edged up to 4.5 percent last month as the economy cooled and wary employers added the fewest positions in 2½ years.
The fresh picture provided yesterday by the Labor Department showed that payrolls grew by 88,000 as losses spread beyond manufacturing and construction and into retailing and financial services. Paychecks also grew more slowly.
Given the housing slump, rising energy prices and overall sluggish economic activity, “businesses are a bit more cautious and reluctant to hire as aggressively as they had,” said Mark Zandi, chief economist at Moody’s Economy.com.
http://www.signonsandiego.com/uniontrib/20070505/news_1b5economy.html
I live in N Arlington and yesterday I was driving around Clarendon looking at all the luxury condos - they appear to be fully occupied. I think the price range for these fancy closets is between $350K - 550K. I just cannot believe there are THAT many people here making the necessary incomes to support these prices. Just 7 years ago prices for condos here were a 1/3 of that. People have to be stretched to the max. Erik and Brandi’s story is sadly comforting.
I see a lot of condos here as well in NoVa, but many of them are still not fully occupied even after 1 year they were completed.
Yeah, there’s that “boutique” condo building on Lee Hwy that is nearly empty. But the ones in Clarendon (the hot spot - if you consider living near Barnes and Noble and a few restaurants “hot”) all seem full. I’m judging by curtains and plants in windows. The converted apt buildings in Ballston (Arlington) — Eastview and Westview — have never been able to fully sell out so now they’re back to renting. A friend bought her apt in one of those buildings back in 2005 (against my advice of course). Her mortgage is 2100/mo and the unsold units are renting for $1500. ouch.
I would put curtains and plants in empty units to avoid squatters if my development was empty! Any cars? People walking?
The longer the media and businesses pretend that all is well, the more it will seem like a thunderbolt when the crash hits. There were naysayers and people who based their lives on rationality and common sense before 1929 and 1999 as well. They were just beginning to lose their beliefs when the crashes finally occurred.
Julian Robertson was proved very correct the same week he announced that he was closing down his fund company.
As a city worker I receive monthly reports from the development department as to number of residential lots being recorded. What was once on average over 1000 a month has dropped to 0-300 if were lucky. There has been an uptick in commercial work but how long can that go on? The city itself has put a hiring freeze into affect and I’m wondering how much longer builders can keep there guys employed?
“Unfortunately, they can’t afford to sell either. Thanks to a falling housing market and a prepayment penalty of about $11,500, they’d owe the bank more than their place is worth”
I was a workout specialist (commercial properties) in the 90’s. Getting the lenders to drop the prepayment penalty was a no brainer.
“Getting the lenders to drop the prepayment penalty was a no brainer.”
That may be still true… but prepayment penalties (and other blocks to prepayment) are a major consideration when pricing mortgage-backed securities- MBS holders don’t want prepayment when interest rates are rising (they essentially price this into the securities), tho’ they might want prepayment if they think the alternative is defaults. Either way, there might now be legal hurdles to dropping the prepayment penalty due to the widespread securitizing of mortgages.
Here Comes the Recession
Taken out of context, but still interesting read from Time Magazine, March 05, 1979
Economy was different in 1970’s than now. People had higher saving rate, dollar was still considered as the world leading currency. Trade deficit did not reach extreme as it now since 1997. There was large pool of working people in their 30’s and 40’s. Today we are facing retiring aging mass of 79 millions of people and many of them have no saving and tied their wealth into mcshack. Gen-X represent only 35mil segment of people, who do not have resources to keep this economy going.
“Gen-X represent only 35mil segment of people, who do not have resources to keep this economy going.”
>True, but the Gen-Y population is larger than the baby boom population. U.S. population is increasing much more quickly than forecasted 10 and 20 years ago. NOT counting illegals, the population went up more than 10% from 1990 to 2000 (248M to 281M). Figures are from U.S. Census Bureau. Since we crossed the 300M mark this past year, there’s no sign of the population growth slowing at present.
If the rest of this decade remains on that pace, we’ll have added 71M new mouths in the past 20 years alone. Granted, this won’t make the picture rosier for older boomers, but it will for younger boomers born after 1958 or so.
I’m a boomer, but my official retirement year isn’t until 2030. And guess what? By 2030, those 82 million born from 1983 to 2000 will be 30 to 47 years old. If our social welfare system continues as it does now (and it should not as it is unethical), then things somewhat decent for people born from 1958 to 1990 or so IF they squirrel away 10% a year as they should).
Provided we can get past this oncoming car wreck (retiring baby boomers born before 1954 and terrorism - two huge if’s), then the system of highway robbery put in place by FDR in the 1930s and 1940s could conceivably be extended another 50 years. Giving amnesty to 12 million plus illegal aliens will help our system of wealth redistribution from productive individuals to slackers will continue. Our standard of living will drop a bit, but it will not doomsday. We’ll be more like old Europe. Malaise.
Like the true baby boomers (those born from 1938 to 1953), Gen X’ers born from 1970-1982 are in a sweet spot demographically. The numbers of Gen Y (82 million, born from 1983-2000) are huge in comparison to their own and will create a big increase in demand for goods, (new and re-built) housing, etc.
Life might be quite good for Gen X’ers who do what their baby boomer parents (born from 1938 to 1954) did not do: Save Money. Many of those in their parent’s generation will suffer because they forever lived life on the fly.
I’m sorry but I don’t know how in the world anyone can afford houses nowadays. To be honest, most houses aren’t worth even their 1990’s prices. Recession? You wish. I wouldn’t be surprised if in a year from now unemployment doubles to 18% and the housing market falls by 40 - 70% in the prime areas and a 90% death collapse in the McMansion ghettos
“Who is to blame here? Yes, Brandi should have asked more questions and scrutinized the fine print. The idea of a mortgage with a 1% rate seems, on its face, too good to be true. Brandi says she did know she’d eventually have to make higher payments, but she planned to move before that happened.”
Such a sad tale. Let the violin music play
Brandi, you’re a fine girl… what a good mortgagee you’d be.
Andy…Thanks I got a good chuckle out of that!!