‘We’ll See Who’s Left Standing’ By Year-End: NMN
Reuters reports on Fed officials speech. “Those anxious about the housing market have urged the Fed halt its tightening cycle before it does substantial damage to property prices. But Dallas Federal Reserve President Richard Fisher sounded less worried and said the high number of home owners with fixed rate mortgages provide a buffer.”
“In somewhat hawkish remarks, he also said U.S. growth would remain strong, provided the Fed keeps inflation under control and trade was not obstructed. ‘As long as the Federal Reserve does its job of holding inflation at bay, and as long as our political leaders resist protectionism and other forms of interference with creative destruction, we will remain a productive economic machine,’ he said in his prepared remarks.”
“Those anxious about the housing market have urged the Fed halt its tightening cycle before it does substantial damage to property prices. But Fisher sounded less worried. ‘It is not unreasonable to think the situation is manageable, albeit worth watching closely,’ he said.”
“Robert Schiller, a Yale economist and author of Irrational Exuberance, warns that Ben Bernanke’s focus on the Great Depression has trained him to fight the wrong war. In 1929, house prices and commodities had been falling for several years, even if Wall Street was frothy. This time assets are on fire across the board.”
“‘We are now in the late stages of the biggest real estate boom in US history, driven by frenzied market psychology. In the near future, this could put Bernanke into uncharted territory for economic stress,’ he said.”
And Paul Muolo writes at NMN. “Fourth quarter production volumes were decent, but all lenders (prime and B&C alike) suffered from the profit margin blues. Payment-option ARMs have garnered a ton of negative press because of their risk to consumers but what about lenders? Here’s the concern: when a borrower with a POA chooses the ‘negative am’ option the lender who made the loan gets to book the interest payment as ‘accrued’ even though the institution has not actually received the money from Joe and Mary Six-Pack.”
“The more negative-am POAs a lender has on its books, the greater that receivable. From what I understand, that accrued interest can be booked as income. In other words, the lender gets to count something as income even though it actually hasn’t received the cash yet. Now, maybe there’s nothing wrong with that but it sounds very close to the gain-on-sale debacle that cratered the nonprime industry back in 1998/99.”
“One analyst suggested to me that accrued (but uncollected) interest isn’t so bad as long as the loans are properly underwritten. He also suggested that accrued interest results in a receivable being created that costs next to nothing. But here’s one other issue to consider, if the firm with POAs is a REIT and it’s hooked on paying dividends, what happens when volumes and profit margins hit the wall? We should have our answer by year-end. Then we’ll see who’s left standing.”
“Here’s the concern: when a borrower with a POA chooses the ‘negative am’ option the lender who made the loan gets to book the interest payment as ‘accrued’ even though the institution has not actually received the money from Joe and Mary Six-Pack.”
New Mortgage Math:
POA = POS.
from the NMN link:
From Countrywide’s earnings release: For nonprime products, the gain-on-sale margin decreased 114 basis points from the previous quarter and 249 basis points year over year
I’ve had it up to here (holding hand over head) with Dick “eighth inning” Fisher.
I gather from the article that “POA” is an acronym that roughly means “option-ARM”. What exactly does it stand for?
POA = Payment Option ARM
@mad_tiger –thanks
it seems like some lender income is a mirage, an accounting gimmick.
‘It is not unreasonable to think the situation is manageable, albeit worth watching closely,’ he said.”
Manageable? Yeah, when Katrina was just a revolving whorl of color on the weather map it looked manageable too. Again and again the Federal Reserve and other economic agencies have shown that they simply do not have the tools to anticipate trend changes. They are even out of practice looking for recessions, and did a poor job anticipating our last two. They were close to eight months late in the early 90’s to even get around to admitting that there was one.
As of the realtor reports for 02/04, higher end homes in my area are still selling for about $1.3 mil. We are lemmings in search of a cliff here.
You guys should see the inventory in downtown San Diego!! I work right in the middle of it. There is a new high-rise residential tower on EVERY corner and nobody seems to live in them! The lights aren’t on at night, no one goes to work apparently because I never see cars come in and out, the parking garage is empty…speculators? Over 50 units are available in one of the 20+ towers alone with even MORE planned…
I’m disgusted with the thought of the feds trying to save all the foolish homebuyers who overbought. Let them learn and pay for their greed. When the stock market crashed a lot of investors wanted to blame someone such as shady analysts. Have some balls and stand up for your decisions for once.
# arizonadude Says:I’m disgusted with the thought of the feds trying to save all the foolish homebuyers who overbought. Let them learn and pay for their greed. When the stock market crashed a lot of investors wanted to blame someone such as shady analysts. Have some balls and stand up for your decisions for once.
Agreed! But how do we guarantee that congress won’t bail out the homeowners/lenders/fannie mae that made really bad decisions!? Start writing your congressman now!
You know if it were not for all these option ARMs & exotic loans home prices would not be so high to begin with. Its the American way, when you can’t afford something come up with a new and inovative way to finance it. Remember when car loans were 36 months or 48 months and a 60 month loan was considered crazy?
Its funny when you hear subprime lenders and builders preaching the use of interest only loans and option ARM’s so more people can afford homes.
I agree with all that… Sure they can buy the home they just can’t afford to keep it.
I bet if only 30 year fixed loans with a manditory 10, 15, 20% down based on credit where allowed, no one would be able to afford homes, therefore builders and sellers would be forced to reduce their prices (eventually) to cater to buyers ability to afford the homes.
What a joke:
Consumer Protection Week: NAR Offers Guidance
( February 6, 2006) — To mark National Consumer Protection Week, the NATIONAL ASSOCIATION OF REALTORS® has compiled guidance and advice to help consumers navigate the complex waters of the real estate transaction and protect themselves and their investment along the way.
“While homeowners across the country, and along with them, the nation’s economy, have benefited from the recent real estate boom, the market has also seen an increase in the incidence of mortgage fraud and lending practices that put many consumers at risk,” said 2006 NAR President Thomas M. Stevens, senior vice president of NRT Inc., from Vienna, Va. “Our REALTOR® members subscribe to a Code of Ethics that requires them to eliminate practices that may damage the public or that might discredit or dishonor the real estate profession. NAR is committed to helping consumers protect themselves and their housing investment.”
Guidance and recommendations to help home buyers and sellers identify and protect themselves from harmful practices is available at REALTOR.org.
Homebuyers can learn how to protect their credit history, use online resources without falling victim to predators, and educate themselves about mortgages and lending practices that might put them at financial risk. Home sellers can glean safety tips for showing a home and advice regarding the fine print of a purchase contract. Materials also explain how Realtors can help protect both buyers and sellers in any real estate transaction.
This is the eighth annual National Consumer Protection Week. NCPW empowers consumers by highlighting current consumer protection and education efforts in the fight against fraud in communities across the nation.
Tips on a wide range of consumer protection issues are available at Consumer.gov.
National organizers of this year’s NCPW are the Federal Trade Commission, the Federal Citizen’s Information Center, the U.S. Postal Service, the U.S. Postal Inspection Service, the Federal Communications Commission, the National Association of Consumer Agency Administrators, the National Consumers League, AARP, the Better Business Bureau, Call for Action, the Consumer Federation of America, and the National Association of Attorneys General.
—REALTOR® Magazine Online
the Feds will probably have to bail out the housing market some way.
Maybe something like this has to happen once a generation. Life expectancy is 70ish and the Great Depression happened about 70 years ago. Fiat currency and borrowers that don’t read history books can’t be a good combination.
Did anyone catch the Ameriquest mortgage commercials last night? The one with the hospital room and the guy is holding the defibulator paddles and the wife and kid walk in the room? then it says something about not “immediately judging” ? Did they mean “we won’t immediately judge you” or did they mean “please don’t judge us just because of our recent $325million dollar settlement”?
I think the Federal Government will end up bailing out a lot of lenders. If anything it’s going to be a repeat of the savings and loans scandle. We are already seeing the reports of rampent fraud and unethical practices from the mortgage brokers.
“”I bet if only 30 year fixed loans with a manditory 10, 15, 20% down based on credit where allowed, no one would be able to afford homes, therefore builders and sellers would be forced to reduce their prices (eventually) to cater to buyers ability to afford the homes”"
THIS SHOULD BE LAW… FOR THE BETTER OF THE NATION, WORLD… ETC. EVEN IF IT CAUSE A BIG ‘F.U.’ FOR THE MARKET, IT WILL BE BETTER IN THE LONG RUN
“In 1929, house prices and commodities had been falling for several years, even if Wall Street was frothy. This time assets are on fire across the board.”
And that’s a critical distinction. The 1927-1929 expansion was deflationary, as was the last leg of the 1980’s expansion in Japan. The economy in both cases lacked liquidity (perhaps because it was funneled primarily into those bubbles), and removing liquidity to fight the bubbles was a serious mistake, because it starved the broader economy and caused widespread deflation.
However, the current rate hikes by our fed. come at a time when there is excess liquidity seemingly everywhere, and rising inflation. In this environment, mopping up excess liquidity by flattening the yield curve is appropriate, and should reduce borrowing and speculation, without starving the broader economy.
In fact, because real estate is so credit sensitive, the fed’s job is made even easier. A 5% fed. funds rate will kill speculators, but is unlikely to starve the rest of the economy.
lato1394 said,
You know if it were not for all these option ARMs & exotic loans home prices would not be so high to begin with. Its the American way, when you can’t afford something come up with a new and inovative way to finance it. Remember when car loans were 36 months or 48 months and a 60 month loan was considered crazy?
Its funny when you hear subprime lenders and builders preaching the use of interest only loans and option ARM’s so more people can afford homes.
I agree with all that… Sure they can buy the home they just can’t afford to keep it.
I bet if only 30 year fixed loans with a manditory 10, 15, 20% down based on credit where allowed, no one would be able to afford homes, therefore builders and sellers would be forced to reduce their prices (eventually) to cater to buyers ability to afford the homes.
I agree. If it were’t for “suicide financing” home prices would be lower, possibly much lower. I think the speculation would have been much less if you couldn’t get 100% financing. Hopefully, we’ll return to more tradional lending practices where a down payment means something. The only way to fix the affordibility issue is by homes price decreases. The FED has no room to cut rates since they are already so low.
All of us know we have a very huge probelm on our hands. What most of us on the site have in common is rationality. Homes have become the great status symbol. I think a lot of people just buy an overpriced home to make them feel important. It is like buying a chevy vs caddy or coach vs loui vitton. I had an ex girlfriend who had to have the best of everything regardless of price. I thought it was nuts to pay 700 for a hand bag or lease a beamer. But it was so important to her to feel like somebody around her friends. Face it, a lot people like to get recognition for having nice things in america. It is a very powerful feeling and emotion that overcomes rationality. I guess that is what makes a market.
“Changes of the guard at the Fed’s marble temple have a nasty habit of rattling global markets, bringing festering problems to the fore as investors suddenly shun risk.”
Great — sounds like the conundrum is ending then.
“But it was so important to her to feel like somebody around her friends. Face it, a lot people like to get recognition for having nice things in america.”
True. The advertisement and entertainment industry have done a brilliant job convincing us that our possesions make us somebody. Also, they have spread the idea that the normal household in America is a good deal richer than it really is. Thus, to emulate this lifestyle credit used to meet the perceived norm.
‘He (Bernanke) insists that America shoppers are not to blame for the excess - much to the delight of the White House and Wall Street. The root cause of the imbalances is Asian thrift, or a “global savings glut” that has flooded into the United States in search of yield. The problem will “unwind gradually” of its own accord, he says. Will it?’
That explanation will give future generations of economic historians a good laugh.
mr. d. said…
“In fact, because real estate is so credit sensitive, the fed’s job is made even easier. A 5% fed. funds rate will kill speculators, but is unlikely to starve the rest of the economy.”
Even against the backdrop of that giant sucking sound as the last housing ATM machine runs out of credit?
Markmax33 Says:
February 6th, 2006 at 11:09 am
You guys should see the inventory in downtown San Diego!!
————————————————————-
We used to see it online whenever we wanted on Realtor (TM) Lew Breeze’s “Downtown San Diego Inventory” graph. But then, for no obvious reason, he took the graph out of the public domain.
indiana jones says…
“True. The advertisement and entertainment industry have done a brilliant job convincing us that our possesions make us somebody.”
What’s worse, only appearances matter. It does not matter one bit whether the bank owns the stuff, only that the “possessor” gets to flaunt it before the “repossessor” reclaims it.
OT, but I would appreciate your thoughts. The inversion between the yields on the 2-year and 10-year notes appears to be growing, now standing at 7 bps. The yield between the 2 yr and 30 yr. is flat. The media seemed to make a big deal about this in December, but I haven’t heard as much buzz recently, despite that fact that inversion is deeper and more prolonged. At what point is an inversion deemed “serious”?
2 Yr. 4.62%
10 Yr. 4.55%
30 Yr. 4.62%
http://tinyurl.com/av8wa
“housing ATM machine runs out of credit?
Per prior posts, home equity credit has fallen $4b since peaking in September.
However, it looks like this is easily being offset:
“Business Loans Show Vigor”
By Tony Crescenzi
RealMoney.com Contributor
“Commercial & industrial (C&I) loans reached their highest level since October 2001, the Federal Reserve reported in its weekly release on commercial lending activity late Friday.
C&I loans are now up about 13% vs. a year ago, a sign of business confidence.
These loans, which fell for more than three years before rebounding in the middle of 2004, tend to increase when businesses are confident in the expansion and the data tend to correlate well with data on industrial production, inventory investment and employment in particular.
The data are a coincident to leading indicator, on the notion that money borrowed today will get spent tomorrow. C&I loans now stand at $1.0654 trillion, up $5.2 billion versus a week earlier and up $19.3 billion over the past month, a 26% annualized gain. These data are good for the transportation sector because it shows businesses are borrowing to finance current production. ”
http://www.thestreet.com/p/rmoney/tcrescenziblog/10266579.html
So while home equity loans have fallen $4 from their peak, this drop has been dwarfed by the gain in business loans, which are up a whopping $19b in the last month alone.
Indiana Jones said:
True. The advertisement and entertainment industry have done a brilliant job convincing us that our possesions make us somebody. Also, they have spread the idea that the normal household in America is a good deal richer than it really is. Thus, to emulate this lifestyle credit used to meet the perceived norm.
You are right on. Cable tv is brainwashing the consumer. I swear in my subdivision that everyone sits and watches tv all day and night. No one ever comes out to hang out in common areas. Their blinds are always shut and I wonder what people are doing all the time. I was just reading another blog about a guy in tampa riding his bike around and feeling horrible, like a homeless person. I feel the same way when I cruise my bike around town. People give you dirty looks like you are a loser. No, I like to exercise and see what is going on around town and interact once in awhile. Anyway it all comes back to the crazyness of this whole deal.
Markmax33 said:
“You guys should see the inventory in downtown San Diego!! I work right in the middle of it. There is a new high-rise residential tower on EVERY corner and nobody seems to live in them! The lights aren’t on at night, no one goes to work apparently because I never see cars come in and out, the parking garage is empty…speculators? Over 50 units are available in one of the 20+ towers alone with even MORE planned… ”
**********
Saw this when I visited last summer; a perfect description of what I’m saying when I say:
“San Diego condos for everyone!!”
Okay, so I got this brother-in-law who brags that he’s “worth” over 1M in real estate…I had to clarify to him that he OWED 1M in real estate and not until it’s paid off is he “worth” anything!!! WHY do these folks think they’re so smart? He’s never had a finance class and certainly doesn’t understand physics so I guess I ‘m preaching to the choir on this blog??
Just wondering
if there was 19 Billion in biz investment in the last month- to offset the housing crash- and what is the economic engine for this spending based on? ‘The Son of the Internet 2” or ‘pet.com part 2′ ? Mr Crescenzi is whistling BS- WHY is the Stock market not BEYOND 11K and rising??
I can point you too a plethora of other economists including Ian Shepherdson, Irwin Kellner, David Rosenberg- who would dispute Mr. C and easily Mr. D.
Can someone point to a source regarding mortgage equity withdrawals in the U.S.?
“Then we’ll see who’s left standing”
The qoute is in reference to REITs, but could just as easily refer to speculators who need low interest rates and rising home prices to survive.
I think the current rate hike program is similar to a siege, intended to starve an enemy of food and/or supplies. The fed. can easily hike rates to 5% and keep them there, starving speculators and heloc borrowers of cheap money.
At some point, these higher borrowing costs will force the speculators to surrender, and the war (the fed. vs. the housing bubble and inflationary expectations in general) will be over.
As I wrote earlier, I think this can be done easily and quickly, without killing off non-housing activity.
arizonadude Says:
February 6th, 2006 at 11:56 am
All of us know we have a very huge probelm on our hands. What most of us on the site have in common is rationality. Homes have become the great status symbol. I think a lot of people just buy an overpriced home to make them feel important. It is like buying a chevy vs caddy or coach vs loui vitton. I had an ex girlfriend who had to have the best of everything regardless of price. I thought it was nuts to pay 700 for a hand bag or lease a beamer. But it was so important to her to feel like somebody around her friends. Face it, a lot people like to get recognition for having nice things in america. It is a very powerful feeling and emotion that overcomes rationality. I guess that is what makes a market.
—————————————————————–
McMansions, leased anything, and 700 handbags speaks directly to the spiritual sickness that has overtaken the U.S. But then again, we have a system that discourages conservation and frugality.
“I can point you too a plethora of other economists including Ian Shepherdson, Irwin Kellner, David Rosenberg- who would dispute Mr. C and easily Mr. D.”
You can put a plethora of economists in a room and still come up with a wrong answer. During this expansion, so many economists have been pessimistic and wrong, that I would be skeptical of their latest pessimistic predictions.
That’s why I’d rather listen to a contrarian economist with a good track record anytime.
My optimism is based on data from ECRI, an economic forecasting firm that correctly forecast both the 2001 recession, and the 2002 recovery.
Their managing director Lakshman Akuthan was on CNBC Friday, and had this to say, “Our weekly index is currently at a 20 week high….clearly, there is no recession in sight.”
http://video.msn.com/v/us/msnbc.htm?g=18b3ce9c-7711-412e-824f-0ef3470de33e&f=00
“WHY is the Stock market not BEYOND 11K and rising??”
The NYSE index and the Russell 2000 (a small cap index) both hit new all-time highs last week. I think that says more about the economy than an average of 30 stocks, some of which are corporate dinosaurs.
Mr. d:
Commercial & industrial loans of $1 trillion still pale in comparison to the $8 trillion in mortgages….
Mr D
you speak ‘republican speak’- I think you get the picture. Also I do not know if you Goldman Sachs news release today- they said they expect a ’significant decline’ in economic acticity later this year and into 07- There release said that the housing market nationwide was over valued by at ‘least 15%’ and in areas like L.A 50%-
Via the BusinessWeek blog:
Goldman economist Jan Hatzius argues that softness in housing will be such a drag on the economy that the Federal Reserve, which has been steadily cranking short-term interest rates higher, is going to have to turn around and start cutting them to keep the economy from tanking. He’s looking for a full percentage-point cut in 2007.
Here are Hatzius’ bullet points:
**Houses are about 15% overvalued nationwide, ranging from 50% overvalued in Los Angeles to not overvalued at all in Houston.
**Housing construction, which is the highest share of GDP in half a century, will slow. And people will pull less cash out of their homes (through cash-out refinancings, etc.).
**Together, these drags will subtract 1.5 percentage points from the economy’s underlying growth rate. For the past two years, housing’s strength has lifted economic growth about 1 percentage point above its underlying rate. All told, then, the downturn in housing from will subtract 2.5 percentage points from GDP growth.
**Ben Bernanke probably isn’t going to react right away. He’ll wait until there’s concrete evidence that a housing downturn is hurting the economy. “If and when that slowdown arrives, however, the response is likely to be fairly aggressive
For all your bombastic optimistic mumbo jumbo- it holds little water. Perhaps it does from the viewpoint of ‘republicaspeak’.
“Commercial & industrial loans of $1 trillion still pale in comparison to the $8 trillion in mortgages.”
Growth is driven by change, not relative size. If C&I loans are growing by $19b a month, unless mortgage and heloc debt shrinks by a like amount, debt driven spending will increase (everything else being equal - which I admit, it never is).
“All told, then, the downturn in housing from will subtract 2.5 percentage points from GDP growth.”
Which has been in excess of 3% for the last 3 years, still leaving positive growth, so what’s your point?
That there’s going to be a slowdown later this year and next, or perhaps a short and shallow recession? That’s no surprise, what with the fed. hiking rates to ensure that outcome.
Where I probably differ with you (on economic outlook), is that I don’t see a long or deep recession. Instead, a short slowdown followed by another expansion is likely.
And, I didn’t see anything contrary to that in Goldman’s outlook either. In fact, I agree with what he’s written.
Did anyone catch the Ameriquest mortgage commercials last night? The one with the hospital room and the guy is holding the defibulator paddles and the wife and kid walk in the room? then it says something about not “immediately judging” ? Did they mean “we won’t immediately judge you” or did they mean “please don’t judge us just because of our recent $325million dollar settlement”?
Yes! I saw those commercials, too. And when the first one aired, my jaw dropped. I thought it was in very poor taste on the part of whomever the decision-maker was to endorse an entity that was involved in fraudulent mortgage activities. And just because they have settled, who’s to say that they haven’t just stepped back and regrouped to try to figure out a less conspicuous way to still borrowers? VERY tacky. What were they thinking?
BayQT~
The gentlemen fron Goldman Sachs is ‘optimistic’
Dr. Ian Shepherdson of High Frequecny Economics has predicted a ‘meltdown’ late this year- and expects a recession.
“C&I loans are now up about 13% vs. a year ago, a sign of business confidence.”
Either that, or else irrational exuberance has outlived AG’s tenure at the Fed.
Oh, that Goldman Sach’s economist:
“Economic Predictions for 2003
Where will the economy go this coming year? Let’s ask the experts”
“Jan Hatzius, senior economist, Goldman Sachs Group: The environment is likely to stay tough. The stock market bubble has burst, but we are still grappling with the economic imbalances that were created by the bubble. In particular, because of the combination of a still-low personal saving rate and the severe declines in the stock market, households are under pressure to cut back on their spending. The decline in business investment is probably mostly over, but a strong rebound is unlikely in an environment of slowing consumer spending growth. Our baseline forecast is continued slow growth with further increases in the unemployment rate. The risk is mainly on the side of renewed recession, for which we see a probability of 30 to 40 percent over the next 12 months.”
http://tinyurl.com/dfxud
So he missed the rebound in the recovery.
Then in August 2003 once the rebound had already occurred, he said:
“In the next 12 months, the economy is going to do well, but it will be a temporary acceleration rather than the beginning of a normal recovery.”
http://money.cnn.com/2003/08/06/news/economy/business_spending/
2 1/2 years later and we’re going to see 4% growth this quarter. I don’t think that’s a temporary acceleration.
So he missed the rebound, and then was wrong about the longevity, and now he’s still clinging to his wrong-headed pessimism. Maybe someday he’ll be right, but for the last 3 1/2 years, he’s been wrong.
“Did anyone catch the Ameriquest mortgage commercials last night? The one with the hospital room and the guy is holding the defibulator paddles and the wife and kid walk in the room? then it says something about not “immediately judging” ? Did they mean “we won’t immediately judge you” or did they mean “please don’t judge us just because of our recent $325million dollar settlement”?”
Yes, and I immediately started a rant the minute it ended. Everyone in the room grew quiet when I freaked out
Anyway, my first impression, they were implying that they wouldn’t judge you (i.e. your credit score) but now that you mention it, I’m not sure. It was in poor taste either way.
Mr D. said:
As I wrote earlier, I think this can be done easily and quickly, without killing off non-housing activity.
It CAN be done, but is there the WILL to do it? It seems to me that Wall Street is as addicted to low interest rates as main street. If the Fed keeps raising rates, the whining from the Stock Market Analysists will be heard for miles, all the way to DC.
arizonadude Says:
February 6th, 2006 at 12:29 pm
Indiana Jones said:
True. The advertisement and entertainment industry have done a brilliant job convincing us that our possesions make us somebody. Also, they have spread the idea that the normal household in America is a good deal richer than it really is. Thus, to emulate this lifestyle credit used to meet the perceived norm.
You are right on. Cable tv is brainwashing the consumer. I swear in my subdivision that everyone sits and watches tv all day and night. No one ever comes out to hang out in common areas. Their blinds are always shut and I wonder what people are doing all the time. I was just reading another blog about a guy in tampa riding his bike around and feeling horrible, like a homeless person. I feel the same way when I cruise my bike around town. People give you dirty looks like you are a loser. No, I like to exercise and see what is going on around town and interact once in awhile. Anyway it all comes back to the crazyness of this whole deal.
Same here. I’ve seriously considered riding my bike to work (its only 15 minutes away, a doable ride on a bike in nice weather) but I swear, everytime someone rides a bike in this town they have to deal with near misses from @sshole car drivers; I fear for my physical safety too much. The people at my work are currently snickering behind another coworker’s back because he doesn’t own a car, but takes the bus. Considering his salary is equal to theirs, and he isn’t leasing a Lexus, tell me who is the greater fool in this situation.
My neighborhood too, same way. Everyone is busy watching cable tv. Even my neighbor, who is too poor to afford his energy bills for his house (he cant afford to run his heater or airconditioner) can be seen from all of his open doors and windows watching premium cable tv channels. No thanks. I cancelled my cable and can get free entertainment at the library (they check out VHS movies and DVDs for free to public there, you know!). And don’t get me started on those home improvement cable channels.
RentinginNJ
Though I don’t think there is really a magic number where a curve inversion becomes catastrophic, though something around 75-150 basis points (the spread of mortgage backed securities and investment grade corporate bonds over treasuries) is when it functionally becomes impossible (IE, no way to make a profit) to borrow money short and lend longer.
“Dr. Ian Shepherdson of High Frequecny Economics has predicted a ‘meltdown’ late this year- and expects a recession.”
I’d want to check his track record. If an economist was wrongly pessimistic the last three years, I think it makes sense to be skeptical of his forecast for the next three years. If he’s ever correct, it would fall in the broken clock category.
“the Feds will probably have to bail out the housing market some way. ”
That’s the part of this that makes me the sickest. Those who had the good sense to stay out of the frenzy will wind up getting stuck holding the bag for it.
“Those anxious about the housing market have urged the Fed halt its tightening cycle before it does substantial damage to property prices. But Dallas Federal Reserve President Richard Fisher sounded less worried and said the high number of home owners with fixed rate mortgages provide a buffer.”
“In somewhat hawkish remarks, he also said U.S. growth would remain strong, provided the Fed keeps inflation under control and trade was not obstructed. ‘As long as the Federal Reserve does its job of holding inflation at bay, and as long as our political leaders resist protectionism and other forms of interference with creative destruction, we will remain a productive economic machine,’
********************************************************************************************
Ahh… If only the Fed were holding inflation at bay. But its not. To the contrary they are printing dollars at a furious pace. At such a furious pace that they don’t want us to know what they are doing and will now stop reporting the M3 statistics.
Here is an interesting item from Mogambo Guru in today’s The Daily Reckoning:
“…the Economist magazine and take a gander at what they show prices
are doing, according to their “The Economist Commodity Price Index.” Hmmm!
I see that, in the dollar index, over the past 12 months, we have “all
items” up 21.6%! Food up 13.5%! “All industrials” up 30.7%! Non-food
agriculturals are up 18.6% and metals are up 36.5%! Oil is up 33.0%! Gold,
precious, lovely, value-protecting, wealth-conserving gold is up 31.5%!
“And inflation is everywhere, too! The Yen Index of “all items” has
inflation at 34%, the Euro Index is up 28% and the Sterling Index is up
27% “!
So all items up 21.6% over the past 12 months? Holding inflation at bay? Hahahaha..
Today’s new reports coming out (by economists, real estate forcasters)… are beginning to:
SMELL like an industry wide conspiracy to unfold
a “SOFT LANDING”??!!! *@##%@!!!!!!!!!
I don’t get it… scroll back to 3 or 4 weeks ago and our blog posts were focused on throwing sticks+stones at comments from realtors that “real estate was beginning to show signs of a more “normalized” market… one that would be a win/win for both buyer and seller. Some said “we won’t see 15-20% increases this year but a more modest 5-8%” *@##$**@UCK!!!!!!!!!
fast forward several weeks and all of a sudden they are starting to introduce (spoken ever so softly…) a more serious tone to this nationwide unfolding epidemic.
Why the F won’t they just call a SPADE a Spade? We all know… don’t we?
because it will cause mass histeria and the market will turn upside down overnight. These sweet-talkers are just praying and hoping for a few more good months of employment…
“Those anxious about the housing market have urged the Fed halt its tightening cycle before it does substantial damage to property prices. But Fisher sounded less worried. ‘It is not unreasonable to think the situation is manageable, albeit worth watching closely,’ he said.”
THAT”S WHAT I”M TALKIN’ Bout
the Feds will probably have to bail out the housing market some way.
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Yep, and this had to be the plan all along. The banks give loans to anyone with a pulse b/c they’re not risking anything… the fed buys these worthless loans from them. And there is no way the gov’t is unaware that the loans are junk. It’s obvious it’s a scam where once again the tax payer gets screwed.
“Those anxious about the housing market have urged the Fed halt its tightening cycle before it does substantial damage to property prices. But Fisher sounded less worried. ‘It is not unreasonable to think the situation is manageable, albeit worth watching closely,’ he said.”
Since when was it the FED’s job to artificially prop up grossly inflated property prices? As far as I’m concerned, F%&k ‘em! If some credit tightening is good for our whole economy in the longer run, then so be it. If Joe Schmoe-turned-RE guru loses 75K on his flip I could care less.
Glenn asks:
“Can someone point to a source regarding mortgage equity withdrawals in the U.S.?”
http://www.contraryinvestor.com/2005archives/modec05.htm
http://www.federalreserve.gov/pubs/feds/2005/200541/200541pap.pdf
# Mr. D. Says:
February 6th, 2006 at 3:45 pm
“Dr. Ian Shepherdson of High Frequecny Economics has predicted a ‘meltdown’ late this year- and expects a recession.”
I’d want to check his track record. If an economist was wrongly pessimistic the last three years, I think it makes sense to be skeptical of his forecast for the next three years. If he’s ever correct, it would fall in the broken clock category.
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While we are at it, let’s check the track record of economists (Robert Shiller, Dean Baker, staff at The Economist magazine, etc.) who have been warning of a housing bubble for several years running now. It looks like prices are still stratospherically high, so I guess these guys are all just a bunch of stopped clocks hoping that if they lock their predictions in for long enough, history will prove them right.
And then there are seriously stopped clocks like myself, who think the long-term effect of a serious overdose of Voodoo economics (only interrupted by a surprising outbreak of fiscal conservatism during the Clinton years) is only now about to bear its bitter fruit …
but I once again meander off topic.
Get Stucco
Dr. Shepherdson actually has been usually very bullish about the economy and stock markets in general. He is not another Stephen Roach, Dean Baker, Robert Schiller Peter Schiff type- his track record in fact has been pretty much on target- he has been one of the most bullish economists often mentioned for his opines since 2000 in the online and print biz columns- his turnabout re: Housing surprised me.
I am surprised you are not familar with him.
Peter Says:
I am surprised you are not familar with him.
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Are you inferring that because my post did not mention him, that I am not familiar with him? This not good logic is.
Peter Says:
February 7th, 2006 at 3:13 am
Get Stucco
Dr. Shepherdson actually has been usually very bullish about the economy and stock markets in general.
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P.S. Perhaps you misunderstood the point of my retort to Mr. D. above, which was simply that it is very hard to separate the null hypothesis
“He was right, but early,”
from the alternative
“He is a stopped clock who history will someday prove right.”
Ian Sheperdson was merely the hapless victim of Mr. D.’s stopped clock characterization. I did not intend to subject Ian to collateral damage in my post.
RentinginNJ Says:
At what point is an inversion deemed “serious”?
2 Yr. 4.62%
10 Yr. 4.55%
30 Yr. 4.62%
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When govt market invervention can no longer maintain the appearance of a flat or slightly upsloped yield curve
(2 Yr. = 30 Yr. = 4.62%), due to overwhelming market forces in favor of inversion.
“Dr. Shepherdson actually has been usually very bullish about the economy and stock markets in general….his turnabout re: Housing surprised me.”
I will definitely look him up.
“While we are at it, let’s check the track record of economists (Robert Shiller, Dean Baker, staff at The Economist magazine, etc.) who have been warning of a housing bubble for several years running now.”
For a commentator to identify a bubble early is still of great value, because it alerts the public to start monitoring for danger.
However, for a Wall Street economist to be wrong for three years is quite another. It adds little value for clients or readers (other than the basic value of listening to counter arguments with which to weigh your own against).
In the interest of fairness to Ian Shepherdson, who was caught in the crossfire of the above exchange, I suggest anyone who wants to see what he has to say check out the following link to his October 17, 2005 commentary on the US economic situation (Weekly Notes on the United States — “Explaining the Coming Housing Meltdown”) :
http://hifreqecon.com/samples/HFUW.pdf
The view expressed therein seems rather congruent with the situation at hand, if slightly more optimistic. For instance, he talks about the dire consequences which would ensue if “people shifted price expectations from 16% increase down to 6% increase.” I guess it would be unreasonable to criticize him for failing to anticipate that prices would drop like a rock (”Ecomomists at Goldman Sachs calculate that, after adjusting for seasonal patterns, the median home price has fallen by almost 4% since October,” taken from “The world economy — Testing all engines” in the Feb 2, 2006 print edition of The Economist
http://tinyurl.com/8yvm9
Note that w/o seasonal adjustment, the decline in the median would be larger than Goldman’s estimate.).
How will price expectations shift when sheople are confronted with evidence of a median home price falling for the first time since the Great Depression at a 15% YOY rate? As Dr. Shepherdson succintly suggests, they will get cold feet, resulting in a YOY rate of price decline of more than 15%.
Considering the News today
Dr. Shepherdson is looking more like his predictions are coming to fruition. Same holds true for the economist at Goldman yesterday- whose prognatications may be (as I said) Too optimistic.