The Question Of Duration Hangs Over The Market
Some housing bubble news from Wall Street and Washington. Inman News, “The same forces that built up the housing boom also played a major role in its drop-off, according to the latest annual housing market report by Harvard University’s Joint Center for Housing Studies.”
“‘Except in the few areas facing real economic distress, this housing downturn has been driven largely by the market’s own excesses. Chief among these is the oversupply of homes triggered by inflated demand from investors, second-home buyers and others intent on getting in on rapidly appreciating prices,’ according to ‘The State of the Nation’s Housing’ report.”
“It is uncertain when the real estate recovery will begin, the report states. ‘Now that the downturn is in full swing, the question of duration hangs over the market.’”
The Boston Globe. “The median price of a single-family home in Greater Boston has dropped 3 percent in the current slowdown, to $402,200 in 2006. At that price, a house costs 5.4 times the median household income of $74,773 for the region. The standard for affordability is 3 to 3 1/2 times median household income, according to the Harvard center.”
“‘It is becoming increasingly clear that the market will not return to a day where everyone who worked could afford a place to live,’ said Nicolas Retsinas, director of the center.”
“House prices would have to fall a dizzying 35 to 44 percent, to the $224,000-to-$262,000 range, before being affordable to a broad swath of the population, as they were in the mid-1990s in the aftermath of the previous housing-market correction.”
The Boston Herald. “‘I think the message here is as long as they don’t have to sell their homes (they haven’t lost their jobs) they can wait it out and at some point, the underlying demand for housing will return and they will do OK,’ Retsinas said. ‘I think this was a wake-up call. At the base of this is that homes are for living in, not investing in.’”
“The question of making homes and apartments more affordable, he said, is complex.”
“‘It’s not just the cost of housing; it has to do with wages and the disconnect between the labor market and the housing market. By that I mean, in our economy, the fastest growing jobs are often in the service sector, which traditionally has paid lower wages,’ Retsinas said. ‘We’ve got to find a bridge between the labor market and the housing market. I’m not recommending anything, but to extrapolate, it means that one of the parties that needs to get engaged in the issue of affordable housing is employers.’”
“According to the report, ‘the problems in the housing market put an end to the big lift that the economy enjoyed since the 2001 recession….Though builders cut back on housing starts, the number of vacant homes for sale rose by more than 500,000 from the fourth quarter of 2005 to the fourth quarter of 2006 and continued to rise in the first quarter of 2007.’”
“‘Until some of the excess inventory is absorbed by the demand cycle and credit conditions stabilize, housing will continue to struggle and home prices will fall in more areas,’ the report said.”
The Toll Brothers Form 10-Q. “Net income in the six-month and three-month periods ended April 30, 2007 was $91.0 million and $36.7 million, respectively, as compared to $338.8 million and $174.9 million in the comparable periods of fiscal 2006.”
“We recognized $216.6 million and $119.7 million of inventory write-downs in the six-month and three-month periods ended April 30, 2007, respectively.”
“Our backlog of $4.15 billion at April 30, 2007 decreased 32% compared to our backlog of $6.07 billion at April 30, 2006. Backlog includes the value of homes under contract but not yet delivered to our home buyers.”
“Beginning in the fourth quarter of fiscal 2005 and continuing throughout fiscal 2006 and into the third quarter of fiscal 2007, we have experienced a slowdown in new contracts signed. We believe this slowdown is attributable to a decline in consumer confidence, an overall softening of demand for new homes, an oversupply of homes available for sale, the inability of some of our home buyers to sell their current home and the direct and indirect impact of the turmoil in the sub-prime mortgage loan market.”
“We attribute the reduction in demand to concerns on the part of prospective home buyers about the direction of home prices, due in part to many home builders’ advertising price reductions and increased sales incentives, and concerns by the prospective home buyers about being able to sell their existing homes. In addition, we believe speculators and investors are no longer helping to fuel demand.”
“Non-speculative buyer cancellations are also adding to the supply of homes in the marketplace. In the six-month and three-month periods ended April 30, 2007, home buyers cancelled 828 contracts and 384 contracts, respectively, or approximately 24% and 19%, respectively, of the gross number of contracts signed in the respective periods.”
“In the comparable periods of fiscal 2006, homebuyers cancelled 371 contracts and 205 contracts, or approximately 9% of gross contracts signed in each of the periods. In the quarter ended October 31, 2006, homebuyers cancelled approximately 37% of the gross contracts signed.”
The Financial Times. “In a new report, Standard & Poor’s says if the UK housing and mortgage markets weaken, it believes lenders with high exposure to specialist mortgage lending could feel the impact.”
“S&P pinpoints subprime mortgages as a ‘new and untested’ part of the UK market where if there were problems ‘the scale of potential losses could be high.’ although it acknowledges that the market differs from that of the US, partly because the relaxation of lending criteria has been ‘less severe.’”
“Nonetheless, lenders offering subprime mortgages were keen to increase market share as profit margins are attractive and ‘credit standards are under pressure.’”
The Contrarian Chronicles. “This week I’ll turn my attention to those who have been gullible enough to buy the sliced-and-diced mortgages that found their way into collateralized debt obligations (CDOs) and other exotica.”
“At a recent presentation to pension managers, a Bear Stearns shill described the bottom rung of the CDO ladder as follows: ‘It has a very high cash yield to it…I think a lot of people are confused about what this product is and how it works.’”
“At the presentation, she likened CDOs to financial institutions in terms of having strict oversight: ‘The outside agencies that oversee these structures are the rating agencies,’ she said.”
“However, her comment drew the following from Gloria Aviotti, managing director of global structured finance for rating service Fitch: ‘It’s not accurate. We don’t provide any oversight.’”
“That view was echoed by Yuri Yoshizawa, group managing director of structured finance at another rating service, Moody’s Investors Service: ‘It’s a common misperception,’ he said. ‘All we’re providing is a credit assessment and comments.’”
From Bloomberg. “American International Group, the world’s largest insurer, will help subprime borrowers keep their homes in a deal with regulators who said the company’s banking unit had made inappropriate loans.”
“AIG will add as much as $50 million this quarter to the $128 million it previously set aside to administer new, more affordable loans, refund fees and hire a consultant to reform mortgage policies, Kevin Petrasic, a spokesman with the U.S. Office of Thrift Supervision, said Friday.”
“‘Loans were made based on underwriting criteria we didn’t think were sufficient,’ Petrasic said. ‘We’ve directed the institution to identify borrowers who were put into loan products that were inappropriate for them and to refinance the loans.’”
“The loans covered in the agreement with AIG were mostly adjustable rate mortgages, Petrasic said. They were originated from July 2003 through May 2006 by Wilmington Finance, which is owned by AIG.”
National Mortgage News. “I recently asked my broker contact how the Long Island market was holding up. This is what he wrote: ‘Not good at all is the right answer….I can’t wait for these mortgage companies that advertise 1% mortgages to disappear. The ads are clearly misleading and the reps never adequately describe the downside of neg-ams.’”
“‘Option ARMs are appropriate for a small portion of the market and clearly inappropriate for anyone looking for long-term predictability in their mortgage payments. The next time a bank blames the mortgage broker for the foreclosure mess now looming let’s remind them of the wholesaler ads touting 4.5% YSP.’”
“The biggest rout in the Treasury bond market in three years is making Wall Street’s bond bulls more bearish. Investors are ‘throwing in the towel,’ said Robert Auwaerter, who oversees about $350 billion as head of fixed- income investments at Vanguard Group.”
“‘Momentum could be toward even higher yields in the next couple weeks,’ said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit. ‘If rates rise overseas, they will become competitive for the U.S. and therefore rates here have to rise.’”
“Bill Gross, manager of the world’s biggest bond fund, is sticking with his forecast for the Federal Reserve to lower interest rates in a ’schizophrenic’ market.”
“‘We’re having a housing bust,’ said Gross. ‘To the extent that continues based on these higher interest rates and economic growth stays weak, inflation is a little lower and ultimately the Fed may lower six months down the road.’”
“‘It is becoming increasingly clear that the market will not return to a day where everyone who worked could afford a place to live,’ said Nicolas Retsinas, director of the center.”
“House prices would have to fall a dizzying 35 to 44 percent, to the $224,000-to-$262,000 range, before being affordable to a broad swath of the population, as they were in the mid-1990s in the aftermath of the previous housing-market correction.”
Help! Can anyone find the train of logic here? The second sentence is an utter non-sequitor.
Here I live in Mass, and i read some of the comments in the boston globe article, and the amount of dimwitts that posted is amazing. It is different here because it is desireable, it is MA, it is the way it is and is not going to change. Those brave enough to tell it like it is are told to put up or shut up. Nope, prices are nog going to go down, at least while granny lives because she will not give the family house away. It is so pathetic, that I am sick of this state, but stay for family reasons….
On the issue of dimwits, I’m not sure it is different anywhere. If someone lives in a place where the majority of the people are rationale, moderate, etc., let us know. California doesn’t qualify.
Or put another way… it’s different here - just like everywhere else.
‘It is becoming increasingly clear that the market will not return to a day where everyone who worked could afford a place to live,’ said Nicolas Retsinas, director of the center.
A simpler explanation is that Nick Retsinas is a retard.
“Retsinas predicted the US and Massachusetts housing markets will begin to rebound late this year or in 2008.”
*******
It appears that based on the above, which is in the last paragraph of the story - Retinsas must be basing his assumptions on this assumption (and perhaps interviewing for the NAR talking head “economist” job - and/or be well funded by REIC members, as others have pointed out).
OK, Kimberly - time to find an alternative point-of-view with regard to “market recovery” and when house price-to-income multiples will be more sane.
These are the people that fund this study
84 Lumber Company
AFG Industries, Inc.
Andersen Corporation
Armstrong World Industries, Inc.
Beazer Homes USA, Inc.
BlueLinx Corporation
Boise Cascade, LLC
Boral Industries
The Bozzuto Group
Bradco Supply Corporation
Builders FirstSource
Building Materials Holding Corporation
Canfor Corporation
Centex Corporation
CertainTeed Corporation
Champion Enterprises
Countrywide Financial Corporation
Crosswinds Communities
Fannie Mae
Fortune Brands Home and Hardware
Freddie Mac
GAF Materials Corporation
Georgia-Pacific Corporation
Gibraltar Industries
Hanley Wood, LLC
Hearthstone
The Home Depot
Hovnanian Enterprises, Inc.
Huttig Building Products, Inc.
Jeld-Wen
Johns Manville Corporation
KB Home
Kimball Hill Homes
Kohler Company
Lafarge North America
Lennar Corporation
Louisiana-Pacific Corporation
Marvin Windows and Doors
Masco Corporation
Masonite International Corporation
McGraw-Hill Construction
Meritage Homes Corporation
MI Windows and Doors, Inc.
Moulding and Millwork, Inc.
Move, Inc.
National Gypsum Company
Oldcastle Building Products, Inc.
Owens Corning
Pacific Coast Building Products
Pella Corporation
Pro-Build Holdings, Inc.
Pulte Homes, Inc.
Realogy Corporation
Reed Business Information
Rinker Materials Corporation
The Ryland Group
S&B Industrial Minerals S.A.
The Sherwin-Williams Company
Simpson Strong-Tie
Stock Building Supply
Temple-Inland
UBS Investment Bank
Weyerhaeuser
Whirlpool Corporation
Exactly. These are the hands that feed the Harvard real estate center.
Harvard University’s Joint Center for Housing Studies
What’s with all these schools having real estate departments, or centers, or institutes, or whatever they want to call them? Isn’t it enough to just have an Economics dept.? Are these getting funding from REIC sources? They seem to all be staffed by shills.
While they’re at it, what about a Department of Used Cars?
I don’t know about other institutions, but here at Washington State University-Pullman (land grant institution for WA state) our Washington Center for Real Estate Research, led by a PhD social scientist, is funded almost entirely by WAR and is unabashedly a real estate cheerleader (surprise, surprise, surprise as Gomer would say).
This is basically on par with agronomic researchers who get all their money from pesticide or fertilizer companies (yes, this happens too). Universities are quite willing to sell their souls for a big enough buck.
Big, reputable universities tend to have serious, long term, ongoing problems with housing all of their people amidst all the growth and gentrification they generate around them. There is also an interesting ongoing tug of war between the planners who would go in with heavy handed methods versus the Jane Jacobs devotees who want dense and diverse city cores.
Exactly who funds all of this is often complex. Remember that it was the Bank of America as part of their research into lasting value that came to the conclusion that sprawl development was a huge waste and had to be reigned in.
That paper and some other similar urban oriented stuff came directly from funding by big lenders.
Housing markets are a very big deal, the product is extremely stubborn and slow to make and move by modern standards, and even small changes to housing markets can have enormous social implications.
“It is different here because it is desireable, it is MA, it is the way it is and is not going to change.”
This is the same crap I ran into with a family member in WA state. It is best described as extreme denial.
I think it means, “all of my friends and I are HELOC’d through the roof and if housing drops that much we are screwed” Hence inconceivable does not mean what he thinks is does.
Slipping in the Princes Bride reference, nice.
What he’s saying is, “It’s different this time, because I said so!”
It’s completely different this time, it is waaaaay worse this time, let him wish for a feeble 30% reduction…I doubt he will get it.
well off to airport, will gone a while, will report from Middle Tennessee next week when I get back.
his sentence makes sense, as long as you start from the tenet:
Housing prices never fall.
once you start there, then you realize that incomes are not going up, then the only rational conclusion is that people with jobs will no longer be able to afford a home.
Clearly, the issue is the first tenet “housing prices never fall”.
Once you remove that silly idea, you realize that this is exactly what will happen.
“‘It is becoming increasingly clear that the market will not return to a day where everyone who worked could afford a place to live,’ said Nicolas Retsinas, director of the center.”
So WHO pray tell is going to occupy all of the vacant inventory currently on the market? Particularly given the currently high levels of home ownership? Do they still teach logic at Harvard?
You are dead on Clouseau, this perverse reasoning starts with the assumption that housing prices couldn’t possibly fall… certainly not something astronomical like 30-50%. I suppose this fellow has never heard of that country across the Pacific called Japan!
As others have posted, he needs not to go that far to find the answers he seeks. He just needs to look out the windows of those fabled ivory towers he inhabits and look around circa 1990-1994. That previous event was mild compared to the current one, and even back then naysayers like us were vilified in the court of public opinion.
In other words, It already happened here you Moron, what is going to keep it from happening in the same neighbourhood again?
Woops the moron part was for retsinas, not HBB blogers.
It seems to me that the key quality you need in order to be quoted as an expert in the MSM these days it to be devoid of any common sense and to exhibit it for all the world to see. Once this happens you get quoted in the press even if you open your mouth and yawn.
Why go to Japan, just open up the good ole Real Estate sales history for Orange County from 1989 through 1993 and check out the blood letting on prices then. Ahh…good ole 1993 I remember it back then I could buy a coke for a nickel and walk to school 10 miles in the snow, so many forget these long time back events. We didn’t have ipods we had walkmen, if kids only knew the frustration of the etch a sketch as a laptop.
I guess the only real thing that has come out of this that we didn’t know for sure before and has been proven now, people can remember back more than 4 years max, and MSM is proven to be liars, and economists are paid shills who spew lies instead of facts. I had serious doubts about the MSM before, however this was the icing on the cake, and I use to have respect for economists.
“It is becoming increasingly clear that the market will not return to a day where everyone who worked could afford a tulip,’ said Nicolas Retsinas, director of the center.”
Tulip prices would have to fall a dizzying 35 to 44 percent….before being affordable to a broad swath of the population…”
sfh fell 30% in NE last time
so why is it so hard to believe
“House prices would have to fall a dizzying 35 to 44 percent, to the $224,000-to-$262,000 range, before being affordable to a broad swath of the population, as they were in the mid-1990s in the aftermath of the previous housing-market correction.”
What’s being ignored, is the fact that price per square foot tells a much different story than the median. Prices are already off 25% in some areas of the country. I had a realtor in WA print up the recent sold comps, and, when compared to list prices, the difference is night and day. Prices are tanking.
Pointed this out before, but the Harvard center is heavily subsidized by RE industry (and has published pro-boom reports before)
You needed to include this part of the article where Restinas also says the following:
In the late 1990s, house prices “raced way ahead of incomes,” Retsinas said. While the recent price drop “will allow us some time to take a breath,” he added, “it won’t make the race even again.”
Retsinas said demand will come partly from Boston’s rapidly growing immigrant population , which competes for the limited supply of homes and puts upward pressure on prices. The area’s foreign-born population makes up 17 percent of all homebuyers, more than the nation as a whole.
Even buyers with six-figure incomes have trouble finding housing in the soft market. Acia Adams-Heath and Raymond Heath together earn $110,000 a year but have not been able to identify an appropriate three-bedroom home in Dorchester to purchase so that they and their two children can be near their extended family.
They saved $3,000 for a down payment and calculate they can afford no more than $250,000. In that price range, the houses they have seen either were in terrible condition, with mildew for example, or were unsuitable. One had a third bedroom in the basement where there was also a wet bar– “not really conducive” to raising a teenager, she said.
“Maybe if I keep searching. My dream house hasn’t come on the market,” she said.
They saved $3,000 for a down payment
wow. They sure are good savers…
And they earn $110,000 combined in a region where it’s estimated that a family of four needs $38,000 to live.
AND THEY’RE HAVING TROUBLE BUYING IN DORCHESTER?!
Un-fricking-believeable!
And they earn $110,000 combined in a region where it’s estimated that a family of four needs $38,000 to live.
Huh? A family of 4 could live on $38,000 if they did without luxuries like heat, food, and clothing.
AND THEY’RE HAVING TROUBLE BUYING IN DORCHESTER?!
If you don’t want crackheads for neighbors and bullets flying through your windows every night, you have to be picky.
“One had a third bedroom in the basement where there was also a wet bar– “not really conducive” to raising a teenager, she said.”
They are too picky. My (parents’) house had a wet bar just outside my (and my younger brother’s) bedroom. It certainly was conducive to raising me properly (how else does one learn to mix a mean marini these days?)
Retsinas is not an economist, so don’t expect him to spout economically consistent logic.
As I mention above - this kind of logic would certainly endear him to an NAR membership in search of a “new Lereah”.
Nocholas retsinas is an RE schill. Basically a David Lereah with a job at Harvard.
A couple years ago, when it was infinitely clear where this RE debacle was heading he went on one of the first bubble shows, a town meeting thing on CNN that was examining the issue of whether there was a bubble or not. Of the whole panel, with the possible exception of the President of Coldwell Banker (or some RE agency), Retsinas was the loudest, shrillest bull on the stage.
The guy is to be ignored, or listened to as one would listen to David Lereah.
“I’m not recommending anything, but to extrapolate, it means that one of the parties that needs to get engaged in the issue of affordable housing is employers.’”
No one doesn’t. Just because someone ‘wishes to have a house’ doesn’t entitle them to have one. They need to learn how to earn one!
But of course all of these employers have all this money just laying around to help support the housing prices. They will happily give their employees a raise in the form of housing assistance because after all, it’s the least they can do.
Holy smokes, where do they find such dolts to quote? Does this guy actually get paid to be such a dunce?
A 30% decline will be getting off light,imo.
It’s not about entitlement; this fool thinks that rather than a simple market price correction, affordability problems should be solved by employers actively subsidizing housing. Ridiculous for too many reasons to list, and the idea destroys any credibility Retsina may have left.
I don’t know - if we’re going back to 19th century standards of income inequality and robber baron business ethics, we might as well go back to when lots of workers lived in company housing and shopped at the company store.
I think that’s the bigger point here. I recently read that they built “affordable housing” in Anaheim for Disney workers who couldn’t afford rent. Why should the taxpayer have to foot the bill if Disney won’t pay a decent wage? As long as salaries remain stagnant, RE prices are going to have to come down 35 - 50% in order to meet the 2.5x income that should be required.
The city *wants* to build affordable housing near Disney, and Disney doesn’t want it anywhere near them.
UC does this in the form of building it’s own “affordable housing” near the campuses. It also has a seed money program where those that qualify can get RE loans backed by the UC regents for 3.% approx. Of course both of those programs are reserved for employees makin 65k or more.
Given the profit margins of builders (and the lack of desire by the university to keep such profits), that isn’t such a poor idea.
The loans are loans from the University endowment or retirement funds and are at a floating rate a bit above what the University would pay for its own money—the cash cost to the university is essentially nil. The professors are getting access to the credit rating of the University in effect, and since the univ. pays the professors, the university takes virtually no credit risk.
True but I still think it’s sh!tty that all the programs are for the people that need it the least but that’s CA for you.
Yep
It’s called the “sharecropper society”.
We are morphing from a nation of savers and investors
who actually own something, to a nation of spenders
and debtors, who forever rent (money).
Once again, the dolts at Harvard are giving the dolts at George Mason U a run for their money in the “Who’s the Dumbest Yet” sweepstakes.
does the government subsidize housing already for the military and therefore artificially inflate prices anywhere they have service people in housing and in rentals - makes it hard for the ordinary person making under 30,000 year to live
He’s a genius. If all employers give their employees a 200% raise then the problem solved. That was easy.
And best of all, it couldn’t possibly affect inflation!!!
Oh, or could it?
Employers have already given up on pensions and health care. You think they give a rat’s ass about employee housing?
They don’t. Read this book and marvel at the wonders of current employee housing:
http://cheapmotelsandahotplate.org/
“At the presentation, she likened CDOs to financial institutions in terms of having strict oversight: ‘The outside agencies that oversee these structures are the rating agencies,’ she said.”
“However, her comment drew the following from Gloria Aviotti, managing director of global structured finance for rating service Fitch: ‘It’s not accurate. We don’t provide any oversight.’”
I’d argue that the rating services don’t even provide a very good assesment of risk to begin with. The lower tranches of the mortgage pools could easily get totally wiped out with even a minor recession. I know as an engineer I work with math more than the average person, so I’m not surprised that regular folks don’t understand the CDO concept, but the financial companies make their living analyzing this stuff, they should have seen straight away that these mortgage pools were desperately reliant on low interest rates and rising housing princpal. A poor job market would make things even worse. None of these conditions are particularly uncommon over long periods of time either. The ratings agencies just totally dropped the ball here. IMHO, that is.
Italian lawmakers on Wednesday criticized major U.S. credit rating agencies, saying they ill-served international financiers by failing to properly evaluate the risks of investments tied to residential mortgages.
http://www.forbes.com/feeds/ap/2007/06/06/ap3796225.html
“Italian lawmakers on Wednesday criticized major U.S. credit rating agencies, saying they ill-served international financiers…”
I would hope that International Financiers would be able to make a connection between median household income and median home prices, and the data is readily available. This article is just a primer for the big people to be bailed-out by the little people. Got Astro Glide?
Climber,
CDOs, MBS’s, bonds are to ratings companies what FBs are to realtwhores and mtg brokers.
Read Frank Partnoy’s book F.I.A.S.C.O. for some examples and a simple explanation of this.
“The lower tranches of the mortgage pools could easily get totally wiped out with even a minor recession.”
I totally agree with your perception of the CDO/REMIC market- the rating agencies did not know how to properly evalute them, so they rated them too highly. However, I should point out that the lowest tranches are typically kept by the securitizing company and not issued (probably BECAUSE they are too flaky to sell). But your point still holds for the Mezzanine (middle) tranches.
If you look at most CDOs, almost all of the principal is in the highest tranche, so they aren’t really all that secure. For instance, a 20% foreclosure rate along with a defaulting servicer would definately eat away at the top tranche, and those conditions are not all that unimaginable.
“If you look at most CDOs, almost all of the principal is in the highest tranche, so they aren’t really all that secure. For instance, a 20% foreclosure rate along with a defaulting servicer would definately eat away at the top tranche, and those conditions are not all that unimaginable. ”
I disagree.. even if you had a 20% foreclosure rate (and that is HUGH!) you would still be able to collect something on the morgage… Assume 100% financing on the foreclosure, even with a 40% drop in value you would recoup 60% of the loan… so a 20% forclosure rate would only drop the value of the cdo about 8%
“For instance, a 20% foreclosure rate along with a defaulting servicer would definately eat away at the top tranche, and those conditions are not all that unimaginable.?”
Really? Top AAA tranches are about 50%. This means there would have to be about a 50% total loss on the pool before payment to AAA were abrogated. Smaller losses and delays in foreclosure recovery might reduce in delayed interest payments.
Even in a foreclosure SOME amount of capital gets back. If you had 50% foreclosure rates and every single property were burnt and salted with radioactive waste (rendering final value zero), then that’s when the top tranche would start losing.
“Really? Top AAA tranches are about 50%.”
This is not correct. Example of AAA tranches being 85% - NovaStar Mortgage Funding Trust, Series 2005-2.
The way the securitizers make their money is by the alchemical transformation of as much of their mortgage pool as possible into AAA securities. The AAA top 1 or 2 tranches should have 2/3 to 85%+ of the principal.
Second, CDO top tranches will go toiletward not initially from failure to receive principal payments. They will start to die when the guanantor/servicer goes into default. 20% foreclosure should do that handily. The whole idea behind the CDO/REMIC concept was to make the financial characteristics of a mortgage investment closer to those of a high rated corporate bond. The servicer folding will scare the cr*p out of the big institutional investors. Recently you might have noticed that several securitzers were unable to get good prices for their bonds and held them instead. Oh, and I would not be the least bit surprised to see Alt-As take a 20% foreclosure rate.
If a securitizer could only get 50% of the principal derivitized into AAA tranches (in 2002-2006), it would not be worth making the derivatives. Shoot, in 2002-2006 you should be able to get more than 50% of principal based on a 2nd mortgage pool into AAA.
As an aside, talking about bad news coming in clusters, we have rising interest rates. A good number of the top (1st lien, AAA) tranches are fixed interest (sort of a coupon) bonds, at rates of say 7%, 300+ months to ‘maturity’. These must be taking a big hit now.
I think the Globe sees the future. Half the people living in shanties on the street, with half the houses empty because the half on the street cannot afford the high prices that continue to be charged. Some houses will stay in families of decades empty, because the owners absolutely refuse to sell for less than five times income no matter what.
‘Owners’ are in fact debtors and will have no choice but to sell or default. Massive mortgage resets begin this month and continue till year’s end. Foreclosure rates will be through the roof in 6 mth’s time, making current rates look like the good ‘ol days.
Precisely Betamax and this is the “sand in the vaseline” that this dolt overlooks in his analysis.
Here’s one way of avoiding the consequences of foreclosure, leave the country! Casey Serin has fled the US!
http://exurbannation.blogspot.com/2007/06/hes-what.html#comments
This guy is an ID10T! Australia has a valid extradiction treaty with the US. Hope that he comes back soon, would love to see him right next to bubba for the next 10 to 15 years (no offense bubba)
Idiot, I don’t think that even scratches the surface, a good start though.
Keep that deadbeat away from me.
Why should we believe this post? Any one an expert on the son-fo-sam laws? This kid should be in jail.
“House prices would have to fall a dizzying 35 to 44 percent, to the $224,000-to-$262,000 range, before being affordable to a broad swath of the population, as they were in the mid-1990s in the aftermath of the previous housing-market correction”
Once again the question is whether that means 35% off by 2008 from today’s “value” or flat prices through 2014. I think that owners that stay in their houses will “mentally hold” the value steady, telling themselves for the next 7 or 8 years that they live in an X dollar house rather than admitting that the value dropped. Unless they have to sell, refi, or HELOC, they will probaby be able to live with this illusion, but all those dreams of doubling the house value for retirement money in 4 years are over.
Yup, inflation is a stealthy thief. Of course, when 90%+ of the populace is innumerate, it’s easy to see why the government would prefer it to big nominal price drops. The question is, can they pull it off? The current monetarist-controlled Fed seems to hate wage inflation as much as they hate asset deflation. Without the former, it’s hard to prevent the latter.
A decent portion of the population 20-40% would substantially benefit from inflation (as their debt servicing costs would decline with high inflation).
Baloney. In the ’70’s, everybody’s mortgage was fixed, and there was little consumer debt at floating rates. If inflation goes up, so do rates. Disaster for today’s homeowners.
DC I guess you still consider a Variable Rate Home-debtor an “owner” ….. semantics. Rates should go up, FED is keeping them artificially low to reduce the debt burden on many levels from the so-called home debtor with a toxic mortgage to the CPI (keeps the entitlement raises down.)
I call huey on your baloney.
I’m with you on this AZ. Many people will just end up staying put and slowly, but surely the idea of housing as a short-term speculative investment will disappear. The transaction costs and expenses associated with real estate will kill sentiment if appreciation is non-existent for an extended time.
“‘It is becoming increasingly clear that the market will not return to a day where everyone who worked could afford a place to live,’ said Nicolas Retsinas, director of the center.”
Oh, THAT makes sense? Working people can’t afford a place to live!! It’s the new American nightmare. You work, work, work…but where do you live…you can’t afford a place…so, do you live in your car or in a cardboard box or on a friend’s couch?
I used to live in a town that was dominated by a huge oil refinery. For dozens of blocks all around the refinery there were thousands of cute but small houses on little lots. They were built decades ago for the workers. The average worker could actually afford the average smallish plain but decent little house. Amazing concept!
So, how about America’s Real Estate Industry pull it’s big fat head out of it’s big fat ass and look at reality. They just now figured out that not every american can afford a freaking huge mansion. Really sucks for them because there are big honking profits to be made selling mansions.
So how about we just go back to the good old days when the average Joe and Jane really could afford a decent little house. The fly in the ointment might be the fact that Joe and Jane now believe fervently that they DESERVE a 3000 sf behemoth of a house filled to the rafters with toys and goodies. Might take a decade or so of pain before they adjust their sights towards a more realistic goal.
Almost the point I was going to make. It’s just a sloppy, misleading comment that “‘It is becoming increasingly clear that the market will not return to a day where everyone who worked could afford a place to live,’ said Nicolas Retsinas, director of the center.”
No. I’m sure what he meant to say was “…who worked could afford to buy a home…” And even that is BS. I worked for a bunch of years and it took me some time to save the 10% for the down payment in 2002. For those of you who haven’t heard of a “down payment”, it’s when you… Just kidding.
Got strawberry-banana Bubble Yum?
MrBubble
joint cheif must be smoking a joint- it’s tanking biatchhhhh
Harvard University’s Joint Center for Housing Studies.”
Again, because it’s so appropriate: Warhol meant to say “In the future, everyone will have a house for fifteen months…”
For flippers, it’s still 15 minutes. Well, if they can find a GF to take the house from them. Not bloody likely these days.
IAT
Boston home buyers and sellers are welcome to bid or to ask whatever they damn well please, but it does not change the fact that rents and incomes are what they are. While this (temporary) disconnect is annoying, this is not a social problem.
A social problem would be if rents were skyrocketing…but they’re not. They are flat or going down (granted, this is anecdotal evidence from a small sample size) in nominal terms. There are plenty of places to live in Greater Boston, as our population has been declining over the past decade. On top of this, you have the older generation of folks dying, adding houses to the rental supply (since it takes forever to sell now).
Anyway, I’m not sure why more attention isn’t paid to the fact that Boston is actually an “affordable” place to live, provided one rents. You can live in a nice, crime free place close to Boston (1500 sq feet or so) and drive 15 minutes (we pay $40 per month in gas–for two cars!) to work for no more than 1200-1400 per month. I wouldn’t call that a problem, especially when one can make $100,000 as a household fairly easily here.
Bingo. This is about “easy money,” nothing more, nothing less. You can’t lever, or speculate, on rents. Supply, demand and ability to pay, from earned income. That is what determines the price. There is no housing shortage, in any bubble market of which I am aware.
That’s nice for you with 20 years experience, but the rents are murder if you’re just starting out. Try temping and see how much apt you get for that. I was living in Worcester and spending two hours on the train every day. Two relaxing hours, I admit, but it was still pretty tight.
Young people were fleeing Boston five years ago. There are some jobs, but not enough, and there are too many jobs that don’t pay enough to pay the rent. Why do you think the students cram in at three times what the fire code dictates? Cuts the rent…
Agree with you. We rake in around 120K per year. Rent is about 1100 per month in a Boston suburb for a 2-bed room apartment. Very convenient and quite affordable. I don’t know why all this big noise is made about unaffordable housing here. House prices are insane, yes, but why anyone MUST buy them is beyond me.
MA is perfectly affordable, provided one rents … AND PROVIDED ONE DOESN’T HAVE KIDS. Add kids to the equation and it changes things in a way you would truly not believe. The standard of affordability isn’t determined by what a childless couple in their late 20’s / early 30’s can manage — that should be a cakewalk in any part of the country.
will they be called “peoples loans ” ? agencies w soviet sounding names
We’ve directed the institution to identify borrowers who were put into loan products that were inappropriate for them and to refinance the loans.’”
Yes, of course, you can always rent. But, if that is the only feasible option, then where we have arrived, is the effective end of the American Dream. The property and real wealth in the hands of a few. Goodbye middle class, and even, upper middle class. A six-figure income, becomes essentially the same as everything below it, in terms of what you can get for your dollar.
C,
I respectfully disagree. Owning a house is not the American Dream, unless you buy into the marketing of NAR. Personal freedom is the American Dream, supported by Constitutional protections.
“pursuit of life, liberty and property”
“property”
And property does not include cash and liquid investments??
and serfdom serfdom serfdom solidarity foreeeeevvvverrr!
‘where we have arrived, is the effective end of the American Dream.’
You are assuming that landlords will subsidize rents indefinitely. Where we are right now, IMO, is the temporary situation where speculators and LLs are slowly realizing that trees don’t grow to the skies. Hence the record inventories all over the US that are wildly over-priced.
I doubt we are moving to a system where there is a landed class and serfs. We have *way* too much land and housing in this country for that to happen within the next century at the least. (Hence the fact that homedebtors now can’t raise rents.) No, this will correct, but it may take time a decade or so.
I mean, where is the return to housing? Why volunteer to be a member of the landed class? Purchase a $500,000 house from the 1920s and save owner’s equivalent rent of $1300 a month, $15,600 a year, minus maintenance and insurance? Awful, simply awful, returns, and that’s if you paid in cash. If you financed it, and pay 6% over 30 years, God help you.
and taxes!
End result of everyone working being about to afford house buying at the current high regime…..in about 10 years 50 million empty houses on the market….and families living in vacant lots in Hoovervilles……
I keep saying very few rich at top, a neglible middle class and a lot of poor on the bottom….good recipe for social revolution….add in 20-30 million illegals….you have the makings of something that is a “Mad Max” world.
Prices will have to come down or wages will have to go up. You cannot have a world with increasing housing, energy and food costs and starvation wages. It will crack and it will bust.
An interesting thought: A good RE collapse across the fruited plains of SoCal could do more to deport illegal aliens than anything the government could do.
Let’s say you can’t find under-the-table construction work anymore. You (and your two friends and their families) are upside down on your $600,000 Downey fixer, you’ve wiped out your California non-recourse protection by a refinance, and you’re dodging collection agencies. The old homestead in Michoacan starts looking awfully good, especially with corn prices being driven through the roof by ethanol demand.
safe_as_apartments, check out my post in the Bits Bucket regarding the return on housing. The property I purchased (4-family in SE Mass) in 2004 for $330K was purchased by my neighbor for $18K in 1974. That is an appreciation of over 1800% in 30 years. The rents collected increased over 600% over the same 30 years (while going from a 6-family to a 4-family).
I’m not saying past performance is any guarantee as to the future, but those numbers say quite a bit to me about the long-term value of ownership.
Long term, yes. But I still have some questions.
Are you adjusting for inflation? CPI or the actual? How about the next 30 years, inflation-adjusted?
Any predictions?
SF Jack, I wasn’t adjusting for inflation. The price he paid in 1974 was $18K. The price I paid in 2004 was $320K. Using an online inflation calculator (http://www.westegg.com/inflation/), his $18K in ‘74 was equiv. to $73.8K in ‘04. That is an inflation adjusted gain of 447%, or an average of 14.9%/yr in appreciation.
As far as rents go, I can only compare gross annual to gross annual. It isn’t a great comparison since he paid all utilities and I pay only water/sewage. His cost of capital was around 14%, while mine is 5.8%. Bottom line, his net was lower on a cost basis then mine is. Based on my rough calculation, his gross annual income was $4.9K while mine would be $33K (based on fully rented, not owner-occupied). That is an inflation adjusted gain of 161% in income, or 5.4% annually.
As far as future predicitions go, I have no idea. I am planning for flat or negative appreciation for at least the next three years and rent increases of no more than 2%. When I purchased the property, it was for cash-flow, not appreciation, as I don’t plan on selling for at least the next decade.
If you purchase positive cash-flow, keep your costs as fixed as possible, only buy decent locations, stay well capitalized (i.e. savings surplus), and learn to time your entry in the market (I need to improve in this area), you will do well. It seems a good hedge against inflation and a good way to diversify your investment portfolio. If you follow those rules, long-term you will be ok regardless of the current market conditions. If you purchased it right, the lowest rate of return you’ll receive will be the interest rate on your note, regardless of current market value.
If I were in the market to purchase right now, I would be looking for 3 and 4-family foreclosures in decent urban neighborhoods that have positive cash flow and are either deleaded or post 1980 construction (good luck in Mass with that). Shoot for a cap rate >6% and/or purchase price of 100 x gross annual rent. Don’t buy rental property in areas with a glut of new condos and stick to more urban areas as I think they will appreciate long term given the trend of increasing energy costs and a shift to increasing public transportation. (Commuter rail project in my city is about 7 years out)
Sorry, that should be $330K purchase price…
Isn’t it just that houses, one type of property, are unaffordable right now? Aren’t there other types of property? Am I naive in thinking that if a company owns stuff and I own (a small piece of) the company, then I still own property? I’m sure that somebody will shoot that theory down. But once affordability comes back, many folks on the blog will be able to buy. As long as you are sitting on a pile of cash, you’ll be OK to buy in a few years. No?
That is until the Lord Humongous rides out of the wasteland and tells you, “Just walk away and you’re lives will be spared!”
Just kidding, Chicago RE and other non-tin foilers! Check out Rob Riggle’s piece on The Daily Show about rising gas prices last week. Leathers and feathers. Pretty funny stuff.
Why? If I’m making twice the median wage and paying half the cost for living, am I considered a pauper? I must be missing something.
The property and real wealth in the hands of a few.
You’ve got it backwards. If you rent a house out to someone who cannot afford to buy it, you are losing money, because the renter is paying less than it costs to buy the place. It’s a transfer of wealth from the owner to the renter. You’d be better off selling the house and investing the money in T-bills - which is exactly why the situation you described cannot exist in the long run.
Geez, why not just say “buy now or be priced out forever?”
C’mon, now, this is Econ 101 — basic supply and demand. The market is the market, and either wages have to rise or prices have to decline.
So they built a bunch of $500K+ McMansions and “luxury” tower condos when the market was for $150K 3+2’s?? Guess what — those McMansions and lux condos will eventually be going for $150K+, because that’s where the money is. Sure, it’ll take a while, but it’ll happen. The builders & FB’s just have to lose their shirts first.
Nobody makes money sitting on empty property or renting at a loss.
“‘Momentum could be toward even higher yields in the next couple weeks,’
Not good for any kind of summer buying relief. I still get my daily rates - 7% 30yrfxd is just about back for the first time in a long time.
IMO rates will start really moving north from here on out. Bring’em on!
Just compared #’s in Placer County, California for the years 00/05
Sorry if this has been done before, but its so fun…..
*Median Income 00′ - $57,535
*Median Home Price 00′ - $232,800
Median Income 05′ - $62,080
Median Home Price 05′ - $492,000
Interest Rates were about 2% higher in 00′
Nothing to see here, move along…..everything is fine!
Ahhh… yes.
Mid-year 2003 to mid-year 2004:
1% FFR courtesy of Alan Greenspan!
And on 24 Feb 2004, when mortgage rates were at all time lows, AG said, signalling to the REIC and their kin (and I paraphrase):
“It’s all good! Go ahead use those I/O’s you’ve been dreaming about… homeownership (that you can’t really afford) for everyone!!”
“It is uncertain when the real estate recovery will begin, the report states. ‘Now that the downturn is in full swing, the question of duration hangs over the market.’”
I thought the official word was recovery by year-end 2007?
What is old? 10 years older than you.
What is rich? Anyone that makes more than 10% more than you.
When will there be a recovery? 6 - 12 months from whatever today is.
Heck, in AZ Republic articles on the coming recovery, I can’t even get anyone to address the question, “What does recovery mean?”.
Nobody will ever nail you for saying ‘6 - 12 months from today’, as six months from now, nobody will remember what you said. And by five years from now, your stopped-clock prediction may actually pan out.
First of all it will flatten out, like a calm placid lake with out a ripple or a breeze - just the calm blue water with the reflection of the Douglas firs on it with the snow capped mountains behind it. Then like the mighty eagle in January it will streak towards the heavens again, over the mountains crisp cold peaks and into and above the soft clouds climbing and climbing. I am working on getting a job with the NAR as a spokes person, I figure that is better than their description with the same verbiage.
So, I guess my job here is done (slaps hands) I will see you all in January where we will kick off 08′ with record sales and long lines at Home Depot! Last one to the Hummer dealer is a rotten egg!
nope, 06 right after the Super Bowl
A niehbor just showed me the RE up 3000 % in 50 years
I asked if he wanted to make a bet on this year or next- no dice
Went to a buddy’s “house” a couple weeks ago. The reason I say “house” is because I swear to you it was a Townhome. I asked him and he said it was considered a “house”. This “house” is located in Lincoln, Ca and 300K was paid for it about 1 month ago. Told me I could get the same “house” for 280K with a bunch of dealer concessions. When I said I will wait till they come down do about 199K…. he got pissed. The all knowing told me that houses were not going to come down in price anymore, this is what the builder had told him and I had better buy a house NOW! No yard, no driveway, no sidewalk and HOA…. NO WAY!
What could a place like this be rented for?
Quote from a follow up story in the Morning Snooze about lack of affordable housing in Dallas. Interesting, a person who came her from NY finds it overpriced. No kidding!
“All the new housing I see is excessively expensive,” said Cecelia Madej, who moved to Dallas from New York four years ago. “Is it developers and the city administration’s plan to get the lower and middle classes out of Dallas altogether?
“Not only is it elitist, but it causes an extra burden on the time and finances of these people who have to commute into work from distant locations.”
NY ? sounds like she wants peoples housing - gov will make it right
“‘It is becoming increasingly clear that the market will not return to a day where everyone who worked could afford a place to live,’ said Nicolas Retsinas, director of the center.
House prices would have to fall a dizzying 35 to 44 percent, to the $224,000-to-$262,000 range, before being affordable to a broad swath of the population, as they were in the mid-1990s in the aftermath of the previous housing-market correction.”
I am missing the economic logic here. Is he basically saying ‘real estate always goes up?’
No GS. What he is REALLY saying is, “Too bad if you want to buy in now since we are so great and grand and the rest of you worthless scumbag dweebs wish you could even get paid to take our trash out, but alas, never will, SINCE YOU WILL NEVER, EVER, BE ABLE TO BUY HERE!
Guys like this are either complete idiots or elitist idiots. Not sure which. Go ahead keep asking those 600K prices. Sure, you’ll get ‘em. About 2-3 a month.
No, he’s not. It is the slippery slope variation of it, though…as in ‘Housing prices never go down’.
“We attribute the reduction in demand to concerns on the part of prospective home buyers about the direction of home prices, due in part to many home builders’ advertising price reductions and increased sales incentives, and concerns by the prospective home buyers about being able to sell their existing homes. In addition, we believe speculators and investors are no longer helping to fuel demand.”
The dropoff in demand is all about rational deciders who suddenly have changed their mind. Never mind that many lenders who were offering crazy credit only six months ago have gone belly up.
Darrell, not sure what it would be rented for. Just looking at Craigs real quick I think someone would “ask” 1300-1500. What they are going to get is a different story though. You can get into a real nice condo/apartment for 850-1200 first month free. I dont see much difference myself in the type of living.
“S&P pinpoints subprime mortgages as a ‘new and untested’ part of the UK market where if there were problems ‘the scale of potential losses could be high.’ although it acknowledges that the market differs from that of the US, partly because the relaxation of lending criteria has been ‘less severe.’”
lending criteria, in the UK? even if you don’t have a real identity you can get a 10x fake income mortgage in the London area … no problem at all. Even the ‘fog the mirror test’ is no longer required.
From Ben’s link:
> Bill Gross, manager of the world’s biggest bond fund, is sticking with his forecast for the Federal Reserve to lower interest rates in a “schizophrenic” market.
> The central bank will keep its target rate for overnight loans between banks at 5.25 percent until a housing led slowdown will drop inflation below 2 percent, Gross said today in an interview in New York.
> “We’re having a housing bust,” said Gross, who manages Pacific Investment Management Co.’s $103 billion Total Return Fund. “To the extent that continues based on these higher interest rates and economic growth stays weak, inflation is a little lower and ultimately the Fed may lower six months down the road.”
> Treasury yields are rising because investors are demanding more compensation for the risk of stronger growth, Gross said.
We agree with Gross that we’re having a housing bust. So where will the federal funds rate go? Is the tanking of US treasuries just a parallel to the fall of bonds of other industrialized countries, or is it in part a “fleeing” from the dollar, even if the fleeing means only reduced treasury buying by other central banks?
Gross seems to assume that the housing bust will lead to a recession (I agree) which will reduce inflation (so that the FED can reduce rates). I would agree if the US would still be a creditor nation, but it is far from it now; it is the biggest debtor nation now. A recession in the US could lead to a reduced flow of capital into the US, leading to a falling dollar, leading to more instead of less price inflation, due higher prices of imported goods and more competition for goods like corn from the US. Only goods and services that are made in the US and cannot be exported will show price deflation. In short: Price inflation in oil and food, price deflation in most wages. As a result, the American standard of living would become more similar to other countries’ standard (aka lowered), as it is expected from the more similar productivity. The FED would not be able to lower rates, to avoid a dollar rout.
What does it mean for the housing bust? If the Fed increases the fund rate, the ARM debtors will see double pain, because wages won’t rise accordingly in a recession.
I think you hit the nail on the head with the “lower standard of living” comment. In the long term, that is what this was all about. Get rid of the middle class and make them into debt-slaves, which are much easier to control. Than, lower the standards of living to something awful and the rich can have a grand old time in their gated estates, etc. Typical!