Falling Prices Give Buyers An Incentive To Wait
Some housing bubble news from Wall Street and Washington. The Telegraph, “Housebuilders Taylor Woodrow and George Wimpey, which are due to complete their £5bn merger next week, have warned that the US housing market remains ‘very challenging,’ adding to fears that weakening demand for new homes in America could be pointing to the start of a global slowdown.”
“The companies also expect the UK housing market to slow in the second half of this year, as successive interest rate rises weigh on house buyers. Taylor Woodrow said today that its US order book was 45 percent lower than at the same time last year, with sales falling due to oversupply and concern about interest rates.”
“The housebuilders have been forced to cut prices to encourage cautious buyers, a move that will hit profit margins. Peter Redfern, who will be CEO of the enlarged group, admitted that the US market has worsened over recent months.”
“‘Sub-prime is a factor as is oversupply but there is less available credit than six months ago and rates are higher than at the beginning of the year,’ he explained.”
“Taylor Woodrow also warned that there was no immediate end in sight to the US housing slump. Mr Redfern added: ‘You won’t find anybody among our US competitors or market commentators who will give a firm view on when the market will start to turn.’”
The Washington Post. “Bernard M. Markstein III, senior economist and director of forecasting for the National Association of Home Builders, said the market will rebound in 2008, then start a multi-year recovery.”
“‘It looks like the decline is slowing, so we may be approaching a bottom,’ he said. ‘We’re not quite there.’”
From Business Week. “Like a mirage in the desert, the bottom of the housing slump seems to fade in and out of sight as the year progresses. Home sales jump, and there—you think you can make it out in the distance. Home sales fall, and it’s lost in the haze.”
“‘There’s a lot of competition trying to figure out when things are going to bottom,’ says Morningstar analyst Eric Landry. ‘But it’s unlikely that you’re going to figure that out before any one else does.’”
“In the last week of June, at the very end of what are traditionally the strongest three months for home sales, we learned that both existing- and new-home sales remained sluggish in May.”
“‘Write it off: ‘07 is going to be a bad year,’ Landry says. ‘It [the housing bottom] could be a 2008 event, it could be a 2009 event.’”
From MarketWatch. “In past episodes, it’s taken years for the housing market to bounce back. In the late 1980s-early 1990s slump, it took four years for new-home sales to reach the previous peak; it took nine years for prices to recover.”
“The inventory of previously owned homes rose to a 16-year high in relation to sales in May. The inventory of new homes fell in May, but the overstock still represents more than a seven-month supply, well above the more typical four-month supply.”
“‘The biggest issue facing housing right now is the unprecedented level of inventory and the fact that prices have to date been sticky, to say the least,’ wrote Richard Moody, chief economist for Mission Residential in Austin, Texas. ‘Those price declines are nowhere near sufficient to begin clearing inventory levels.’”
“Falling prices give buyers an incentive to wait before they sign, further depressing sales. For sellers, falling prices could be devastating if they are pressured to sell. Delinquent mortgages and foreclosures were rising even before the latest spike in interest rates.”
“‘Expect no salvation from the housing sector, including residential construction, for some quarters to come,’ said Gabriel Stein, an analyst for Lombard Street Research.”
“Even the most pessimistic observers say the sun will ultimately come out again, they just don’t think dawn is right around the corner. They think supply and demand could go further out of whack, as interest rates rise, adjustable-rate mortgage payments reset, lenders clamp down on marginal borrowers, and foreclosures head higher.”
“‘Sorry, but these problems go way beyond psychological factors and aren’t going away anytime soon,’ said Moody.”
From Reuters. “U.S. Securities and Exchange Commission Chairman Christopher Cox said on Tuesday that the agency is reviewing valuation methods hedge funds use for their assets, a central issue in the liquidity problems of two hedge funds managed by Bear Stearns Cos. Inc.”
“‘We are going to further review, using the SEC staff, the valuation and other issues that managers for these funds have,’ Cox told the House Financial Services Committee.”
“He told reporters after the hearing that the concern that hedge funds and the investment banks that manage them are not marking assets to their proper value is of interest to the SEC’s examinations and enforcement departments.”
“The fund’s main investments, a type of bond known as a collateralized debt obligation (CDO), trade infrequently, making their valuation difficult.”
“In response to a question about whether the SEC is generally examining whether the values of hedge fund assets have been inflated, thereby inflating the fees paid to asset managers, Cox said, ‘Those are the kinds of problems that are concerns in this area.’”
From Bloomberg. “Bear Stearns Cos. assigned its top mortgage trader to help manage the $1.6 billion bailout of a money-losing hedge fund as it tries to unwind bets on investments tied to home loans.”
“Bear Stearns said in yesterday’s statement that it ‘brought in additional resources with expertise in these asset classes to facilitate the orderly de-leveraging process.’”
“When asked on a conference call with analysts last week how a firm with a reputation for strict risk management could err in a market it dominates, Chief Financial Officer Samuel Molinaro said the asset-management arm is sealed off from the rest of Bear Stearns with a ‘Chinese wall.’”
“‘Clearly there are controls in place in the asset- management side too,’ Molinaro said on the call. ‘Obviously we didn’t envision market dislocation of this degree.’”
“Merrill Lynch & Co., the world’s third-biggest securities firm by market value, has expanded in subprime lending and the business of packaging loans into securities that can be sold to investors. Merrill also is the world’s biggest underwriter of collateralized debt obligations, or CDOs.”
“‘There are risks in some of the structures, in some of the complexities of CDOs, mortgage-backed securities and particularly prime brokerage, but there’s no clear sign that there’s contagion developing,’ CEO Stanley O’Neal said.”
“There is no way to ‘predict what the event will be that will cause contagion,’ O’Neal said. ‘The only surefire way to prepare for that is to manage liquidity.’”
The LA Times. “There are signs that the problems with aggressive lending to sub-prime borrowers during the tail end of the housing boom afflicted the prime mortgage market as well.”
“Standard & Poor’s reported Tuesday that mortgage loans made in 2006 to borrowers who used little or no documentation to verify their incomes are going bad four times as fast as similar loans made in 2004.”
“These so-called Alt-A borrowers are considered less risky than sub-prime borrowers because they generally have good credit histories. ‘During 2006, lenders became increasingly comfortable with offering higher-risk loans in substantially greater numbers, not only to sub-prime homeowners but also to Alt-A homeowners,’ Standard & Poor’s analysts said.”
“‘The most disconcerting trend,’ the S&P report said, ‘is how quickly the performance of these delinquent borrowers has deteriorated.’”
“Mortgage applications fell for a second straight week as interest rates remained near recent highs, an industry group said on Wednesday.”
“James O’Sullivan, economist at UBS Securities, still follows the indexes closely although he has noticed some dichotomies with other aspects of the housing market.”
“‘Clearly there has been a complete breakdown of the relationship between the purchase index and home sales in recent months, with home sales clearly falling in 2007 even as the purchase index shows it rising,’ he said.”
“‘The main story is the tightening of lending standards, so more applicants are being rejected and they’re probably reapplying again,’ he said. ‘There was also a rush by some people to get their application in before rates headed higher and that has faded again.’”
From CNN Money. “It’s called ‘hitting the number,’or inflating a home’s value,- and real estate appraisers who don’t do it often enough can find it hard to make a living.”
“In prepared testimony Tuesday before a Senate subcommittee on mortgage industry abuses, Alan Hummel, spokesman for the Appraisal Institute said ‘Appraisers face pressure from various parties involved in mortgage transactions. They are told to doctor their appraisals or else never see work from those parties again.’”
“‘If the appraisal comes in below, they can’t get the deal done,’ said Evans. That’s when the mortgage brokers and real estate agents may hit the warpath. ‘They have to go out and beat up the appraisers,’ said Mike Evans, a fellow of the American Society of Appraisers. who said he’s been threatened himself, ‘and find one they can twist.’”
“The National Association of Mortgage Brokers (NAMB) addressed the issue last year, changing its bylaws to prohibit pressure on any other players in the transaction, including appraisers. ‘NAMB opposes any effort by a mortgage originator to pressure or influence the work of an appraiser,’ NAMB director Denise Leonard testified Tuesday.”
“As long as prices were quickly appreciating up, many of these problems didn’t surface but with the housing slump, they’re bubbling up.”
“The remedy to most appraisal fraud, as far as Evans is concerned, is greater scrutiny for mortgage brokers. ‘When they start getting sued, just like appraisers do, they’ll start cleaning up their act.’”
Basic cost of ownership calculations gave (and give) savvy buyers an incentive to wait. Falling prices give sheeple an incentive to wait. Anybody not buying because prices are falling right now are the reason we see dead cat bounces.
Does this make sense to anyone?
“Anybody NOT buying because prices are falling right now are the reason we see dead cat bounces”.
Should that have been worded like this?
Anyone buying because prices are falling now are the reason we see dead cat bounces.
Someone misquoted or had their simple logic in reverse.
Nope. If you aren’t buying because prices are falling, the second you see a ‘glimmer’ of turn around, you jump back on the bandwagon. I’m suggesting that if the reason you aren’t buying is because housing prices are falling, you’re not doing the due dilligence. The people afraid to buy into falling prices are the same people afraid to be left out of appreciating prices. People who are waiting for fundamentals to realign won’t buy at the next uptick, and could care less if prices are falling or rising, they’re just waiting for it to make financial sense to own.
Totally understand what you are saying & agree 100%.
People need to get away from the idea that they are waiting for an “x”% decrease & pay more attention to average (mean & median) incomes, home prices, rent-to-PITI ratios, historic appreciatio rates (and where that puts us on the trendline), economic trends, etc.
It’s what makes watching this market so frustrating. You’ll see homes on the market for a year, listed at a certain price (obviously overpriced) and then suddenly see a couple of people bidding over the list price.
Either it’s fraud, or somebody’s not doing their homework.
That’s the problem with the “free market” — too many morons out there willing to do something just because everybody else is doing it. Seems too many don’t even do some VERY BASIC homework when making the biggest purchase of their lives.
Unbelievable…
a dead cat BOUNCE ?
All that’s LEFT of the dead cat around here is a fuzzy little greasy spot with all the bad news thats been hitting it
From the LA Times, “The home sales numbers are consistent with the housing market hitting the bottom — or coming close to it,” said Mark Vitner, senior economist with Wachovia Corp.
The housing slump is also weighing on consumers’ outlook. The Conference Board reported Tuesday that its index of consumer confidence declined to a worse-than-expected 103.9 in June from an upwardly revised 108.5 in May. The June number was the lowest since last August.
Vitner sees the housing market remaining soft into 2009 as prices nationwide continue to tick down before rebounding.
“We’re not out of the hole yet,” he said, “but it’s not a big hole.”
Did he just call himself a big a-hole?!?
Naw not a big hole at all. I guess he goes to the Grand Canyon also and scoffs at that little hole also.
Economists are freaking shills now, I wonder if they have to take a course on how to sell your soul to industry and still look in mirror and still smile at the hollow shell of a human you are now.
They are nothing more than paid liars who violate their conscience for a dollar. Turn on the news and you get the same thing. Now I know why I get my news and info from blogs.
Dont you get it? We’re in a big hole right now. We got to dig ourselves out!
“Standard & Poor’s reported Tuesday that mortgage loans made in 2006 to borrowers who used little or no documentation to verify their incomes are going bad four times as fast as similar loans made in 2004.”
I am shocked, SHOCKED that people who had no verifiable income tend to miss their mortgage payments.
“Vitner sees the housing market remaining soft into 2009 as prices nationwide continue to tick down before rebounding.”
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“… before rebounding…”?
Rebounding off what?
Firstly, a price floor has to be established and that won’t happen by 2009. And as well, when the market finally does reach bottom… in many areas prices could be “flat” for a very long time.
“Firstly, a price floor has to be established and that won’t happen by 2009.”
I’m not sure it’s possible to bottom out by then. Still a ton of liquidity floating around. I was at Tahoe yesterday, and the amount of money being pumped into real estate is phenomenal. Prices softening, but not tanking by any means. Asking prices still delusional. I came across a listing for a 1.25 acre lakefront lot in Inclie Village. Asking price? $10,995,000. Yes, nearly $11 million for bare dirt. 10 years ago, that would have bought you one of the sweetest lakefront homes available, on a larger parcel. We’ve got a looooooooong way to go.
Inclie = Incline
Income Village…
You try just a little too hard IMO.
i was up there yesterday too, to check.. fire missed by a mile.. literally.. one mile. Going up again Friday.
Incline’s average was $1 mil not so long ago.. maybe 16 months?
ok.. Question:
A load of homes in some neighborhood burn to ashes. What’s the effect. Does the value of the survivors go up or down?
Up seems reasonable, since supply is down at least for a year or so… but there are probably plenty of other factors to stick into the equation..
I have a friend Dr. Steve who lives on the hillside in Laguna Beach and he has a house with a name “The Wave House” of Laguna. His whole neighborhood was decimated by a fire almost all the houses except his were torched to the foundation. His value skyrocketed, I believe it was valued at 3 million and then 6 after the fire. I asked him why it did this, and he said because all the houses in his neighborhood are brand new custom homes now. I wonder what the value of it is now after the bubble, probably 10 million….sick. Especially since he bought it for like 1.2 I believe.
So when the next door neighbor torches his place and the rest of the street accidentlly goes up in flames, the neighbor is actually doing you a favor?
And if you torch your deadbeat foreclosing neighbor’s house sending the rest of the street up, you do yourself a favor and have a patsy to take the fall.
‘Yes, nearly $11 million for bare dirt’
who has that kind of money?
Bear & Sterns fund managers.
12 million was the price per acer in Tokyo at the hight of their bubble.
“Standard & Poor’s reported Tuesday that mortgage loans made in 2006 to borrowers who used little or no documentation to verify their incomes are going bad four times as fast as similar loans made in 2004.”
For commercial real estate loans, I was told the number one predictor of default is the year of issuance (and thus the credit conditions at the time). Many of the “innovations” in commercial mortgages have been applied to residential mortgages recently. Commercial mortgages default at much higher rates than residential historically.
“Bernard M. Markstein III, senior economist and director of forecasting for the National Association of Home Builders, said the market will rebound in 2008, then start a multi-year recovery.”
“‘It looks like the decline is slowing, so we may be approaching a bottom,’ he said. ‘We’re not quite there.’”
Where do they find these thugs? Please don’t tell me that they are oblivious to the downright deception. They know they’re being deceptive, yet it is acceptable to lie because you’re getting paid to lie?
Isn’t America great?
Markstein’s job requires that he say things like this. He undoubtedly wants to remain employed, but my guess is that he knows he’s lying through his teeth
If it looks to Markstein like “the decline is slowing” it’s because he’s seeing the first of several deadcat bounces.
Bottom callers are not hard to find. The tresury secretary (chief numbskull cheerleader) has called the bottom every month for the past 4 months. I expect him to step out on that shaky brittle limb at least once a month until he joins Learah and “resigns”.
“Economists” being deceptive? Or lying?
How about clueless?
“I just don’t think we have what it takes to prick the bubble… I don’t think prices are going to fall, and I don’t think they’re even going to be flat.”
Diane C. Swonk, chief economist at Mesirow Financial in Chicago
New York Times, “Trading Places: Real Estate Instead of Dot-Coms”, 3/25/05
What really annoys me is that they will have the excuse that back then when they made their quotes they had no idea how rampant mortgage fraud was or that there was a sub prime mess. How ‘could’ they have known!
Even now many of them will make some overly optimistic statement and then tack on a qualifier that they can point to in a couple of years to say ‘See, I told you that IF this happened then of course my estimates wouldn’t come to fruition’.
I remember that particular “economist” Swonk predicting on TV, around 2001 (back when we still had a TV), that interest rates would be rising, which of course was the opposite of what happened. These TV talking heads keep being paraded on the idiot box no matter how wrong their past pronouncements have been.
Bernard Markstein, initiails BM…hmmm, how appropriate
Look at all the psychology NAR applied to this years spring buying season. Did it work?
Sorry for being OT again, but doesn’t any one else find it interesting that the supposedly “A” grade Credit Default Swaps (insurance on “packaged/bundled” mortgages(?)) tracked by the ABX index are down so much?
http://www.markit.com/information/affiliations/abx
Take a look for the graph of ABX-HE-A 07-1…isn’t this one of the higher ends of the subprime tranches, diced up and mixed with spices to make a (supposedly) “A” grade investment?
That graph doesn’t look like an “A” investment to me. Are people that think they are holding “A” investments in CDSs in for a rude awakening? Will this (finally) increase the risk premium for sub-prime lending, tightening up credit even more?
Isn’t “single A” garbage?
I think most of the retirement funds/city pensions/etc can buy “A” grade securities, meaning that in theory they shouldn’t be trash. These particular securities probably are, though.
“Isn’t “single A” garbage?”
Nope. Investment grade is BBB to AAA. BB and down is speculative (or junk) grade. In a CDO, the mezzanine tranches (aka middle) usually run from BBB to AA, so an A rated tranche would be in the middle of the issued tranches (I think it is pretty common for the issuer/securitizer to hold the speculative/subordinate and first loss tranches, which would be rated BB and down).
IMHO A rated tranches (1st lien mortgage and HELOCs) should really be rated BB, but we could quibble on that one…
“Housebuilders Taylor Woodrow and George Wimpey, which are due to complete their £5bn merger next week”
So Woodrow was the lucky one. I bet they were all courting ole Wimpy.
We could have had Lennox&Wimpy, Toll&Wimpy, …
Can’t wait to see the Woodrow&Wimpy banner flying over a San Diego condo conversion soon.
“There are signs that the problems…afflicted the prime mortgage market as well.”
“mortgage loans made in 2006 to borrowers who used little or no documentation to verify their incomes are going bad four times as fast as similar loans made in 2004″
I guess the cat is out of the bag…we’ve only been saying this for a year or so. It’s not *just* low credit scores, it’s “liar loans”, high loan-to-value ratios (including fraudulent appraisals), no money down, and teaser rates/neg am loans. These were NOT constrained to just sub-prime.
I knew there were problems when we were looking to trade up in 2003. The amount of money they were willing to lend us was staggering — and they didn’t even flinch when they gave us the numbers.
We’re have excellent credit, decent income & sizable down payment, but even a monkey should be able to see $100K earners CANNOT take on mortgages well over $300K.
At least we knew what we could afford, even if the lenders didn’t. That’s why we now rent.
We’re - we
Edit button!
“‘Write it off: ‘07 is going to be a bad year,’ Landry says. ‘It [the housing bottom] could be a 2008 event, it could be a 2009 event.’”
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I say: “Or it could be a 2012 event.”
[And especially if there are a minimal number of helicopter drops]
The Washington Post. “Bernard M. Markstein III, senior economist and director of forecasting for the National Association of Home Builders, said the market will rebound in 2008, then start a multi-year recovery.”
The cycle in my neck of the woods is :
#1. For Sale listed by a realator (house sits)
#2. For Sale by another realator (house still sits)
#3. For Sale by owner (house still sitting)
#4. House For Rent (house looking run down)
#5 NOD on the front door (house looks like a section 8 dump)
Yup the market is looking great here in the High Desert !!
#5 NOD on the front door (house looks like a section 8 dump)
The simple way to verify section 8 occupants is to look for abandon shopping cart(s).
I thought a nonworking car in the front lawn was the sign.
I thought it was a nonworking car on the front dirt.
I thought it was the occupants in broken down lawn chairs complaining to each other how tough it is to make ends meet on their welfare checks.
Don’t forget the weight bench and the pitbull dogs.
You’re forgetting the gangsta rap blasting from the property at all hours.
how long until they connect the dots to record unaffordablity and all these loans? there is not income to pay them back. there probably never was and NEVER WAS SUPPOSED TO BE. the game was going to go on through refis.
how long until they connect the dots between strawberry pickers have $800,000 loans and the troubled subprime and CDO market?
somebody holds these loans. who are they? we know the answer, why can’t they figure it out? this stuff is toxic JUNK.
can you imagine how many billions in hedge fund fees rested on the valuations of models and not the actual market?
__________________________
Can bond market stand to be exposed?
Merrill Lynch’s auction of a hedge fund’s assets may reveal the true value of complex assets like CDOs and derivatives. It might not be a pretty sight.
By Jim Jubak
The bond market has no clothes.
You remember Hans Christian Andersen’s story of the emperor’s new clothes? After he had been fleeced by some shady merchants, everyone told the emperor how beautiful his new clothes looked, how rich the colors were, how fine the fabrics, until a little boy, who didn’t know enough to flatter, said, “But he’s naked.” And the embarrassed emperor ran as fast as he could for cover from the unleashed laughter of his subjects.
Something very similar is happening in the bond market right now.
Investment losses at a little $20 billion hedge fund — and yes, in a $24 trillion bond market, this is a small fish — and Merrill Lynch’s insistence on an auction of some of that fund’s assets could make Wall Street admit that prices for trillions of dollars in assets are fairy tales made up in the backrooms of the investment banks themselves. Most immediately affected is the $2 trillion market for pools of securities backed by mortgages, corporate bonds and leveraged loans called collateralized debt obligations (CDOs), and by extension, the entire $30 trillion market for synthetic derivatives modeled on those pools.
That would require a massive re-pricing of portfolios all across the globe. It would turn some winning portfolios into losers and turn modest losses into debacles. It would force pension funds and insurance companies to make up massive shortfalls in the value of their portfolios. Some hedge-fund managers and Wall Street investment bankers, whose bonuses are determined by profits based on these fictitious prices, might see bonuses disappear completely. They might even — be still my heart — have to give back performance-based fees.
You should know what’s going on so you can decide whether you want to risk your nest egg in this kind of debt market.
sorry, the rest of the link is good too.
http://articles.moneycentral.msn.com/Investing/JubaksJournal/CanBondMarketStandToBeExposed.aspx
“can you imagine how many billions in hedge fund fees rested on the valuations of models and not the actual market?”
*******
Yeah, that’s a good question (and wouldn’t it be great if all of our incomes could be based on some model fantasies we’ve created for ourselves?).
And I suppose those who obtained a subprime, Alt-A or other funny money mortgage probably had a model (actual or virtual) that told them, “hey, I can afford this and pay this off… someday.”
Well, that day is never arriving for many.
And so it goes…
(and wouldn’t it be great if all of our incomes could be based on some model fantasies we’ve created for ourselves?).
I don’t know how many cars I sold, but the average car seller sells 10 a month and I’m above average. imagine telling your boss your models say you sold 15 cars and he should pay you according to that?
“Yeah, that’s a good question (and wouldn’t it be great if all of our incomes could be based on some model fantasies we’ve created for ourselves?).”
They can and are, they’re called “liar’s loans!” Did you miss out on getting one?
“can you imagine how many billions in hedge fund fees rested on the valuations of models and not the actual market?”
The hedge fund managers could. That’s why they are operating out of Cayman Islands. The police in George Town are on the case. The punishment will be severe. No martinis before 10AM and possibly a slap on the wrist.
Ah, the Caribbean hedge funds strike again!
The hedge funds are getting some much needed CPR from their #1 friend:
June 27 (Bloomberg) — Treasury Secretary Henry Paulson said Congress shouldn’t punish Blackstone Group LP with higher taxes because it became a publicly traded partnership, and he warned against “unintended consequences” of broader efforts to tax hedge funds and buyout firms.
“I don’t believe it makes sense to single out one industry,” Paulson said when asked about the proposed legislation at a conference hosted by the Wall Street Journal in New York. Senate legislation would force Blackstone to pay taxes at corporate rates of 35 percent instead of as a partnership, with a burden as low as 15 percent. “We need to be careful dealing with something like this piecemeal,” Paulson said.
Paulson, the former chief executive officer of Goldman Sachs Group Inc., was the second senior Bush administration official today to raise concerns about bills introduced this month in Congress that would raise taxes for Blackstone and many managers of hedge funds and buyout firms. White House spokesman Tony Snow also suggested that the administration will oppose such an effort.
Shares of Blackstone, which traded as low as $29.13 15 minutes before Snow’s first remarks, jumped 3.5 percent to more than $30.40 afterward. Shares of Fortress Financial Group LLC, the first hedge-fund manager to go public in February, increased as much as 6.2 percent after Snow’s remarks. The shares of Blackstone and Fortress were trading at $30.13 and $23.19, respectively, at 2:41 p.m. on the New York Stock Exchange.
Well, the Supreme Court voted in favor of “free speech” for the political advertising of corporations, essentially giving them the same rights as individual human citizens. So, they ought to pay the same taxes as individual human citizens.
When you have deep enough pockets to pay an army of bean-counters to “avoid” taxation…. It does not matter what the little man may pay cause Corps pay what they want to pay.. Financial engineering meet my CSI Accountant….Mr.Tax Avoidance.
“Investment losses at a little $20 billion hedge fund — and yes, in a $24 trillion bond market, this is a small fish”
Only small fish until you account for the leverage in the market. Figure in the leverage and $20 billion become $200 billion.
From MarketWatch. “In past episodes, it’s taken years for the housing market to bounce back. In the late 1980s-early 1990s slump, it took four years for new-home sales to reach the previous peak; it took nine years for prices to recover.”
my parents brought a house for $98K in 1988 at 11% interest rate. The house was assessed around 100K for 10 freaking years. Now the house is valued at $350K (thank god for liar loans and 5% interest rate). Well, I guess the moral of the story is don’t buy at peak of the boom!
“In past episodes, it’s taken years for the housing market to bounce back. In the late 1980s-early 1990s slump, it took four years for new-home sales to reach the previous peak; it took nine years for prices to recover.”
And here’s how the majority of people will interpret that statement…current prices are at the bottom and we’ll be flat for possibly 9 years.
I will guarantee you most people out there cannot perceive of prices actually declining…and declining…and declining from where we are right now. A predicted 9 year recovery doesn’t mean this is as bad as it gets presently. But, of course, we all know that.
Even if they were just flat for 9 years the damage to the economy would be severe. Where is all the HELOC money going to come from to keep retail spending going ?
“‘Sorry, but these problems go way beyond psychological factors and aren’t going away anytime soon,’ said Moody.”
Moody for president!
Moody just gave Lawrence Yun a public spanking.
Isn’t it ironic…
Earlier this week, someone posed comments made by one of the Fed governors, Frederick Mishkin. The name sounded very familiar so I googled the govenors and clicked on his name. I took a class titled “Money, Banking and Financial Markets” with him back in the day.
I remember very clearly the day he told us why he became an economist. He used to listen to elderly relatives talk about the Great Depresion and he was fascinated and wanted to know why and how such things occured. I don’t remember him saying he wanted to help prevent them, but he was a b-school professor back then, so there wasn’t really any reason for him to say such a thing.
I wonder how much of a downturn he is going to get to observe up close this time, and all the rest of us too.
Interesting anecdote!
There are many similarities (often pointed out on this blog) between now and the period just prior to the GD. Agree that we will be in for some rough times.
Rant for the day: After reading the story and then the entries about economists coupled with yesterday’s story about Countrywide execs and the home office under investigation, I am led to believe only one thing. It is all about the gawd-almighty dollar more than ever. Sure, in the past we’ve had bubbles and scandals, but what we are witnessing is increasing and at an alarming rate.
I am also disgusted by the nepotism with all these squawk boxes. Geez, doesn’t anyone work for someone where the lies are not bought and paid for wither by ads or salaries? i am just so disgusted with all the cheerleading.
All the fundamentals are off in this country’s economy, fraud is rampant, debt is waaaaaay out of control, un and underemployment and outsourcing serious problems, but all we get is everything is great.
Heck, if that was true, why do we need a PPT?
I know, I know, all the bulls keep saying “You guys are always predicting the end.” Sure, I realize that we can be wrong, but the problem is that when the party finally ends it is always worse and does more damage than all the bull-run lead up did good.
In other words, all look at the GD. All the money made, couldn’t prevent soup lines and 1 out of 3 unemployed. Sure, did people get rich and make massive money off of others’ suffering, as well as, boatloads of money in the runup before the fall? However, the fall was very painful. I think that is what pisses me off the most. Party like its 1999, but don’t plan or take into account the future. Hey, at Christmas everyone will get that million dollar bonus. Yeah, and pigs fly!
“All the fundamentals are off in this country’s economy, fraud is rampant, debt is waaaaaay out of control, un and underemployment and outsourcing serious problems, but all we get is everything is great.”
And we keep hearing “everything is great” at such an accelerated rate than in past times. I’m in my 40’s and I cannot recall any other time in my life where I heard things are wonderful as I have in the last 5 or so years. Yet the reality on Main Street far far different. This kind of disconnect has a very negative effect I’m my attitude toward institutions and establishments.
Shhh! You’ll let the terrorists win!
“Now, everybody, altogether now: Everything is great!”
Exactly NoVawatcher. It’s that kind of stupidity and sheer lack of intelligence that I speak of. I did have a real strange moment yesterday though. Chris Matthews interviewed the postergirl for everything thats wrong and ignorant in America, Ann Coulter. Unimaginably, she made a statement that was factually correct and I agreed with it and I was floored. She said that the proposed immigration policy floated by GW Bush was one that had one primary goal: To hand over cheap labor to corporations. I nearly fell out of my chair when she said that……See? There really is hope for the delusional.
The real problem isn’t unemployment, it is under employment. People can get jobs, but they are not utilizing their skills and training and are not well-compensated.
I am using my skills and training and I am still under compensated, but that was a life style and stability choice.
“I am using my skills and training and I am still under compensated, but that was a life style and stability choice.”
Then you are fairly compensated. It’s just that some of the compensation comes from more free time and less worry about your job going away.
My wife recently changed jobs and took a massive pay cut to do so. But, she gets more time off, does more of the work she is good at and loves, and is under less stress. It was more than a fair trade. Salary was only one part of the equation.
I’m far from a Huffington fan, but there is a nice little editorial on the Huffington Post about Busheconomics and how it’s basically been an exercise in cheerleading. Sorry, don’t have the link.
“In other words, all look at the GD”
the only thing i know about “1929″ is watching the filmstrip of men in suits selling apples.
my dad’s uncle lost 9 out of 10 chicago properties owned by his sister, my grandma.
he margined them to fairydust in 1929.
anybody guess what he spent the money on?
people who own 5 properties and more will be the ones feeling the 1929 blast!
my “blue blood” is boiling.
My grandmother came from a very wealthy blue-blood family, and my grandfather lost everything circa 1930 due to overleveraged real estate investments (not the stock market as is assumed for depression era failures). She divorced him and spent the rest of her life in poverty. Only when her kids grew up and found reasonable jobs was she able to move into a decent home (with their continued financial support).
Too few people are familiar with the history of this country and the very real impacts of financial collapses.
“..my dad’s uncle lost 9 out of 10 chicago properties owned by his sister, my grandma.”
waitaminute..
My dad’s uncle is my grandfather’s brother.
And my dad’s uncle’s sister is my grandfather’s sister..
Not that I care.. it’s the puzzle that attracts me… but to be my grandmother, must sister have married her brother?
My Dad’s uncle is my grandmother’s brother. Not my grandfather’s brother.
yeah. I get it.
so, we could simplify and say that my grandma’s brother lost 9 out of 10…..
The cheerleading was rampant in the 1930’s too. Music and movies from that era often have black humor about the gov’t saying that prosperity is just around the corner (over and over again until it became a joke). The movie My Man Godrey is the only example I can think of at the moment, but I know I’ve seen others. Actually I think Cinderella Man had some of that too, even though it wasn’t made back then.
The Busby Berkeley musicals 42nd St. and the Golddiggers series were all centered around Depression era themes (”We’re In the Money”, etc.) And most of the 30s comedies were about the rich, whose foibles seemed to fascinate those who had to struggle to come up with the quarter to see the films.
He NAHB’d it!
Fancy FIGURE skating, of the financial flavor…
He’s going to do a hard combo here, a series of jumps through hoops, followed by a triple toe loop, evasive posturing, right into a lutz, ending with the salchow of all sales calls forecasted for the future…
“Bernard M. Markstein III, senior economist and director of forecasting for the National Association of Home Builders, said the market will rebound in 2008, then start a multi-year recovery.”
Coach Landry:
Everybody go deep and hopefully somebody will be open…
“‘There’s a lot of competition trying to figure out when things are going to bottom,’ says Morningstar analyst Eric Landry. ‘But it’s unlikely that you’re going to figure that out before any one else does.’”
Dragging Mortgage Brokers into an Appraisal fraud discussion seems like throwing an already dead body under a bus to cover the real crime. Mortgage brokers are on their way to extinction, even without lawsuits. Everytime the phrase “yield spread premium” is uttered in public, another broker gets their wings. How that system managed to run in secret for so long is a tale that needs to be told.
All of these articles underscore the fact this housing crash is going to be like nothing else we have seen in a long long time. I know I underestimated the heights this market would climb. But I wouldn’t want to underestimate the depths it will reach. Far more risk being wrong on the way down than being wrong on the way up.
Imagine what this mess is going to look like in 2-3 years. Hedge Funds will have imploded, a major global recession will be on us, and there will be no end in sight. Interest rates will be much higher, unemployment will much higher, and inflation will continue to rage. Foreclosures will be everywhere.
This time it really is different. Here is what I am (and have been) doing.
1. In 2005 we looked for a house, but I saw sales numbers dropping, and foreclosures trending up. So we decided this was not a good sign, and we wanted to take a wait and see approach for another 6-9 months.
2. What do you know, 6-9 months later and all of a sudden prices are flattening out in a few places. Again we saw this as a bad sign, so we extended our wait and see period another 6-9 months.
3. Next thing we know, prices are actually falling in a few places, and sales are really tanking. We again saw trouble so we decided to wait until early this year to reevaluate.
4. Now we see prices dropping, hedge fund problems, sub prime imploding, rates rising, foreclosures skyrocketing, and things look much worse, not better. We are not even going to bother to look at housing until next year now.
And when we do, if it still looks like crap we will push it out another 6-9 months. Why this time frame? Because 6-9 months should smooth out the dead cat bounces and provide a much clearer direction. But I am not optimistic we will see anything better next year. Of course, regardless of the situation we must be able to afford the purchase. If it isn’t affordable next year, the market outlook is irrelevant.
My point is this. Nobody knows just how bad this is going to get. Instead of guessing for a bottom, hoping to time it correctly, it seems far smarter to periodically assess the market and then decide if the situation merits a purchase.
If you see things looking up I would still wait another 3-4 months, just for good measure. You want to make sure you aren’t buying right before another leg down starts. And with all the problems we have today any recovery will be SLOW. Forget the V shaped BS the media spouts. There will be resets for as far as the eye can see. Pressure will continue for many years. There is no rush. Besides, how happy are you going to be when:
1. Nicer and nicer homes continue to come on the market for lower and lower prices.
2. You have less and less competition from other buyers for those homes.
3. The amount you have to borrow keeps dropping.
These things more than offset the desire to buy now IMO. And every day you wait you reduce the chance you are going to get hurt financially.
JMHO
I like your post. here is how I’ve seen things through this blog.
there is no housing bubble -2005
sales slump
spring bounce in 2006
prices will level off and we’ll have a soft landing(souffle talk)
subprime disaster/less soft landing talk/subprime is contained
prices start coming down
NAR says prices will come down for first time since Great Depression
open hard landing talk
bear stearns meltdown/serious banter of systemic risk/still contained to subprime though
we’ve gone from no housing bubble to a serious discussion of some sort of systemic risk in just a short while.
Exactly. The trend is not pointing to a recovery. It is flashing warning signs when just a short time ago it was the opposite. This is a radical change in a short time. Better to be cautious and wait.
My point is this. Nobody knows just how bad this is going to get. Instead of guessing for a bottom, hoping to time it correctly, it seems far smarter to periodically assess the market and then decide if the situation merits a purchase.
Completely agree. I was staying put in an apartment I was unhappy in because *any day now* I’d be able to buy a house. Forget it. Recently moved to a much nicer rental so I can’t even think of reassessing until next spring (when the lease is up). Pretty sure I won’t be missing any bandwagons between now and then.
eastcoaster,
We sold to rent in 2004 (because we needed to move up & couldn’t afford it with the tax payments, etc.).
Initially, we wanted to find the “cheapest” place (smallish apartment for a family of 5) close to work because my husband was toally bitten by the housing bug & wanted to buy *no later than six months* from then. I pushed to rent a comfortable SFH, specifically so we wouldn’t feel pressured to buy & am very happy we made that choice.
Three years later, we’re still here, and will probably be here for at least a few years more.
Great post. In addition to not being worried about high mortgage payments, I’ll bet you sleep pretty well at night too.
So far, a lot of the price reductions have been in places where there is lots of building–builders respond to increased supply and slightly tightening credit by offering lots of incentives, thus paralyzing the existing home market, etc. Banks are still making aggressive loans.
The financial tightening thus far has only been the drawing the noose around the housing bubble’s neck.
The next leg down won’t be supply driven with some liquidity tightening.
It will be a full credit crunch, refinancing to lower your monthly payment will be non-existent, and refinancing to help make payments will be virtually non-existent. Two reasons:
1. Buyers of MBS will demand much tighter underwriting (complete appraisals, verified income, etc.). A Moody’s rating and average FICO scores will be far from enough; and
2. Resales of homes purchased at foreclosure sales will finally be comps that appraisers will be forced to use (in part because of #1).
So, homes won’t appraise for high prices, pushing more people into foreclosure when they can’t refinance their way to riches, dampening how high home prices CAN sell for, and reducing the buyer pool again…
Wicked spiral down.
2008 will be a bloodbath. 2007 was a shaving cut in comparison.
Yep, agree 100%. This ugly spiral has just started. Just imagine how things are going to look this time next year. Pretty soon people will be avoiding real estate like the plague. It will be the reverse of the boom, with greater intensity. Fear is a much stronger emotion than greed.
And yes, I am liquid and sleep like a baby.
“Chinese wall”…ha ha ha ha!!! Wall Street banks have said that they have “Chinese walls” right before every blowup that has occurred in the last twenty years. These bank “Chinese walls” are about as effective as the real one was at keeping out invaders.
What a steaming pile of horse manure….
Lets see what your Chinese Fire Drill looks like?
“When asked on a conference call with analysts last week how a firm with a reputation for strict risk management could err in a market it dominates, Chief Financial Officer Samuel Molinaro said the asset-management arm is sealed off from the rest of Bear Stearns with a ‘Chinese wall.’”
I’ve been working on the psyche of a co-worker….
Poor sap put $15K down on a $500K new house, before having sold his house he paid $150K for 6 years ago, and was sure would sell for near $350K. He needs the $200K from the old house to be able to afford the payments on the new place….. Old place has been on the market for 4 months, $30K in price drops have not increased the traffic of lookers. No hope for sale in sight.
I thought I had him convinced to walk from the $15K deposit. He was sure that was what he was going to do. Well, while I was out of town for a few days, his wife got to him….
Now they are going to rent out the “supposidly worth” $300K+ house for ac ouple hundred a month carrying costs on their $100K loan on it, and are basically walking into the $500K house with $0 down.
His plan os to hold the new house until the kids are out of high school… that is minimum 12 years for the 6 year old youngest. Surely prices will be up over the next 12 years.
I think prices being the same as they are now 12 years from now is the absolute best case, meaning he’s putting money in the bank with “at best” 0% interest rate, and locking it in for 12 years.
Looking in his eyes, I can see he knows this is the wrong thing to do, but that he doens’t have the ability to talk the wife out of it, or the nuts to flat out tell her NO!!!
Another knife catcher.
Maybe he’s one of my neighbors. They had their house for sale for a while, took it down and moved out. Now they are vacant. No doubt waiting for “the bounce” next year. Gator’s will get hungry in the meantime.
I live in Phx too; FYI. This type of thing is still happening in ‘07.
We’ll see the next true leg down when the bank says no, you can’t borrow 100% on that home.
While the wife didn’t help the guy out, the bank was still a willing accomplice.
I sure hope they love the house and are willing to stay in it for a long time.
“We’ll see the next true leg down when the bank says no, you can’t borrow 100% on that home.”
He’s financing through the builder. Rather than a price cut, they offered a below market interest rates.
Sorry… old house is being rented out for a couple hundred a month “over” carrying costs… Wife, that hasn’t worked for 10 years, has now agreed to go back to work to help make the payments on this $500K aligator they are buying….
Closing tomorrow.
I’ve shown him the PMI numbers which say we’re the second riskiest market in the country (only L.A.’s inland empire is rated higher by PMI). I showed him today’s numbers that indicate we have the second highest % of sub-prime loans… Only Vegas has a higher % of sub-prime. I’ve shown him the 11 months of inventory on the market. The falling prices… etc…
He’s worried as heck (as he should be), but still plans to close tomorrow.
“Looking in his eyes, I can see he knows this is the wrong thing to do, but that he doens’t have the ability to talk the wife out of it, or the nuts to flat out tell her NO!!!”
He got Suzanned! Poor bastard.
LOL
The article above about Alt-A problems reminds me of a post from about a month ago.
Question: How long does sub-prime get all the blame for the “slump”?
Answer: Until Alt-A, then prime, start getting some of the blame.
An article I was reading yesterday really pinned the tail on this donkey… This is not a problem of financial markets that can be narrowly averted by a Bear Stearns bailout of one of its troubled hedge funds. This is a problem of new houses sitting vacant in Vegas, piling up inventory in Chicago, unsellable condos in Miami…
This is not going to just go away…. Delay maybe… but it is just bailing the titanic with a teacup.
In Ft. Myers FL. Ryland Homes put 50 of last townhouses up for auction,originally sold $300k-$325k.Thirty were auctioned for varing prices under original. The last 20 went under the gavel for $145K. Original owners rip—-
Go Florida! They really know how to do it right down there! This is the second 1/2 off new home auction we’ve seen down there in just a couple weeks.
“Bernard M. Markstein III, senior economist and director of forecasting for the National Association of Home Builders, said the market will rebound in 2008, then start a multi-year recovery.”
Another dopey wrongway “expert”
What the hell does a “Senior Economist” do? I have yet to see one that did anything except cheerlead.
Either he is a lousy economist or he is a liar. Either way, his opinion is worthless.
“‘Clearly there are controls in place in the asset- management side too,’ Molinaro said on the call. ‘Obviously we didn’t envision market dislocation of this degree.’”
what a POS…blowup billions of dollars…these people are friggen greedy. Could not see it coming?
You need your @$$ fired. I can and will do much better than you clown.
Got a Ventures for you all…
Minimum investment required.
http://www.youtube.com/watch?v=2NOq_yx7X2k
Good news for those waiting for/anticipating higher interest rates:
Just heard on CNBC that Ben B. has said he is considering adding “headline inflation” (food, gas, etc.) numbers into future interest rate decisions.
I’m thinking whether he actually does that or not is beside the point. The fact that he’s announced it means rates won’t be going down no matter how much various interest groups/people whine about it. Because any idiot can plainly see that food prices are inflating, rather drastically.
So BB wants real numbers? Excellent news
I was driving through West Marin outside of SF last night and saw so many for sale signs it was errie. There are so many signs the realtors have decided to make them smaller now - 7 inches by 7 inches so when five house are for sale right next to each other on one street it dosen’t look as spooky. You can’t even read the for sale signs driving by because they are so small. Very symbolic….so many little signs everywhere!
Haven’t seen the smaller signs here in the D.C. area yet, but all of a sudden a lot more houses on the market in the last couple of weeks, even in my neighborhood that has largely withstood the crash until now.
They are drowning in debt, 3-4K mortgage payments are killers.
And the jobs don’t look so stable now.
Use just one big sign and say THIS HOUSE and THE NEXT FIVE are for sale.
No, they just can’t afford the higher cost of the larger signs anymore….
‘The Washington Post. “Bernard M. Markstein III, senior economist and director of forecasting for the National Association of Home Builders, said the market will rebound in 2008, then start a multi-year recovery.”’
I forecast the serial bottom callers will keep forecasting a market rebound one year out from now until at least 2012.
the appraisal issue has been around for a long time and is even worse in this market. there is a ton of evidence on the mls where properties are being sold above the listing by as much as 100k. yet it is ignored by all…
From MarketWatch. “In past episodes, it’s taken years for the housing market to bounce back. In the late 1980s-early 1990s slump, it took four years for new-home sales to reach the previous peak; it took nine years for prices to recover.”
Funny how 2 years ago I told everyone, ” Remember the 80’s and 90’s ?”. “This is going to be much worse.” They looked at Me like I was a Moron, Real estate always goes up?
Now all of a Sudden, WE Remember the 80’s and 90’s Now. I need a Drink.
When we bought our house in the 80’s there were hardly any mortgage companies and the loan officers worked for the bank on salary, not commission. Going back to this would eliminate a lot of the illegal lending.
Yes, the idea should be to align the interests of the final (and actual) lender with the person originating the loan. The appraiser should be working for the lender, NOT the originator. How in the world did they ever think the current system (appraiser-originator alignment) would work?
I long for the good ol’ days of the 80’s when I went in to my local, small town bank and sat at the table across from the banker who sized me up and decided whether or not to give me a loan and then KEPT IT ON THEIR BOOKS!
And I’d see those people all throughout the month around town and once a month at the bank when I went in to pay the mortgage.
Sheesh, how quaint is that?
This stupid easy money episode has been just unnerving. I can’t stand the feel and energy of it in society. I’ve been smiling unconsciously all day just hearing the news of credit shake-ups and knowing it could be over soon.
“‘The most disconcerting trend,’ the S&P report said, ‘is how quickly the performance of these delinquent borrowers has deteriorated.’”
Anyone with half a brain who even casually reviewed what was happening could have predicted this. In fact this exact scenario was predicted by many of you on this blog years ago. I suspect that the money folks on the street were too busy looking at their models and listening to the bilge spewed forth by the REIC to do the due diligence required. So how much was that bonus last year Mr. “I am so surprised by all of this” economist?
Hmmm… so “Helicopter Ben” actually wants to talk about real numbers with “headline inflation.” Interesting… how fascinating it would be if he actually grew a set of iron nuts and did what had to be done - drain the toxic cesspool of “liquidity” with higher rates. And the real estate shills think things are tough now… hehehe… And we’re only a few months into the first wave of loan resets and already things are falling apart. Amazing!
http://money.cnn.com/2007/06/27/real_estate/subprime_abuses_may_persist/index.htm?section=money_latest
“According to Doug Duncan, chief economist for the Mortgage Bankers Association, troubled lenders are aggressively making new loans for an infusion of cash.
“They’re gambling,” said Armstrong, “doubling down and that’s a recipe for disaster.”
But not everyone at the Senate hearing agreed with the CRL. Anthony Yezer, an economics professor at George Washington University, expressed little regard for its findings.
“As an academic economist I really pay attention to literature in peer-reviewed academic journals,” he said. “This doesn’t have much credibility.”"
Ummm can you believe this guy?!! Did someone here say GWU gets quite a bit of mullah from the real estate groups?
‘During 2006, lenders became increasingly comfortable with offering higher-risk loans in substantially greater numbers, not only to sub-prime homeowners but also to Alt-A homeowners,’ Standard & Poor’s analysts said.”
The most amazing part is how they really tried to scrape the bottom of the barrel in 2006. It was clear by 2004 that borrowers were already in over their heads…then, the spent the next two years making it even worse!
“‘The most disconcerting trend,’ the S&P report said, ‘is how quickly the performance of these delinquent borrowers has deteriorated.’”
No, what’s disconcerting is that “economists” ignored the painfully obvious fact that borrowers were **using their “equity” as income, in order to pay their mortgages**. This is only possible if prices are rising. Once price increases stop, the party is over. Again, that was obvious, even to those of us without econ degrees and only rudimentary knowledge of the credit markets.
There should be no “surprises” WRT the oncoming housing “crisis” (note how the former “housing crisis” used to refer to not enough affordable homes…now the “crisis” is too many affordable homes — these “economists” are a joke).
I also am amazed by the lenders and funds, etc. that relented and “went for the trash” in ‘06. There was SO MUCH information that was so easy to get (ie. on this blog for one) that painted out a really clear picture of where this was going and how quickly it was going to get there.
One bank, previously conservative, that I went into told me they finally began making no-down loans in Dec. ‘06. That’s right, 6 months ago…like 2 months before the mortgage problems became headline news.
They told me they felt they had to to stay competitive.
It is scary that so many people were not paying attention. But then again, if even 10% of the people who should have been paying attention had been, none of this would have happened.