A Whole Bath Of Bubbles Could Be About To Go Pop
Some housing bubble news from Wall Street and Washington. MarketWatch, “Increasing problems with mortgage loans and the rapidly shrinking human touch in stock markets dominated news in the financial sector Monday. Huntington Bancshares Corp. warned that second-quarter profit has fallen prey to a triple play of credit-related issues, rising loan-loss provisions, ineffective hedging and declining net interest margin.”
“‘These results were below our expectations and resulted primarily from difficult and deteriorating residential real-estate markets,’ said Thomas Hoaglin, CEO of Huntington, in a press release.”
From Bloomberg. “Credit Suisse Group said losses for investors in bonds backed by U.S. subprime mortgages may total $52 billion, the low end of estimates as analysts try to determine the fallout from rising delinquency rates and foreclosures.”
“No one knows how much money is at risk from subprime defaults because CDOs made up of the loans aren’t required to publicly disclose holdings.”
“Banks are likely to suffer smaller losses on their own investments in CDOs than from lending to hedge funds that may be unable to repay the debt, according to Credit Suisse.”
“‘Banks’ direct exposure to CDOs is not as high as people think,’ said Credit Suisse analyst Ivan Vatchkov. ‘They stand to lose $5 billion to $15 billion from direct exposures over time on the basis of what we know now. Banks have lent money to the people who bought the risky equity tranches of CDOs, but that market isn’t transparent enough to estimate exposure and risks there could be bigger.’”
“Delinquencies and defaults on U.S. subprime mortgages will keep rising as borrowers who received loans with less rigorous checks fail to keep up with repayments, Robert Parker, vice chairman of Credit Suisse Asset Management, said on July 5.”
“Loans that require little or no documentation of income made up 46 percent of all U.S. subprime mortgages last year. U.S. homebuyers with undocumented income defaulted at a rate of 13 percent in February.”
The Guardian. “These days, hedge fund managers and private equity bosses, not fixed income traders, are the new masters of the universe; but the dramatic sell-off in the bond markets over the past few weeks could have more momentous consequences than even the boldest private equity coup.”
“Falling bond prices mean rising yields, and that means higher borrowing costs for everyone. Analysts fear a whole bath of bubbles could be about to go pop.”
“Central banks have been warning for some time that investors may be paying too much for risky assets. Since the losses suffered during the sub-prime crisis, however, many investors have responded by rethinking how much risk they are willing to carry in their portfolios.”
“‘I think greed is switching to fear,’ says Julian Jessop, of Capital Economics. ‘Even if you don’t have any exposure to sub-prime, you might look at your portfolio, and think, ‘maybe I’m paying too much.’”
“The consequences of a downturn in the credit markets are especially tough to predict, because of a proliferation of exotic new financial products in recent years. Lenders have been packaging up liabilities, chopping them into chunks and selling them on to other investors in complex instruments such as ‘collateralised debt obligations’ (CDOs).”
“That comforts banks, which feel they have offloaded risks, but it makes it hard to ascertain who owes what to whom - and which domino could be the next to fall.”
“Anthony Bolton, the high-profile former chief investment officer of Fidelity, warned last week of ‘major risks’ with CDOs, saying that they ‘prolong the party and put off the day of reckoning.’”
“‘In the old days, if you had a credit crunch, the authorities knew where to go: they went to the lenders, and looked at their books,’ says Andrew Clare, professor of portfolio management at the Cass Business School. ‘Now, when a lot of the banks have got a lot of this off their books, it’s not easy to know where to look.’”
“What started as a financing squeeze in the subprime- mortgage market now threatens other parts of the economy. ‘We’re just starting round two,’ says Andy Laperriere, managing director at ISI in Washington, who was among the first to highlight the economic impact of tougher home-loan terms. ‘Tighter credit appears to be spreading beyond the mortgage market.’”
“Investors now demand almost 3 percentage points in extra interest to own U.S. high-yield bonds rather than government debt, compared with a record low of 2.41 percentage points on June 5, Merrill Lynch & Co. data show. That’s the fastest increase in spreads since April 2005.”
“‘The credit cycle is peaking,’ says John Lonski, chief economist at ratings company Moody’s Investors Service in New York. He sees the high-yield spread rising to 4 percentage points by the end of 2007.”
“Home buyers face rising borrowing costs as a 51 basis-point increase in yields on 10-year Treasury notes during the last eight weeks feeds into the mortgage market.”
“Lenders are not only more cautious about extending credit to low-income borrowers, they’ve also grown stingier with mortgage loans to more credit-worthy customers, says David Seiders, chief economist at the National Association of Home Builders in Washington.”
“‘The problem in terms of subprimes extends out into other credit areas and produces a cool wind’ that the economy has to fight against, says Bill Gross, who heads Pacific Investment Management Co.’s $103 billion Total Return Fund.”
The Chicago Tribune. “There is a growing insecurity that institutions that invested in subprime investments have yet to surface with large hits to their investment portfolios.”
“‘People didn’t understand the risks’ in investing in subprime mortgage-related securities, Jeffrey Gundlach, chief investment officer of the TCW Group, said at a recent Morningstar conference in Chicago. ‘Now that the tide is going out, all the wreckage is showing up at the bottom of the sea.’”
“Among subprime loans, which make up about 12 percent of mortgages, ‘the delinquency rate is climbing and it should climb at a very high rate,’ undermining the value of the related securities, Gundlach said. Delinquencies are now at 14 percent, and he estimates they will climb to 20 percent.”
“Gundlach notes that investors who didn’t realize they were taking a chance with the securities are being surprised with huge losses.”
“Many investors bought subprime loan securities thinking they were rated AAA, ratings that suggest very safe bond investments, he said. Yet, they are discovering the sophisticated computer models that suggested the investments were safe are not valid, and investors bought junk bonds rather than safe bonds.”
“‘That’s a problem,’ he said. ‘People bought thinking they were buying something else.’”
The Orange County Business Journal. “What a difference a year makes. The subprime mortgage industry—heavily rooted in Orange County—saw loans fall by 40% in the first quarter from a year earlier, according to a survey by National Mortgage News.”
“The tally is the first look at the sector since subprime lenders started reeling late last year and Irvine’s New Century Financial Corp. began its spiral into bankruptcy in February.”
From Reuters. “Having spent billions on German residential real estate in past years some private equity firms are now looking to sell, opening the door to new investors but also raising questions about the health of the property market.”
“‘There’s no question we’ve reached a point where some private equity firms which have built up pretty big investments are going to think about cashing in,’ said Marc Weinstock, a board member of the real estate holding company of Hamburg-based lender HSH Nordbank.”
“‘The market is asking itself how long the party will continue, whether these fairly high prices we’ve been seeing can last,’ Weinstock said.”
“Bovis Homes Group Plc shares fell the most ever and other U.K. homebuilders tumbled after the company said higher interest rates have scared away buyers.”
“Visitor numbers to Bovis’s building sites have plummeted in the past six weeks and first-half sales, reservations and prices were static after the Bank of England raised borrowing costs five times in 12 months. Any further slowing of demand will cause the Longfield, England-based company to cut its full-year sales target, it said in a statement today.”
“‘Confidence has been affected,’ Bovis CEO Malcolm Harris said in an interview. ‘Buyers have started to understand that they have to pay more and are taking longer to look at their finances and see what they can afford. The Bank has been explicit in its wish to reduce consumer spending and they’ve put up rates to do just that.’”
“‘Bovis hadn’t previously indicated they were under pressure, so this is a surprise,’ said analyst Tom Gidley-Kitchin. ‘Investors are worried about when house prices are going to start to fall and no one knows when it will be. Bovis has been more cautious than anyone else.’”
“Bovis aims to introduce a new range of inducements for buyers within weeks to help counter the extra financial burden of higher borrowing costs once it’s won approval from the U.K. Financial Services Authority, Harris said.”
“‘We believe we can increase our volume, but if the market slows any further we’ll have to bring our target down,’ he said. ‘We need our sales rate to pick up and we will introduce new incentives to do that.’”
Love the baseball metaphor…
Making it sound like this is somehow an unusual event.
“Increasing problems with mortgage loans and the rapidly shrinking human touch in stock markets dominated news in the financial sector Monday. Huntington Bancshares Corp. warned that second-quarter profit has fallen prey to a triple play of credit-related issues, rising loan-loss provisions, ineffective hedging and declining net interest margin.”
At least he didn’t say “trifecta”
“You know, I was campaigning in Chicago and somebody asked me, is there ever any time where the budget might have to go into deficit? I said only if we were at war or had a national emergency or were in recession. Little did I realize we’d get the trifecta.” — President George W. Bush, Charlotte, North Carolina, Feb. 27, 2002
About 20 years ago, I was back east @ a convention somewhere and took a couple of British friends out to a ballgame…
There was a triple play and I tried to explain the rarity of such an event, but it was only their first baseball game they’d ever seen.
I’ve only ever seen those in the instant replays, and even then you don’t see them very often. I think the stats say it’s about 1 in 10,000 of seeing one in any given inning.
About the same odds of having a pleasant conversation with a recently new homeowner right about now.
Did I just read (in the original post) that ONE in FIVE subprime loans is expected to go delinquent?
yes, but that is a conservative estimate in my book!
I’d say there’s definitely 46% of subprime loans that will go into default. Most people who seek a loan where you don’t have to prove your income, do not have enough income for the loan.
“Loans that require little or no documentation of income made up 46 percent of all U.S. subprime mortgages last year. U.S. homebuyers with undocumented income defaulted at a rate of 13 percent in February.”
Got model?
Got model glue?
I need something to open my sinuses.
Steve McCroskey: Looks like I picked the wrong week to quit sniffing glue.
http://www.jalanetipot.com/
I was looking at the rate reset chart (I have a printout, but can’t find a url). Anyway, it looks like, between now and November, there are about $220 billion dollars worth of ARMs resetting. That ought to be interesting. My printout is from March 07. I wonder how many of the ARMs on that chart were successfully refinced between March and now.
Well, the mortgage origination index thingy was out a few days ago, and the re-fi index was down. Methinks many with those big resets are in ‘ignore it and it will go away’ mode.
Considering that prices are in a nose dive, I suspect it would be difficult with the early payment penalty as well to get out of these loans. No one is dumb enough to refi a loan on a 700k house that is now worth 590k, well I take that back…there is a person for every situation.
I believe that the long-term, historic delinquency rate for sub-prime, owner-occupied, mortgage loans, is in the 10-15% range. It was only unusually low in the 2002-2005 period as housing prices rose nearly exponentially. Keep in mind, however, that way-back-when, sub-prime borrowers, like all other borrowers, had to have income sufficient to make the payments. Recently, lenders have ignored payment capacity in granting loans, and as a result delinquencies will be much greater than normal for teaser-rate, option-pay, and ARM loans.
If the sub-prime real estate loans were all long-term, fixed-rate loans then 20% would not be a very unusual delinquency rate for say 1 or 2 years. But add in the exotic loan features then delinquencies on sub-prime loans should be at least 20%. I expect that many sub-prime, home loan pools will have delinquency rates close to 100% and that if such pools back CMOs then the AAA-rated tranches will incur losses of 5-10% of principal as the residuals and lower rated tranches get wiped out.
Don’t forget for added fun, you can leverage your CDO purchases so that a 10% drop in value wipes you out completely! The real fall out is many hedgefund positions are wiped out because of the leverage. As long as know blinks first and marks them down, they can all pretend their “leverage” is still above zero.
Historic deliquency may be 10-15%, but I highly down that lenders were taking $100K-200K hits on each foreclosure. The problem isn’t the rate of foreclosure. The problem is that lenders are having to take 80% of foreclosed properties as REOs because they can’t sell for close to what is owed on them. $10 billion a month being added to the REO lists.
5-10% hit on the high rated slices? I don’t think so.
It is my understanding that the AAA slices were about 80% of the total loan, with the 20% piggyback portion being the lower grade. Assuming a 50% slice in prices over the coming years, that would be a 25%-ish loss to the AAA.
Wait.. not all CDOs are from peak. Oh, but some areas are looking at much bigger than 50% hit. Like California that seems ready to take a 3/4ths slice in price.
Weren’t the Bear Stearns AAA CDOs going for less than 80% par when the high leverege fund liquidated?
Yeah… 1 in 5. Enough to kill the financial markets, but still a low estiamte, in my opinion.
Definitely a low estimate.
They’ll eventually wake up to reality.
I’m in shock OC is still doing 60% of the sub-prime they were a year ago…
Got popcorn?
Neil
Don’t be shocked Neil. Many are still lapping up the Kool-Aid and it is still the only way to afford a home, esp. in South OC. RSM, Lake Forest, Foothill Ranch are still waaaay overpriced except to nutball millionaires. Even on 250K a year, these homes a running 3.5X annual income. For cryon’ out loud how many households clear that? Yeah, I know, I am the only one who doesn’t! Go ahead and run me out of my rental and town for bringing down the ‘hood.
In other news, I was in the Jacuzzi this weekend and ran into another fellow renter and his girlfriend. This was great. He has just started an RE business. He is what I would call middle of the road. He sees the overpricing, but still believes in 20-30 years homes will avg. a coll mil in OC. I asked him who will be able to afford? You have already exhausted every conceivable mortgage loan type and even the 100-yr. loan only takes about 100 dollars a month off the monthly nut. Well, he still thinks it will happen and he thinks it is a great time to be in RE. What I didn’t have the heart to ask is if it is so great why do you live here? Obvious. He and the girl can’t afford anything else. No brainer, but I just didn’t have the heart to crush the guy.
The only way those houses will average a million is many decades from now when salaries are $250k+ a year. Of course inflation will make a million in the far future worth much less.
Those $900k houses in OC are worth maybe $300k, thats a 66.7% off the price. Would salaries support even $300k houses?
I don’t know. Sometimes I really wonder about this. We never thought it would be this out of control either. Unfortunately, they may not be entirely wrong. It could get that bad because most people are that stupid. And a decade from now, when the younger generation grows up, most will have forgotten how bad it was now and will refer to these years as we refer to the early 90’s, and the new young adults of that area will have been too young to remember or be aware of how things are now. We didn’t learn from the 90’s, what makes us think we will learn from the early 2000’s. However, you still will have the majority of people not being able to afford them. But I really wonder if it will actually stop the prices from going there.
I’m certainly not saying it’s a good thing or even anything I want to happen. I would love for housing to crash and burn and people to come back to their senses and start looking at housing as shelter and a basic necessity of life and not an investment. I just don’t think society is smart enough to actually do it.
Like fish or birds who don’t stop eating until they explode, naive consumers borrow themselves into oblivion.
I have a 24 year old married friend who bought a house in Beaumont, California last year (at the peak) despite our warnings. His loan was an 80/15/5 meaning he had 3 loans to finance the house. On top of that, he borrowed on the meager equity increase he got last year calling it, “Free Money”.
No, I’m not joking. Now he has to move and the realtor is telling him he might have to take 20-30k less on the house than he paid for it. That’s the good news. The realtor of course wants to sugar coat the contract. Every week that passes without a sale I’ll bet the value goes down 2k. He’s hurting now because he thinks he’ll have to borrow the 20-30k to bring to the closing. I wonder how he’ll feel when it turns out to be 50k or more (on a 450k house originally).
“Among subprime loans, which make up about 12 percent of mortgages, ‘the delinquency rate is climbing and it should climb at a very high rate,’ undermining the value of the related securities, Gundlach said. Delinquencies are now at 14 percent, and he estimates they will climb to 20 percent.”
20 percent? We should be so lucky. I estimate 80+% of subprimes in i/o, 100%, etc. wacky loans will default. I say this truly thinking almost 100% will fail- - - because these ppl could never afford a house to begin with, let alone one for $500k - - - however I am willing to think a few may succeed. I am in there rooting for them!
Darrell in PHX……You nailed it on the head . The problem is the amount of loss per foreclosure that the investors are going to take on these defaults . When Lenders use to require down payments ,often times the lender would not even have a loss on a foreclosure . In the past on low down loans that were insured by PMI the insurance pool would pay for the loss .
Not only were these lenders not requiring down payments, but they weren’t requiring insurance on low down loans to reduce the risk on the low down loans . In past lending cycles sub-prime borrowers just didn’t get low down loans .Low downs were for the cream of the crop borrower ,which made it less of a risk also .To give a low down loans as well as not requiring proof of income is insanity .
Add to everything the fact that the appraisals were inflated in many cases ,along with the cash back fraud ,and easy money 125% LTV refinances , it will be a nightmare of loss for the money people .
The people that set up the funds for these loans should be barred from lending with their bogus understanding of ratings on loan risk .Did these middle men for the loan investors ever once check the quality of the junk they were getting from the front line loan agents/realtors/borrowers/builders ?
Those who can succeed probably found some fool to sell or even charge outrageous rents or maybe won the lottery-haha
Time for Bernanke and Paulson to go back to Capitol Hill and repeat the ’subprime contained’ mantra. Serenity now…
“Serenity now…”
ROFLMAO….that was a good mental image of those two!
LOL, just choked on my burrito, thanks.
“Many investors bought subprime loan securities thinking they were rated AAA, ratings that suggest very safe bond investments, he said. Yet, they are discovering the sophisticated computer models that suggested the investments were safe are not valid, and investors bought junk bonds rather than safe bonds.”
“‘That’s a problem,’ he said. ‘People bought thinking they were buying something else.’”
I have a refrigerator full of spoiled milk. If I put a AAA label on it can I sell it to you as fresh milk? You don’t need to see the expiration date or do any similar due diligence do you? It’s AAA milk!
Only if you mix the spoiled milk in with other vintages and package multiple refrigerators into a big truck, then slice the truck up into smaller pieces.
Moody’s or S&P: “But we smelled the milk last month and it smelled fine. Who could have known it would eventually spoil?”
“Yet, they are discovering the sophisticated computer models that suggested the investments were safe are not valid, and investors bought junk bonds rather than safe bonds.””
Why does wikipedia state that these CDO’s are junk bonds from their definition of junk bonds? Seems like people suck with their money if wikipedia could have told the investor the same information before it even happened. Of course my sophisticated computer model was research on a simple information website. If I had lots of money to invest I would probably try to figure out what the downside to getting such a high yield back would be. Though I also cant understand why people dont spread their savings through different banks in case one goes under. Oh well. Junk Bond usage from wikipedia below.
“High-yield bonds can also be repackaged into collateralized debt obligations (CDO), thereby raising the credit rating of the senior tranches above the rating of the original debt. The senior tranches of high-yield CDOs can thus meet the minimum credit rating requirements of pension funds and other institutional investors despite the significant risk in the original high-yield debt.”
“‘The problem in terms of subprimes extends out into other credit areas and produces a cool wind’ that the economy has to fight against, says Bill Gross, who heads Pacific Investment Management Co.’s $103 billion Total Return Fund.”
The temperature often drops steeply in the minutes preceding tornado formation.
Low preasure will do that as the air gets sucked out of an area.
This comment is priceless.
Cristian Crespo of Valley Village, California, said he found it ridiculous that automakers hadn’t yet come up with a way to combine fuel efficiency with luxury provided by a SUV.
“It’s not that Americans don’t want to be environmentally friendly, it’s just that we don’t have much of a choice,” he wrote. “As an SUV driver, telling me that my only alternative is a Toyota Prius or a Honda Civic is like telling me to eat beef jerky when I’m used to filet mignon.”
Critically, Cristian Crespo of
Valley Village
Angrily Ask Automakers
for Fantasy Fuel Fulfillment
like the earth dipsht concert- FLY less, unless by private jet—like us
“serenity now”
Yeah… Why can’t they figure out a way to make a giant engine that can repeatedly and quickly accelerate 3 tons, that will push a giant, un-aerodynamic hole in the air at a very rapid velocity, but do it with little fuel?
Darn that law of consertavion of energy!!!! Why hasn’t America repealed that law yet? It really sucks!
Americans would like to be environmentally friendly; however, if changing their lifestyle is required then they just can’t, sorry.
Jeez, they watched Live Earth on the weekend; they’ve done their bit already. Time to fire up the hot-tub and call a taxi to deliver some beer.
“The American lifestyle is not negotiable.”
Vice President Dick Cheney
Good…., finally a Valley-Boy. Hope he finds a Valley-Girl so they can have lots of little Valley-Kids. I mean, like, you know, poor people suck.
http://www.bloomberg.com/apps/news?pid=20601087&sid=az8bx8dK06AI&refer=home
“U.S. home sales in 2007 will drop to the lowest level since the start of the five-year housing boom in 2001 as mortgage rates and foreclosures increase, according to a forecast by Freddie Mac.”
So much for the “return to normal ” realtor spin.
These guys usually don’t make these kind of bad comments unless the data is there to support this, at minimum.
WOW!!! Back to 2001, already. I wonder how many episodes of ‘Back to the Future in RE’ we are going to see.
As long as Henry “Hank” Paulson and Ben “Da Chopper” Bernanke can fog a mirror, infinite sequels of back to the future.
If you’re inclined to short stocks you might want to look at the stock prices of the major homebuilders circa 2001. Though homebuilder shares have dropped substantially from their peak some may have a lot farther to fall. If you can’t pick an individual loser you may want to short the SPDR S&P Homebuilders ETF, ticker XHB. It’s down about 15% from the beginning of the year, and about 33% from the beginning of 2006.
It’s such an interesting balance between people who want to buy but can’t find financing vs people who can finance but have chosen not to buy. Of course, there’s probably no way to find this information, but it would sure make for an interesting graph.
One might think “we’re winning,” and folks are choosing not to buy. But there’s also the more truthful theory that in order to jack the homeownership rate up to 70%, people who would have been buying now have already bought and can’t refi to salvation or sell underwater. So now, there’s not a growing demand of sideliners, there’s simply a vacuum created by those who abandoned freedom for FB-dom.
A craigslist poster points out the real problem here. In 2000 and 2001 rates were at 8.32% and 7.3%, so with rates still in the 6% range there is plenty of room left for rates to impact the market.
http://forums.craigslist.org/?ID=67394545
the poster included a nice chart too
The feds really need to increase the interest rate and put an end to this bubble misery fast. Oh and to combat inflation and the weakening US dollar :rolleyes:
“No one knows how much money is at risk from subprime defaults because CDOs made up of the loans aren’t required to publicly disclose holdings.”
I guess that, technically, this is true, but besides the point. CDOs are essentially an analog of a bond fund, where asset-backed securities are collected, and a series of bonds (tranches) are issued which have a call on the principal and interest payments of the fund. Where the problem really is is at the MBS (REMIC) level. If MBSs go kaput, who cares if they are owned by CDOs vs owned directly by pensions plans, bond funds, etc. The blather about CDOs is a smokescreen. It would be as if, during a stock market collapse, the pundits concentrated on mutual funds- of course the mutual funds would do poorly, but it would just be one facet of the real problem. In the same way, a focus on CDOs (which can contain student loan backed securities, mortgage backed securities, credit card, emerging market bonds, etc.) misses the big picture. The SEC does have records of the MBS performance- they are openly traded and easy to track. And the issues are running more than $100 billion a quarter. Whack those bankers with a haddock and get them off of the focus on CDOs.
By the way, most CDOs (at least, most CMO/CLO that I have seen) have a prospectus. Otherwise, who would buy them on the secondary market? These are very explicit about the contents of the funds (if they are closed) or else about how the contents will change over time. Of course, that would involve e-mailing a broker, probably too much work for rating agencies…
Of couse did the Calavaras county Retirement And Pension fund read the entire prospectus. Naah… they just relied on the ratings. Soon they will realize that those ratings are little better brochures for Florida swampland.
But, and this is just speculation, I get the feeling the term CDO is used not just for normal MBS investing, but also now for the CDO-squared, and/or Synthetic single-tranche nutjob vehicles. The squared market, IMO, is where the mis-rated bonds have a multiplier effect and you can get a major, major precipice of risk miscalculation. I also get the feeling like this squared market has been the source of a lot of the CDO growth 2005-2007.
You can have an entire CDO-squared invested in only BBB “investment grade” CDOs that then gets huge portion assigned AAA. Or, even better, you are offering synthetic CDS against those bonds… Man are you screwed! And in a way that can be very obfuscated, because you’ve been allotted a contingent percentage risk of so many, many sources. And the single-tranche synthetics, I can’t imagine there is any way to track what that market is doing.
These guys that are being quoted in Bloomberg clearly have no problem alerting the public of problems. I think if the risk breakdown were calculable, it would have been calculated
Pop goes a bunch of weasels…
The collective noun for a group of weasels is “merge”. Multiple groups may be referred to as “merges”.
Let me see if I understand the Credit Suisse report. They’ve come up with a figure of $52 Billion, even though:
“No one knows how much money is at risk from subprime defaults because CDOs made up of the loans aren’t required to publicly disclose holdings.”
and
“on the basis of what we know now”
and
“that market isn’t transparent enough to estimate exposure and risks there could be bigger”
Why did they even bother to come out with a report? It’s like saying “we don’t know about our hitting, or pitching, or for that matter our coaches, but we’re going to have a winning baseball team this year”.
Seems like double-talk, no? “Banks’ direct exposure to CDOs is not as high as people think,’ said Credit Suisse analyst Ivan Vatchkov…but that market isn’t transparent enough to estimate exposure and risks there could be bigger.”
Bold off?
I have to stop this madness there
More like, “we know we’ll win exactly 87 games this year”. Good enough for the NL West.
Maybe the 52 billion is just their share. Ha Ha!
“Central banks have been warning for some time that investors may be paying too much for risky assets. Since the losses suffered during the sub-prime crisis, however, many investors have responded by rethinking how much risk they are willing to carry in their portfolios.”
The left hand flashes the warning sign, while the right hand runs a loose monetary policy of helicopter drops of freshly-printed liquidity with the unintended consequence of encouraging frivolous risktaking behavior.
You mean when the bath tub overflows, the first thing is to turn off the water, then look for the mop? The Central Banks are running around with a paper towel and a mop, but they left the faucets on full blast.
“Bovis aims to introduce a new range of inducements for buyers within weeks to help counter the extra financial burden of higher borrowing costs once it’s won approval from the U.K. Financial Services Authority, Harris said.”
This tactic has worked well for US homebuilders, so I don’t see why it wouldn’t work in the UK.
“Bovis”
New HB: Bovis & Butthead
Dammit Butthead, I told you never to call me that.
Heh heh…homoaners…
I am Householio !
I just read another article that mentioned that 40% of the homes bought in 2005 were either investment properties or second/vacation homes.
I don’t think people really understand the significance of this. That means there was a 66% increase in demand. For every 100 homes sold normally there were 167 sold. Given, we’ve always had some investments and second homes sold but the 40% in incredibly high.
Look at it this way. Let’s say the market is in equilibrium. We have x houses being built per month for x potential buyers. Now add in 1.67*x buyers, will the price increase 67%. Of course not. The price will increase to a level where 67 of those buyers drop out of the market and a new equilibrium is established. With easy credit, that can be a 3 or 4 fold increase.
What do you think would happen to oil prices if he had a 67% increase in demand and the supply could not be immediately increased to meet the new demand?
Now that supply has met and exceeded demand, and the credit in drying up, we can again go back to reasonable pricing.
I think this is all common knowledge to the posters here but I don’t think most people really get it.
Actually, after re-reading my post there are some inconsistencies there. I talked of increasing demand with supply being constant in one place but talked of supply increasing (100 vs 167) in another place. Excuse me for that. I think my point is still valid.
Maybe I can make this a little more clear. Let’s say we normally have 100 houses selling per month to first time homeowners (and a small fraction to investors). All of a sudden with increased investor activity, we now have 167 people wanting those 100 houses. Now the price must increase enough to have 67 people drop out of the market (either by choice or by lack of funding). If investors and first time home owners drop out at the same rate, we would have 40 investors and 60 first time homeowners. In either case, the artificial demand would (temporarily) have profound implications on the housing prices.
Not only did builders plan on that extra 40% demand, but they are now competing for sales with those houses coming back to the market.
For PHX, we normally sell 10K new homes a year, but that jumped to 20K+ new homes for 3 years, putting 30K “excess inventory” into the bank. Builders are still trying to push 20K houses a year into the market that is now flooded with 30K excess inventory. There are 54,000K houses for sale in MLS, an unknown but elivated number of FSBOs and REOs, and upto 20,000 new spec homes. A healthy market should have less than half that many houses for sale, half as many under construction, and be asking half the price.
The increase in price for both of your scenarios, housing and oil, depends on the elasticity of each. Could be more than 67% as you suggest or less.
I wasn’t suggesting 67%. I was saying it would probably more like 2 or 3 fold.
JJ - Chiming in late here - Your 40% second home/investment figure is limited to those who FULLY DISCLOSED TO LENDERS of this circumstance.
Have a nice day.
Add this one to the articles in this thread. Yee-haw!
Mortgage resets: Record bill coming due
http://tinyurl.com/293snp
“More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market.”
.
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“Subprime ARM lending was most common in some of those once red-hot areas. According to Zandi, three quarters of all those loans were made in the California, Nevada, Arizona, Florida and Massachusetts markets.”
And another thing:
“”In October alone more than $50 billion in ARMs will reset,” according to Mark Zandi, chief economist and co-founder of Moody’s Economy.com. That’s a record, according to Zandi.”
Who was it here that predicted a chilly Halloween? Spooky, indeed.
The foreclosure rate next spring will be once (I hope) in a lifetime event - a head-splitting hangover to one hell of a party.
Keep it coming! Max pain must be administered to the sheeple.
The complete recklessness of our government is breathtaking. But what they are about to do next will surely take the cake.
You see, to create a mess like we have is one thing. But the same fools are going to now try and fix it.
God help us all.
Keep Your Eye on the Land Value Ball
http://wallstreetexaminer.com/blogs/winter/?p=890
Russ — Did you mean to say Land Value Wrecking Ball?
I don’t doubt land will fall 5-10x in some extremely inflated markets. In some places in California, the “land” can be worth as much as 80-95% of the house. Meaning $2 million property, the land can be worth $1.6m to $1.9m. The house can range anywhere from a 1200 foot teardown to a decent 2000 foot house to an elegent 5000 foot mcmansion.
A Builder in Tulsa proclaims these are the best prices you will see in his lifetime. Tulsa ?
http://tinyurl.com/35c4oa
Typical builder: he uses a complete labor-theory-of-value argument - it’s all because of input prices - petroleum, land taxes, production materials. Never even mentions demand as a factor in pricing. Interestingly, those prices only refer to the houses in his market, in his price range. This thing reads like an advertisement. Think this guy might be over-optimistically leveraged?
“Subprime ARM lending was most common in some of those once red-hot areas. According to Zandi, three quarters of all those loans were made in the California, Nevada, Arizona, Florida and Massachusetts markets.”
Well then, I guess if real estate ain’t all local, it sounds like the ARMs are localized.
I wonder why Zandi specifically mentioned October and not July - Oct.
“That comforts banks, which feel they have offloaded risks, but it makes it hard to ascertain who owes what to whom - and which domino could be the next to fall.”
The perfect recipe for a mass a$$pounding…
” We don’t own the flaky loans, we lent money to other people to buy those loans (and they used the loans as collateral for other loans as well).” Yup, the banks offloaded the risk all right, from one side of the ledger book to the other.
“Delinquencies and defaults on U.S. subprime mortgages will keep rising . . . ”
Don’t want to be too technical - okay, yes I do - If you are delinquent on your mortgage, you are in default. These articles and quotes don’t do a good job of defining default IMO. Does delinquent mean less than 30 or 90 days past due? and default greater than 90 days??
In addition, there is usually a little known and never read Event of Default in most mortgage documents that says you are in default if the market value of the collateral ever falls below the note amount!!!
Holy insolvency Batman, 100% of the $0 down mortgages are now upside down and technically in default. I know . . . the lenders will never call a loan NOW based on this Event of Default, but it’s there.
IRES sales statistics for Northern Colorado are in for June 2007: Pretty much the same story as the past 11 months. Total sales down 11% June vs. June, new home sales down 29%.
Past 12 months, new home sales down 38.7%, total sales down approx 12%. Top end very slow, medians mostly flat YOY except for condos . . . those are down.
1,163 fewer sales at avg. of $240k per sale x 6% sales commish = $16,747,200 fewer $ in the hands of realtors . . . not a bad year!!
In 2005, about 40 percent of all purchases were of second homes and the majority of these were for investment purposes.
As returns on these investment properties decline, owners will bail out, increasing the listing backlog and depressing prices further.
Not only returns will cause owners to bail out. How many of these people had a refi on their main residence to buy these 2nd homes and investment properties. As their own homes decline in value, and if they had an ARM, they’re going to be way more than upside down. Plus many bought to use these 2nd homes as retirement homes, but now they’ll never be able to retire.
I know someone who spent $200k for a “retirement” house in north FL. He rushed to buy it before prices go up more. Guess hes gonna lose more than half the value. Others who took out HELCOS to “invest” in a second house probably will lose BOTH houses and their retirement nest egg. Greed goes punished.
‘Now, when a lot of the banks have got a lot of this off their books, it’s not easy to know where to look.’
Might I suggest Madame Merriweather’s Mudhut Malaysia?
http://globaleconomicanalysis.blogspot.com/2007/06/monte-carlo-simulation-of-cdos-part-2.html
‘The Orange County Business Journal. “What a difference a year makes. The subprime mortgage industry—heavily rooted in Orange County—saw loans fall by 40% in the first quarter from a year earlier, according to a survey by National Mortgage News.”
“The tally is the first look at the sector since subprime lenders started reeling late last year and Irvine’s New Century Financial Corp. began its spiral into bankruptcy in February.” ‘
Did they completely shut down the subprime machine?
40% reduction is not a shut down. Perhaps this tally is too early, first quarter
is when the subprime problem surfaced.
“Home buyers face rising borrowing costs as a 51 basis-point increase in yields on 10-year Treasury notes during the last eight weeks feeds into the mortgage market.”
I expect the Fed to do all they can to squash the rampaging inflation risk premium on l-t T-bonds. Not sure that will work, though…