The Housing Bubble

w/ fed @5.25 and actual inflation @7-8%, FED is running a very accommodating/stimulating monetary policy.
Means dump your dollars or you would lose ~10% in a year.
Even w/ such stimulus, housing is still treading water shows how deep water it is in.
Dollar is junk and FED doesn’t care.

Did Bernanke announce a material shift in economic outlook yesterday (in short, subprime is no longer contained)? I imagine it is all good on Wall Street, where the shift will be interpreted as a signal that lower Fed Funds rates are more likely sooner.
——————————————————————————-
Fed chief acknowledges credit fears
By Krishna Guha in Washington and Richard Beales, Michael MacKenzie and Saskia Scholtes in New York
Published: July 18 2007 18:47 | Last updated: July 19 2007 01:34

Ben Bernanke acknowledged for the first time on Wednesday that credit concerns were spreading beyond the subprime mortgage market as investors showed their worries with a flight to quality, seeking refuge in government bonds and other safe assets.

Although the Federal Reserve chairman played down the likely effect on the US economy, declaring that financial conditions remained “generally favourable”, US Treasury yields fell sharply following the release of his testimony to Congress. Ten-year notes were yielding 5.02 per cent – 2 basis points down on the day – after dipping below 5 per cent.

Mr Bernanke said the Fed had trimmed its central tendency forecasts for growth this year and next, but made no change to its forecasts for inflation.

http://www.ft.com/cms/s/029bce2c-3554-11dc-bb16-0000779fd2ac.html

That is good news for the stock market (steady rates). It should also keep gold steady at $650 to $675. Watch out for the peak oil though. $100 per barrel as it will be easily known soon that Ghawar is certainly past peak. Also Berghen and the other super giant oil fields in the Gulf area. Steady rates of 5.25 while ARM resets continue the next 4 years will mean a prolonged deflation in Real Estate prices - several years long.

Anticipate renting the next several years folks!

“Fortunately down on Wall Street they are singing and dancing. The Greatest Story Never Told gets to write a new chapter of CDO wealth and prosperity”.

Yep, The bubbly is always flowing, the never ending party goes on and on!

look at the bright side, at least in nominal terms everything is going up

on the euro side of the pond, same story; homeprices and stockmarkets keep rising strongly, consumer confidence near all time highs, etc.

in Netherlands some more news today about mortgage fraud investigations; to everyones surprise appraisers are pressured by mortgage providers to come up with higher appraisals or otherwise they will not get the job. A preliminary investigation found that out of 300 mortgages that went delinquent, at least 100 had extremely high appraisals. Seems the appraisers are starting to complain because they get paid relatively little (like EUR 175), while the mortage companies and RE brokers charge hefty fees to the homeowners (like 500-1000 EUR) for the appraisal. Homeowners don’t care about the fee, because it is always included in the mortgage (and covered by the 50% HMD).

Some officials suggest that only the bank that provides the loan should appoint the appraiser, instead of the RE broker or mortgage provider. I think we heard that same suggestion abut 10 years ago and nothing happened. Apart from that, I think most of the banks that write their own loans (small percentage probably) already check the appraisals.

P.S.: an appraisal is considered ‘fishy’ over here when the actual sales price of a home is lower than the last appraisal. Clearly shows how unusual declining home prices are for the RE mob.

That’s all due to the exploded transformer? What a mess.

re: the upward bound indicators… ever been on a plane as it goes into a stall? you sort of feel betrayed during that moment of weightlessness, because you still feel like you should be going up, but the plane isn’t… and then a moment later you take an accelerating nosedive that will scare the crap out of anyone who doesn’t know what’s happening…

Sounds great - DOW 14,000 - then 15,000 and beyond!

All is well - just don’t try to buy: a house, food, energy, medical care… oh, and don’t look for a job, either… in fact, just stay home, watch TV, and consume, Consume, CONSUME!!!

“No one wants to give these pieces of paper up for cash because that is an actual transaction that people could point to as opposed to a refinancing or trying to finesse your way out.”

I asked someone in the know, and she said there are all kinds of illiquid, thinly traded instruments out there (loans, for example), and financial organizations are not required to mark them to what the market would be if everyone decided to sell at once.

Still to me this almost sounds like collusion to disguise losses from investors.

What you might say is this. The value of the bonds is dropping in anticipation of the defaults and losses. There is no certainty the defaults and losses will occur. When they do occur, the MUST be booked.

Except that the houses are being bid for in foreclosure by the financial organizations for the mortgage value, further delaying the day of reckoning.

“What we’re seeing already is a spreading of the contagion.”

Thought that the posters who keep chanting subprime-is-contained might appreciate the above quote.

“…more holders are forced to sell the securities in a falling market…”

Sounds to me like the buy signal has been sounded for hedge funds and private equity firms to snap them up. Go get’em, boyz!

I thought my time machine was on the blink again.

Dry milk up 100% and loss of 1,500 jobs. The inflation and employment numbers are a complete fabrication.

http://www.msnbc.msn.com/id/19713009/
It probably didn’t help that Mexican rebels blew up a pipeline, shutting down Hershey’s factory in Mexico. If I were a Hershey exec, I’d have 2nd thoughts about relocating there.

That guys is hosed, as I can find quite a few 3br no garage townhouses in that area on ZipRealty for

Oh, and I would hate to “ loose that 6% commison “!

The part about being within walking distance to a gas station confuses me.

If you need gas, shouldn’t you take your car with you?

Over $400K to open up my front door and be right on top of a shared parking lot? Sign me up!

$424,000 for that POS? What are they smoking? In my area - Tri-Cities of Washington - that would sell for $99-109k at best.

I view this post as direct evidence that the exburb housing drop is starting to “ripple in”. Last year everyone was saying DC is different. This year with the eburbs tanking, everybody is now saying “Inside the beltway is different” Well if I got my geography right it appears that this place is much closer in and flirting with the beltway. The level of desparation I hear in this post is high and I’m seeing similar behavior in other beltway areas!!

It must be that they have easy access to the best coke suppliers in the world.

I came for a job and the lower cost of living. I’m making it much better than I would in NE.

I really want to move to Portland, OR, though. It sounds cool. (I’m a bicyclist, you see–commute to work by bike, do my errands on the bike, etc.)

They just run out of gas here.

I can help you a little bit. Go to the attached link. Put in your landlord’s last name and put Lis Pendens in under Instrument type. You can’t get all of the details without a (fee) subscription, but at least you can tell if the bank has filed anything against your landlord.

IMHO the proper use of subprime is good for the economy and for all of us. Because of the economic failings in society, many peoples that had a history of always paying bills ended up in BK (loss of job, illness etc.). Now they are back on track. Should these formerly staid individuals be denied credit?

Uh … Subprime loans, by definition, do not go to creditworthy borrowers. Why would a creditworthy individual agree to pay extra for a subprime loan?

But isn’t the fact that they’ve shown themselves, as evidenced by their credit scores to be non-creditworthy EXACTLY WHY they’re subprime borrowers? Or is he admitting that they’ve been steering those who could have qualified for prime mortgages into higher margin subprime loans and intends to continue doing so? All rhetorical whinging aside, most of those who have “taken advantage” of the greater availability of subprime financing in the last few years would have been better served if they had simply been denied financing until they could get their house in order. There’s a place for subprime, but it should be a very small proportion of the mortgage market, things like REFIs for those with plenty of equity who’ve had health or job difficulties that look like one time hits.

Yes it’s typical BS from a home builders group, NAR, etc.

“Alex Edelstein, developer of the mid-rise Manhattan condos and Manhattan West in Las Vegas, points out that many U.S. cities have had housing prices well above the national average for decades. They’re “cool” cities like San Francisco, New York and Los Angeles, he said.

“My interpretation of Vegas is not that it will have to plunge 33 percent, but rather that Vegas is being promoted into the small elite group of cities that have enough external factors that make people want to own property there that the prices simply are high relative to income,” Edelstein said.”

Elite group of cities? Las Vegas? Edelstein made a funny.

There’s no urgency for people to go out and buy.
Seems to me that a family with school-age kids looking to buy would have some urgency to buy before the new school year starts. It’s always the weather: too hot, too cold, too wet, too dry.

Yes! There’s the key statement. “Bottom line is prices have been set by investors.” Just like ALL bubbles, that’s why this mess will end very, very badly. However, it’s a worse situation in this case. Throw in crooked mortgage brokers, crooked appraisers, crooked banks and this is going to be a horror story. Interesting to watch the talking heads who were telling us a year ago that sub-prime was not a problem, now mumbling into their coat sleeves that it’s a serious problem. The main culprit is Bernake who is turning out to be a real little slimey two faced worm.

David Hume (1711-1776) set forth the classical dichotomy between real and nominal money. In essence, if the Central Bank doubled the amount of money relative to the quantity of real wealth denominated in such money, and nobody in the economy was fooled by the monetary expansion, then prices would double.

“If so, how can BB inflate the dollar, if his job is to keep inflation at a low rate?”

The Fed runs a discretionary monetary policy, which means that, official policy announcements notwithstanding to the contrary, they can target inflation where they see fit.

Mr. Bernanke is chairman of the Federal Reserve, which makes him the point man. He does not have the power of the CEO of a major corporation. The Federal Reserve is “in the business of managing total demand in the economy so as to produce desirable outcomes on inflation and employment”.

The Federal Reserves official policy is to not interfere in asset bubbles. Either by not pricking them early and not to assist when the asset bubble pops. The Riksbank (The Swedish Fed) is of the opinion that bubbles should be burst as soon as they appear. The Riksbank uses asset prices to assist in monetary policy. The Federal Reserve uses asset prices to expand the economy.

The Riksbank belief is monetary policy cannot appropriately deal with the consequences of a burst bubble. The Federal Reserve of the US was not concerned (until Congress got into the fray). “Monetary policy should be effective in countering the effects of a burst bubble”.

My money is with the Riksbank.

“The view that government officials know better than the markets has been proved wrong over and over again.”

all quotes from Federal Reserve
Governor Frederic S. Mishkin
The Role of House Prices in Formulating Monetary Policy

It depends what you mean by “inflate the dollar”.

If you mean “make the dollar worth more vs. other currencies and goods”, that actually is DEFLATION…as the dollar’s “buying power” rises, it takes less and less of them to buy any given good or service. In other words, prices go DOWN…which is a sign of DEFLATION.

If you pump more $$$ into the economy, each single $ becomes worth less and less (supply and demand), and so you need more and more of them to purchase a good or service…ie prices go up. That’s INFLATION.

(Someone correct me if I’m wrong here)

Increasing the money supply
leads to
more $$ floating around
leads to
each $ being worth less and less (supply and demand)
leads to
price inflation (more and more $ needed to buy goods)

I assume that there is an ver growing “demand” for $$$ (based on economic growth, etc.), so increasing the $ supply per se might not cause inflation…but I would assume that increasing it beyond the “demand” would.

(Again, someone correct me on this if I have it wrong)

This one is more basic but you are asking questions that exceedingly bright economists come to very different conclusions about.
In short yes, but it’s not quite that simple (else any fool could be a central banker and no fool would need to be). The trick is that there are two parts. The central bank effectively sets the amount of money in the economy (not just currency but credits (demand deposits) as well) this is done via printing, open market activities (setting the fed funds rate), and reserve requirements. However, the participants in the economy take the units of money created and spend them at a given rate. Sometimes when that rate falls, even exceedingly expansionary monitary actions do not trigger inflationary results (for example Japan’s central bank has pursued the most inflationary policy possible for most of a decade with scant inflation in the economy).
Inflation results when the combination of the money created multiplied by the transactions it is used for exceed the real output of the economy (it’s a gigantic differential equation in some sense). Neither side can predict what the other will do, nor what the exact output of the economy will be, so it’s easy to have errors (generally inflationary errors are seen as less costly to the economy than deflationary errors which you can see the value of all currencies over the last 100 years).

Lowering interest rates sure inflated home prices. I think in Japan it does not work that way but here in the USA yes too much money cashing too few goods = inflation. Low interest rates increase the money supply as easy borrowed money gets added to the money supply and if banks don’t need reserves to back up their lending the Money supply can increase without bounds.
Japan on the other hand has lowered interest rates to almost zero and no inflation. japan is destroying a whole nation of savers the biggest hoard of money ever.

It is important for you to get one basic idea straight, which is that the interest rate is the “price” of money — in terms of what it costs to borrow it in the credit markets. According to any standard text on Money and Banking, the Fed controls the Federal Funds Rate (the rate that banks charge each other for overnight — read “very short term” — loans), and all the other interest rates (including those on Treasury bills, notes and bonds) are set by “the market.”

In fact, there have been periods of history (e.g., the latter half of the 1930s) when the Fed pegged Treasury bond yields (controlled the relationship between quantity of bonds in circulation and purchase demand in order to hold the yield at a fixed level). I have conjectured as of late that the l-t T-bond yields might be similarly targeted under present policy, as the inflation risk premium seems rather low given signs of building inflationary pressures.

Everything is going down, except inventory.

I’m not an expert in international economics, but a falling dollar coupled with an import-oriented economy running persistent unsustainably-high trade deficits would appear to also be inflationary (though the trade deficit will gradually get choked off if the trend continues to where the higher import prices and lower export prices to our trade partners equilibrate the trade flow with the money flow…).
———————————————————————————-
Declining dollar not a good traveler
Steep euro, pound exchange rates make trips costlier
By Mark Landler
NEW YORK TIMES NEWS SERVICE
July 19, 2007
http://www.signonsandiego.com/uniontrib/20070719/news_1b19dollar.html

immpossible we have low inflation, the FED says so.

Over here in Phoenix I paid $780 per month from 2000 to 2004 for one apartment in a non-gated area and no inside washer and dryer. From 2004 to now I’ve been paying $966 per month in a different complex, more upscale, with all the appliances I want. Rents have been cheap here at least since 2000. The excess inventory of houses (about $60,000) continue to make rents stay cheap. I figure the rents are going up 2% per year here since 2000. Better to put excess cash in T-bills. I just reordered $3,000 worth of 3 month bills today.

And a little stupid. Buying back stock with cheap debt as a way to increase stock price because of the higher earnings yield is not a good plan for most companies. Adding leverage to leverage. Sheesh.

In the last 42 years the Dollar has depricated approximately 90%.

WHAT’S NEW: Dropping demand has triggered price declines that are helping revive the housing market.

a revival…really?

It’s funny to think about a bunch of Congressfolk hammering a Princeton economics professor on matters beyond their grasp…

Looks to me like a banker just rediscovered how valuable being the banker in a fractional reserve banking system can be and is trying to use “community” to sell the goods. Nice work if you can get it!

HOLY COW! BATMAN! Traffic of Perspective Buyers
Dec 2005 = 40 July 2007 = 19 (NINETEEN)
Make your low ball offer with this printout, and explain you are the only qualified buyer left in America

The NAHB/Wells Fargo Housing Market Index (2005 - Current) Normal View

A rating of 50 indicates that the number of positive or good responses received from the builders is about the same as the number of negative or poor responses. Ratings higher than 50 indicate more positive or good responses.

Housing Market Index
(Seasonally Adjusted)

2005 2006 2007
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
57 57 56 54 51 46 42 39 33 30 31 33 33 35 39 36 33 30 28 24

Housing Market Index Components
(Seasonally Adjusted)

2005 2006 2007
Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
Single-Family Sales: Present

64 62 61 59 55 50 47 43 37 32 32 33 33 36 40 36 33 31 29 24
Single-Family Sales: Next 6 Months

65 66 64 62 59 55 51 46 41 37 42 45 49 48 53 50 44 41 39 34
Traffic of Prospective Buyers

40 41 40 40 39 33 29 27 22 22 23 26 23 26 29 28 27 22 22 19

Source: NAHB, Builders’ Economic Council (BEC) Monthly Surveys

Just goes to show that the street does not understand Newton’s First Law. “Every object in a state of uniform motion tends to remain in that state of motion unless an external force is applied to it.” This is how the Federal Reserve operates.

Then: “Leaning into the wind” meant increasing the Fed Funds rate to stem building inflationary pressures.

Now: “Leaning into the wind” means building up investor confidence when herd instinct is telling the bulls to dump everything and run for the hills.

yeah except he bought it 4 years ago for 90K

They must not be properly accounting for the devastating effect of (Fed-stimulated) massive overbuilding of the U.S. housing stock on the long-term health of our national economy.

Mr. Bernanke is probably correct about subprime. What he is not saying anything about and (to me at least) far more worrisome is the CLO market. This market is 10X the size of the subprime market and is far riskier. 60% of bank loans are CLO, 75%+ of underlying CLOs are JUNK. In the first 6 months of this year almost a Trillion dollars was written, in the last 5 years 6 Trillion; Packaging Junk bonds and rating them AA.

My personal opinion is that - on the surface at least - I don’t see any problem with this. On her salary alone, the house price is in the comfortable 2.5 x income range. You have some downpayment which is good. Don’t know how much debt you pay off each month, but I can’t imagine it’s so much that you couldn’t easily swing this.

Just keep in mind it’s unlikely you’ll be building any equity early on. No matter where this house is, I just don’t see any real estate appreciating for a while.

I would look seriously at rent vs. own ratios. Is it about the same price to rent as to own in your area? (Knowing the area would help us help you.) Or, like here in San Diego, is it two to three times for the joys of ownership?

Keep in mind that tax savings help but not nearly as much as realtors would have you believe. The absolute most you will save on Federal taxes would be 35 cents for each dollar of mortgage interest and property taxes spent. (This assumes you do not fall into AMT and lose the property tax deduction.) For now I am ignoring State tax savings as I do not know what state you are in. (California is a bit different from Texas for example.) However, you would have to make almost $350,000 this year to fall into the 35% tax bracket so you will (probably) get less than 35 cents back on the dollar.

Add to interest and property tax costs (minus X%) insurance, HOA’s, repairs, lawn care, etc. and see if it still financially makes sense. The real estate will probably go down in value over the next few years - can you be in the home at least ten years? If all that makes sense make a lowball offer and go for it. If not, wait and rent - even a couple years could make a big difference. (BTW If I could buy a decent home in SD today for $240k I would do it in an instant. But currently it doesn’t exist. And I won’t overpay elsewhere because CA prices are outrageous.) Good luck!

And should we die before our journey’s through,
Happy day! All is well!
We then are free from toil and sorrow, too;
With the just we shall dwell!
But if our lives are spared again
To see the Saints their rest obtain;
Oh, how we’ll make this chorus swell —
All is well! All is well!

magnet target

Yeah, I had a feeling that would happen. A friend of my husband’s (who is Indian) has basically stopped talking to us because I accidentally implied that immigrant workers (both legal and illegal) would not be taken care of if the US decided it was not in our best interests. I mean, maybe India will take care of the guy, but the US won’t. I didn’t really mean to start the conversation; it was one of those faux pas, but in the end I learned that this guy really believes these 4 things:

1. India is superior to America because its people are more educated and there are more people there.

2. India’s economy is NOT growing because of American investment. It’s growing because their system is just bound to produce growth (no explanation of why it’s so sudden).

3. India was a world power for 2,000 years and will take over again soon. Like it’s taking a nap or something.

4. The US will keep him employed forever because he’s too valuable to let go.

The weird thing is that # 4 pretty much makes #s 1-3 irrelevant/stupid/wrong. I’ve been getting exceedingly frustrated by this overwhelming sentiment among temporary workers and illegal immigrants. But what can I do? I’m just a voter. Ugghh.

Is it just me, or is there some kind of diconnect in watching a bunch of rich yahoos learning to cook duck on Viking stoves while a poor black man entertains them with the blues? I’d advise Greenwood, Mississippi tp maybe diversify a bit.

Good news for the Street. It’ll go up 100 tomorrow, watch and see.

What I find puzzling is that it seems the major debt ratings services (Moody’s, S&P’s and Fitch’s) have merely scratched the tip of the iceberg with respect to ratings downgrades. What would make J.P. Morgan analysts want to pipe up about a bottom being close at hand if they did not have a tip from the top that a fix was in?

BTW, “low home price inflation environment” is a pleasant euphemism for “deflating home price environment.”

Fitch boosts default estimate on subprime ARMs
Wed Jul 18, 2007 4:45PM EDT
Email | Print | Digg | Reprints | Single Page
[-] Text [+]
Market News
Dow at record close over 14,000 | Video
Oil surges past $77 as supply concerns mount
Dollar pauses, stays near record low vs. euro
More Business & Investing News…
Featured Broker sponsored link
Money Center
Free practice account at FOREX.com

By Al Yoon and Nancy Leinfuss

NEW YORK (Reuters) - Fitch Ratings on Wednesday said that it will sharply increase its assumed level of U.S. adjustable rate subprime mortgage defaults, possibly more than doubling estimates, amid expectations that credit quality will worsen further.

The revision applies to adjustable-rate mortgages after the current two-year or three-year year fixed interest rate expires. Rates on $335 billion of such loans are slated to reset in the next 12 months, according to Fitch and Loan Performance data.

“We are now starting to get better data on ARM resets in low home price inflation environments combined with other adverse loan characteristics,” Glenn Costello, co-head of Fitch’s residential mortgage group, said on a conference call.

http://www.reuters.com/article/bondsNews/idUSN1835632220070718

Not everyone seems convinced the subprime subsidence is about to reverse. I love the way McCulley doesn’t mince any words about where the blame for the subprime debacle lies. However, I am not impressed by his deflation prediction, as it falls under the heading of “predictions which have already occurred.”

Fed to Cut Rate After Housing Slowdown, McCulley Says (Update2)
By Brian Sullivan and Wes Goodman

July 19 (Bloomberg) — A slowdown in the U.S. housing market and losses in mortgage-linked bonds will lead the Federal Reserve to cut interest rates, said Paul McCulley, a bond fund manager at Pacific Investment Management Co.

“The recession we have in the housing market is going to be a very long, protracted affair,” McCulley said in an interview from Pimco’s office in Newport Beach, California. “That’s going to lead the average consumer to recognize that he needs to save more out of current income, which is going to weaken consumption in the economy.”
…
The mortgage losses will spread beyond financial markets, McCulley said.

“This whole subprime crisis has been more of a Wall Street event than it has been a Main Street event, but that’s going to change,’‘ he said. “You’ve got overpriced homes and inventory that’s half the distance to the moon. Nationwide deflation in home prices” will follow.

Companies marketing mortgage-linked bonds are to blame, he said.

“The first sin was created on Wall Street,” McCulley said. “Wall Street created the demand for originators to create this crap type of mortgage product.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aleBtlZNvFMo&refer=home

Not sure about debt, but charging interest is definitely verboten.

Un-friggin-believable! A voice of reason and perception sounds forth from the babble of the Bernanke Congressional hearings!!!

(RON) PAUL: Thank you, Mr. Chairman.

If we strive for a lower dollar in the exchange markets, we will have price increases here at home, at we have to deal with it.