Home Buyers Getting Mixed Signals: NAR
Some housing bubble news from Wall Street and Washington. Bloomberg, “Sales of existing homes in the U.S. fell more than forecast last month, a sign that residential real estate remains mired in its worst recession in 16 years. Purchases declined 3.8 percent to an annual rate of 5.75 million, the slowest pace since November 2002, from a revised 5.98 million in May, the National Association of Realtors said today in Washington.”
“Regionally, existing-home sales in the South are 11.4 percent below a year ago. Existing-home sales in the Midwest are 8.1 percent below June 2006. Existing-home sales in the West are 19.1 percent below a year ago. Existing-home sales in the Northeast are 7.3 percent lower than June 2006.”
“Lawrence Yun, NAR senior economist, said some consumers are uncertain. ‘Home buyers have been getting mixed signals about the housing market, which is causing some of them to hesitate,’ he said.”
“NAR President Pat V. Combs said that local market conditions vary widely. ‘Consumers should avoid making decisions based on what they hear about the national market because all real estate is local,’ she said.”
The Associated Press. “‘It appears that some buyers are looking for more signs of stability before they have enough confidence to make an offer,’ Yun said.”
“Yun said that if the price decline turns out to be greater than he is forecasting that would raise concerns that consumers could cut back on their spending by enough to raise worries about a possible recession for the overall economy.”
“The Realtors are forecasting that sales of existing homes will fall by 5.6 percent this year with prices dropping by 1.4 percent. That would mark the first annual price decline on record.”
“Private economists…noted that existing home sales were falling at an annual rate of 28 percent in the second quarter, the steepest plunge so far in the downturn.”
“‘Housing is contracting at an accelerating pace, taking out with a vengeance the brief stabilization at the turn of the year,’ said Ian Shepherdson, chief economist at a private forecasting firm.”
From CNBC. “The median price of a new home edged up slightly to $230,300 in June, a small 0.1% increase from the sales price a year ago. That was the first year-over-year price increase in 11 months, but analysts cautioned that it would take more months to determine whether the downward trend in prices has finally stabilized.”
“‘The net increase in prices is very misleading,’ said Mark Zandi, chief economist at Moody’s Economy.com, in a CNBC interview.”
“‘[The increase] is related to the mix of homes that are transacting. The low end of the market is getting pummelled by the implosion in subprime, but it’s being biased upward because the share of homes in the high end is greater now,’ Zandi said.”
From Reuters. “Centex Corp., the fourth-largest U.S. home builder, posted a fiscal first-quarter loss on Tuesday, as the U.S. housing market continued to decline. For the quarter ended June 30, the company posted a net loss of $128.0 million.”
“The results included a $193 million, or 98 cents per share, pretax charge related to the declining value of building lots.”
“First-quarter home-building sales fell 32 percent, as home sales declined 27 percent to 6,095. The average selling price of a home fell 5.5 percent to $291,179. Incentives and lower home prices helped sink gross margins to 8.1 percent from 25.6 percent a year earlier.”
“New orders, which are not a factor in this quarter’s earnings, fell 22 percent during the quarter to 6,474, with the Southeast and Central regions showing the greatest decline, Dallas-based Centex said.”
The Daily News wire services. “Countrywide Financial, America’s largest mortgage lender, said that more borrowers with good credit were falling behind on their loans and that the housing market might not begin recovering until 2009 because of a decline in house prices that goes beyond anything experienced in decades.”
“In a lengthy conference call with analysts, Countrywide’s CEO, Angelo R. Mozilo, said home prices were falling ‘almost like never before, with the exception of the Great Depression.’”
“‘This is a huge battleship and it’s headed in the wrong direction,’ Mozilo said.”
The New York Times. “Many of Countrywide’s home equity loans were second mortgages made to people who were financing the full or nearly full cost of their homes. ‘Countrywide is highlighting what is an industry-wide problem,’ said Christopher C. Brendler, an analyst with Stifel Nicolaus. A second mortgage ‘is really an unsecured loan, like a credit card.’”
“Executives at Countrywide for some time had been more skeptical than others, but the bluntness of their comments surprised many on Wall Street.”
“In June, the usually optimistic Robert I. Toll, CEO of luxury home builder Toll Bros., acknowledged that housing might not rebound before April 2008. In early February, Toll had told Wall Street analysts the industry was ‘at the beginning of the comeback trail.’”
The New York Post. “Mozilo told analysts the housing climate is so bad it will force the 10 giant mortgage firms like his to consolidate or perish. ‘I think we’ll get to five,’ Mozilo said while discussing Countrywide’s second-quarter earnings bomb, its third-straight quarterly loss.”
“‘You’ve seen it in terms of Wachovia and World, and Fleet and Bank of America. Nothing is out of the realm of possibility,’ Mozilo said.”
The Union Tribune. “Shares of troubled subprime mortgage firm Accredited Home Lenders skidded 15 percent yesterday, highlighting investor fears that the company’s proposed $400 million sale to a private equity firm could fall apart.”
“Investors have been slow to embrace the proposed takeover. Lone Star originally set a July 17 deadline for shareholders to tender the stock. Only 21 percent did so.”
“‘That’s shockingly low,’ said Bud Leedom, publisher of the California Stock Report. ‘I really don’t know why it hasn’t been more successful. This thing has been trading like a broken deal almost from the start.’”
“The cost to insure the debt of U.S. home builders is trading at its highest level in at least five years. As spreads deteriorate, most builders’ credit default swaps are trading at levels that imply much lower ratings, and many investment grade builders are trading at levels that imply junk ratings, according to the credit strategy group at Moody’s.”
“In high yield, K. Hovnanian Enterprises, Inc. is trading at levels that imply a rating of ‘Caa1,’ seven levels below investment grade, and three levels below its actual rating of ‘B1,’ according to Moody’s.”
“Bear Stearns recently upgraded its recommendation on Hovnanian to ‘outperform,’ saying the current trading levels of more than 600 basis points imply more distress in the name than is the case. ‘I think that 600-plus in CDS is implying a liquidity event … which we absolutely don’t see at this point,’ Bear Stearns analyst Sue Berliner said on Monday in a conference call.”
“Benchmark ABX indexes fell to record lows on Wednesday as July performance data showed further deterioration in loans underlying subprime mortgage securities, traders and analysts said.”
“The ‘”BBB-’ indexes are down by one to two points across the board on the latest remittance reports,’ said one trader. July remittance reports are ‘worse than we expected,’ said another market source. ‘Delinquencies are accelerating still.’”
“Defaults on some so-called Alt A mortgages packaged into bonds last year are now outpacing those from subprime loans, according to Citigroup Inc.”
“The three-month constant default rate for 2006 Alt A hybrid adjustable-rate mortgages is 2.3 percent, compared with 2.2 percent for subprime ARMs, Citigroup analysts led by Rahul Parulekar wrote.”
“The speed at which Alt A hybrid ARMs are being paid off due to home sales or refinancing has also fallen to about the same level as for subprime ARMs, which typically prepay more slowly, the analysts said.”
“Moody’s Investors Service last week said it may downgrade $316 million of Alt A securities created last year, joining Standard & Poor’s in saying it is considering downgrading such bonds. Ratings cuts and warnings by the New York-based services have so far affected more 2006 subprime securities.”
“Alt A mortgages, short for Alternative A, are loans that fall just short of the typical underwriting standards of Fannie Mae and Freddie Mac, the two largest mortgage companies. They’re usually granted to borrowers with good credit records who seek atypical underwriting or loans, such as reduced proof of their pay, lending on an investment property or so-called option ARMs.”
“Average default rates obscure that ‘within things called Alt A, we see a very wide spectrum of credit quality,’ said Andrew Davidson, the head of Andrew Davidson & Co. Inc., which sells consulting service and risk analytics for mortgage and asset-backed bonds.”
“‘That’s the problem with Alt A: It’s a name that doesn’t really have a meaning,’ said Davidson.”
From Marketplace. “Steve Henn: In Slavic Village — a working-class neighborhood in Cleveland — there were almost 400 foreclosures last year. Entire blocks have been blighted.”
“Jim Rokokis is the local county treasurer. He’ll be testifying today and is glad to finally have Congress’ ear. Jim Rokokis: It’s only now that there is blood flowing on the streets of Wall Street that people are paying attention to this problem.”
“This year alone, Rokokis expects 17,000 foreclosures in his county. According to Cayahoga county statistics, just one lender, Argent Mortgage, has seen about 25 percent of its loans in Cleveland go under. Rokokis estimates Argent’s Cleveland-area portfolio is almost one-quarter of a billion dollars in the red.”
“In 2006, Argent’s sister company, Ameriquest, settled a massive abusive lending case for $325 million.”
“Lawrence Yun, NAR senior economist, said some consumers are uncertain. ‘Home buyers have been getting mixed signals about the housing market, which is causing some of them to hesitate,’ he said.”
A fresh batch of FunYuns for lunch… Thanks Ben. Anyways, mixed signals? You must mean a little bit of truthful data is hitting main street and folks are beginning to question NAR? Ahh yes…
I heard new reports of Larry “The Mouth” Yun talking about “mixed signals”. Maybe he should be talking with Angelo Mozilo to get the stories straight…
I think these AssHats at NAR, NAHB, lenders etc have been colluding all along. The fact that their stories don’t jive is surely contrived.
The economist at NAHB has been much more forthright throughout. NAR’s guys have been pure spinmeisters the whole time.
Maybe because many if not most major HBs have to answer to public shareholders, while the NAR answers only to themselves?
N.A.R.
Never Assume Responsibility
Bingo.
Builders are subject to lawsuits if they lie. NAR is not.
Thus the NAR is not a credible source of information regarding the state of the housing market, and by extension neither is the MSM, since a very large portion of the MSM’s income is derived from real estate advertising.
And here’s another “mixed signal” from the commercial RE side…REITs have been taking a hit the past 5 months, and Vanguard’s REIT ETF is down to year ago levels (ie entire year of gains has been wiped out):
http://finance.yahoo.com/q/bc?s=VNQ&t=1y&l=on&z=m&q=l&c=
Arroyogrande, 2012 is the year I’m expecting to get into that ETF. Yields should be high by then.
Here is the signal to buyers.
“Wait another 2 years before you even look at homes”.
How is that for clarity?
Exactly.
And when buying a home 2 years from today, you will find financing will be hard to get, down payments will be 20%, and interest rates will be 9 per cent and up. And the desirable neighborhood where you really want to live will still be overpriced.
Real estate still is Location, Location, Location and its the median and poor located properties that might drop 50%, but Not the good stuff.
I think in regards to the good stuff you are right when it come to location but the good stuff can suffer as well. Take for instance the state of Florida where even the good stuff is taking a beating as buyers decide that yes they want that home but are not willing to buy it knowing that their taxes will be high and that the insurance will be costly with a ridiculous deductible..those high end homes are being reduced at huge amounts verses what the average homeowner is slashing his/her selling price at…
mixed signals=unusually uniform and clear negative signals
‘Home buyers have been getting mixed signals about the housing market, which is causing some of them to hesitate,’ he said.”
—————————————————————————–
The only thing causing me to hesitate is that the prices are still too d@mn high!
“Defaults on some so-called Alt A mortgages packaged into bonds last year are now outpacing those from subprime loans, according to Citigroup Inc.”
Bwah hah ha ha ha ha! Just like we said…and as the LA Time’s article on Countrywide says:
http://tinyurl.com/2y3884
“Until recently, such problems had been almost exclusively limited to the so-called sub-prime market, for borrowers with flawed credit records and high-cost mortgages.
But Countrywide, the nation’s biggest home loan company, reported Tuesday that it was seeing more of its good-credit “prime” borrowers do the same.
“The spillover into prime, I don’t think, is something that should shock anybody,” Angelo Mozilo, Countrywide’s chief executive, said in a three-hour conference call with investors and analysts to report second-quarter earnings.”
Contagion all the way up to PRIME. And Angelo Mozilo tells us that no one should be shocked by this. Well, at least those of us here on THBB aren’t too surprised…
The Daily News wire services. “Countrywide Financial, America’s largest mortgage lender, said that more borrowers with good credit were falling behind on their loans and BLAH BLAH.
- Just because a home buyer had ‘Good Credit’ at the time of the purchase does not mean that they are living within their means. They naturally bought into the lie ‘Buy the biggest house that you can’. They are just as doomed as the sub primer.
In fact, they now are subprimers.
We’ve known alt-A would be a big problem for a while but a lot of folks are just awakening to the potential.. I’ll just reiterate: other than FICO score, alt-A has even bigger risk factors than subprime - no doc, piggyback seconds, option ARM (negative amortization).
Gee, how could this have happened? Hmm, maybe it had something to do with couples in Los Angeles buying $800K homes a few years back and then coming to the conclusion they couldn’t even afford cable TV after paying their mortage.
“…couples in Los Angeles buying $800K homes a few years back and then coming to the conclusion they couldn’t even afford cable TV after paying their mortage.”
Possibly to be followed by a coming to Jesus moment.
A couple years ago I used to carpool with a firefighter’s wife in LA and she said that he’d been on calls to plenty of $1+ million houses where people are living with plastic patio furniture inside their homes. That was even when the market was on a tear.
“Alt A mortgages, short for Alternative A, are loans that fall just short of the typical underwriting standards of Fannie Mae and Freddie Mac, the two largest mortgage companies.”
Huh??? I thunk Fan and Fred were in the business now of ‘guaranteeing subprime loans.’ What standards are they talking about?
———————————————————————————
Fannie, Freddie deepen involvement in subprime loan market
By Danielle Reed
DOW JONES NEWSWIRES
July 22, 2007
NEW YORK – Fannie Mae and Freddie Mac are riding to the rescue of the subprime lending market.
The two large housing finance agencies are beefing up their business of guaranteeing subprime loans at a time when slack lending standards and falling home prices have translated into rising delinquencies and foreclosures among subprime borrowers.
Their involvement will provide alternatives for borrowers anxious to refinance out of existing mortgages that have or will reset to higher monthly payments.
http://www.signonsandiego.com/uniontrib/20070722/news_1h22fanniee.html
Yes, riding to the rescue, but they are merely creating a generations of serfs who will “work the land” for the lord of the manor. Meanwhile, those that are “freemen” i.e. not bound to the mortgage master will be free to move where they like and buy at 50% off in real dollars from their serf cousins. Riding to the rescue indeed.
40 year mortgages.We are soon on the way to 100 year mortgages like those common in Japan. Anyone know how that economy is doing since their bubble broke? You need chronic deflation as a systemic dysfunction to make a return on a loan there at .5 percent. Where are we headed deflation, stagflation, or worst of all hyperinflation? No on knows do they? Not a climate I want to invest in.
Consumer spending is fixin’ to plummet because MEW is gone and the credit card spigot is about to close. People will be struggling just to stay alive, much less buy toys, cars or Chili’s. We will have deflation in everything except the basic necessities of life. I don’t know what you call it, but it ain’t gonna be good.
We already have “infinity year” loans…they are called interest only loans. You never pay off the principal. A lot of good that does ya when you are at the beginning of an ARM reseting, as the interest payments are the biggest “bite” of your mortgage payment in the early years. 40 year mortgages are in no way going to save the US housing market.
40 year or 50 year mortgages, it won’t help. Time to pay the piper.
100 year loans. Great! Slaves will be paying for life as their lenders profits grow. Work, work, work, to keep those loans current, don’t fall behind or the new loan will reset with additional fees for the lender. Death certificate of the labor will close the loan unless the “fine print” makes son/daughter liable for the loan as the lender must be paid in full. The new world is coming and history will be written about this great real estate bubble that never happens again untell another 80 years.
Heh, like the three-generation lease! Hold until the grandson dies, then the property goes back to original owner.
Original meaning of husband == house bond
How is Japan doing? Well, their stock market peaked at 39,000 in 1989. 18 years later, it is just under 18,000.
Seriously, Japan is a society where everyone lives more or less at the same socio-economic level. It’s very comfortable. Sure, the young girls and guys are obsessed with designer goods, but overall, not as much conspicuous consumption.
One thing that surprised me on a recent trip back (I lived there from ‘90 to ‘00) was that prices of food hadn’t risen as much as in U.S. Other good thing is most of country has electric rail, and train tickets were still pretty cheap. Plus, they have nationalized health care which is pretty decent. Overall, I rate Japan’s quality of life as higher than in U.S.
Japan is a society where everyone lives more or less at the same socio-economic level. It’s very comfortable …not as much conspicuous consumption …Plus, they have nationalized health care which is pretty decent. Overall, I rate Japan’s quality of life as higher than in U.S.
Say whaaat?? Relatively even distribution of wealth, nationalized healthcare, little poverty. Are you a Communist or something? Why do you hate our freedoms™?
Other than nationalized healthcare, how the heck is that close to communism.
He never said the system forced an equal distribution of wealth. And I can’t see little poverty ever being a bad thing (by itself).
You can become very wealthy in Japan. It is very much a capitalistic society. But your comment makes me think that you believe the ideal of capitalism is a high distribution of wealth and high poverty. Very strange comment….
JJ,
You’re missing Harm’s sarcasm.
Yes I think Harm was pulling a Steven Colbaire on us.
There’s no way this society will weather the coming storm better than Japan did - no way. Oh yeah, and Japan’s rail system rocks!
Yup, I was trying to be a ‘little’ tongue-in-cheek here.
Sorry I missed that. I swear, I usually get sarcasm!
Fannie and Freddie do Full Doc at least. There will be plenty of subprimers flooding into FHA and FNMA programs… at least those that can prove they have the income (if not the credit) to afford the loan. There is not much refuge there for your typical 10-home Alt-A liar loan investulator.
I’m in the Bay Area, and we are AltA Central here. So… AltA defaults are now keeping pace with subprime….hmmmm…..no wonder, this was how folks with “good credit” got into homes at 7x,8x,9x annual income. You know, young couples grossing $150K a year combined and buying $700K “starter homes” here in Marin County, a very special place filled with financially savvy people -);
Very few people, regardless of credit score, can afford a loan reset on a home purchased at insane multiples of household income. This doesn’t seem like a difficult concept to grasp, but the MSM is still spinning this as a Subprime focused problem.
“the MSM is still spinning this as a Subprime focused problem”
Not for long…the LA Times has had two articles recently with the phrase (paraphrasing) “spilling into prime”. NOT alt-A. PRIME.
Lisa how funny, we see this in OC as well, my wife and I earn combined 190K and wouldn’t purchase a home over 330K max and even that is a bit high for our tastes. I guess we just prefer to have a life where we save for retirement, travel and vacation when we want, go out to eat, spend time with our kids and enjoy our friends and family.
You know, there are many things in life FAR more important than being a slave to an overpriced home market. It is frustrating for us, we may have to move to Colorado to find the neighborhoods we want as the prices we are willing to pay, but since we can move our jobs and income, the trade off to keep the standard of living that we enjoy and pace of life we love would be worth it.
I love South OC, but I am not willing to sacrifice my entire existance for it. What good is it to live in a “great and special” place if you have no time to enjoy it??
I am in exactly your situation, only on the other coast. SImilar HH income, now renting in Palm Beach county.
What fun is it to have a high income if you can’t do anything?? Let me speak from experience, with an income approching 200K, you should (and can) eat out all the time, go on exotic vacations, max out your 401K and still save money for a eventual downpayment on a home. The idea that I want to get into a 600K home just because MAYBE I can afford it is nuts. What fun is it to be high income if your eating Ramen ever night?
OT, but I never could understand the appeal of constantly eating out. The money issue aside, I can’t imagine any bigger misuse of time and health than constantly eating out.
Testify! Nothing I like more than fresh, home-cooked food - no matter how simple or complex. It actually makes me enjoy better the times I *do* eat out also.
OT: I have to admit one of the charms of living in Los Angeles is an almost infinite variety of foods. My wife and I both cook, but there is no way I can make Vietnamese Pho the way they make it down at Pho So 1. My wife makes great ribs but ah the convenience of calling Dr Hoogly Woogly BBQ and picking up an order. When your local food critic wins a Pulitzer it would be a shame not to eat out. I am with you Michael, renting at this point frees up so much of your income for other things. Paul you can substitute your luxury of choice.
“Vietnamese Pho the way they make it down at Pho So 1″
Off topic, but where is that? I haven’t had good pho since iving in Mountian View, and eating at Pho Huo on Castro (in Sunnyvale?)
Pho So 1
6450 Sepulveda Blvd
Van Nuys, CA 91411
http://www.yelp.com/biz/3BPKtU3D7_TQgUkRQXm_LQ
Whenever I read on here about “young couples” buying at 7x or 8x their income, I get a vision of two yuppies on a gerbil wheel, running as fast as they can. Sometimes, it’s just the guy running on the wheel, with the trophy wife off to the side yelling, “Faster! Faster! I want the newest Coach bag! Faster, I said!”
How can that sort of debt servitude be any fun, just for the sake of having a McMansion and keeping up appearances for the approval of friends, and often strangers? The fools.
– Judge Smales
“You’ll get nothing and like it”
I know people who have recently bought in the bay area. Most of them are ordinary people convinced that the only way they can save for their future is to take the plunge and buy a house. How did it get that way? Why do we have a negative savings rate? People have been conditioned to believe that they cannot get ahead by saving in money. Look back over the last 30 years and look at the house price appreciation. This is much more more a monetary policy issue than the average person being foolish.
So tell me, can a single guy who bought a TINY place (1bd/1ba) in Nov. 2003 in downtown San Jose for 328K with a 3/27 neg-am no down, w/income of 75K/yr. really re-fi into a 30 yr. fixed loan that only has pymts. of $1100.00 mo.? (Even after pulling out cash for a new truck and a few bills). The math just does not work out for me…
The math did not work for me back in 1980 after buying and I walked away. We had a 30 yr first and a second and third loan with balloon payments at 13 & 19 % due in three years. If I had managed a way to hang on inflation would have made my debt less comparativley to my wages. We also had dropping interest rates.I don’t think that will happen this time but still people can point to the past 30 years and say even if you buy near the top you will come out OK.
Like you, we are another fiscally conservative family. We are thinking 2x income is the right price for a house.
For 330K we can now easily get a great 3bd/2ba colonial house in the southshore area of MA. This wasn’t possible till last year during the bubble mania. But now our price limt is lowered to 250K. And we have a combined income of 125K, socking away nearly 50K each year into our mutual fund accounts, while we rent a lovely apartment. Renting gives us so much time/money to enjoy life that I secretly question why we should ever buy a house. But my wife wants one, so…. We are in no hurry to help out the desperate sellers, will wait until whole real estate industry crashes and burns!
NeilT,
For those of us who think our incomes are unstable, I recommend throwing away the equation based on n * income. I recommend net worth divided by 6. For young professionals (in their 20s) the income equation is what they should use. for older professionals who followed the advice of personal finance experts and actually saved a good nest egg, the 1/6 of net worth figure will work well. The younger people should go for the 30 year loan. the older people with high net worth should go for no more than a ten year loan.
My net worth is about 750k and I’m 40. Does this mean I can only afford a 125k house if I became self-employed? That is about half of the down payment required to buy a nice house here in the Bay area. I guess I need to move to NW Pennsylvania.
1/6 of net worth to purchase a house will only apply multi-millionaires ($1 million/6 = $166,666 - awful looking numbers, lots of 6s). Not much of a house for a millionaire in So Cal. Income must be part of the equation.
How high are your monthly expenses?! 330K with a $190K income is nothing. Either way, you are never going to own in the OC for that. Prices aren’t going to come down that much, barring a major earthquake.
Personally, I would rather cut down on eating out and instead have a nice kitchen to come home to, but that’s just me. 3x income for a mortgage is tolerable for me.
What makes you say that, a cursory look at craigslist finds
$2600 / 3br - Deatched house in Rancho Niguel. (sic)
Thats 312K at 120 times rent. Believe me we are going to overshoot on the down side and you would be able to get these houses for 290.
Not many young couples in Marin Co. Very very very unaffordable.
Is this really true? Kindergarten enrollment is way up in Mill valley. It’s cheaper to move there and get a top-notch public education for your kids than to stay in San Francisco, for example, and have to pay private school tuition.
Leaving SF for better public schools in Marin, or anywhere else for that matter, is nothing new.
What’s new is homebuyers in Marin buying places at 10x income with crazy loans.
Someday, the craziness will stop.
“Very few people, regardless of credit score, can afford a loan reset on a home purchased at insane multiples of household income.”
And there’s the real problem. That’s the core of the bubble. If it weren’t for people “qualified” by mortgage lenders for homes they could never actually buy in the past we would have never had the huge run up in housing prices.
Lisa, I totally agree.
I peruse some SF blogs once in a while. the kool aid is thick.
when I point out that the typical San Franciscan purchases with an ARM (and most of them with IO or Option ARMs which now make up 65% of home purchases in the Bay area), the kool aid drinkers say
“yeah, they use ARMs but they COULD have used a 30 yr fixed… they just are financially savvy and have 100’s of thousands of $$$ in liquid investments at a higher return!”
craziness.
as many of us (including me) hypothesized… the Bear stearns hedge fund collapse seems to have marked the time when psychology shifted from ambivalence to fear. (at least in the capital markets)
I’m just wondering whats going to happen as the credit issue works its way out. Many current prime/alt-a home debtors will not qualify for another home loan for a long time esp in a tightening credit environment. Subprime early borrowers will probably not accept the responsibility needed to borrow in the near future.
This bubble has effectively wiped out a generation of potential home purchasers. I here a lot of people talking about buying when prices return to sane levels but if the pool of buyers is as small as it seems once credit is withdrawn is that even prudent ?
I read that in Russia when the economy collapsed Dacha’s went from 2000 dollars to 100 dollars and you could not even find a buyer at that price and better you needed a dacha to grow your own food.
Are we headed for a similar experience here. Home prices spiral downwards more people taken out of the market by bad credit which leads to more credit tightening until your required to pay 50% down to get a loan ?
I think so.
“Home prices spiral downwards more people taken out of the market by bad credit…”
I will disagree. Back in the late 90’s you could get a subprime loan for 5-10% down and pay 1.5 to 3% more than a prime loan as far as rate goes. You also had to meet all affordability guidelines. This will once again be the norm very soon. People in the upper 500’s and low 600’s for FICO scores will be able to purchase at 5% down plus closing costs and people in the low to mid 500’s will need to put 10% down plus closing costs.
FHA and VA loans will also be viable instead of the ALT-A loans for those in a little better financial shape.
I’m replying to you. The problem is prices are highly inflated and trending downward and we are not in a deep recession yet. For banks to safely cover this trend I think downpayment requirement will be much higher than your suggesting to ensure they don’t go underwater on the loan. Your correct it will start at 5-10% but thence up to 20% and higher. This cycle will remove more and more buyers from the market and stops only once investors can make decent money off of rentals. But with the even higher down payments for investors this is a much lower price point. Understand you have a glut of rentals on the market at this point moving the point they make money even lower.
So it only stops and reverses once the rental market heats up.
But you can see the number of potential rental residential real estate investors is even lower then home buyers.
This is going to get beyond ugly.
“This is going to get beyond ugly.”
Agreed on that point for sure. I do however feel that once we get to 50-60% of bubble pricing we’ll begin to see inventory clear. Once inventory is clear prices will begin to tick up again.
As for down payments, just remember that lender’s flexibility comes with rate as well as down payment. If they’re afraid of a particular risk, as long as the market is gaining and not losing, they don’t lose by taking the lower down payment and higher rate.
So it brings me to the next question. How much tighter is credit going to get while prices continue to decline? I don’t think we’ll see down payment requirements above 10% even for the worst risks simply because loans got so easy to get at the peak of the bubble.
One must consider interest rates as well and Government sponsered loans. The Fed will lower interest rates in order to increase afordability and will expand the role of HUD and FHA loan requirements in order to put a bottom on this fallout. They will start lowering by Feb next year and possibly sooner in order to try to catch this falling knife. It will put a floor on the housing fallout. It should go back to historical norms eventually but due to the hangover effect it will be a while before houses start to appreciate again at historical norms. Many peoples credit will go from Prime to subprime and their ability to re-enter the buying pool will be several years. We are just starting the transition from the weak hands to the strong hands which is the reason one should save each and every month. If one has a strong hand they can purchase when the timing is right. Cash will be king again in the near future but it will not take 50% just to get into a loan. The Fed won’t let this happen
I don’t think we’ll see down payment requirements above 10% even for the worst risks simply because loans got so easy to get at the peak of the bubble.
What kind of logic is that?
The Drudge Report has several negative RE stories linked today.
My sister lives in the Bay Area, wants to be a first-time homebuyer, and was talking to me about how their starter home was going to cost $800K. I just bit my tongue… Nothing I could say or do (like move north to Portland, OR 12 years ago!) would have an effect. Fortunately, they did get priced out, and couldn’t get parental help to get into something. Sheesh!
“NAR President Pat V. Combs said that local market conditions vary widely. ‘Consumers should avoid making decisions based on what they hear about the national market because all real estate is local,’ she said.”
Yeah, and the fall out is international, you dork.
Just like every economy is local! I will now buy goods “Made in Denver” only. That should keep my savings account going up…..
Yeah, all real estate is local; however, prices in Portland, OR, are still expected to increase, because we are still inexpensive compared to San Francisco.
How’s that for mixed messages?
How about this… real estate is local, but financing is global.
“real estate is local, but financing is global”
The perfect retort to those darn RE agents still trying to tell me how different the Bay Area is. Many thanks!
“Bear Stearns recently upgraded its recommendation on Hovnanian to ‘outperform,’ saying the current trading levels of more than 600 basis points imply more distress in the name than is the case. ‘I think that 600-plus in CDS is implying a liquidity event … which we absolutely don’t see at this point,’ Bear Stearns analyst Sue Berliner said on Monday in a conference call.”
HOV is losing money hand over fist…
By ‘outperform’, did they mean ‘Perform much better than our Enhanced Leverage hedge funds?’
no, they meant everybody out- right after we get our clients out
Bingo. You know they are telling the public one thing, while singing a different tune with their clients.
LOL. It’s not so hard to outperform a worthless piece of crap.
The developement of the Alt-A mess is because many people with good credit lost their good judgement and bought into the not so mixed signals of the NAR a few years ago. Now they need to put tires on the car, pay-off the vacation they took on the money the got from re-fi they took out. Other things like groceries and clothing are getting the way of making their bloated mortgage payments too. These folks are the “keep up with the Jones’s” types. Now they’re keeping up the Jones’s into default.
I have decided to no longer call this issue a housing bubble but instead it is a housing pyramid scheme and the NAR has been the adminstrator.
The pyramid is collapsing taking the bottom (subprime) first and now the next tier (Alt-A) is starting to buckle. It won’t be long until the pyramid collapses completely and all levels of the market are impacted. The top level is last to go because they made all their money when people bought into the pyramid underneath them.
Pyramids by their nature collapse because the support at the bottom collapses because no-one can buy in any longer and the pyramid can’t split anymore.
“I have decided to no longer call this issue a housing bubble”
Credit Bubble…as in “The Great Credit Bubble of 2K”
I’ve decide to call these particular posts the “daily doom.”
They’re getting longer and longer. Ben didn’t even get into the collapse of corporate financing deals today (Boots, Chrysler) as investors suddenly fear that (yikes) unaffordable loans won’t be repaid.
It’s Crazy Credit!
“The developement of the Alt-A mess is because many people with good credit lost their good judgement and bought into the not so mixed signals of the NAR a few years ago.”
******
Exactly.
And kind of funny when one realizes that nearly “everyone” here in the Alt-A Bay Area congratulates themselves on their “good judgement.”
“‘This is a huge battleship and it’s headed in the wrong direction,’ Mozilo said.”
Is that a subliminal reference to the Titanic?
“Is that a subliminal reference to the Titanic?”
More like the Yamato:
http://en.wikipedia.org/wiki/Japanese_battleship_Yamato
Build it as big as you can, then go down to the bottom when your ammunition magazines (loans) blow up.
More like HMS Victoria:
http://en.wikipedia.org/wiki/HMS_Victoria_(1887)
The ship’s already started her turn; too late to reverse before the collision.
More like the USS Bennington, which blew up in San Diego, in 1905…
http://www.uss-bennington.org/early.html
“Her active service was ended by a deadly boiler explosion at San Diego, California, on 21 July 1905.”
More like the Eastland, moored, pulling away from the docks and flipped upside down - 800 people died. In the heart of Chicago.
http://tinyurl.com/3×6xe3
Or how about the Bismark…took one in the rudder and could only go in big circles until the Brits came in for the kill….
Now it’s the seller’s taking it in the rudder and going around in circles until the repo people come in for the kill…
“Now it’s the seller’s taking it in the rudder and going around in circles until the repo people come in for the kill… ”
Or perhaps its the US economy taking it in the rudder and going around in circles until the Chinese (or other huge debt holder) come in for the kill
Sink the Bismark!
Remember the Maine!
It blew up in the harbor of Havana, Cuba…which resulted in a war.
USS Maine
Is that a subliminal reference to the Titanic?
No, it’s a reference to the USS Indianapolis.
Do you think Admiral Yun would do the honorable thing and go down with the ship?
.. or should he be forced to walk the plank?
“Fifteen men on the dead man’s chest–
…Yo-ho-ho, and a bottle of rum!
Drink and the devil had done for the rest–
…Yo-ho-ho, and a bottle of rum!”
“‘This is a huge battleship and it’s headed in the wrong direction,’ Mozilo said.”
Good thing you jumped off.
Like my wife says… Selling his stock at the top was perfectly legal. Folks should have paid heed to that and joined him, rather than letting greed get the better of them.
Right. I take Mozillo and Toll’s sudden ‘honesty’ as the signal that they have converted all reasonable stock options to cash, and now have no personal interest in maintaining the lie.
He warned the world a year ago! And then sold.. There are no surprises. Experiments show that individuals – unlike what is maintained in the theory of expected utility – assess probabilities and make choices under uncertainty, by means of heuristic rules implying systematic errors. The simple rule of cognitive economics. People only believe what they already believe and act accordingly.
…and keep in mind that, although we like to think we saw this wreck coming first, Mozilo has an army of people in the field - if he didn’t have the peak nailed down withing 2 months of when it actually happened, I’d be very surprised.
Winter has a foreclosure post up.
http://wallstreetexaminer.com/blogs/winter/?p=922#more-922
The funding for the Chrysler buyout just flopped today; this follows the junk bond offering that was pulled yesterday for GM’s Allison unit that builds transmissions. Credit crunch big time. Once junk bonds crater, the next leg down will probably be the realization of just how worthless anything based on alt-A loans is.
Right now, the only ingredients to the CDO “sausages” that aren’t getting slammed (yet) are commercial MBS and foreign government debt. Wait until the corporate credit problems really get underway. Then will flow back into the residential mortgage markets. People only think that they’ve seen a real tightening so far.
Wasn’t there a Chrysler finance deal that blew up just before the last recession?
“Private economists…noted that existing home sales were falling at an annual rate of 28 percent in the second quarter, the steepest plunge so far in the downturn.”
What’s worse, there has been so much recent news about the worse-than-expected housing downturn that negative psychology is starting to add weight to the downward acceleration, which tends to make steep plunges become even steeper…
except in nyc it is different here,
the next person i hear say that i will puke on
It’s different in NYC. Lol…
I had a H_U_G_E argument with my best friend last night regarding NYC. He graduated top of his class at a top law school and is going to start at Cravath soon… and… umm… well, he wants to buy because NYC always goes up. We were literally yelling at each other.
He’s the smartest dumbass I’ve ever known. I sent him the link to HBB so I hope he starts a little ‘due diligence.’
He used the “prices in London” argument.
He’s working at Cravath - he’ll be fine.
Hey good news, did Ben post this CA article yet:
http://www.latimes.com/business/la-fi-housing25jul25,1,7579220.story?coll=la-headlines-business&ctrack=1&cset=true
Wait…ala Credit Suisse reset chart, it actually gets *worse*. Much worse.
“mixed signals”, thats rich…so reality and common sense is one signal and the NAR and it’s machine is the other…..got it
“Lawrence Yun, NAR senior economist, said some consumers are uncertain. ‘Home buyers have been getting mixed signals about the housing market, which is causing some of them to hesitate,’ he said.”
Only the NAR could concoct a claim that the housing market is “sending mixed signals.” These guys are living in a bubble.
Bear Stearns is telling us to buy Hovnanian?
BWAHAHAHAH!
Maybe they’ve moved the analysts from their hedge funds to cover homebuilders.
And Blackstone (whose share price has dropped like a rock since its IPO) has been hired to “fix” an Australian hedge fund which is sinking under a weight of subprime bets gone bad. Curiosor and curiosor!
http://online.wsj.com/article/SB118529190863976259.html?mod=googlenews_wsj
‘”Blackstone’s role will include negotiating with investment banks to prevent adverse pricing and selling of assets, as well as add to the international experience of the funds’ investment management and advisory teams,” Basis Capital said.’
Will the PPT be an unpublicized participant in these negotiations?
I am glad that in the years to come we will have blogs like Ben’s to review. That is provided the archives do not get lost, or sold to the NAR for the sum of $1 trillion. LOL
The blog archive will be classified as TOP SECRET by the US Govt before FED starts another bubble in the future.
The existence of archives from an identical blog in 1929 wouldn’t have changed a thing this time. It’s always different this time. People have no interest in saying no to easy money even if they KNOW it’s a bubble. They always think they’ll be able to get out at the top.
“Treated as Secret/SCI”
http://www.comedycentral.com/motherload/player.jhtml?ml_video=89317&ml_collection=&ml_gateway=&ml_gateway_id=&ml_comedian=&ml_runtime=&ml_context=show&ml_origin_url=/shows/the_daily_show/videos/headlines/index.jhtml%3FplayVideo%3D89317&ml_playlist=&lnk=&is_large=true
Jeez, when I checked the Dow this morn, it was up over 70. Then, Hearing the stuff about Chrysler, I looked and Dow only up 35, then, a couple minutes later, only up 12. What fun! Oh man, just looked again, now up 5. HOLY SH!T. Look out below!
I’ve seen Mario Bari-ometer, or whatever, on Today twice in the last week. I used to find her attractive, until she started lying all the time.
Prediction: Things finally get so bad housing wise that Fed stops trying to fight inflation and starts trying to goose the economy with rate cuts, etc. Dollar falls even more (at record lows now), and imports and energy shoot up in price. Demand for goods decreases as foreclosures mount, MEW withdrawals are curtailed, and consumer sentiment tanks. Unemployment (already started by housing, mortgage finance, and building industry layoffs) rises.
We end up with higher inflation as the dollar tanks and the Fed keeps trying to goose the economy, with higher unemployment.
Inflation + stagnant economy : Stagflation.
Is this a possibility?
If the Fed stays the current course, or tightens, housing *will* fall.
If they loosen, housing will *still* fall, and inflation will pick up.
Those are my predictions.
The Chinese can sell us their 4 billion bicycles for 1 peso-dollar each. Got to have some way to get to nowhere.
Definite possibility. In the long run, politics is the biggest factor, even though it’s negligible day-to-day. Americans led by Dems won’t tolerate rapidly rising unemployment, will re-inflate (firing BB if necessary). Bullish for gold.
In high yield, K. Hovnanian Enterprises, Inc. is trading at levels that imply a rating of ‘Caa1,’ seven levels below investment grade, and three levels below its actual rating of ‘B1,’ according to Moody’s.”
I’d imply a rating of Cat 5…
As in Category 5 Hurricane.
“In June, the usually optimistic Robert I. Toll, CEO of luxury home builder Toll Bros., acknowledged that housing might not rebound before April 2008. In early February, Toll had told Wall Street analysts the industry was ‘at the beginning of the comeback trail.’”
He has pinpointed the rebound to April 2008. Boy is his crystal ball precise!
As every standardized test taker should learn, “might” is the ultimate “out,” and makes almost any conclusion logically inferrable. Here, “might not rebound before April 2008″ contains no prediction about any date the market will rebound (if any). Toll is getting clever!
Interesting take on interest rates/housing from Newsmax.com. They’re saying the gov’t is purposely letting the dollar slide while paying lip service to protecting the currency, because they realize the housing market as a source of GDP is gone and they need to prop up exports to replace that, via a cheap dollar. If true, it bodes well for big cap stocks, I guess. Unless US consumer spending tanks, of course.
Also, strange how metals are drifting down despite all the inflation/dollar in free fall…maybe all that’s already priced in.
weak dollar = less spending on imports
fewer imports = slowing growth in Asia, esp China
slower Asia = less demand for raw materials
Precious metals went lower because of margin calls in currencies and stocks. As opposed to stocks and bonds, precious metals are instant cash and can be used to meet margin.
Good to know there is one liquid asset (PMs) when margins are getting called on illiquid assets (stocks, bonds and houses).
“Lawrence Yun, NAR senior economist, said some consumers are uncertain. ‘Home buyers have been getting mixed signals about the housing market, which is causing some of them to hesitate,’ he said.”
Mr. Yun: Consumers are not confused, they are just not listening to the hype of the NAR and refuse to pay the high costs of homes that have been driven up by speculators and Flippers. Listen to your customer and get the message NAR!!!!
“Yun said that if the price decline turns out to be greater than he is forecasting that would raise concerns that consumers could cut back on their spending by enough to raise worries about a possible recession for the overall economy.”
So, do I understand this correctly: If I don’t buy a house and help prop up those inflated prices, it is my fault if there is a recession?