Weekend Topic Suggestions!
And send in your housing bubble photos to:
hbbphotos@gmail.com
The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
About Me
Name:Ben Jones
Location:Northern Arizona, United States
To donate by mail, or to otherwise contact this blogger, please send emails to: thehousingbubble@gmail.com
PayPal is a secure online payment method which accepts ALL major credit cards.
Links
-
May 2024 M T W T F S S « Sep 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
Photo Submission: hbbphotos@gmail.com
View the HBB Photo Gallery *updated 4/13/2008
I was talking with a Realtor yesterday (no I’m NOT buying a house). I asked him about the market to see if he would break down and cry or anything. He did say there were some deals out there but most everything was dead. It’s hard to get these people to come clean and admit that. He said he wished that the market would drop in price. Now there is a guy who already unloaded his crappy houses. I said, well the commision on 20 houses @ $100K is better than the commision on 0 houses @$500K.
Where was this Tim?
Knoxville, Tn
2Q reports show that areas sales were off by around 20% and permits were down 35-50%
Finally the bubble burst has reached us.
I had a post on my foreclosures blog that showed the foreclosures in Memphis were equal to total home sales for last year. Lotsa subprime.
I wonder how Nasheville is holding up. Lots of people bought spec homes around the Vanderbilt campus.
Well that only leaves one more major area in Tn. Wonder how things are in Chattanooga.
A good topic would be this week’s revelation of spillover into both Alt-A and prime, and the resulting hit on the stock market. Additionally not just the tightening of mortgage credit but all kinds of credit - e.g. for mergers.
(Classic symptoms of a recession, BTW. IMO the speed of this deterioration is indicating the start of at least a really bad recession, possibly depression)
‘The credit quality of U.S. mortgages is set to weaken substantially through the remainder of 2007 and well into next year, with delinquencies peaking in mid-2008, Moody’s Economy.com said on Thursday.’
‘This will result in substantial financial damage,’ Mark Zandi, chief economist of Moody’s Economy.com, said after the release of the study. Subprime, ‘Alt-A’, jumbo interest-only and option adjustable-rate mortgages, or ARMs, account for about 25 percent of all mortgage debt outstanding, or around $2.5 trillion. Of that amount, approximately $1.4 trillion is at serious risk of default, he said.’
‘Of those mortgages, about $460 billion should actually end up defaulting some time this year or in 2008 and of that, $113 billion will be a loss to investors after recovery efforts are made, said Zandi.’
This is an utterly devastating report for anyone still clinging to the “subprime is contained” reassurances. As for the “high end holding up better” observation, it is possible this reflects the longer time lag until Alt-A and prime resets peak (around 2010, if I recall correctly from Ivy Zelman’s now-famous reset chart). If Alt-A and prime resets are concentrated among owners of relatively more expensive homes compared to the homes owned by subprime borrowers, the peak damage to the high end may similarly be delayed till the end of the decade.
Continuing from the article, in reference to Zandi’s $460b figure:
‘That’s more pessimistic than Federal Reserve Chairman Ben Bernanke, who last week estimated losses between $50 and $100 billion.‘
‘The deterioration of mortgage credit quality can partly be blamed on falling U.S. house price prices, with all parts of the housing market experiencing declines. The high-end of the market, however, is holding up a bit better than the middle- and low-end, said Zandi.’
‘The erosion of mortgage credit quality will also be due to the fact that many borrowers will soon be facing measurably higher mortgage payments. October will be the peak reset month when about $50 billion worth of mortgages will be adjusted to reflect higher interest rates, he said.’
‘”As the resetting mounts, that will put significant financial pressure on many of the subprime borrowers and this pressure is already very intense,” he said.’
‘About 2.5 million first mortgage loans are expected to default over the next two years, with credit problems rising sharply in California’s Central Valley, Florida, and the metropolitan areas of Las Vegas, Phoenix, Washington, and New York, according to the study.’
Can anyone with an informed opinion suggest how to reconcile BB’s $50b-$100b subprime damage estimate with Zandi’s $460b damage estimate? Is the “$113 billion will be a loss to investors after recovery efforts are made” the comparable figure to BB’s $50b-$100b estimation range? And is $113b reasonable, or low, compared to likely reality?
“…The U.S. economy in turn will not benefit from this tidal shift and increasing cost of financing. The Fed tightens credit by raising short-term rates but rarely, if ever, have they raised yields by 150 basis points in a month and a half’s time as has occurred in the high yield market. Those that assert that this is merely an isolated subprime crisis should observe very closely the price and terms that lenders are willing to accept with Chrysler finance this week. That more than anything else may wake them, shake them, and tell them that their world has suddenly changed. High yield lenders, perhaps if only in their frozen, frightened passivity, are signifying that the wealth must be redistributed, that the onerous oppressive tax in the form of low yields must change, and that finally enough is enough!”
pimco
Bill Gross July 27, 2007
http://tinyurl.com/24h2lc
The credit quality of U.S. mortgages is set to weaken substantially through the remainder of 2007 and well into next year, with delinquencies peaking in mid-2008, Moody’s Economy.com said on Thursday.
You can’t trust any of the numbers. There was a report from Moody’s that their bond ratings were based on income figures that were NOT TRUE from the companies. There is NO TRANSPARENCY. These projections from these econ guru’s are totally worthless. They missed the downturn 2 years ago, and now their get their names in print by predicting something in the future based on “who knows what” figures.
Enron and Arthur Anderson are “alive” and “cooking the books”
WHILE Standard & Poor’s, Fitch and Moody’s have all taken fire for their alleged failures in assessing the risk of securities backed by subprime loans, that job is complicated if those risks are intentionally obscured.
A recent report by the Mortgage Asset Research Institute (MARI) found a 30 percent increase in suspected mortgage fraud incidents during 2006. The quality of data on borrowers and loan characteristics provided by lenders to the ratings agencies “has also come under question,” Standard & Poor’s says.
“Data quality is fundamental to our rating analysis,” the ratings agency said in a report explaining its decision to reconsider its ratings on MBS classes issued in 2005 and 2006. “The loan performance associated with the data to date has been anomalous in a way that calls into question the accuracy of some of the initial data provided to us regarding the loan and borrower characteristics.”
Mason said that just as lawmakers should not bail out troubled borrowers or try to facilitate loans to people who wouldn’t otherwise qualify, investors in mortgage-backed securities should be allowed to suffer their losses. Only then, he said, will they demand the transparency needed to assess the risk of such investments.
‘Of those mortgages, about $460 billion should actually end up defaulting some time this year or in 2008 and of that, $113 billion will be a loss to investors after recovery efforts are made, said Zandi.’
The corporate bond risk has soared. Gold has dropped in value as those who had margin calls cashed in. Not a good picture!
Here are some highlights of Zandi’s forecast, based on a study using anonymous data collected by consumer credit agency Equifax:
Home prices will fall 10% from the peak nationally, more in the bubble regions in California, Florida, Nevada, Arizona and Washington, D.C.
Home sales could bottom later this year, home construction could bottom early next year, and house prices could bottom late next year. It’ll be 2010 before the housing market could be termed “normal.”
About 17% of total mortgage debt is at risk, totaling about $2.5 trillion in subprime, Alt-A and jumbo debt. About $1.4 trillion is at serious risk of default. Investors will lose about $113 billion as $460 billion worth of mortgages default.
About 20% of the subprime loans written in the last half of 2006 will fail, with the peak of the defaults not coming until 2011. A “significant number” of these borrowers never made a single payment.
More than 2.5 million first mortgages will default this year and next year. Subprime borrowers will experience significant financial distress.
The U.S. economy will grow less than 3% annualized through the middle of 2009. A healthy job market should prevent a recession, although the jobless rate will likely rise to 5% from 4.5% by the end of the year.
Consumer spending has already slowed and will slow further.
People may not want to make money on their houses, but none of us can afford to knowingly go into a purchase that will depreciate from the get-go. Who can predict what will happen in the short-term or long-term to force a move or experience a job loss?
I have a house in Atlanta though I work & live in Northern VA. My daughter covers the mortgage and I take care of the taxes and insurance. I plan to keep the house for the forseeable future. No reason to sell there, but plenty of reasons not to buy here.
Yep, that sounds right. Foreclosures are very high here as well, up something like 900% in some areas. They’re doing something to get them off the records though as many never show up as forclosures and I know that they were forclosed and still on the market. The house behind me was forclosed last fall, the bank took possession in Feb. The house still sits for sale @ $410,000. It was purchased new in 98 for $189,000. No bubble here huh?
‘Louisiana-Pacific Corp. is getting out of the decking business, while reporting sharply lower sales of other wood products to homebuilders, signs that illustrate how a deeper U.S. housing slump can cause harm to a key corporate employer in Middle Tennessee.’
Tim,
Same here in Port Charlotte…The REO is just a sittin without going on the market. The really creepy thing i have noticed in the last few weeks…The number of new listing jumping into the market. Maybe people who now need to sell?
Last year in the spring and summer everwhere ya looked were for sale signs. Almost all got pulled last fall/this spring…Now they are back…
Chris
The analyst for the big brokers have said it’s *impossible* for builders to make an affordable house given raw material cost today. They said prices are stuck because India, China, etc are keeping the raw materials high — otherwise the cycle would correct naturally (as in past cycles) because raw materials would fall and the HBs could build cheaper again. Will raw material inflation keep us deadlocked? Or will REO and all the stock built prior to 2002 be enough to cause prices to fall?
If the U.S is the primary market for goods produced by India and China then a U.S. led recession will led to a recession in those countries and thus a decline in their demand for building materials, thus the market for those high priced building materials will eventually correct.
Good thing we probably don’t need any more homes built for 5 years to give us time to soak up all the inventory from the bubble.
How long do you think we could go without building a single home before we ran out of inventory?
“They said prices are stuck because India, China, etc are keeping the raw materials high — otherwise the cycle would correct naturally (as in past cycles) because raw materials would fall and the HBs could build cheaper again.”
Another reason that globalization is THE WORST. IDEA. EVER. Of course, this is a good excuse, blame it on China and India.
And the alternative is? Not trade with anyone?
Sorry. We’re all human beings. When countries trade with each other they have an ever expanding incentive to get along with each other. Yes, differences in wages make for dislocations of all kinds but that happens in any dynamic, technology driven, economy, no?
Having the rest of the world catch up to us would seem like an enlightened “progressive” idea even if it causes us a bit of pain.
“And the alternative is? Not trade with anyone?”
Hey, bub, don’t put words in my mouth. “Trade” has been going on ever since people from one area made contact with people from another area. Jeebus Cripes. “Trade” and “globalization” are two different things. We “traded” with other countries long before globalization.
But, on the subject of trade, I certainly wouldn’t trade with other countries (as in China) to the detriment of my own. Trade must be a good deal for both sides.
And before we can really trade with any other country to any great degree, we need to clean up our own filthy house here in the US. Only then can we set a true example and trade equitably. The China trade is not working out for most of us, I think. But that is not necessarily their fault, but ours. Charity begins at home.
“But, on the subject of trade, I certainly wouldn’t trade with other countries (as in China) to the detriment of my own. Trade must be a good deal for both sides.”
Oh, but it WAS a good deal for both sides. The problem is that you and J6P weren’t represented by either side.
The term globalization means different things to different people. When people say they are for or against it, one hardly knows what they’re really talking about.
But if you’re talking about groups of people become more and more connected regardless of location, then globalization has also been occurring since people from one area made contact with people from another area. One aspect of this is trade, but cultural standardization can be another.
But regardless, there is no “idea” here. It’s a description of a phenomenon, not something where somebody said “I just came up with globalization and it is the best idea ever!”
You can rail against it all you want, and it’s fashionable at times to believe that some cabal is putting it together against the interest of people as a whole, but people as a whole have either implicitly or explicitly endorsed it through their actions. Sometimes it was in their best interests, sometimes not. However, given how long it’s been going on, presumably, more often than not, they thought it was in their best interests. Note that the specific actions that might be in the best interest of one group might not be in the best interest of another, but each group is still acting in what they think is their best interest.
There are isolationist hiccups or re-adjustments along the way that slow it down or even temporarily reverse it, but the long-term trend towards globalization through the centuries has been very pronounced and will likely continue in the future.
You missed out one important fact contained in your smug comment. Many countries in the world do not want to, “catch up with us.” Many cultures around the world dislike the western culture and their bad values of greed and their obsession to own/buy lots of crap. Added to that, places like India for instance, are so diverse culturally it will take (if it ever happend) hundreds of years to change. During that time, many radical groups will emerge as they are now to stop western attempts who are trying to change them into mirror images of the US or the UK, etc.
I’ll take greed over a bunch of crazed suicide bombers any day.
Huh?
Countries where kids grow up knowing both parents?
“Catching up to us” doesn’t necessarily mean that they have to be mirror images of the US. He means catching up to us in terms of wealth and opportunity. Each country is going to define these two traits differently, but they all still want wealth and opportunity. In that respect, Jag is correct, all countries, including the US, are trying to catch up vs. somebody in some respect.
Again, it’s fun for some to rail against globalization, but the actions of the people as a whole speak louder than small minorities. The Chinese government can make a big deal about Japan’s actions during WW2. There are protests that are widely televised. But in the end, the Chinese still buy a ton of Japanese stuff. If so many cultures dislike western culture to the extent that you imply, then why are they worried about US culture to begin with if it’s so distasteful? The vast majority of people in the US probably do not want to live like a tribe in New Guinea. And those people don’t worry about it either.
Hey, I don’t like US consumerism, but apparently a lot of people around the world do. I don’t like McDonalds or KFC, but apparently, a lot of people around the world do. I don’t like buying stuff from Wal-Mart, but apparently a lot of people in the US do. The marketplace, local or national or global, has spoken. Maybe its words will change tomorrow, but I don’t think it’s tone and overall point will. When people want something, there will be those trying to provide it, and that’s what brings them closer together regardless of the consequences.
I do agree there will be backlashes, just like there is a minority for every majority, but again, the long-term trends towards a blending of cultural values as each culture takes what they like and leaves the rest behind will dominate those who think that some sort of purity is attainable.
I saw a sign off of Toledo Blade Blvd in North Port,Fl proclaiming…We will build on your lot at get this…63.00 per square foot. Bwhahahahah…
How low can we ago ?
Chris
That’s low, but not insane. You can build a nice house for 100/sq/ft, although, if you ask any RE people, they will tell you that’s total BS, and that the rules have changed.
My uncle built an amazing home in VA for 125 sq/ft; very, very upgraded, with a fully closed in basement. Much more upgraded then the 300 sq/ft home that I live in in Palm Beach.
I had a nice blog operating where I tracked the cost of a median new home price per square foot. The latest available number was $108 a square foot (overall, US) in December 2006.
Adjusted for inflation, there was no statistically significant change in the median new home cost per square foot from January 2004 through December 2006.
Note: mu number includes the cost of land.
They used to build some nice homes in Florida for cheap. Good to see that we may return to the days of a fair exchange for a job well done.
This is the future. When traditional material prices get to high.
http://www.housesofthefuture.com.au/hof_houses04.html
Wow - looks like The Onion has branched out into other domain names. That almost looks like a serious web site!
The clay, steel, and steel houses look like much of the new prefab. See Dwell Magazine. I love those houses.
I don’t care what the house is as long as it’s efficient. The wanton waste, energy-sucking McMansions is the last thing I will own.
Material prices are flat to down around here. The realtors keep pitching that building costs are up but I know they aren’t. Concrete and excavating are up slightly, framing, osb, etc are down. Copper wiring is even down some. There’s still oversupply from Katrina on many things.
The biggest cost of of a home is land, not construction materials.
Good thing land prices are deflating, then…
UPDATE: Impairment Charges Knock Home-builder Earnings
Dow Jones
July 26, 2007: 12:31 PM EST
BOSTON (Dow Jones) — A slew of residential builders releasing quarterly financial results this week have reported that profits are being eaten up by impairment charges as land and home prices continue to head south.
http://money.cnn.com/news/newsfeeds/articles/djf500/200707261231DOWJONESDJONLINE001071_FORTUNE5.htm
land being the greatest cost may be true round your neck of the woods……the biggest cost is in the LABOR.
Shiller makes a good argument that the cost of constructing a house should be falling because of increased use of prefab (roof trusses) and greater efficiency in labor. Of course, most real estate agents have only a primary understanding of economics, and continue to state differently.
most real estate agents have only a primary understanding of economics, and continue to state differently.
Most real estate agents only have a high school education. Very few have college degrees and understand economics.
They understand that in order to fill the Hummer up with gas, they are going to need a credit card to pay at the martini bar that evening.
By the way, inventories are thru the roof here. Local mls has over 24,000 properties listed not counting fsbo, etc. 2Q sales were 1393, do the math on getting rid of that glut. About a 4.5 year supply with more coming on the market daily. Why are so many people so late to the party?
and meanwhile, the clueless fliptard across the street from me continues pouring money down the drain on his “project.” He paid too much for the house as it was (268K), now has probably sunk another 25-30K into it and will try to profit in a neighborhood where there is a solid, impenetrable wall at 295K.
and meanwhile, the clueless fliptard
Txchick- i love that expression. i don’t think i have seen “fliptard” on here before but, it is definitely a welcome addition to the HBB venacular.
Weekend topic suggestion:
How will/has the housing bubble affected retirement planning for present/future generations?
I agree. I am freaking out about this issue, especially after calling my “financial planner” the other day. I mentioned housing and stopped speaking (you know, so he could react) and he sat in silence. I also him about an aggressive fund I >was
Whoa, I got cut off there. Anyway, yeah, retirement and whatnot.
I’m a fair ways from retirement still, but I can say my planning is more conservative than it otherwise would be, due to the almost certain recession/depression coming. Not so much from a risk standpoint, but the emphasis is more on investing in things that will do better during an economic downturn. Lots of precious metals, shorting (e.g homebuilders :-)), and investing in companies that enable bargain-hunting - e.g. eBay, Priceline, Big Lots, and generic pharmaceuticals (e.g. TEVA). I’m getting out of tech stocks and consumer goods and retailers. Also doing more treasuries than I otherwise would.
“How will/has the housing bubble affected retirement planning for present/future generations?”
I think financial flexibility will become a bigger theme for future generations. A lot of emphasis has been placed on things like security or maximizing returns (or utility) in the past, but as our economy becomes more volatile, financial flexibility will become more important, particularly among younger generations who don’t have the same concept of financial security as older generations had.
This isn’t really tied to the housing bubble although I think the housing bubble will bring the point home more easily for many.
For example, my wife noticed an interesting job in another city a month ago. If we had bought a house in Napa for say $500K 1.5 years ago and could only sell it for $400K today, she might not even be looking at jobs in other cities even though the returns on getting a better job would be far better than any housing consideration. We’d be worrying about paying that mortgage and avoiding coughing up $100K at the close.
We both currently make good money, but we still save 25%+ of our gross income. What’s the primary reason? It’s not retirement funding (although that’s a secondary effect). It’s really so that neither of us gets stuck in a job we hate. I know a lot of people who are chained to their lousy jobs because of financial commitments (kids, house, spending habits, etc.) because they have no meaningful liquid asset base. We’ve been in lousy jobs. We’ve also been laid off before. We want flexibility to do what we want to do which means we have to save.
We won’t always feel that way. At some point, we will be comfortable enough that flexibility will not mean as much for us. But many younger people have a long ways to go before they’re well off enough to not need flexibility if they want some sort of financial freedom.
Ok here is some news that highly leveraged companies are starting to feel the pinch on refinancing that our good HB are feeling.
Hey the link did not attach, um
try this:
http://www.ft.com/cms/s/06371f56-3ada-11dc-8f9e-0000779fd2ac.html
txchick57, I know of someone trying to do that too. They bought three cheap foreclosured houses to flip but now have invested more in the houses than they paid for them. The neighborhood cap is at least 25% under what they have in them. According to them, the market will rise up to them because they have the nicest houses on the block. Lol
welcome Tim!
when you’re replying to someone’s question/comment, hit the
“Reply to this comment” button so that your answer comes immediately after their question/comment! (notice how my reply is right after your comment, and look how your reply to txchick is lower down!)
otherwise, your reply will get “lost”
the “reply to this comment” is here:
—————————————————————>
Oops, my arrow didn’t reach the button.
it’s the blue colored button in the lower right hand of each post.
—————————————————————————>
looks like Reply to this comment
thanks
Weekend topic suggestion: How would “we” (HBBers) clean up this mess? After all, we are the folks with the wisdom and foresight to see what would happen. Of course, no one would listen to us, but now that the damage is done, we can play “policy wonk” amongst ourselves. What would we do if we were in charge? If we were Bernanke, Paulson, members of Congress, etc.? How would we solve this situation to bring it to a resolution? And how could we prevent it from happening in the future? We’d have to examine how we got here in the first place, maybe there’s some fundamental problems that need to be handled, like requiring kids in school to become financially literate.
We could look at this from both a macro and micro viewpoint. For example, on a local level, I would have liked to have given some of my county commission members a good pasting for the completely irresponsible way that builders and developers were given leeway to do whatever they wanted, to the detriment of the community.
The housing bubble and the bust speaks to my ongoing concern about how “business” and corporate entities have been allowed to take precedence over “the people”. Why cannot the two entities co-exist for the good of each other? (Gee, what a concept, and why does it have to seem laughable and naive?)
Anyway, what would we do about it if we were put in charge? There are many brighter minds here on this blog than mine as far as economics go, but for starters, if I were Bernanke, I’d do the Volcker.
I would try to introduce the concept of fear into those who are fearless regarding the acquisition of debt. It’s crazy when multitudes will commit thirty years of future earnings to a bottom line of a contract that they don’t care to understand. The Market can be a great, though extremely strict, economic teacher; it’s too bad so many never get its lessons from watching what happens to others. The lessons hit home (not a pun) for these people only when directly experienced.
combo, I agree with this. Perhaps financial history should be a subject taught at the high school level?
Grade school. Scrap the Christopher Columbus propaganda, and replace it with Dirty Joe Kennedy and the rise and fall of the 1920’s bull market.
Or, just stick with the bush clan. Remember Neil and the Silverado S&L scandal? Or the Union Banking Coorp. and it’s deals with Thyssen, financing Nazi industrial production.
Watch bush’s grandfather in action.
http://www.john-loftus.com/Thyssen.asp
I’ve tried so many times to warn people about whom I care concerning this mess…I’ve sent a link to Ben’s blog to so many folks, too. Either this mess is so unbelievable that people don’t want to believe it or I’m not convincing enough…any suggestions on how others on this board have been able to convince friends & family that there is a housing mess and what could occur as a result of it?
if I were Bernanke, I’d do the Volcker.
That’s what is needed a correction and get it over with already, but Bernanke is no Paul Volcker and of course this time it’s different. I think the FED’s next move when it happens will be a cut.
You are probably right about what will actually happen, but what would you do, if you were in charge of something in government or business that would clean this mess up and prevent it from happening in the future? “They” may not listen to us, but at least, if we blog it out here, our policies and ideas are out there, so that people can see the right moves and compare it with the future idiocy that is sure to come.
“… but what would you do, if you were in charge of something in government or business that would clean the mess up and prevent it from happening in the future?”
I would work to make sure risk remains connected to reward. When those who knowingly make junk loans are immediately and amply rewarded for these loans and at the same time are allowed to pawn the junk off to someone else then you end up with the mess we are in now.
I used to be for unrestrained free enterprise; not anymore. The lesson I learned from this fiasco is that GroupThink can and will take complete possession of the common sense of large groups of people and make them crazy. There needs to be laws and regulations that will prevent this from happening.
“GroupThink can and will take complete possession of the common sense of large groups of people and make them crazy.”
I love it, combo. That is SO well put and is exactly what happens. That’s actually why we have a republic, or a representative democracy, because our Founding Fathers were very well aware of GroupThink and the damage it can do. Our elected representatives were meant to be a safety valve or check to override popular but damaging measures and to restrain the urges of a mindless “bread and circuses” mob. However, to a great degree, they have become the mob.
We hadn’t had any pain lately, so everyone forgot.
For a while, everyone made money … gravity had been repealed … new paradigm … regulations are so “old type” … the market knows all
all future events are already priced in … the market is allknowing … the market knows the future …
*barf*
Apparently you and PIMCO’s Bill Gross agree on this conjecture…
And the U.S. economy? Of course it will be affected. Consumption will be reduced to say nothing of new home construction over the next 12-18 months. After all, attractive subprime pricing has been key to the housing market’s success in recent years. Now that has disappeared. Importantly, as well, and this point is neglected by most pundits, the willingness to extend credit in other areas – high yield, bank loans, and even certain segments of the AAA asset-backed commercial paper market should feel the cooling Arctic winds of a liquidity constriction.
If not taken too far – and there is no hint yet of a true “crisis” – these developments may be just what the Fed has been looking for: easy credit becoming less easy; excessive liquidity returning to more rational levels. Still, PIMCO looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next 6 months.
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+July+2007.htm
Not sure of the right pace to fix the situation at hand, but the deregulation juggernaut and its combined impact leading to the abolishment of home mortgage (”subprime”) and corporate (”covenant lite”) lending standards, and also giving “lightly regulated hedge funds” a pass to ramp up systemic risk to frightening levels, must ultimately be remedied. It is possible that this is exactly the Fed’s plan, but they prefer to let market forces carry out the process through a “controlled burn,” rather than inadvertently creating a conflagration by taking a more activist role in the process.
I would propose special specific accounts like HSA’s and IRA’s where first time prospective homeowners could save for a downpayment as a deductable expense on their tax return. While they can already take out of their IRA for this, better to have something specific so they save for both retirement and a downpayment. A housing market with borrowers with skin in the game is much healthier.
“…where first time prospective homeowners could save for a downpayment as a deductable expense on their tax return…”
While we are on the subject of saving, how about if the Fed declared a cease fire in the War on Savers, and focused on getting that U.S. national savings rate back up from negative levels?
in other words, raise the federal funds rate?
Kill Fannie Mae. Allow interest rates to float, not based on the Fed’s fiat.
I would issue a public statement containing the following points:
–No taxpayer bailout for mortgage holders. They are responsible for repaying their loans they contractually agreed to, or arranging otherwise through private markets
–Anyone filing bankruptcy from multiple home loans, who committed fraud on mortgage applications (either by claiming primary residence or inflating income > 20%) is going to spend a minimum of 24 months in federal prison, unless they agree to pay back the full amount as stated on the loan
Then I would let the free market sort out the mess. Zero down loans are fine for those with a stellar credit or repayment record, especially for a primary home.
“Then I would let the free market sort out the mess.”
And for deregulation zealots, a friendly reminder that capitalism does not function very well without a rule of law in force.
Absolutely, but any kind of bailout will embolden speculation during the next boom. If people who are overextended buying speculative housing can’t get loans to buy a primary home, then so be it.
ADD: We’ve all seen what gov’t intervention in private insurance has done to the Florida coastline. Alas, I feel that if you can afford to build on the beach, then you can afford to buy insurance on the open market. The gov’t should not be in business of insuring homes that private actuaries cannot insurure because of the risk.
I’m of the opinion regulation good, bailout bad. Bailout in this case creates a moral hazard and will just make the problem worse. Regulation will help prevent some of these situations in the future.
I think there are plenty of productive forms of gov’t spending, but rewarding the foolish (especially those who were foolish on a grand scale) is not on my list.
Speaking of rewarding the foolish: “Good job, Brownie”. Lol.
Fraud is already a felony. Like anything typically responded to by more legislation, if the present laws had been enforced in the first place, there wouldn’t have been a problem. We could really enemize the industry by focusing on the enforcement side.
Imagine undercover FBI agents working as loan officers, account execs, *borrowers*, HA! So much fraud, right out in the open… Start sending people away in jumpsuits and those guys will fall in line. Hell, they’re used to commission pay with little loyalty, all they need is a $$$ upside to start ratting each other out.
The whole biz got way too fraudy.
The U.S. already has too many people in jail. Fraudsters should make restitution for their fraud.
If there were no fannie mae, and no bail-outs, mortgage stooges would not be able to pump-n-dump fraudulent mortgages, as there would be nobody to buy them.
The free market really does work, only we’ve never really tried it yet.
Paul
Save yourself, then stand back and let everyone else learn their lesson.
This country needs a national BK just to clean house and get it’s priorities straight. Only then will we prepared for whatever the future may hold.
How much does it actually take per square foot to build a house? some of the builders are claiming it is too expensive for prices to come down and I am skeptical but would be interested in hearing from anyone who knows, what does it actually cost?
City fees need to be added in the mix as well…I understand fees in the Inland Empire are approaching $80K per lot.
I am thinking we should avoid land/city fees because they vary so much (materials may vary from area to area too?) but if we could determine an average range of actual labor and materials per square foot I think it would be very interesting…
In my area, building a medium quality two story home will cost you $175 sf and up. The materials might run $30-50 sf. There are a couple of teams I know in Ga that build lowend plain jane 1000sf rentals and have $25K total in them.
25K really? that is almost as inexpensive as “modular homes”.
The quality is that of a cardboard box house made by children. They are literally thrown together by crews that do the exact same thing every day. Labor is cheap, sometimes, wink wink…
Some of these estimates vary wildly. To get close, do a material take off, divide by square footage for material costs/ft.sq. Multiply material costs times 2.05 to get your total (labor+material)costs/ft.sq.
Weekend topic: How to respond to people who say, “you know, you might have been right two years ago when you mentioned that you believed that housing fundamentals were so out of whack that the house of cards would soon collapse. Why didn’t you warn me.”
My vote: “I did, you argued with me and told me I was an idiot.”
Not a bad idea. I have a similar problem.
My Mom: How can you say the economy is in trouble? My friend X, a suburban housewife in an investment club, says that the economy has never been better and that everything is going great.
Me: That’s what the peak of a bubble looks like.
Aside from any other factoid I had, the peak was here when Time magazine printed the “Gaga over Houses” issue in Sept. 2005. When the MSM starts saying that something just doesn’t look right, you know we’re already in trouble.
A lot of older (by older I mean cash poor boomers with property as a retirment plan) do not and will not accept the notion that real estate does go down, while younger wage earners can adapt to the idea rather quickly (though some have to be beaten about the head and shoulders with data).
So, I usually respond with… Either you listen to the facts or you dont.
I’m surrounded by the older “landed” boomers. One is convinced she is going to sell her crappy Dixon, CA home for 5x what she paid in 01 in another 4 yrs when she retires. That is her entire investment plan.
She was the worst example of what I see. What is interesting is that now some of the boomers are asking my option on what to watch for. The Dow dropping for several days has brought a sudden reality check to them. They think I’m a genius. I just tell them I read ALOT.
a weekend topic–> what does the economy really look like. I feel like its going down the drain, everything is expensive, very hard to save but people seem to think everything is dandy.
I guess if you are spending every penny you make, it looks good. I dont know. What do others see in their circle i.e. businesses, friends, neighborhoods.
What I see is most of my friends and family are stretched thin, on paycheck away from financial destruction. minimal savings. those tied to the RE industry have lost thier jobs or downsized.
how do others see things?
one paycheck away
That is what led me to Bill Fleckenstein’s column, and later to this blog……the reality that the MSM and Government is spewing, versus what I could see with my own eyes.
Fleck has been talking about this stuff for a year and a half.
If you are party of the “money shuffling” crowd, the economy has been great……but for us run-of-the-mill types, it’s beem 10-15 years of continually losing financial ground due to layoffs, 3% “raises” every year, and medical costs that are totally out of control.
I think we all sense that this economy is built on bullcrap. The problem is that ALL the numbers are being fudged, so no one knows how big the problem is. Unfortunately, I think that we are going to be finding out sooner rather than later. The thing that pisses me of is that you just KNOW that all the cheats, crooks, weasels, and a-holes that got the country into this mess will be sailing off happily into the sunset. And nothing will be done about it.
“medical costs that are totally out of control.”
Seen the Michael Moore film, Sicko, yet?
Not yet…..not a big Michael Moore fan, but……
Maybe someone can explain to me why it takes three office visits (one to my PCP, one “referral” to look at the problem for five minutes, and one to actually do the procedure), and a THOUSAND BUCKS (with all the charges) to have a couple of little moles removed from my face?????? Not to mention the three half days of work I missed.
My old family doctor (back in the sixties) did the SAME JOB in his office in about two minutes.
How ’bout the big recession — can we finally agree to agree that it is inevitable?
Inspired by this whipsaw of a Zandi report, in which he proceeds to tick off a bunch of reasons why the economy is near crisis, then up and predicts no recession because ‘employment figures’ will be good.
http://www.marketwatch.com/news/story/economist-world-one-hedge-fund-collapse/story.aspx?guid=%7BC9E3B6A4%2DA22E%2D43D2%2DBA2A%2DEC4A8F61D2E4%7D
I don’t get this Zandi guy. One moment he seems to make sense and then comes a comment like the one about employment.
He is definitely a two-handed economist (”On the one hand, about half the water has spilled out of the glass, but on the other hand, the glass is still half full.”).
All economists are two handed.
Many economists are underhanded.
I don’t get this Zandi guy. One moment he seems to make sense and then comes a comment like the one about employment.
Business leaders know that if there are massive layoffs such as those shortly after 9-11-2001, it would put this country in a severe recesion. As long as the consumer continues to spend or even slows down, there should be limited unemployment except for business tied directly to RE or certain credit or financial markets. Think of it this way, if I am working the economy is fine and I’m out spending, but, if you are unemployed, your view is the economy is in a recession and your not spending and probally struggleing to pay your bills.
But anyway, yep, a recession looks likely and I hope that’s all it will be. I wanted the bubble to deflate or pop, so I could get a cheap house for cash. But I do not want a depression.
Right with you, Palmetto. One thing that interests me a lot about this bubble is the practice of “excuse-onomics” in market analysts’/economists’ reports. Whereby 99 percent of their data point strongly to one conclusion (a housing bubble, a credit bubble, P/E ratios out of whack, etc etc), yet they grasp for and emphasize that one small piece of data that could possibly indicate otherwise. What this seems to indicate is analysts lodged deeply in the pocket of Wall St., but of course that is another weekend topic suggestion…
“excuse-onomics”
FANTASTIC terminology! I’ve been thinking that, after the 2000 elections, it became fashionable to become a lying sack of crap in all areas of business and government.
Education is the key. I’ve heard it said that our schools have been deliberately dumbed down. If you can degrade the very basics of education (reading, writing and ‘rithmetic), you can degrade the people.
The problem is CYA. As a public economist, you get villified if you manipulate the markets, regardless of if you are right. Few economists would rant about the housing bubble in 2005 even if it was clear to the rest of us. A.G. himself could have called it a bubble and people would keep on buying houses, and once the music stopped, those without chairs would blame HIM for stopping the music, not general economic overbuilding. The housing bubble collapsed of it’s own weight, as was always the outcome, and now economists are just starting to talk about it.
I wanted the bubble to deflate or pop, so I could get a cheap house for cash. But I do not want a depression.
Palmetto: You will be able to find that cheap house for cash in due time. I bought one in the Tampa Carrolwood Village area in 1991 that was forclosed during that downturn in RE for $85,000. It was built three years earlier and the people that lost it paid $142,900. It worked for me and it will work for you, just let this mess cycle through it’s course.
Awesome, Fuzzy! A house in Carrolwood Village for $85,000 is astounding. Now, that’s what I’m talking about!
*Nobody* wants a depression, but when the writing is on the wall you gotta read it.
…can we finally agree to agree that it is inevitable?
My dad has considered me a doom and gloomer for a while now. However, he has recently seen the light (I think). It seemed evident to me as we were driving around Lancaster, PA earlier this week. That’s an Amish area and we saw lots of folk in their horse and buggies, on scooters (not gas powered) or bikes, and plowing fields using horses, not tractors. I said, “The Amish have the right skills and lifestyle to make it through a recession.” Normally my dad would snap back something like, “What are you talking about recession? There’s no way that will happen.” This time, however, he said, “Yeah…they won’t skip a beat.” Acceptance.
That’s a great story, eastcoaster. Maybe a weekend topic on how to prepare for a recession/depression. Not just financially, but in terms of skills, low-tech stuff that can assist physical survival, getting along with others, handling criminals, etc.
You know, it all looks bad, but on the other hand, we could actually, if we cleaned ourselves up here in the US, come out of this even better than before, by restoring true life skills and values.
Great idea for a topic! As house prices fall, property taxes will, too, so cities and counties will have to cut back on services and/or pressure states to raise and share income taxes.
The tax issue will be huge in Montana. We have no sales taxes or even tourism taxes (on hotel rooms, restaurant meals, etc), so when housing settles and tourists stay home, we will be screwed.
Already Missoula streets and other infrastructure are way behind schedule in terms of updating — amazing when you consider that they are paid for largely from building permits (which until recently were booming).
I just thougth of a new slogan: “When Banks Compete, You Win”.
Countrywide and Wells Fargo are chasing each other down on two REOs on the same street in Sacramento:
House A: Purchase price, $684,000 in April 2006. Countrywide 80% first, 10% second. Foreclosed April 2007
House B: Purchase price, $679,000 in April 2006. Wells Fargo 80% first, 5% second ($611,000).
Wells started the REO asking price at $640,000 (wishing price?). One months later, they drop to $590,000. Countrywide forecloses and puts the exact same model on the market for $499,000. Oops, there goes the neighborhood. Wells drops to $479,900. Countrywide matches at $479,900! I believe this will go on until these houses get into the $300k range. $100/SF is coming back.
It is such a beautiful sight. “When banks compete, you win.”
LOL! add to that the new fines the county is going to start slapping on vacant homes and it will get really competitive.
I think there is a Huge pent up demand in America for$150-$200K homes. But with those people buying the $300-400K and then going into foreclosure, ruing their credit, the demand was already used up far into the future.
I see nothing here in NYC being built that is affordable. Yet there is like a 10 year waiting list to get into public housing.
In New York City, public housing is the housing of choice for many, as evidenced by a waiting list of over 130,000 families.
“I think there is a Huge pent up demand in America for$150-$200K homes.”
I have a huge pent up demand for a $50,000.00 home, LOL! And NOT a condo.
My pent up demand is more like $90,000 - $130,000.
id write a 70k check for a solid $750 a month rental….unfortunately, rates are too low iunder any scenario I can drum up in my grass hut.
I have a huge pent-up demand for a $50,000 Gulfstream IV.
How about an entire weekend devoted to discussing the PPT? This is a topic that seems to go unmentioned around here.
Ah, I kid. What I would like to know is that some on here seem certain that there will be a 50% cut across the board, everywhere. Credit will tighten, the money wells will dry up and prices must drop. But then others mention that certain areas, the nice neighborhoods that everyone wants to get into, will not drop as far. Which also makes sense. But aren’t these the areas that also climb the most? Are these not the areas that speculators pushed into the stratosphere?
If a credit pinch will be universal, how will the markets stay local?
Perhaps because the wealthy wouldn’t be very much affected by a credit pinch?
But for the wealthy to keep moving up, someone has to buy the houses they no longer want!
Around here, the earliest sign of the bubble was all of the high end homes under contract but waiting for their buyers’ homes to sell. Only the superrich can just collect things indefinitely. Most have to cash out of one thing to get into another.
Didja see the PBS show about Haute Couture last night? Most interesting factoid (other than that rich does not equal beautiful) was that among the 200 superrich women who regularly buy and wear couture, more than a handful wear each 100,000 dress just a few times then donate it to a museum for a tax deduction.
Museums: masolea for rich people.
Depends on what you mean by ‘wealthy’. If you really mean debty then yes, a credit pinch is bad news. Keep in mind that it’s not so bad yet, A-paper loans have barely missed a beat (at least in the owner occupied market). That will change over the next year, and debty people will find themselves in a lot of trouble when things get tight.
Wealthy people, on the other hand will ride this thing out to the bitter end. No one will sell. Eventually they’ll cancel the newspaper, shut off the TV, stop reading magazines, stop talking about real estate… anything to avoid the bad news.
Is there going to be an honest value until banks are forced to liquidate their REO’s?
Ditto for hedge fund liquidation of underwater asset pools “at fire sale prices”…
My weekend topic would be lets see who can beat the street for the next say 3 months. Everyone mock up and publish a 100k portfolio, lets see who has the best/worst return over 3 months.
ya could do something like that at Marketwatch’s virtualstockexchange.com.
It’s possible to start a new private “game”, participation available by invite-only to HBB bloggers or something..
Will it let you list positions in assets other than stocks?
This really isn’t a weekend topic suggestion but I find it funny how just a year ago there were commercials funning saying that you should buy a home. You rent when you could own and get a tax deduction on the interest you pay. Now I hear a ton of commercials about paying off your mortgage. “Get rid of that debt and worry.” Well, if you pay off your mortgage you won’t have a deduction anymore. SOOOO, which is better? I wish the voices in my radio would make up their mind.
Let me retype that…
This really isn’t a weekend topic suggestion but I find it funny how just a year ago there were commercials saying that you should buy a home. “Why rent when you could own and get a tax deduction on the interest you pay.” Now I hear a ton of commercials about paying off your mortgage. “Get rid of that debt and worry.” Well, if you pay off your mortgage you won’t have a deduction anymore. SOOOO, which is better? I wish the voices in my radio would make up their mind.
What about the vacant homes w/ green swimming pools? Don’t we already have sufficient mosquito habitat without this additional source?
And why would a bank want to sit on REO during a historic market crash? Are they dumb enough to miss the fact that by waiting to unload declining value REO, they are going to catch falling knives? Or is this the shareholders’ problem?
Foreclosures Turn Pools Green
Video Available!
Reported By: Marc Pickard
Last Modified: 7/27/2007 7:26:50 AM
There was an up-close look on Thursday at just how much effect the troubled housing market is having on the economy with the sharp drop of the stock market.
But it is actually having a broader impact than that.
House foreclosures are leading to something called green pools — and it’s not the kind of green most people might think.
Metro Atlanta looks lovely from above: nice neighborhoods with pretty homes and nice yards, some even with swimming pools.
But the picture on the ground reveals there’s trouble in paradise. Metro Atlanta is not immune from home foreclosures. Some of those homes have swimming pools — and those pools have been abandoned.
“When a pool isn’t treated regularly with the chemicals that keep the water clear and the turbidity low, then bacteria can grow in it,” explained Vernon Goins with the Gwinnett County Health Department. “Insects can live in it; even frogs can take up residence in it.”
http://www.11alive.com/news/health/article_health.aspx?storyid=100730
Don’t miss the video… It shows a closeup of mosquito larvae swimming in a green pool.
I hope the CDC gets involved and charges banks holding REO w/ green pools for any uptick in West Nile virus incidence.
Stucco, I know we talked about it before but I really expect that SD and Sacramento’s new fines structure on vacant and dangerous properties is going to have an impact on that standing inventory.
BTW Sacramento is reporting it’s first cases of West Nile now.
The county wants the homes moved asap and will just keep slapping fees on them. I suspect quite a few properties will be taken over by the munis as even the lenders walk away. They just don’t have the manpower to keep up.
“I suspect quite a few properties will be taken over by the munis as even the lenders walk away.”
Why not just sell them to an owner-occupant at a price the market will bear? These homes which are being allowed to deteriorate to the point where they create a public health menace while sitting unoccupied are quite vexing to anyone familiar with the recurring news item about California’s housing shortage.
“I suspect quite a few properties will be taken over by the munis as even the lenders walk away.”
This is what happened during the stag-flation 70s in NYC, but also due to unpaid property taxes. In the end, NYC decided that selling abandonned property and for a bargain price, was in its best interest.
I am not worried about an uptick in West Nile virus, I am worried about Yellow Fever and Malaria making a reappearance.
My husband’s hockey buddy’s pool looks just like that. My husband told him “Dude, if your dog falls in the pool you’ll never find him.”
What’s more interesting is the little story he told my husband after the game. The wifey told him he has to get his stuff out of the house because it’s being foreclosed on. Wife is a bookeeper and handles all their finances. He just hands her the check each month. Anyway, they bought their home in 1988 for $129,000 and he says it’s worth about $500,000 now. He said the house has been refinanced a couple of times but they only pulled out 10 thousand each time so there should be plenty of equity. Now their payment is supposedly $2500 a month which doesn’t make a lot sense unless they pulled out more money when they refied. I figured I wouldn’t be able to find out too much online but I hit paydirt on the county website right away. His wife SOLD THE HOUSE in December for $485,000. My guess is the 2500 was rent. She also says her car is being reposessed. Now what I wondering is, does this woman have a pile of money stashed somewhere or is her @ss broke? He was supposed to call us but didn’t. He’ll get the news at tomorrow’s hockey game. Stay tuned……..
Tell him to go get a good divorce lawyer ASAP. The wife most probably already has one, and is working her “marriage exit strategy”.
I’m betting he gets a restraining order after he gets his stuff out of the house. He needs to pre-empt that B.S., file for divorce, and file a restraining order ON HER.
If she sold it, who did she sell it to? A relative?
Yeah, we were pretty much thinking the same thing about the lawyer. My husband knows a damn good divorce attorney.
Hubby has a hockey game tomorrow. We’ll see if the new owner’s name rings any bells with his buddy.
What State?
In the 1980s I wrote insurance for banks and S&Ls. One of our main conditions was that they not hold REOs but unload them ASAP. We took far more hits on REOs (slip and falls, fires, etc etc) than on commercial liability and fraud.
I would imagine bank insurers are already telling their clients to unload the stuff or find separate coverage — and who wants to insure a stand-alone REO? That’s like writing insurance in New Orleans.
This should create a nice tipping point for prices. Individual sellers may try to hang on, but banks will soon start cutting.
I’m interested how the “language” surrounding housing and real estate is going to change.
Certainly, the mortgage indutry is going to try and come up with a new term for “subprime” — or is that term too embedded to shake?
And - as the market drifts and rattles slowly downward over the next couple years, what will be some of the terminology that realtors will try to utilize? I expect to see the word “stabilizing” used a lot, even if the market continues to drift down. Perhaps we’ll also see equalizing, rationalizing, forming a strong base, and even strengthening or gathering strength.
As a marketer/communicator myself, I look forward to seeing how the doublespeak evolves.
A blog glossary:
Blosarry—–define new terms in the blog.
blogtionary
Zero,
Bernanke tried out “non-prime” on Thursday–a nice, non-threatening way to introduce Alt-a contagion to the contained sub-prime. Everal posters noted the change.
Back during the Great Depression and again in the 80s farm crisis we had national outrage over farm foreclosures/auctions. In the 80s that led to the annual fundraising concert Farm Aid. May I be the first to predict a national fundraising concert coming soon - ForeAid. To help the hapless homeowners.
Now we just need to come up with some good country song titles about losing your house to the bank…
Or, we could have “Subprime Aid” — where C and D-list performers and has-beens provide low-quality entertainment to half-heartedly raise an unimpressive amount of money for holders of lousy loans in crummy developments.
“I got me the re-set blues.”
There’s an old AC/DC song called “Down Payment Blues” that works nicely for FBs these days.
Maybe the name should be called Foreplay because you know what happens next.
ForeAid is a term I would save for a bris.
“Now we just need to come up with some good country song titles about losing your house to the bank…”
“Turn around and walk away…alone, alone”
“Turn around and walk away…alone, alone”
Boz Scaggs
http://en.wikipedia.org/wiki/Boz_Skaggs
Have the Thompson Twins perform “Our House.”
Is it contained to subprime or are there signs of contagion?
http://www.bloomberg.com/apps/news?pid=20601103&sid=awHx59OM5fCQ&refer=us
Signs of contagion… time for Fed wonks to review chaos theory: Sensitive dependence on intitial conditions… butterfly effect…
Australia’s S&P/ASX 200 Index Completes Worst Week in 15 Years
By Malcolm Scott and Darren Boey
July 27 (Bloomberg) — Australia’s S&P/ASX 200 Index tumbled the most since September 2001, completing its worst week in 15 years. James Hardie Industries NV and BHP Billiton Ltd. led the slide on concern a worsening U.S. housing slump will slow growth in the world’s biggest economy and prompt investors to shun stocks.
“You’ve got an economic impact from lower housing prices and housing demand,” said Simon Doyle, a strategist at Schroder Investment Management Australia Ltd. in Sydney, which manages the equivalent of $11.4 billion. “That’s where we feed back through into the local market. If the U.S. is under question, there might be a broader contagion.”
http://www.bloomberg.com/apps/news?pid=20601081&sid=afb2PMDhTy.c&refer=australia
Does the foreclosure of a subprime borrower’s home in California set off a hedge fund collapse in Sidney?
http://en.wikipedia.org/wiki/Butterfly_effect
“…tumbled the most since September 2001, completing its worst week in 15 years…”
Not to question the direness of the situation at hand, but isn’t 2007 - 2001 = 6 (not 15)?
See that is the problem with you yanks, you take things literally. 15 years ago the writer of this article got caught with another woman by his spouse. And it cost him as much as he lost this week in the market.
It should have read “…completing his worst week in 15 years…”
Lots of MSM sources are suddenly declaring the end of easy money. What are the implications for the future of the conundrum and the symbiosis of a sudden rapid drying up of liquidity? And is there anything the Fed & Co. can do to stop it (assuming they would like to do so)?
The end of the credit party
The once-endless stream of cheap credit is starting to dry up; buyouts, corporate deals take a hit.
By Grace Wong, CNNMoney.com staff writer
July 27 2007: 11:35 AM EDT
LONDON (CNNMoney.com) — Dealmakers, investors and home owners in the United States are facing a grim summer as conditions for borrowers get worse.
Until recently, there has been a seemingly unlimited supply of cheap money to fuel leveraged buyouts and other takeovers. There was also an easy flow of mortgage money available before the housing market turned south and the crisis erupted in subprime mortgages made to borrowers with poor credit.
(pic
A trader reacts to Thursday’s selloff on Wall Street, where credit concerns sent the Dow industrials tumbling 311 points, the 2nd biggest loss of the year.)
But now investors are showing a greater disdain for risky debt - and fears about a looming credit crunch have shaken investor confidence worldwide. The Dow Jones industrial average plunged 311 points Thursday - its second-worst day of the year - and sent global stock markets reeling. The Dow opened lower Friday as well but later stabilized and was little changed in mid-morning.
Besides triggering a global stock selloff, the jitters are casting a shadow on the buyout boom and could slow down everything from private equity deals to corporate restructuring plans.
Housing slump gets longer, and longer …
The housing market, meanwhile, is still struggling to find a bottom. The subprime meltdown started the worries in credit markets - and the extent of the problems in the subprime mortgage market remains uncertain.
“The ultimate outcome of the decline in mortgage credit quality is not wholly predictable,” Moody’s Economy.com said in a July 26 report. While there are efforts being made to forestall the surge in foreclosures, “the downside risks outweigh the positives,” the report said.
http://money.cnn.com/2007/07/27/markets/credit_deals/index.htm
How is the hedge fund industry faring these days?
Corporate bonds sell off as stabilization bid fails
By Leslie Wines, MarketWatch
Last Update: 1:59 PM ET Jul 27, 2007
NEW YORK (MarketWatch) — The corporate-bond market remained shaky Friday after a morning effort at stabilization gave way to volatility and fairly heavy selling, as a very rough week for the debt markets drew to a close with fresh rumors about hedge-fund troubles.
“The mood is somber and tired and disgusted,” said Sid Bakst, senior portfolio manager at Robeco, Weiss, Peck & Greer. “People are just trying to make it though the day.”
The bleak mood was made worse by fresh rumors that subprime-credit problems are taking a toll on some hedge funds.
“It would actually be surprising if there weren’t hedge-fund troubles after the recent surge in volatility and asset-allocation swings,” according to Action Economics. However, the rumors remained unverified.
The Wall Street Journal online reported that hedge fund Sowood Capital Management has endured significant bond market losses and is down about 10% on the year, “making it among the first high-profile firms hurt by the recent market fallout.” The fund has met margin calls and is not closing, but it has had to sell assets to cover for credit market losses, the report said.
http://www.marketwatch.com/news/story/corporate-bond-markets-volatile-rough/story.aspx?guid=%7B0E67BE60%2D395D%2D4A88%2D9366%2D79DC0CCB4586%7D
An excellent question. Total world stock capitalization is around 51 Trillion, total stock derivatives are around 400 trillion. Derivatives outnumber the underlying stocks by 8 to 1. The derivative market in 1987 was around 8 to 1 except stocks were worth 8X as much as the derivatives. The markets have never been stressed with this type of underlying risk at any time in history. There could be a rush to exit as funds panic to get out.
Once before I wrote that 2-3% of all hedge fund managers are brilliant financial geniuses - I still believe that. But what about the remaining 97% of these managers - some will survive by luck, but the rest will try to liquidate in an illiquid market. Who gets these losses? The derivatives market is not a zero sum investment.
“But what about the remaining 97% of these managers - some will survive by luck, but the rest will try to liquidate in an illiquid market.”
Charles Darwin had insight to address this question.
If Zandi is warning, it is likely we are already there… The best predictions describe events which have already occurred but are not yet common knowledge.
Subprime could create global crisis, economist says
World is one “Bear-like’ event away from liquidity freeze, Zandi warns
By Rex Nutting, MarketWatch
Last Update: 4:07 PM ET Jul 26, 2007
http://www.marketwatch.com/news/story/economist-world-one-hedge-fund-collapse/story.aspx?guid=%7BC9E3B6A4%2DA22E%2D43D2%2DBA2A%2DEC4A8F61D2E4%7D&dist=TNMostRead
“…as the genesis for the crisis lies within the U.S. financial system.”
Like I’ve said before:
James Taylor singing: “Let it fall down, let it fall down, let it ALL fall down.”
Might be the only way for American’s to truly understand the TAX Dollar $$$$$$$$$$$$$$$$$$$$$$$$$$ cost of building “Irvine, CA… templates” in Bagdad, Iraq and other places of political interest by using our military as the the earth movers and bull dozer’s for a few select individual’s who vacation on private beaches around the globe but know what’s best for us ALL in… “The Long Run”.
Might cause a lot of internal domestic pain, but what the heck, might be better for the our “Nation” in… “The Long Run”
IMHO, This housing bubble has only been a symptom of the disease.
“A sign or an indication of disorder or disease, especially when experienced by an individual as a change from normal function, sensation, or appearance”
There is wealth distortion afoot…and human history clearly shows that eventually…there’s a day of reckoning, for all.
I can think of a lot of things that would please me…at the top of the list:… is the “Economy” crashing down on the end of the Bush/Cheney’s …”let’s re-make American’s” political experiment.
Oh garçon, some Single Malt Scotch…and some imported:
“Neil’s Buttered Derivative Popcorn”
Check out this URL : http://www.ccfj.net/dispatchhoa.htm on potential problems with HOA fees.
“We have said it often enough — and nobody seems to be willing to listen.
ELECTIONS IN FLORIDA ‘S HOMEOWNERS’ ASSOCIATIONS ARE A JOKE — NOTHING ELSE!
Total lack of enforceable provisions leaves victory to anybody who is willing to cheat and/or bully the neighbors!
Some association leaders remind me of school-yard bullies who want our lunch money. Only the stakes are much higher — lots of money lying around unprotected — and the bad guys know there is no accountability for financial mismanagement, uncontrolled spending, kickbacks and even clear embezzlement. When you watch what’s going on in some of our communities you get the feeling that some people think it’s fun to waste neighbors’ money!
And as the headline of an investigative article in the Miami Herald said:”
PHX’s problems go well beyond housing… You know it’s bad when the problems facing a mid-sized US city rate an article in The Economist.
Phoenix
Into the ashes
Jul 26th 2007 | PHOENIX
From The Economist print edition
A city that once won prizes is now a crime-ridden mess
MICHAEL ZISTATSIS, a restaurateur in downtown Phoenix, used to be excited by the prospects that only a gentrifying city, more foot traffic and wealthy new locals can bring. His business had been growing steadily for years. But now things have changed. City planners decreed that there should be a light railway linking Phoenix to neighbouring cities such as Scottsdale. The construction work, which is currently ripping up miles of downtown Phoenix, makes walking and parking almost impossible; so few feel motivated to shop or dine there. Proprietors like Mr Zistatsis, whose clientele has dropped by 30% since 2005, feel distinctly miffed. And they are not the only ones losing faith in Phoenix, a victim of ill-managed city planning.
Phoenix was once hailed as a model city. It grew fast. Its streets were new and shiny, and housing was cheap. Beginning in 1950, the National Civic League voted Phoenix an “All-American City” four times. In 1993 an international competition rated Phoenix, along with Christchurch, New Zealand, the world’s best-governed city. Forbes recently ranked it as America’s second-best job market, thanks to its buoyant property market and rapid urban growth. In the past five years metropolitan Phoenix’s population has grown by almost a fifth, to over 4m.
But in the past few years the awards have mostly dried up and things have started to go wrong.
http://economist.com/world/na/displaystory.cfm?story_id=9546749
I have lived in Phoenix (renter) for the last 15 months and have been following the city news for about 3 years. This article is simply an overstatement of Phoenix’s problems. I have observed that positive articles stop once a city reaches a certain level of success. Phoenix is still growing as fast or faster than any other US city but at the expense of places like the upper midwest or California. The state of Arizona is also trying to stop illegal immigration into the state and you can see veiled references to this in the Economist article.
Like almost anywhere in the US with a large first generation Spanish speaking population, the school systems are struggling to produce students with competitive test scores. Places like Scottsdale, Tempe Cave Creek, Chandler, Mesa, Gilbert, Goodyear, Glendale, N. Peoria, to name a few, have good schools. As is the case everywhere, the more expensive neighborhoods have more educated parents who motivate their children to do well in school. The rest of the city is very integrated and test scores suffer. I am not sure that pushing for ethnic neighborhoods like East LA or South Central LA are the answer. How do their Test scores compare?
Like every large city, Phoenix is attempting to bring life to its inner city. However most of the city’s growth is in the burbs. Things are far from perfect here but I still feel it is a good place to live. But I am a retired Boomer who may be too far removed from reality to see the problems.
Interesting to see the convergence here of topics dealing with declining property tax bases and the possibility of municipalities taking over or being “stuck with” foreclosures.
I asked about this earlier this week and the main response was, “Oh no, don’t let the gub’ment get their grubby hands into this, too!”
I’m all for the basic sentiment - I see red over stories of eminent domain being used as a sledgehammer for “redevelopment”…what I don’t see, is a lot of easy, practical answers for the green pools and all the other joys that jingle keys are sure to bring to a “nice” neighborhood near you and me And yes, I have kids in the public schools - which even the oldsters care about, knowing damn well that in “normal” times, RE values live and die by the school scores - so I’d just as soon not see public services grind to a screeching halt.
Don’t like a gub’ment solution? Got a nice capitalist one to propose? The prospect of 100s of thousands of houses just rotting away - not because of the ‘usual’ blight/job flight/whatever, but because there’s no way to break through legal logjams or the financial unravellings of those who hold the paper - that, to me, is obscene.