Bits Bucket And Craigslist Finds For July 28 2007
Please post off-topic ideas, links and Craigslist finds here.
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
So now, on to the next phase:
About a week ago, Countrywide announced that they were eliminating their very popular 2/28 and 3/27 loans – obviously because the chances of them actually being paid back were sinking like a rock. Then, just this week, a small sidebar announcement as most people focused on Countrywide’s earnings and projections – the announcement was that Countrywide will now have to service the loans that it writes – no more FLs (frocked loaners, such as pensions, hedge funds, etc.) to pass them off on, no more re-packaging of the loans to obscure the risk, and no more Moody’s to call them AAA (or even if someone calls them AAA, no one wants them anyway). So, one can only ask: Is it a coincidence for Countrywide that these events happened at almost the same point in time, or has Countrywide known all along that these loans were worthless? Most likely the second – and that portends very bad days ahead for lots of people.
Next item – and something that I haven’t seen directly addressed on this blog. We talk a lot about down payments are now, finally, being required, but until a few months ago that wasn’t the case. Because of that, the steady stream of new buyers, who should have spent the past 4 years or so saving for a down payment, didn’t do it, as they were able to “buy” without one. So what happens now? The older people move out or die off, but their replacements have no money for a down payment. The net results is that there will be a sizable shrinkage in the number of people that can qualify for virtually any mortgage – even if prices drop big-time – for a number of years. In other words, the pipeline will be empty for a while. So, we can also mention that to people who think that this ship will turn around next week.
It doesn’t look good.
“… or has Countrywide known all along that these loans were worthless?”
Everyone in the industry knew these loans were worthless. The problem was if Countrywide didn’t make the loans the lender down the street would and thus Countrywide would soon find itself out of business if they didn’t make them therefore Countrywide was forced to join the party. Same with all the other lenders.
Same went with the appraisers. Those appraisers who appraised honestly didn’t get work; those who played the game did.
Wall Street also knew these loans were junk when they sliced & diced them and packaged them up for sale, but the money was so good they didn’t care.
The entire industry was corrupted.
Tough to argue that one…but I still would not have made loans that couldn’t be paid back, considering the damaging effects all around. Maybe I’m different, but then so are most of you guys.
“… but I still would not have made loans that couldn’t be paid back …”
Nor would most people if they had to keep them. But the financial machinery evolved to a point where the originators of junk loans could easily pass them off to someone else, who then passed them off to someone else, etc, etc, etc. Thus the loan game offered ample and immediate rewards for loan originators without all the risk.
But the risk was still there, it just wasn’t with the originators. This risk ended up with the final holders of the junk paper, paper Moody’s and Standard&Poors blessed with an AAA rating.
The scheme worked very well for years until, suddenly, it didn’t.
Wow. Sounds like a giant pyramid scheme.
“Sounds like a giant pyramid scheme.”
You nailed it.
Ah, but guess what. There are guys like me paid lots of money to find the holes in the paperwork, and they will. The only winners in this dance-off will be the lawyers, because everyone will else will be using them to fight for what crumbs remain of the great credit pie. You may not see it on the courthouse steps and on CNN just yet, but you will, trust me.
Pairs of black lizard shoes in the court rooms. Look for prices going up as lawyers scramble for these shoes. Appearance is everything even when one con artist is sueing another con artist. Hope this can be on tv so we can make side bets on who is winning. This could be better than Las Vegas show.
Here is another.
http://biz.yahoo.com/bw/070727/20070727005793.html?.v=1
At the current deflated stock price, AHM was offering a 26.3% dividend. That is kind of like NEW. When NEW was going down, the dividend, as a percentage, skyrocketed. A guy in our office held NEW because they were still paying a dividend.
AHM should really tank. I almost bought puts on LEND two weeks ago. I had my order in. Then the buy/sell spread went crazy so I withdrew my order. That was a bad move. We are about to see more bankruptcies and I would guess that includes AHM & LEND.
HB puts have been doing great and I’m not even in the dogs with the most fleas, BZH, DHI, PHM. Oh, it is getting ugly.
At one time I collected old stock investing books. Most books prior to the 60s have a rule — stocks with super high yields are poised to fall and should never be bought. The market knows the past dividend is no measure of the future dividend. It’s hilarious to see the yokels on the yahoo message boards that often buy stocks yielding 50% or more due to a ONE TIME dividend (usually a spin off, that was a capital restructing and downsizing). The yahoo stock screener will turn these stocks up with a “high yield” screen. But it is meaningless. The poor yokels will posting happy thoughts, “At least the stock is yielding 50% dividends!!!!!!!!”.
At one time I collected old stock investing books. Most books prior to the 60s have a rule — stocks with super high yields are poised to fall and should never be bought. The market knows the past dividend is no measure of the future dividend. It’s hilarious to see the yokels on the yahoo message boards that often buy stocks yielding 50% or more due to a ONE TIME dividend (usually a spin off, that was a capital restructing and downsizing). The yahoo stock screener will turn these stocks up with a “high yield” screen. But it is meaningless. The poor yokels will posting happy thoughts, “At least the stock is yielding 50% dividends!!!!!!!!”.
This is one of Larry Kudlows current mantras. The talking heads on CNBC appeared on Fri. to be DESPERATE. They were so worried that they were stuttering. I’ve never seen Marie B. so shaken. Can’t wait for Mon. morning.
Sure, a 10% or 50% dividend yield is probably too good to be true, but there are solid companies like Altria or Bank of America that pay yields of around 4% or 5%….I own Altria stock and am thinking of buying some Bank of America next week in part because the offer a nice dividend, but I’m a little spooked by the possibility that they may have a gazillion dollars in bad loans/mortagages on their balance sheet….Anyone else thinking of buying BAC?
Hondje, good post. I cast a wary eye on yields that are above single digit (although I do own Pengrowth stock for exposure to oil). I do not own Altria but I do like it. I own Bank of America (they are increasing dividends by 14% to all shareholders on record as of September 7, by the way). These are large solid companies with lots of cash, and they have been through decades of economic crises. I owned MBNA stock until BAC bought them and have held onto the BAC shares and this week bought 100 more at $47.85. P/E below 10. I also own PFE, T, NYB, PNW, and PGH. PNW has some real estate exposure (master planned communities) but also runs utilities and yields 5.4%.
Check out Calculated Risk today. AHM(American Home Mortgage) has decided to withdraw its announced dividend. Announcement made last night, after 7pm, dividend was to have been paid today, for owners of record as of 7/9/07. Nobody on that blog can remember when a REIT simply failed to pay an annnounced dividend. This one has the posters on that blog crazy anticipating the affect on the market Monday.
Thought about BofA (also Citi) several times, but ended up rejecting it b/c of the risk. Their balance sheet looks terrible. Of course, their size protects them, but even size didn’t save banks in 1931.
BAC is a pile of crap. I wouldn’t own their stock on a bet. I’m sure they’re up to their eyeballs in bad loans.
Citi is probably just as bad a stock, if you can go by their terrible web site or their money-losing credit card promotions.
But after all, I don’t do this for a living, so what do I know?
Monday morning we will see all of the banks lower as people start to worry about less dividends in the future.
Okay
Agreed BZH is on the highway to hell. I will add KBH & HOV to doing great column here. Also GS puts are on a tear
Just got some CAT puts, so far so good. This week, both BZH & HOV took a monumental pounding, ouch! Any more ideas?
Even though it doesn’t feel that the market is done going down, the fact that people seem to be loading up on the HB puts over the past week probably means that there are better places to go bear-hunting, and if the market spikes up the HBs will spike up sharply. Not to mention options are getting a little pricey. So I don’t think the next 2-3 days is a great time to be piling on (even though I do think one or more of the HBs is going under real soon). One idea is to short or buy puts on ADRs - foreign stocks probably have more potential downside short-term.
I’m feeling you Paul - I was about to go in to SRS but after this week’s huge spike, I’m afraid to now… of course, if I keep saying that I’ll eventually miss out on all the fun…
“..have no money for a down payment.”
I doubt that buyers who are able to purchase within their means will be left high and dry just for the sake of a downpayment.
Assuming the market returns to healthy and sane conditions where prices have bottomed out, borrowed down payment money will be available if the buyer can afford it.
It’s hard to imagine a time when opportunities for a high return is not appreciated by some investors.. the caveat is that the market has truely corrected itself and what you see is what you get.
Joey, it is my past experience that there will be little to no 100% financing going forward. Yes, you are correct, in that there will be some programs like FHA, our private mortgage insurance. The reality will be that buyers who use those programs will effectively be paying 20% interest on that 10% they need to borrow for a down. The cost will be reflected in a higher interest rate on the 90% balance.
No one in their right mind would pay that cost.
Not to mention higher closing costs as well.
“Assuming the market returns to healthy and sane conditions where prices have bottomed out, borrowed down payment money will be available if the buyer can afford it.”
Sorry, but I don’t understand how allowing the average first-time homebuyer to “borrow” a down payment is healthy and sane.
Borrowing some or all of a down is nothing new.. If their family can’t front them the money, i guarantee that there are people out there who will, under the right conditions.
Will the lack of savers stall sales in the corrected market of the future? I don’t think so. Markets abhore a vacuum and if there’s a need for hard cash, someone will fill that need for a price.
Going way back, say 10 or 15 years ago, borrowed down payments- even if from a family member were a definite no-no. Borrowers had to be able to document to the lender that the down payment was their own savings- perhaps by showing account statements for the last two years.
If the lender suspected that the money was fronted by relatives, no mortgage.
I expect the lenders will start to enforce this rule more than ever, and perhaps even go as far as to ask for 3 years’ documentation of the down payment, credit patterns, and income.
Lenders must sell their product or they will cease to exist, and money is their product.
The lending rules will adjust to market conditions, whatever those may ultimately be.
However i cannot see lenders tightening standards while simultaneously tightening that noose around their own necks. There has to be a balanced policy that allows an active market..
Joey, you do not seem to get it yet. No one is buying the RMBS bonds anymore. No one. Offerings are going out unsold. The Wall Street houses are getting stuck with them. In the future, lenders are going to be holding there own originations (see top of this thread about Countrywide). When the originating lender is also the risk taker, you will ALWAYS see a down payment requirement. In 1993-1994, after years of similar financing shenanigans, you could only get 97% financing with FHA and 90% financing with MIP (private mortgage insurance) and a higher rate on the loan.
The documentation was onerous. 3 months bank statements, proof you had the savings for the down for 6 months to a year. No cash out. 65% LTV max for N.O.O(non-owner-occupied). It is coming.
Jingle,
I agree with the 3% for FHA but for anything over the price cap or second homes, it become stricter. I think we’ll see restrictions and added scrutiny for anyone holding more then one house. Remember when a any non owner occupied residence required a commerical loan?
Jingle, I hope we see worse then 65% LTV in the future for noo or Sacramento will become a sea of rentals as young families will still have a hard time competing with RE investors.
My basic point is that if, someday, 20% DP is required and buyers do not have it, and therefore the market stagnates, this is simply an untenable condition and something must give.
In a stable, fully corrected maket with stable values, with a buyer who can well afford the payments, who is taking the risk by loaning that 20% DP? Not the holder of the 80% 1st.. he’s well covered… while whoever holds the 2nd will demand and get his pound of flesh.
Joey, something will give, and it will be prices that will drop until a 20% downpayment is within easy territory of most buyers.
Tighter loans are coming, but with tightened standards, there will be some people (
some people (I guess less than 2% of the borrowing pool) who will have stellar enough credit and risk profiles to be able to borrow 100%.
“something must give”
Of course. What gives is the market price.
A house is less affordable, and people must save longer before ‘buying.’
It’s called deferred gratification, and it helps foster wealth.
The world will certainly not end, and there will not be catastrophe, despite what people in high-cost housing areas may think. It’s no more unthinkable than the notion that property values never go down.
And the beneficiaries of such affordable houses- and dare I say it, an affordable California- will be our children.
We will never return to the days of a 20% down payment. If the lenders really imposed that requirement, the entire market would seize up immediately and prices would have to fall 80-90% before people could afford to buy.
The lenders will never let that happen. They can’t. If they did, every existing homeowner would default on their mortgage, no one would keep paying a $500,000 mortgage when the identical tract house next door costs just $100,000 after an 80% drop. To prevent this, the lenders will gladly waive the 20% down payment requirement and lend to people who can put 3-5% down. Lending to someone with that little skin in the game is a less-than-ideal risk, sure, but it’s better than seeing your entire portfolio of existing mortgages go into foreclosure.
A 20% down payment on a $100,000 house (an absurdly cheap house in most parts of the country) is $20,000.
Probably only 1% of potential first-time buyers have $20,000 in cash. Maybe only 15-20% are capable of saving that much in 5 years.
Go ahead and castigate buyers for their profligacy, complain that previous generations were able to save up 20%, etc. — nonetheless it is, as a practical matter, impossible for most people, especially first-time buyers in their 30’s, to save up a 20% down payment.
This is why I always laugh when I hear people say stuff like “the middle class cannot afford more than $250,000, after the crash that will be the entry-level price with 20% down, etc.”
Do you have any idea how many “middle-class” families have $50,000 (20% of $250,000) in cash saved up? None, basically. If they were to start saving today, assuming no other debt (an extremely unrealistic assumption) it would undoubtedly take them 7-10 years.
For these reasons, I believe that the 20% down payment requirement is never coming back. If it does come back, house prices are going to fall a lot more than even the most bearish of HBB-ers thinks they will.
I don’t know if 20% will come back (probably not, as a hard rule), but even at 5% it will kill people - considering that most of the next generation of buyers are negative, due to credit cards…it will be bad - how bad, who knows.
No, I’ve thought for a long time that the 1.2 million dollar houses would eventually hit 200k (17% of peak “value”). Mentioned here about 2 years ago that my father-in-law’s neigborhood did that back in Japan’s heyday. I believe we’ll see 20% d.p. again - with the drops you’re talking about.
Japan has about half our population, but the whole (mostly mountainous) nation can fit inside of California. We can, and did, build as much as labor can keep up with. Our ABUNDANCE of land could make this worse than Japan.
“If it does come back, house prices are going to fall a lot more than even the most bearish of HBB-ers thinks they will.”
yup.. that’s exactly what must and will happen..
The problem with the industry sitting up low down/low doc. loans to begin with is that it was the means to keep the fake real estate investment scheme going when the affordability index was bringing the market to a standstill in 2002 .For the industry to avoid a natural affordability contraction in the market in favor of fraud and high risk low down loans for a number of years now was absurd .
Now the industry is in a mess because low down/low doc loans are the only way a majority of borrowers can finance a real estate purchase . The industry has no way of keeping the party going at these inflated prices ,while they change the lending requirements that they already establish for 4 years or more that established the bubble prices .
The RE industry is between a rock and a hard place . The industry cannot continue to make bad loans because the investors won’t stand for the loss anymore . The industry can’t get enough buyers that really qualify with a down payment to buy up the excess supply of housing . In the meantime the prior borrowers are holding on by a thread ,unable to sell ,unable to refinance ,sitting the stage for record breaking foreclosures .
Perhaps the industry will need to insure the loans when they are low down loans ,(at a high cost to the borrowers ),in order to get loan investors ,but that still doesn’t solve the problem of a low % of borrowers will qualify income and credit score wise .
Lets face it , the demand for homes by qualified buyers is going to be low and the supply of homes is going to be huge for years . Can’t see how a crash in prices is avoidable .
My understanding is that if you are not a Japanese national, it is extremely hard to buy any real estate in Japan. If so, this is something that would ascerbated that long downturn as no foreign money could get in to speculate in the market.
Sadly, we do allow foreigners to buy RE here. I’m a protectionist and don’t think that is healthy. (can you be a extreme lefty and favor flat tax and protectionism? the mind boogles)
Gywnster,
Typically, the only “gaijin” buyin residential RE in Japan are married to Japanese and living in the residence. I known plenty of foreigners in that situation who bought housing. I considered it myself and toured a few condo developments in Tokyo. The condo office staff didn’t seem to judge me too harshly, but this was in the mid-90s, when it was clear the Japanese bubble had burst.
“Lets face it, the demand for homes by qualified buyers is going to be low and the supply of homes is going to be huge for years.”
A sober deduction, Housing Wizard.
If $500k houses fall 80-90% we are all in big trouble. I do not believe that it will get that bad. I think a roll back to 2000 prices is what we will see. That will only be 25-30% for most houses. No doubt there will be some places, OC for instance, where prices have gone up over 100% since 2000 that will have steeper drops. But nationally I doubt very much that the median price falls below 200k.
In Sacramento, we saw homes go from 100k in 97′ to 550k in 05′. That 550K house should really be about 175k if you set the value to local fundementals. That’s better then a 30% drop.
We Rent!
I actually agree that the high end will fall 70%, in the bubbliest of areas. This is because in a typical market, the old sell to the young.
Consider a 70-year old retired doctor who wants to sell the family home and downsize. In a bubble market like LA, SF, or NY, that doctor’s house could easily cost $1.5mm.
When he sells the house, he’ll sell it to a younger version of himself — a 35 year-old doctor.
The typical 35 year-old doctor cannot afford to pay $1.5 mm for a house. These days, 35 year-old doctors have $200,000 in student loans and make $100-$150k. They have high incomes, sure, but $1.5mm is simply out of the question.
This is true for everyone, not just doctors, but IMO the spread is greatest on the high end. I have one of those “high-end” jobs — I am an entertainment lawyer in LA — but can I pay $1.5mm for a generic family house in a good school district? Are you @#$% kidding me? Even if prices fall 50%, to $750,000, that’s not going to help in the least, those prices are still impossibly out of reach. At 70%, OTOH, it’s do-able.
This, however, is only true on the high end in the bubble markets. A $45k/yr truck driver married to $15k/yr part-time dental hygenist in St. Louis can probably afford to pay $125,000 for a house, assuming that they are otherwise prudent. If that house is $200,000 at present, it’ll be $125,000 after a 42% drop.
If we require the couple to have a $25,000 cash down payment, on the other hand, they won’t be able to afford the $125,000 house any more. It would realistically take them 5-7 years to amass that kind of cash. The banks aren’t going to let the whole market sieze up for 5-7 years, they’ll do a 97% mortgage.
So I agree that on the high end, in the bubble areas, prices will fall 70% anyway. But on a nationwide level, they don’t have to fall 70% to be affordable, and in the rest of the country banks would rather do a 97% mortgage than require 20% down.
I know several 70+ year old doctors in LA. Their houses are all worth 5M minimum because they bought in Beverly Hills in the 1960’s. The 40 and 50 year old doctors are the ones with the 1.5M to 2M houses.
The NY Times has an article on three couples who did just that - cut back on spending and save up a down payment. If you can do it in NYC, you can do it anywhere:
http://www.nytimes.com/2007/07/29/realestate/29cov.html?_r=1&oref=slogin
I don’t understand why people can’t save a downpayment? If you cancel the cable+ $60.00 per month, cancel the cell phone= 100.00 per month, ( go back to a land line), cancel the hbo= 10.00 per month, quit eating out 3x per week and cook actual food, 200.00 per month, buy a used car and pay cash=300.00 per month, cancel subscriptions to newspapers= 25.00 per month, cancel subscriptions to magazines=25.00 per month, wow, there’s 700.00 per month of non essential services. $700.00 x12= $8.400 x 7 yrs= $58,800, not counting interest. if you can’t wait and save for seven years, you must belong to the I have to have it now generation..Instant gratification, till the piper comes calling. There is no such thing as I can’t save!
anyone who’s done it knows that saving is easier than it seems.. and it feels really good.
A simple technique is to cut spending by 10% and live on 90%. But as saving becomes an obsession, and it likely will become one if there’s a definate and worthy goal, one can save a lot more than that without any suffering. To the contrary, saving relieves suffering.
If one was to cancel the $50 a month of reading they did I think they would have a big hole to fill. Maybe they could even get a part-time job now and save even more!
Starbucks at $4 a pop, 5 days a week.. a thousand bucks saved in a year.. So, foregoing designer coffee saves 5% of a $20,000 down payment.
Instead, buy a thermos. No! better yet: ask for a thermos as a b/day gift and pocket that $20 too.
I’ve just started to work after graduating from college and I am trying to work out a finance program.
The first week when I moved I had to eat out everyday with my coworkers, easily $10 for a lunch in my area (outside DC). The best thing I do now it pick 5 recipes to cook the next week than I shop on the weekend buying what I need for those dinners (plus the typical milk, eggs, etc.). This way I have something to take to work everyday for lunch and I eat healthy.
My next step is to buy quicken when the new version is released to better track my expenses. Does anyone recommend another budget program?
“..buy quicken..”
No offense, but are you also gonna buy a nice new wallet or purse in which to save money??
How about keeping track of things with a pencil and paper while being determined to buy no more than what you absolutely need.
I think Quicken is a great way to plan your financial life.
Those pie charts and graphics give you the big picture quickly.
Plus the budgeting feature in quicken rocks!. I can tell through the month what expense categories I need to pull back on, it really does give you the full picture. Plus the net worth column is always fun to watch
There are plenty of other programs out there beside quicken, that was just the first one that popped up. Some are even free. I was just trying to see what others used.
You can do a lot more with a computer program, it makes looking at your finances more dynamic. It is easier to track, archive, play around with the number, etc. A budget program does more than just track debt, it can also track investments, 401K, etc.
I’ve done fairly well with spending so far. My starting salary is $60K but my rent for a 1/1 is under $1000 for everything. Outside DC, that is good as I looked for two months. I don’t even have a couch. I have one chair I bought at a yard sale five years ago.
Heath-
I put EVERYTHING on a credit card and download the transactions monthly. (I miss approx 40 bucks/month in cash transactions, sometimes credit cards are not feasible.) Naturally, I pay the credit card in full every month, because I loath the thought of some banker taking my interest money.
I can say that although quicken has it’s warts (they will force you to rebuy every 3 years), it has proven to be completely worth the effort & money. It provides you with a great measurement of how much money is being spent where. The big eye-openers are where the little stuff is being spent and how it adds up.
I’m probably 2x your age and have used quicken for 10 years, and wish I could had done it for the 10 years before that. So if you can take advice from someone who probably looks like an old fart to you, I recommend that you bite the bullet and do it sooner rather than later.
Signed,
An old guy who hasn’t matured much.
Heath,
I used Microsoft Money 2005. If you have Bank of America with online banking, they have a free budget program (My Portfolio) that works very similar and is accessible from anywhere.
Sounds like you are on to a good start. First piece of advice = avoid the shiny new car. Plus keep your spending and savings patterns to yourself (don’t discuss at work). People, especially office drones, are more than happy to talk your ear off on what a great investment a McMansion is an how nice it is to cruise around a lake in a boat all weekend. I just figure most of them are too simpleton to think for themselves and do things they see others doing, who are also in the same position (stuck in a rut at work and one paycheck from bankruptcy).
Good luck.
Thanks!
I do have a BoA account, just opened it for this new job, so I’ll look into that. I have a mac, so I don’t think I can use microsoft money (for this reason I also wanted to shy away from quicken as I understand the mac version isn’t as nice as the pc version).
As for the shiny car, that’s a hard one. I have a paid off ‘98 nissan altima that I know can last me for at least two or three more years. By that time I hope to take advantage from all the talk about new toys coming on the markets from FBs.
A guy I went to high school with became an RE in 2004, bought a brand new VW golf and then last year was talking about getting another new Honda or something. Seeing as he hasn’t made a sale since last Nov, I can only imagine that isn’t in the cards anymore.
Oh yeah, cheap toys are a coming, especially if they use a lot of gas.
“This is why I always laugh when I hear people say stuff like “the middle class cannot afford more than $250,000, after the crash that will be the entry-level price with 20% down, etc.”
Do you have any idea how many “middle-class” families have $50,000 (20% of $250,000) in cash saved up? None, basically. If they were to start saving today, assuming no other debt (an extremely unrealistic assumption) it would undoubtedly take them 7-10 years.
For these reasons, I believe that the 20% down payment requirement is never coming back. ”
I disagree completely. The reason you don’t see middle class families saving is because they don’t have to. If they don’t have to, they spend their extra income on $200 jeans, $5 coffee, new cars, $600 iPhones, etc etc etc. All of a sudden they have built a “lifestyle” and sure, they can’t maintain that lifestyle AND save 50K in 3 years…but if they have to save the money, they will. There are at least 4 households in my group of friends who have lived beneath their means (like making 150K household and buying used cars and renting a cheap apt) for 5 years and believe me, they have well over 50K saved.
“Go ahead and castigate buyers for their profligacy, complain that previous generations were able to save up 20%, etc. — nonetheless it is, as a practical matter, impossible for most people, especially first-time buyers in their 30’s, to save up a 20% down payment. ”
Especially after they pay for their cell phones, cable bills with all the bells and whistles, going out to eat all the time, new cars, high tax rates, well deserved vacations etc. No wonder they can’t afford 20% down. So let them be renters.
When we bought our first house in 1978, we spent the prior two years saving every penny we could so we would have the 20% down payment required. We spent only what we absolutely had to and saved the rest. Many other couples we know did the same thing.
The problem is that few people now are willing to do without the frills to save up the down payment. These are the same ones that complain about never being able to buy a house.
Do you have any idea how many “middle-class” families have $50,000 (20% of $250,000) in cash saved up? None, basically. If they were to start saving today, assuming no other debt (an extremely unrealistic assumption) it would undoubtedly take them 7-10 years.
So what if it takes them 7 to 10 years? That’s what people used to do, and it didn’t do them much harm that I could see.
People who have money for a downpayment can’t even afford one at current nosebleed price levels.
Exactly - I know plenty of folks with 50k+ in the bank, the problem is, with bubble prices, that won’t buy you anyplace you’d actually live in LA. I don’t think I’ve seen anything appealing here in quite a while at less than 750k (check out Dr. Housing Bubble’s Real Homes of Genius for Compton and other fun areas at 400k…), and the number with 150k in cash is a lot smaller than that with 50… this is not linear, saving up for 4 or 5 years is a different thing than saving for 12-15 just to get a down payment.
Plus, once you had 150k in cash, who would dump it all into a single asset rather than diversifying? Few accountants or financial advisers would suggest such a move absent crazy (see non-sustainable) appreciation, and even then only for a young person with a very high risk tolerance… a move back to 20% down requirements at even 60% of today’s prices would paralyze much of the market for years. Since prices really tripled in many places over the past 7-10 years while incomes rose only 30% over the same period, prices would really need to fall 60% or more to make housing affordable to the middle class with old school down payments…
I don’t understand why many Congressmen are keen on undermining time-tested incentives to encourage prudent household financial management. Is it that hard to grasp how perverse incentives which enable and even encourage those who have not developed the slightest degree of financial self-discipline to purchase homes they cannot afford is a key contributing factor to the foreclosure crisis unfolding in the U.S. housing market? WAKE UP CONGRESS!
Here is a lovely REIC propaganda piece which refers to the highly-questionable efforts currently underway to increase FHA loan limits and eliminate down-payment requirements as “FHA modernization.” Amazingly, the article seems to completely miss the fact that private subprime lending is, for practical intents and purposes, a historical anomaly at this point.
Posted on Fri, Jul. 27, 2007
As alternative to subprime mess, can FHA make a comeback?
By JOANNE CLEAVER
Milwaukee Journal Sentinel
MILWAUKEE - Over the past eight years, the Federal Housing Authority has become less and less important.
Subprime lenders offering high-cost loans won away many of the moderate-income first-time homebuyers who used to count on an FHA guarantee to snare a mortgage.
Home prices rose far above FHA lending limits, set by Congress and unchanged for years. And though the agency streamlined some of its procedures, it still takes far longer than 24 hours to approve an FHA loan, unlike the instant gratification that lures eager buyers to hard-marketing subprime lenders. What subprime lenders? http://ml-implode.com/
The number of loans guaranteed by the FHA dropped two-thirds nationally from 1999 to 2006.
Now, the FHA’s resurrection may be at hand.
Legislation aimed at modernizing obsolete FHA loan standards is back in Congress, having died quietly last fall after passing the House.
Then, nobody much cared. They do now, says Megan H. Booth, senior policy representative for the National Association of Realtors.
“This is a critical window,” she says. “There’s all this congressional concern about the subprime mess, with horror stories in every district. This is our time to get Congress to say: ‘If we can reform this program, we can give people a viable alternative that’s not risky like these crazy loans,’ ” she says.
“How many hearings has Congress had this spring on subprime? A gazillion. FHA reform can’t be a bailout to subprime problems, but it can be a solution.”
Sweeping changes in the mortgage market this decade “shut them out. Now there’s an opening,” agrees Ann Grochala, director of lending and accounting policy for the Independent Community Bankers of America.
If the Expanding American Homeownership Act of 2007 does pass, it would allow the FHA to consider what consumers have to pay for loan guarantees as determined by their credit histories; increase the amount it guarantees and thus come closer to the cost of houses in more expensive, usually urban, markets; and make it easier to purchase condominiums with FHA loan guarantees, lowering the first step into homeownership in pricey areas.
The modernization bill would raise the limit to 100 percent of the loan limit allowed by mortgage purchasers Fannie Mae and Freddie Mac for high cost areas, and from 48 percent to 67 percent of the limit in lower-cost areas.
“If it were increased, it would provide more options,” says Delbert F. Reynolds, Wisconsin field office director for the FHA. “Loan limits aren’t the only issue. One of the points of modernizing is to do some catch up with other tools, like not requiring a down payment.”
That is one of the controversial provisions in the modernization proposal put forth by the Department of Housing and Urban Development, which includes the FHA eliminating the requirement for a down payment of at least 3 percent. The new requirement would be some type of cash contribution by the buyer at some point in the purchase process.
If the modernization legislation passes, it might bring the FHA into the 21st century, where it faces more competition than ever for historically overlooked moderate-income homebuyers.
http://www.philly.com/dailynews/features/8755992.html
Testify…
I am compelled to share a conversation I had with a co-worker yesterday. He had hoped to retire late last year. He and his wife sold land in Northern VA and bought a retirement home in Florida. (Can’t imagine why anyone would want to live there fulltime, but that is another story.) Naively he and his wife believed that selling their Manassas, VA home would be a piece of cake. It has been on the market 18 months. There have been 2 contracts. Both fell through. He said no one has looked at the house in 3 months.
He and his wife have lived in it for many years. It bought when prices were reasonable and he has no desire to make a killing. He simply wants to sell the house, retire and move. He told the realtor that he would like to reduce the price further to get rid of it. The realtor blew a gasket. Said that no other agent would show the house if he did since he was low-balling the neighborhood. The neighbors would panic and values would plummet. Another point: none of his neighbors have been able to sell a house in subdivision for over a year. They cling to the notion that their homes are worth 2004 – 2005 so-called values.
Now he plans to take the house off the market at the end of August and rent the house in Florida. He has no idea when he can retire. I didn’t have the heart to say what went through my mind. It will be many years before the houses in Manassas will go for what owners believe they are worth. He better plan on renting the Florida house for a long, long time.
The realtor doesn’t give a whit about him or the house. She is only concerned about living in the 2005 world and admitting the truth of the situation: the house is not worth the asking price. Period.
realtor says this and that.. yeah.. well, tell your co-worker to grow some stones.
I don’t understand why the real estate agent is the boss of him.
He should tell the agent to list the house as requested, or fire the agent for breach.
He can then list the house at the price he wants AND save the cost of a commission. Then let all the other agents that are the bosses of all the other sellers in the neighborhood throw hissy fits.
ROTFLMAO!
I agree. F*ck the agent. Let the B*tch starve for all I care. He could figure out what her commission would be. So discount the house by 6% at least plus his other price drop and sell the thing FSBO.
Exactly. Fire her and FSBO it. Screw the agent, screw the delusional neighbors - since when is it his duty to take it in the shorts and hold on all the way down for the neighbors, who are all going to get burned in the end anyway?
He’d be a fool to hold on here - we all know that the first mover makes out the best here, and the Realtor is consciously and deliberately sacrificing his interest for that of others. He needs to fire her, right f—ing now, and do what is in his own best interest.
There is no shortage of realtors who would be more than happy to pocket a commission on the sale of that house at any price.
This is where flat says, ‘probably gov parasite already retired “on the job”‘
He is retired enlisted military who has worked hard in the printing department of corporation for 17 years. He is like me, like my dad and any number of people I personally know. It is dangerous to assume anything here or anywhere.
Exactly. There are too many prejudiced people still, and although they may no longer be racial prejudiced, there is an idea that all federal employees are wasteful parasites. I know for a fact there are a lot of people who are both federal employees and huge supporters of the Libertarian Party. It sounds inconsistent from an outsider’s point of view. Also like Kugo says, lots of these people are veterans or children of veterans who became handicapped due to service connection (I’m one). It is indeed dangerous to assume anything here or anywhere.
It was a joke about flat, not a comment on government workers.
that was a really good flat impression!
Manassas is toast….I lived there before moving closer in to DC and I couldn’t believe the asking prices for homes considering the poor quality of life; it’s like they have the worst of city life (hellish traffic on Hwy 28, expensive housing) and the worst of suburban life (no sense of community, drab housing, no cultural activities)….there’s also a lot of immigrants from El Salvador and Honduras there, and while I think some posters on this blog get a little carried away with the immigrant bashing, I can tell that there is growing backlash/resentment against these folks that will lead to racial tensions.
I also didn’t realize that realtors have the final say in pricing.
In other words, tell your co-worker to either list at the requested price or terminate the contract - or report the realtor to the state.
If they don’t sell now, they’ll be stuck there for years…it’s amazing to see how realtors behave.
I also didn’t realize that realtors have the final say in pricing.
They don’t. I used to be a realtor and usually the only times I tried to talk someone out of a price, was if it was way too high for the area. Usually that was a waste of their time and mine.
The other instance was an 80 year old woman who bought her house 55+ years ago for $8500. She didn’t want to try to make a killing ,so she only wanted it tripled in price. The area was selling for $150-180k. I finally talked her into having a fee-based appraisal and it came in at $175,00. Some flipper would have been laughing all the way to bank if I hadn’t talked her into getting it appraised.
If someone wants to price their home the lowest in the area to get rid of it, I say go for it and screw the realtor’s opinion. If she or he was a good honest realtor they wouldn’t care about lowering the values in the neighborhood, they would only be worried about their fiscal responsibility to the seller. Problem is, many are so greedy that they’ve forgotten that clause in the realtors code of ethics. One of the reasons I don’t practice anymore.
This is so sad. The worse part is can he rent in Florida?
I lived in the panhandle and fortunately priced my house correctly, sold to the first person, and did it by myself. (Yes, I do know how fortunate I am).
I lived in a waterfront community among $$ housing…the guy next door paid $600k–we sold for $295k.
I’m sure the neighbors (if they know) would set me on fire (thank heavens up way up north…LOL)
Kuga,
do your friend a favor and print out this thread for him. His RE agent doesn’t care what happens to him or his wife, or his retirement dreams, and even being a decent guy, he’s got to look out for himself, not his neighbors.
The realtor has to understand that prices are going to be “Bobbitt-ized”. Bwahahahaha!
You’re going to have many more hedge funds blowing up.
Countrywide was doing these risky loans at least 5 years ago. Our neighbor had a 110% loan on their house, and finally went into foreclosure with Countrywide.
As for the people who have to save for down payments, maybe some of them will now. It’ll be years before they’ll have one, and in the meantime the economy will slow as they quit spending on discretionary items and try to save for a house. Probably going to hit both segments at once.
“Because of that, the steady stream of new buyers, who should have spent the past 4 years or so saving for a down payment, didn’t do it, as they were able to “buy” without one. So what happens now?”
I believe this is where a revamped FHA is supposed to ride to the rescue of subprime with govt (taxpayer) guaranteed 0% downpayment loans, possibly aided and abetted by Fannie Mae and Freddie Mac, which are govt sponsored enterprises which operate (at least in Fannie’s case) under an impenetrable cloak of secrecy afforded by missing financials.
Here is an article on the proposed FHA rule change to allow 0% downpayment loans as of last summer. Last I checked, some in CONgrass were trying to sneak similar legislation under the political radar screen again this summer. I suppose it hasn’t yet dawned on some CONgrassmen that 0% downpayment loans encourage people to buy homes they cannot afford, and contribute to high future foreclosure rates?
August 03, 2006
The FHA Wants to Make Zero-Down Loans. Is This a Good Idea?
Peter Coy
When the FHA was started in the Depression to insure mortgage loans and thus help people of modest means buy homes, it required a minimum downpayment of 20%. That hefty chunk of equity ensured that people wouldn’t walk away from their homes if they ran into trouble. Plus, the ability to raise the downpayment was seen as evidence that the buyer was financially responsible and knew how to save money.
Over the years the downpayment requirement for FHA-insured loans shrank to 3%. It was a thin shell of equity surrounding a big ball of debt.
Now, the FHA has decided that even 3% is too steep a requirement for homebuyers. The FHA has been losing market share to others who require 2%, 1% or zero percent downpayments, including giant loan buyers Fannie Mae and Freddie Mac and many subprime lenders. So the federal agency has asked Congress to repeal the 3% minimum, and it appears that Congress is going along. On July 25, the House of Representatives voted 415-7 in favor of the “Expanding American Homeownership Act,” which among other things would repeal the 3% rule. The Senate is expected to pass similar legislation, and the White House has expressed support.
http://www.businessweek.com/the_thread/hotproperty/archives/2006/08/the_fha_wants_t.html
You can’t fool all the people all the time.
“During a recent trip to Beijing, US Department of Housing and Urban Development (HUD) Secretary Alphonso Jackson tried to sell China on the idea of buying more MBS. Investing in MBS offers better returns for China than US Treasury bonds, and at the same level of risk, Jackson claimed. He called it a “win-win” situation in a statement released prior to his Beijing trip. “China has bought some mortgage-backed securities from us, but not in great numbers,” Jackson said.”
According to HUD’s website, as of June 2006, China held $107.5 billion in MBS, up from $3 billion in 2003 and $100 million in 2002
“After seeing how the property prices in China kept soaring, these Chinese companies never thought of the US property market as having problems and they bought a lot of mortgage-backed securities, particularly in the past two years,” Yi told Asia Times Online. “Apart from underestimating the level of risk, the better returns offered by MBS over US Treasury bonds also made the Chinese investors unable to judge the high risk of the US mortgage market.”
“Yi said some bond ratings agencies that advise investors, including Chinese, also purposely played down the MBS risk. “Some ratings agencies slapped investment-grade ratings on mortgage-backed bonds that they knew they were risky,” he charged.”
http://www.atimes.com/atimes/China_Business/IG26Cb02.html
I picture a few scenes from a movie – like Traffic, Syriana or Crash – where actions and decisions made by a few are affecting lives of the many, and strangers around the world cross paths: a business man, in a NY bar, talking with his buddies about the Chinese with all this cash and no place to put it; a young Chinese official, looking for ways to move up the party ranks, learns about MBS and convinces his superiors to invest in them; an American home buyer, in 2005, trying to find a house that is affordable.
Given that they haven’t significantly increased their exposure to MBS’s, it looks as though the Chinese Communists are a LOT SMARTER than our Wall Street Capitalists.
And our biggest concern is how much time Paris Hilton spends in jail.
Go figure.
Whoops - misread on my part.
Still, $100B is a drop in the bucket for both China and this mess. China will still be fine if they dive in any deeper.
And will China be fine if the U.S. stops buying their junk? The backlash coming against all this trade with China is coming. If we hit hard times, the middle class is going to be pointing fingers and it is going to point them, right or wrong, straight at China and our officials that wanted to do so much business with China (and their fixed currency). They won’t be thanking Walmart. This is going to get ugly.
Hey Palmetto, what is the worst idea ever?
LOL, NYCityBoy, I received a bit of a pompous flaming over in the weekend topics thread because of my “railing” against globalization.
Of course, I have never really stated what I think globalization is. To me, it is the vision of the “New World Order”, a single economic system and centralized international government. We’re just not advanced enough as human beings for that. And it is just too much temptation for corrupt idiots to seize power and enforce their own personal wishes. Countries should be friendly, separate but equal, cooperative, etc. Like good neighbors. I don’t want the planet to become some miserable HOA, LOL!
I am not against trade, it has been going on for millenia since groups of people made contact with each other.
Good post, Palmetto. Personally, I am for fair trade between responsible parties. If you had a neighbor on your block that you knew was running a pit bull fighting ring, you wouldn’t walk over and borrow a cup of sugar from them.
“..a single economic system and centralized international government..”
..and we’ll all just get along.
Sorry, but i don’t have anywhere this much faith in the human race in general.. and even less faith in those who would be leaders.
anywhere nearthis much faith
“..a single economic system and centralized international government..”
…virtually guaranteeing a very robust black market.
I feel just like you do, joey, that’s why I’m agin globalization. I was sort of responding to the weekend topics mild flaming I got from a couple of pro-globalization posters and telling NYCityBoy about it. That’s my point, the human race is NOT, at this time, in any condition to participate in true globalization. The only way it could work is if other “globes” were entered into the equation. I guarantee, there’d be nothing like a good interplanetary war to bring the planet together. Joe Smith, Wu Chen, Kareen Akbar Bin Laden, Jose Gomez, et al would all be high fiving each other behind the ray guns each time they zapped one of those big-headed, big-eyed guys or their spacecraft, LMAO!
i am fine with globalization, if no one or a few would/could dominate it. unfortunately, due to human nature, it is always going to happen.
-china is now basically the world’s factory.. after we have spent the last 20 years tripping over ourselves giving them capital and expertise. it is arrogant to think we are their only export market (probably the largest though)
-china has $1TRILLION+ in foreign reserves, to compete for oil, copper, whatever resources needed to keep those factories churning
-china has roughly 50M+ urban residents (shanghai, beijing, guangzhou, etc, not to mention the hong kong’ers) that can already afford the junk coming out of their own factories… the chinese city folk are just a revaluation away from having more disposable income than your typical hick in mississippi
i’m not so sure THEIR world will collapse when SHTF here… and im not so sure we have the resources to outbid them when the music stops
So in addition to all the other problems, China is going to have a diplomatic beef with us when this whole thing finishes unwinding? Wonderful, just wonderful.
“You can’t fool all the people all the time.”
Honest Abe was right. We could sure use some honest politicians these days.
Well, you are wrong, someone *China*? is buying our housing debt. This is from Russ Winter on Friday (Russ is a great source of info):
“If you wondering what the foreign central banks have been up to during this credit swoon, the answer is buying record amounts of housing debt securities. The latest custodial data shows a record $15.0 billion in these Old Maid Cards were purchased, although they sold $6.5 billion in Treasury to do it.”
http://wallstreetexaminer.com/blogs/winter/?p=933
Is there a rational explanation for why FCBs would want to snap up Old Maid Cards (aka housing debt securities) at the very moment when hedge funds are collapsing under their downwardly-mobile weight?
One theory: FCB cargo-cultists are keeping their faith that the U.S. Congress will put the U.S. taxpayer on the hook for the subprime mess. There would be a beautiful irony if Congress succeeded in hardwiring U.S. tax receipts over to the hands of FCB creditors!
the total amount is so miniscule to their total foreign reserve.
“I picture a few scenes from a movie – like Traffic, Syriana or Crash – where actions and decisions made by a few are affecting lives of the many, and strangers around the world cross paths”
I think we miss that touch so much that we crash each other’s economies just so we can feel something.
According to HUD’s website, as of June 2006, China held $107.5 billion in MBS, up from $3 billion in 2003 and $100 million in 2002
Man, they’re so going to nuke us for this. Can their ICBMs hit Wall Street yet?
When are the citizens of Florida going to tar and feather their elected officials and run them out of town on a rail?
http://www.sptimes.com/2007/07/27/Northpinellas/Worth_less__but_taxed.shtml
Worth less, but taxed more?
“Now, it turns out, the property tax “fix” approved by the Legislature last month contains another wrinkle that could raise tax rates.”
Don’t even get me started on Florida politicians. I watched the local Friday evening political punditry panel discussion on PBS last night and of course this whole issue of taxes came up. One of the panelists was a businesswoman as well as a political consultant and she commented that the local governments should be able to do what she did, act like a business and cut back when it becomes necessary. She also mentioned that there is no excuse for them to be whining and moaning about budget cuts when they were taking in enormous amounts of revenue over the past few years and if they spent it foolishly, too bad. They just need to do what the rest of us do, tighten belts.
Of course, also the issue of instituting a state income tax came up vs. taxing stocks and bonds. Jeb Bush got rid of the tax on stocks and bonds (figures, given his pedigree) but now that might come back, given the unpopularity of state income tax. If Florida ever passes an income tax, I am so outta here. The point is, government in Florida is desperate for any way to get funds to maintain its level of corruption. The developers have such a lock on elected officials. One good side effect of the bust is that maybe builders and developers won’t have the cash to spread around, thereby enabling the elected officials to do the work of the people.
Florida’s government used to be able to get by on a whole lot less even five years ago. They can do it now, but just don’t want to.
“Jeb Bush got rid of the tax on stocks and bonds (figures, given his pedigree)”
But don’t poor folks benefit from such charitable tax relief? Oh, I forgot, it mostly benefits the middle class, silly me.
Florida & Texas…Bush country Babeeeeeeeeeee.
Well there you go. Some naive posters here were saying a few months ago that when Florida home values dropped, property taxes would go down. Did they really think their elected officials would voluntarily give up the gravy train that came about when they didn’t lower millage rates as values soared? Now that values are dropping, they’re raising the millage rates. Well, duh!
I reside in a very large second home market, Eagle River, Wisconsin.
Many lake homes. At present, in 54521, there are 556 homes for sale. About 300 of these homes are 300k and above. The market here for second homes is toast. Vilas County home sales avearges about 12 per week. Thats the entire county. County wide, we have over 3k listings. At 12 per week, were have a 250 week inventory..
never seen the market so bad. I give substance to the fact, that most of these homes belong to non resident boomers. Without a down payment, the up and coming generations can’t buy. Also, we have had an explosion in lake condos. Priced from 300k to 650k. One such complex has stopped construction at 15 units…only sold 3 in 2 years. originally planned 28. Another, wild eagle lodge..built through an investment reit, has sold units to its real estate sales people on signature loans. Condos here are really toast. Just starting to see reduced signs and ads. The most interesting part is that the number of lake home listings keeps rising. I guess when push comes to shove, the second home is the first to go.
And so you describe, at a micro level, the real unpinning of the upcoming collapse in property values: There are simply too many houses built for our population (and the builders are still going at it), and that will ensure that the market stays dead for many more years.
This is one downside to cheerleading from top economic leaders a few months back to give hope that the residential construction industry would turn around by year-end 2007. It would have been wiser, IMO, to let Mr. Market decide what would happen — this is one role that free markets (unencumbered by propaganda) do much better than govt or industry spokesmen. It is impossible to indefinitely hide a massive glut of overpriced housing inventory behind a cloud of happy talk.
And this oversupply of houses is causing some real problems for communities. Abandoned homes are becoming drug and squatter havens and around here, the sheriff has had to have at least one house destroyed because the former owner is BK and wouldn’t respond to pleas to secure the property.
As some of you may recall, I posted a hypothetical example of why a builder can sell a home originally intended to sell for $500,000 for $200,000 (that is at a loss, but it is less of a loss than not building).
One thing I missed was according to the famous March 27, 2007 Credit Suisse report was that 60-80% (depending on builder) of new homes are financed through the builder’s in-house mortgage division. So, similar to GM (which is more of a financing company that simply makes cars in order to sell the financing for those automobiles via GMAC), homebuilders can sell at even more of a loss than I expected.
Again, my example was a builder puchases a lot for $100,000 and plans to spend $300,000 on labor, materials, and overhead staff to build a home. The builder plans to sell the home for $500,000 (20% profit - I know it is too high but it makes the math easy). If the builder already has the land, and the materials are in the pipeline and the labor force is already blocked out, a cancellation may cost the builder $100,000 due to subcontractor suits and materials being returned - not to mention the land without a house may not even have a buyer. So the builder has two options:
1) Walk, with a loss of $100,000 on the land and $100,000 due to subs demanding payment and materials being returned/dumped; or
2) Build, spend $100,000 on land and $300,000 on labor, materials, and overhead for a cost of $400,000, and sell for $200,000.
In case two the builder at least maintains market share even though the loss is the same as not building, so it is the obvious choice. It is even more obvious if the buyer goes with the in-house financing division - assume the builder makes $10,000 on reselling the mortgage.
In otherwords, in this example, as long as the builder can get $190,000 for a previously expected $500,000 home, it makes sense to build. And in a tight market the builder may prefer to take an even greater loss to maintain market share with the hopes of outlasting the competition. Can you imagine buying a $500,000 home last year, only to find out the builder is selling the exact same home down the road this year for $150,000?
I don’t understand how Mr. Builder can suffer a 250k loss and keep building houses? Explain that one please.
The 20% gross profit margin in your example is probably a bit too low. Remember that’s the GROSS margin. He then has to subtract his costs and expenses (office space, office employees, utilities, insurance, advertising, interest, taxes, etc.) and still have some net profit left.
1) It is a hypothetical example, yes: no idea on true profit.
2) The point is a builder has to line up subs months in advance as well as order materials. To cancel after lining up subs is not free: the subs will demand some cancellation fee as they may have turned down other work to book the builders. Same thing with material deliveries. So cancelling is not *free*. It costs real money: in my example, it costs $200,000 to cancel the hypothetical home. If the builder hopes they can sell for $300,000, they might as well do so and only book a loss of $100,000.
If that were the case, why not build and hope for *less* of a loss? It (a) gets the land off the books; (b) gets market share, (c) keeps the home office employed, (d) and keeps the subs on the books.
That is why the builders keep building: we’re still so early in the game the losses are less than if they didn’t build. One way we’ll know we’re close to the bottom is when the builders stop building, because that means is costs less to outright eat the costs of not building than the cost of selling at less than cost.
This is purely a simple example: others can feel free to use real numbers, but I kept it simple to illistrate just how much the builders can cut prices before they’ll stop building.
The reality on the ground is that builders are bleeding cash and must cash out the land that represents the majority of their inventory. The best stop-gap strategy actually comes from building smaller and cheaper houses, especially since those are the ones that have a chance of being sold quickly. I think once the first builder goes under, it will give the HBs an excuse to cut prices drastically - something that has been difficult to do for several reasons, including all of their recent inflated sales.
The only safe haven now is smaller houses in established neighborhoods. Everything else - new, largish - is getting ready for Big Price Whack #2.
Would you want to buy any house built in this past cycle run up anyway? I would want an extra discount on top of the market price to account for any mistakes/short-cuts builders may have taken while slapping up the box.
I have a very close friend that always likes to say, “you can’t get hurt buying on water.” I finally just said, “shut up”. There was nothing more for me to say.
I’m in the same situation, but I did not tell my friend to “shut up.” I simply changed the subject rather than be rude.
Thank you, Emily Post
my parents live up north of greenbay, they retired up there on some land they have held since 1992. The area they live in is a major second home area. Home prices sky rocketed so much that the locals are having trouble affording local prices. However, everything is starting to unwind. Home’s are for sale everywhere. They have never seen so many homes for sale in their area.
The FIBs’ home equity machine that has financed all of these 2nd houses is beginning to run out of gas.
We’ll be up your way in a week for vacation. I have been visiting the Northwoods for over 30 years, and have see it change a lot since my grandparents lived there in the 70s. The house my grandfather sold for $65,000 in 1979 would list for over $500,000 now.
I never understood the condo building there. The reason we go up north is for peace, quiet and isolation. Not to be right on top of other vacationers. If I wanted to do that, I would go to Florida.
Is the megayacht bubble near its peak? And are yachtflippers still in the game, now that a severe credit crunch has decimated easy financing?
(My personal take: The appearance of this article as a leading SD Union Tribune story is a shoeshine-boy moment for the megayacht craze, similar to the ominous role of Time Magazine’s Home $weet Home cover story for the U.S. national housing market.)
Megayachts sailing toward San Diego
Luxury 400-footers set to be port’s newest residents
By Maureen Magee
STAFF WRITER
July 28, 2007
http://www.signonsandiego.com/uniontrib/20070728/news_1n28yacht.html
In case any readers did not know that yachts could be flipped, here is another “shoeshine-boy moment” article I reference above:
THE WEALTH REPORT
By ROBERT FRANK
Flip That Yacht
Rich Buyers Sell Unfinished Boats, Reaping Millions in Profits
May 25, 2007; Page W2
Terry Taylor, a Florida car dealer, has purchased five yachts since 2001. But don’t expect to see him anchoring off the coast of Cannes this week. Mr. Taylor is boatless, having sold all of his yachts to other buyers for huge profits.
“I wouldn’t feel too bad for Terry,” jokes Felix Sabates, a partner in Trinity Yachts of Gulfport, Miss., which built Mr. Taylor’s boats. “He’s probably made more money off those boats than we did.”
http://online.wsj.com/public/article/SB118004846052414031-LWTe6TrhDhTxm72ZZYmfaiwOMi4_20070624.html
Any economy that supports “flipping” in all aspects of economic life is one with RAGING inflation. Funny how that doesn’t show up in the hedonics.
How do hedonics account for the rise in beer keg thefts to sell them as scrap medal? I suppose this eventually will show up in the CPI when rising beer prices accompany rising beer consumption…
———————————————————————-
Beer Keg Thefts May Drive Up Beer Prices
Beer kegs are disappearing by the hundreds all over western Wisconsin. Brewers and beer distributors are blaming high scrap metal prices, and that means you may soon see higher beer prices.
http://www.weau.com/home/headlines/8347332.html
Is beer consumption part of core CPI?
$6 for a draft beer in NYC and $7 is on the way. D’oh.
For $6.99 I can buy a premium micro brewed six pack.
don’t forget they’re stealing plastic crates.
J boats redux
HP has changed his tune — no longer happily whistling “subprime is contained” anymore. I like his prudent advice on risk management, though I note that it is a bit late to close the barn door, as the horses have already fled and bred in the wild. By now the brood have returned with the four horsemen of financial apocalypse riding grimly astride their backs.
Treasury Secretary Henry Paulson called the market turbulence a “wake-up call” to investors to re-examine their degree of risk.
“Lenders need to be very aware of the risk. Borrowers need to be aware of risk,” Paulson said. “I would submit that people are more aware of those risks and the need for discipline today than maybe they were a month or two ago. So again, let’s keep our eye on the very strong underlying economy, which puts us in a position of strength.”
http://www.signonsandiego.com/uniontrib/20070728/news_1b28economy.html
Let me be the first to say that delinquencies on easy money loans that back commercial mortgage-backed securities is a serious problem, comparable to rising foreclosures on subprime loans to homeowners which helped them buy houses they could not afford and drive home prices to unsustainable heights.
Hints of Broader Problems Arise in Real-Estate Loans
By Ryan Chittum and Michael Hudson
Word Count: 685 | Companies Featured in This Article: J.P. Morgan Chase, DaimlerChrysler
Delinquencies on loans that back commercial mortgage-backed securities rose for the first time since 2003 in the second quarter, potentially a sign that real-estate problems are broadening to the commercial sector.
CMBS delinquencies rose 13% in the second quarter to $1.65 billion from $1.46 billion in the first quarter, according to a new report by Standard & Poor’s, which attributes the rise to overaggressive loans made in 2006, as well as increased problems in the retail sector.
It is too early to say if this is a serious problem.
http://online.wsj.com/article/SB118554771673180353.html?mod=home_whats_news_us
good catch
considering that they were getting something like 3% on that deal for the huge aparment complex in manhattan, I’d say it’s probably not far off that they were doing the same for commercial. just wait until all those hedge fund managers are out of work.
I’ve seen nobody on tv question the commercial space since so many realtors and mortgage brokers are no doubt out of jobs and have closed shop, literally.
In other words, everything is going according to plan. What that plan is, I haven’t a clue. But I’m sure it is not to the benefit of the average American citizen. I am suspicious of Paulson, because of his Goldman Sachs background. I do NOT trust him. And what’s this about a strong underlying economy? Right now it looks fragile to me.
Bernanke-Paulson conundrum:
– Keep on cheerleading, and get an earful from the untutored masses about how they are “out of touch” with life on Main Street.
– Report honestly on economic fragility, and send the economy (and stock market) into a tailspin.
“Report honestly on economic fragility, and send the economy (and stock market) into a tailspin.”
Sometimes a purge is good for the system, if that’s what a tailspin would create. But also, it is so ridiculous to me that mere words and pronouncements (spin) can have so much influence.
If this past Th-Fr’s action on Wall Street is any indication, the influence is wearing rather thin anymore…
I was wondering about that. Next week should be a “jolly good show”, as the folks across the pond would say.
I consider myself modestly bearish - very bearish on US markets, but Nandu Narayanan makes me look like a raging bull. GS, Nandu is one of the 3%.
…”All of these credit instruments and these fancy things that Wall Street has provided these people have really been predicated on one thing, which is that markets are orderly and everything is fine,” Mr. Narayanan says. And when they aren’t? Then you can’t sell them because there are no buyers. Ben Bernanke, the U.S. Fed chairman, estimated last week that losses on subprime loans may turn out to be $100-billion (U.S.). Mr. Narayanan’s view of things is less tidy: When a real credit crunch hits - and we have not seen it yet - some banks and hedge funds won’t even be able to figure out for months what their losses are on high-risk debt.
So they’ll be paralyzed. And then? Lending activity dries up overnight, which leads to a U.S. recession, which brings on a global recession. “This could potentially make Long-Term Capital [whose collapse helped fuel the '98 crisis] look like some kind of walk in the park,” Mr. Narayanan says.
You could easily dismiss the guy as too apocalyptic, and perhaps you’d be right. On the other hand, while your portfolio was getting savaged, his fund, which is short-selling “everything we can get our hands on” related to the U.S. lending industry, went up 10 per cent this week. If there’s any truth to his doomsday predictions, this will prove to be a great time to buy gold and government bonds. And to build a bunker in your backyard.”
Globe and Mail Saturday July 28
Report on Business
Thanks Hoz.
Just starting to read and do research on trading and the stock market (great timing
). I have no idea what you are talking about most of the time, but I have saved your post so I can refer back to it later.
For the this last week, I have tried to read every comment in every thread on this site. It takes some time and wish there was a way to sort by date/time instead of digging through older comments. But I must say that you consistently force me to open notepad and copy and paste your comments to read later in future. Thanks
Advice, read “Reminiscences of a Stock Operator”
now available as a pdf file.
Reminscences of a Stock Operator pdf [Trading-Naked.com via The Big Picture]
http://tinyurl.com/uy5rl
Thank you very much.
“…some banks and hedge funds won’t even be able to figure out for months what their losses are on high-risk debt.”
Isn’t this one of the problems facing Fannie Mae about now (and even before recent credit problems came to light!)?
“Bernanke-Paulson conundrum:”
The printing press is in excellent working condition…we just need a new “asset class” to inflate at $100,000 chunks…quickly…let’s see, where can we possibly re-ignite the burn…everything around seems kinda “black”?
Add “body dump” to the list of vacant house activities:
http://rnews.com/TopStory_2004.cfm?cmd=top&rnews_story_type=18
Blech! I would take a pot farm or meth lab in the neighboring vacant home any day…
Ben, I’ve been busy. I missed the weekend topics category. I would love to see the subject of Wall Street bonuses be the topic for a thread. Why? The Wall Street bonuses have kept up one of the most over-inflated markets in the country, Manhattan. The psychological effect for the entire New York City metro area has been massive. The $16 billion paid out to Goldman Sachs employees last year made all of the sheep in NYC feel like they were rich. It also spurred the rally cry, “New York City prices won’t go down because Wall Street people will use their bonuses to buy.”
The financial infrastructure of the U.S., pumped for 5 years by commissions on shoddy loans, is in the process of taking a huge hit. When that leads to price cuts in New York City, the rest of the nation will cringe. After all, I’ve read some place that New York City is bubble proof.
I don’t know if you’re speaking to me directly, but I believe NYC will be crazy sticky and drawn out. I don’t think it’s bubble-proof, but I don’t think prices will roll back as far as other places. Sorry, I’m the doomiest of bubble-believers but still think NYC has a lot going for it.
I would love to see Wall Street crater and have non-commercial artists return.
I think the city has a lot going for it, too. But it doesn’t have $1,200 per square foot going for it. Plus, the city will be a lot less safe during a downturn. Plus, there is a lot of development. Plus, the bonuses are going away for a couple of years. I put the NYC drop at 40%. That still leaves us at $700 + per square foot. That is still rarefied air.
“I think the city has a lot going for it, too. But it doesn’t have $1,200 per square foot going for it.”
Hear hear!
Your comment (with suitable rescaling of bubble pricing) applies just as well to every other coastal bubble city on the planet whose residents say, “I don’t think prices will roll back as far as other places, because everyone wants to live here.”
Which places?
Sidney
Vancouver
Miami
Honolulu
San Diego
Los Angeles
Madrid
London
Washington, D.C.
Seattle
(The list goes on endlessly…)
F. Scott Fitzgerald: “The rich are different from you and me.”
E. Hemingway: “Yes, they have more money.”
Bugs: “eh, yes, they have more of “everyone’s” money”
Daffy: “Hey Bugs, I found a beautiful pond to swim in, it’s in Arkansas…belongs to the Walton family”
But not everyone wants to live in Miami. Think of all of the live-at-home young professionals waiting in the wings in N. Jersey, Long Island, Westchester et. al. waiting to “move in when things get cheap.”
GS, you can be hard on me, but don’t compare NYC to Miami, please. People do the craziest sh*t to live in NYC - like live on a chair at the office and shower at NYSC. Or, like I did, live with 3 couples in a one bedroom.
There is a drastic increase in supply, but believe me there is some pent up demand.
O.k., we need a “Is NYC different?” thread…
“People do the craziest sh*t to live in NYC…”
That is one of the effects of easy money on greed-crazed fools.
It is different in NYC, because people who desire to live there believe it is different.
F. Scott Fitzgerald: “The rich are different from you and me.”
E. Hemingway: “Yes, they have more money.”
Mommy and daddy are subsidizing a lot of the little jerks that live here. What’s going to happen when mommy and daddy can’t afford that any more? It will be, “bye-bye snotty little girl with your flip-flops, iPod, cell-phone, Coach purse and bad attitude.” We won’t miss you.
Will mommy and daddy ever run out of money if the crib in Great Neck or Chappaqua is paid for? That species of spoiled, subsidized brat has been infesting the city for a long long time. There is a lot of money in that region and not all of it is going to get wiped out.
As my screen handle betrays, I live in the middle of flyover country, and the concept of paying $1400/ft2 is mind blowing, but my mom grew up in NYC (Bklyn) and virtually all of her family still lives there, so I’ve been hearing about these bratty turds for my whole life. They’re as much a part of the landscape as the ESB.
It’s also somewhat demographic. Just as SF is mecca for gays and Miami for Latins, NYC is for young people. I lived there from ages 28-30 ($400/mo. rent on W. 16th, back when it was still a semi-slum.) So, yes, how many 20-somethings there are, and how many 20-somethings are subsidized by their parents are important considerations. Isn’t there a pretty good flow of that age group right now, with the boomers’ kids?
I grew up in suburbia, moved to NYC out of college, and used to think the city was for young people, then I got older. There are so many people that have committed to living here, and raising families. The city even offers an attractive lifestyle for the elderly, provided they can afford their apartments and the taxes. Some are beneficiaries of rent stabilization or rent control, or bought their apartments in conversions in the 80s at a (relatively) reasonable cost. My apartment is modest, comfortable and affordable. I suspect I will see first hand what happens in the next downturn, because I like the arts, the edge of city living, and the freedom of living without a car. No doubt a lot of “tourists” will flee, however.
That’s still too damned steep. Or are you just talking Manhattan? I’d like to see south of $500 sq/ft in not-far-out Brooklyn. If we could get a 3 br for around 500, I guess we’d be happy. And I’m not talking glass-walls & doorman! Just a fookin walkup.
“…but I don’t think prices will roll back as far as other places.”
I expect something like 1929 in NYC, thanks to all those (like you) who think it’s different there.
I have a friend who bought a studio in the Village for $90k in the late 90’s. Short of terrorism, do you ever think those prices will return? And even if there was terrorism (like there was) the dump trucks would be already lined up (like they were).
Is there a bubble in Canton? Is there a bubble in NYC? Where would you rather live?
Canton.
O.k., that’s it. You and me in the parking lot at 3 p.m.
Lol…
Well now, Stucco, don’t be so hard on Muggy, I sort of understand the idea about New York. My family lived there and then lived in the Connecticut burbs for many years, some still do. I can’t speak for New York, but Greenwich, Connecticut has never really declined much for as long as I can remember. It has been sticky, it has been flat, it has languished, but no great decline that I can point to. If anyone has information to the contrary, I don’t mind being corrected. I’d LOVE to hear that values in Greenwich dropped like a rock at some point since 1975.
“If anyone has information to the contrary,…”
No problemo, amigo.
Economic Collapse
Most historians mark the beginning of the Great Depression by the crash of the New York Stock Exchange in October of 1929, but the effects of the depression were being felt on the Lower East Side even before the crash. increased unemployment, families moving in with one another to save money, or taking in boarders, or moving to cheaper apartments altogether, and increased appeals for aid were a harbinger of hard times to come.
New York City was one of the hardest hit areas of the country during the Great Depression. By March 1930, there were fifty bread lines on the Lower East Side alone, serving 50,000 meals a day to the hungry. By 1932, half of New York’s manufacturing plants were closed, one in every three New Yorkers was unemployed, and roughly 1.6 million were on some form of relief. The city was unprepared to deal with this crisis. Abandonment of women and children by husbands and fathers increased 134 % during the first few years of the crisis. Vacancy rates nearly doubled as the number of people with money to pay rent plummeted. Privately funded mutual aid societies, the first defense for most Lower East Siders, collapsed under the stress. The number of mutual aid societies on the Lower East Side dropped from 6,000 in 1920 to 2,000 in 1938, in part because of out migration. In addition, 400 private social services institutions - one-third of such agencies in the city - closed their doors within the first three years of the crisis.
http://www.tenement.org/Encyclopedia/ecodepress_greatdepression.htm
And before anyone jumps in to cry “foul” on me for going all the way back to the 1930s for my example, cite another point in U.S. history since 1929 when NYC was as drunk on easy money at the onset of a credit crunch as they are currently.
Well, I do think you have a point, there, Stucco, provided “The Event” occurs to that magnitude. My grandfather, who died before I was born, worked for an organization in NYC formed by a local banker during the Depression to assist people who needed jobs, food, clothing, lodging, etc. His area of expertise was logistics, so he was responsible to interview people who needed assistance and to see that various donations got to the people who needed it. My mother used to tell the story about how they were one of the few families in her neighborhood that had a telephone, because people needed to reach my grandfather with pleas for help. She recalled people begging for blankets because they were cold and had no heat.
So, yes, New York really suffered. And we certainly have the potential conditions for such an event right now. I just wasn’t looking at quite that drastic of a scenario. I was more looking at how Florida has had its own booms and busts over the years since the 70s while places like NY and Greenwich and parts of CA haven’t experienced quite the same phenomenon.
So, while I am a bear, I am not wishing for a Depression or similar event.
“I am not wishing for a Depression or similar event.”
Nor am I. But I am a realist. (That is how I knew back in Fall 2004 that the housing bubble was going to pop soon.)
“I was more looking at how Florida has had its own booms and busts over the years since the 70s while places like NY and Greenwich and parts of CA haven’t experienced quite the same phenomenon.”
A realist must ask whether conditions now more closely resemble those of the 1970s or the 1920s (and the aftermaths thereof)?
The Atlantic Monthly | October 2002
The Roaring Nineties
http://www.theatlantic.com/doc/prem/200210/stiglitz
I hope you fellows saved up a good part of your portfolio in T-bills, savings bonds, and the like. For those in NYC, I doubt if rents for 2 bedroom apartments will be cheap like what someone can find in Canton, Ohio. I’m okay for myself downsizing to a $340 per month studio and I know of some in that price range in Tucson, should I move there.
Canton, Ohio? I thought they were talking about Guandong!:)
GetStucco’s comparison to the 1920s guilded age and today make sense to me. There were some predicting doom in 2002, and here we are five years later and still going. But the amount of credit in the system, particularly supporting housing, is to me parallel to the margin debt supporting stock prices in the 20s. When that credit/stock bubble unwound, there was a lot of regulatory change and an aversion to debt and credit for a generation. Now we are nearly eighty years later: My how far we have come.
Imagine…Seinfeld, Kramer, Newman, & George all having to live together…and fighting over food from the soup nazi’s relief kitchen…now there’s a come-back theme.
“I would love to see Wall Street crater and have non-commercial artists return.”
TES-TI-FY! Artists have worth to society. DaBoyz, not so much.
Brooklyn now has two zip codes in the top 500 zip codes with the most foreclosures nationwide. It is alreay unsticking in a big way here - if you think beyond the isle of Manhattan.
And I see tons of new condo buildings going up, from the backseat of the taxi, when I go out to LaGuardia.
There are 2 half-finished condos abutting my building in Brooklyn. Seems to have been no work done on them since early spring. Other condo projects in the boro have gone rental recently. A change is in the air …
“if you think beyond the isle of Manhattan.”
I’m not…
It’s a worthwhile endeavor, Muggy — the fortunes of the outer boros are bound with Manhattan’s, in larger ways than you might think. In prior downturns, it was boros that slumped first, followed by the city. It is also the boros where the majority of workers in the city live. Outmigration from NYC is going up (we are losing more citizens than we are gaining) - if our tax and working base begins to erode, it can (and has) pushed the whole city into recession. There just simply aren’t enough rich people here that can or are willing to keep the engine going. And if crime and social problems increase, as they do during downturns, those rich folks will be the first ones in flight out of here.
It really is a good idea to look to the boros. Sure, Jamaica, Queens and the UWS do not compare, and Staten Island frankly doesn’t either, but there are lots of places in the outer boros that are reasonable substitutes. Bronxville, for example, is really nice. It’s already cheaper; if it became a lot cheaper, it would start to take demand away from the UWS.
The same is true with commuting times outside of NYC. To most people, a short commute is very important. Therefore, prices on close-in suburbs are always going to be higher than those of comparable neighborhoods farther out.
But the markets certainly do affect one another. A short commute is very important to me, but if I could literally get twice the house by adding an extra 20 minutes to my commute, I’d do it.
“And if crime and social problems increase, as they do during downturns, those rich folks will be the first ones in flight out of here.”
It will be, “so long NYCityBoy, hello VermontBoy, DenverBoy, NewHampshireBoy or BostonBoy”. I’m not getting trapped on this island if these animals start acting out.
“It’s a worthwhile endeavor, Muggy — the fortunes of the outer boros are bound with Manhattan’s, in larger ways than you might think.”
Outer borough slump is contained…
Great, good job guys…
Don’t go too far against housing or you’ll end up sounding as stupid as Snaith or Shuffield. The truth is we are all here because we want money, housing or both. So quit acting like we all want crime-ridden ghost towns. The truth is must of us are searching for a beneficial entry point and would prefer to live in a balanced community.
“So quit acting like we all want crime-ridden ghost towns.”
I don’t want crime-ridden ghost towns. But I do prefer accurate reporting of bad news to viewing the world through rose-colored glasses. (Not to worry, Muggy — it’s different in Phx than in Manhattan…)
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
http://economist.com/world/na/displaystory.cfm?story_id=9546749
“But I do prefer accurate reporting of bad news to viewing the world through rose-colored glasses.”
Me too. Why is it so hard for you to see that NYC will be stickier than other areas? My view is neither rose nor colored.
“Muggy — it’s different in Phx than in Manhattan”
Why do you say something silly like that?
“Why do you say something silly like that?”
I guess you missed the sarcastic expression on my face when I typed that line. Crime will go up in NYC as well as Phx as this bubble unwinds — it’s in the bag.
“I would love to see Wall Street crater”
Ya know… I hear an whole lot of this type of sentiment from many people. They are people who are usually patriotic, God and country types.
I’m one of them too.
Hiya, exeter! Thank you for saying that. I have a great love for this country, which is why I get so cheezed off at many politicians, corporatists and globalistas. I wish I could do more for it, the US, despite its many faults, has been very good to me and I, perhaps, have not done as much as I could. I hate to see people cannibalize it, which is what I think Wall Street is doing and it fills me with fury.
Screw Wall Street. It might have been a good idea at one time, but it is basically nothing more than a sleazy, gamed casino and it shouldn’t have any more effect on citizens than Las Vegas. Who cares if Joe Blow shoots his wad in Vegas? Too bad, another one bites the dust. But now, if Bare-ass Stearns does it on Wall Street, the whole planet is supposed to shudder. What’s wrong with this picture?
“I hate to see people cannibalize it, which is what I think Wall Street is doing and it fills me with fury.”
Ditto that. Wall Street IBs equally screwed FBs and the rich investers who bought the debt which enabled subslime borrowers to purchase homes they could not afford, while skimming middleman fees and paying big campaign contributions to pols in order to buy their silent complicity. Now we have a huge mess on our hands and no policitian has the cojones to say that Wall Street is to blame.
I love it when palmetto TESTIFIES!
“I love it when palmetto TESTIFIES!”
Ditto.
I guess those who would “love to see Wall Street crater” do not have retirement accounts (401ks or IRAs or SEPs). Sheesh! Tens of millions of Americans do have 401ks and IRAs. They would hate to see Wall Street or any other major trade area crater.
My problem is I take you people too seriously. Or should I this time?
I know I’m going to get flamed now.
getting worried with your investments, bill?
Nope, but from knowing your posts, I’m sure you wish the worst of all outcomes for me. Thanks.
Bill,
The general consensus is that there is too much back-door boy games going on in WallStreet and corporate America. I don’t want to see the thing implode either, but it’s part of human nature to want to screw over thy neighbor thinking that it won’t affect you. It always does, and gas prices are a perfect example. All those people who want to see gas go to $6/gal to force people into Priuses are just signing their own pink slip.
Don’t forget, NY’ers think the Japanese, Chinese, Europeans, Russians, Middle Easterners with stronger currencies will keep the market up FOREVER.
Is this news about the falling value of Fannie Mae’s and Freddie Mac’s subprime bonds worth more than a yawn, given the recent track record of unreliable financial reporting from these companies? Isn’t $4.7b pretty much a drop in the bucket for these venerable financial behemoths?
The bigger question, IMO, is whether the recent dyspepsia inside the bowels of the subprime securitization monster has implications for Fannie’s and Freddie’s charge to the rescue of the collapsing private subprime sector?
Fannie, Freddie Are Said To Suffer in Subprime Mess
By James R. Hagerty
Word Count: 563 | Companies Featured in This Article: Fannie Mae, Freddie Mac, Citigroup
Falling prices on subprime mortgage bonds have cut the value of such securities held by Fannie Mae and Freddie Mac by $4.7 billion, Citigroup Inc. analysts estimate.
http://online.wsj.com/article/SB118554604207880334.html?mod=home_whats_news_us
Creo que tendriamos que enviarles una felicitación desde burbuja.info por su labor recopilataria de articulos sobre la burbuja USA y sus efectos.
Posteo grafico ….
http://www.burbuja.info/inmobiliaria/showthread.php?p=378826
Oximoronica: AAA-rated subprime mortgage bonds. From the WSJ article:
A Freddie Mac spokeswoman called the analysts’ estimate “mistaken.” She said the company uses third-party sources to value its holdings and hasn’t seen “any material markdown of value.” A Fannie spokesman pointed to disclosures on the company’s Web site, saying that none of the mostly AAA-rated bonds in question have been downgraded by ratings agencies.
This is a NYTimes story that I found very sad. Called “Every Penny Counts” it’s middle-class NYers who saved for years to amass a downpayment, and now are buying at the top of the market. No indication from the Times that their timing may be off, and if prices fall, their downpayments and years of scrimping will be wiped out.
In RE reporting, there’s no journalistic ethics, no mention of market forces, or tanking markets around the country, or even, god gorbid, timing the RE market for maximum personal advantage. This one just stinks.
http://www.nytimes.com/2007/07/29/realestate/29cov.html?_r=1&oref=slogin
I couldn’t read too much about these idiots because I am surrounded by them. They make just over $100,000 and jumped into a $445,000 apartment. Smart move. My favorite line was:
“They gave up smoking to cut costs”
Just brilliant. I can just see the conversation now. “Don’t worry, honey. Once we start making more money, we can start smoking again.”
I pretty much had to quit reading after seeing how they were sacrificing everything to own a place. We live in New York City to experience New York City, not to be home slaves. F—ing morons.
after 20% it’s within their income range
With no room for a drop in their income. “Hello, recession.”
“We wanted a bedroom with a door and sunlight,” Mr. Lenton said.
Ahh, gotta love it.
We live in New York City to experience New York City, not to be home slaves.
Great line! It amazes me beyond belief how people sacrifice a lot of their carefree lifestyle and interests (cable TV, internet, dining out) so that they could leap at the chance to become mortgage slaves! It’s cheaper if they wear hair shirts (like during the dark ages).
My favorite suggestion made by a new NYC homeowner/saver was that they saved money by hanging out with unemployed people. In the next downturn, they may have more friends!
the mortgage paymen is not a big deal here, it’s saving the downpayment for almost any piece of RE in NYC. New construction condos want 10% down, most co-ops want 20% and a few will take 10%. and when you sign a purchase contract it’s a custom to give the seller’s lawyer 10% down to hold in escrow and the other 10% at the closing. add the fact that almost every co-op will check your financials and will make sure that you will have 12-18 months assets after you close before letting you buy and it’s pretty hard saving up. my 1 berdoom co-op that sells for $250,000 needs over $50,000 in cash saved to buy it
Ugh - don’t get me started - ok do get me started — if you plug in the scenarios for each of these buyers into the Times’s own “is it better to rent than buy” calculator, all but one come up with a firm “better to rent” result (and the results for every buyer assume annual price appreciation of at least 2 percent, something not occuring in the places where they bought)
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?ex=1185768000&en=ef9aec5aeb02d59a&ei=5070
The NY Times lost a lot of money this last quarter due to loss of RE advertising amid the housing slump. So you can expect a lot more b-job articles like this one in the Times’ RE section in an attempt to keep the party going and RE revenue flowing into the Times’s coffers - of course, as always, at the expense of its readers.
Also Ben, if I might humbly request, this latest from the Times deserves some spotlight treatment. It is really shameful.
And another thing (boy did I get started): As irked as I am by this, you can practically see the desperation dripping off the page with this article. Rich people are still buying (hence the ’stickiness’ of NYC’s median prices) but the middle class has really put the brakes on — as have some banks in terms of credit they offer to such buyers– so we have a growing inventory of housing in the “affordable” range — (in NYC of course, not affordable at all in relation to incomes). So the message between the lines the RE is sending –using the ever willing Times as mouthpiece– is “Look how wonderful it is that all these middle-class buyers — who of course can’t qualify for risky loans now — scrimped and saved to shoehorn themselves into the market just as it’s about to plunge– don’t they seem successful and enterprising? Don’t you want to be just like them?”
Yep, scrimp for years for the right to pay 4K a month to live in a slum like “Hudson Heights.” If you live up there and feel like a night out, you get to fork over $30 for a cab home or take the A train thru Harlem at 2 a.m. Have fun.
Housegeek,
that was my take on the piece…let’s drag some more responsible if unsophisticated folks in for a scalping. At any point, was an objective view of the market offered? These are not news pieces, the’re infomercials in print. And NYJoe is right–Hudson Heights is geographically marginal–the Inland Empire of Manhattan.
And, once again, for the record, Manhattan RE tanked hugely in ‘89-92. And crime, spiked by crack, rocketed. Those friends of Muggy waiting in Jersey will look elsewhere where the gloss is gone and the jobs are scarce, and the nightcrawlers start working over the unwary.
As expounded in this invester’s home-spun wisdom, the volatility on Wall Street the past two days has set up a great buying opportunity.
(Sarcasm off. Yes, this is another shoe-shine-boy moment, as evidenced the WSJ writer’s wry account of this goober’s “buy-the-dip” plan.)
Stocks Tumble
As Wary Investors
Reassess Risks
By MICHAEL HUDSON, PETER A. MCKAY and AARON LUCCHETTI
July 27, 2007; Page A1
By bidding up stock prices all year, investors were effectively betting the housing slowdown wouldn’t engulf the broader economy. Yesterday, that confidence appeared to be shaken.
Stocks and corporate-bond markets tumbled amid selling that was more widespread than during the three previous days of triple-digit declines this month. Along with risky bonds and anything connected to the housing market, investors sold off stocks, emerging-markets bonds and even high-quality corporate debt. The record trading volume in stocks reflected rising anxiety.
Meanwhile, roughly 1,300, or nearly 17%, of the around 7,800 stocks that trade on U.S. exchanges hit their lowest price of the past 12 months.
[go to chart]
To many investors, that made yesterday’s selloff more ominous than other big declines this year.
…
‘Buying Opportunity’
Some investors appeared undeterred by the selloff. Larry Reno, a retired civil servant in Fayetteville, Ga., was tinkering on his recreational vehicle yesterday morning when he heard about the market’s rout on the radio. “Today is like the day-after-Christmas sale — this is a buying opportunity,” said Mr. Reno, who estimates his stock portfolio to be worth about $750,000.
Mr. Reno, who owns about 35 stocks, said he isn’t concerned about the subprime-mortgage market or the prospect for a weakening credit cycle.
“This is a flash in the pan. It’s a great day to be in the market to increase positions,” he said.
http://online.wsj.com/article/SB118549309797479652.html?mod=sphere_ts
Meanwhile, professional money managers offer some tried-and-tested homespun wisdom of their own to the mix of opinions…
Until recently, emerging-market bonds had largely weathered the turmoil in the U.S. and European credit markets. That’s a testament to the strong economic fundamentals and financial stability of many emerging economies. But, in another sign of the disquiet in the markets, Russian energy giant OAO Gazprom abruptly postponed a bond offering planned for yesterday.
“It’s kind of like catching a falling knife right now,” said Edwin Gutierrez, an emerging-market portfolio manager at Aberdeen Asset Managers in London, of yesterday’s trading. “I wouldn’t be in a hurry to add risk.“
One man’s vomit is another man’s food.
Hedge Funds Pounce on Debt Amid Turmoil
Unfazed, Some Take
Advantage of Reluctance
To Buy Loans, Bonds
By GREGORY ZUCKERMAN, HENNY SENDER and ALISTAIR MACDONALD
July 28, 2007
http://online.wsj.com/article/SB118554794313680356.html?mod=home_whats_news_us
Sorry if reposted. But this article may merit a reposting…
More Business news
ALL BUSINESS: Nobody should act surprised by the housing market collapse
By Rachel Beck
ASSOCIATED PRESS
9:30 a.m. July 27, 2007
NEW YORK – Century 21 Real Estate’s CEO Thomas Kunz may have unintentionally hit the nail on the head when he declared that a “pity party” is gripping the housing industry right now.
Many recent home buyers are expressing shock that their properties may be worth a lot less than when they bought them. CEOs like Countrywide Financial Corp.’s Angelo Mozilo are claiming that “nobody saw” the deterioration of real estate values coming, and are pointing fingers at others for causing this mess. And Wall Street seems to only now be waking up to the implications of mortgage securities imploding.
They all need an education in how markets work. In a perfect world, everyone keeps making money on their investments because values never drop. This is the real world. Things just don’t work that way.
http://www.signonsandiego.com/news/business/20070727-0930-allbusiness.html
I got married 2 weeks ago, and for the honeymoon, took a week cruise through the caribbean that stopped at 5 different islands (St. Thomas, Dominica, Barbados, St. Lucia, and Antigua). When you visit an island with 160,000 people and talk economy, you get a good idea how things really work in an economy. The U.S. is so big that it is complex and convaluted and “obscure”. In the small scale, the things that underpin EVERY economy become obvious.
Also, being the off-season, they sell cruises to people from the islands for steep discounts. We shared out dinner table with a couple from St. Crux and a couple from Trinidad. One in sales and one in utilities. Great insight into the economies.
These islands had a few things in common. #1) all are pretty dependant on tourism. Some have other economic base, but tourism is #1. #2) None have any native sources of fossil fuels or other sources of electrcty like rivers that can be dammed for hydro power. All of them use diesel generators to make electricity, and all are getting killed by the price of oil.
The result is that all these islands have an economy that is a tug-of-war between bringing money in (tourism) and sending money out (oil).
St Lucia grows banannas, and since they are part of the British Commonwealth, get to export banannas above market value. Huge plantations in Columbia and Panama where there is cheap labor has killed the price of banannas for most of the other islands. Britain is protectionist to St. Lucia’s bananna crop.
Dominica, was French commonwealth but has broken all ties. They are hurting. They don’t have a very good tourist base and pull in 1 cruise ship a week off-season, 3 a week peak season. Compare to Antigua that has a cruise ship 5 days a week off-peak season and 3 at a time during peak season. They are turnign to China for capital. They support the “one China” policy (China take back Taiwan), and therefore are getting investment from China as reward.
St. Thomas (U.S. Virgin Islands) has a Colgate/Polmolive plant. They process lots of cocoa butter for soaps and such. But other than tourism and the one factory, not much there to offset their need to import oil. Fortunatly, they are on U.S. dollars.
Other islands, like Barbados, have real industry… unfortunatly, most of it is making crap tourists buy, then selling it to the other islands to sell to tourists.
Barbados has their own monitary unit, called the Barbados Dollar. It is very storng agains the U.S. dollar as it seems tied to the British Pound. Barbados was a UK holding until recently, so this makes sense. Unfortualty for tourists, the Barbados dollar strength made stuff EXPENSIVE! $28 for a lunch for 2 that consisted of burger, fries coke + egg salid sand, fries, coke. Talked to some people that were not on the cruise, but staying there in a hotel for 3 days. First morning they got the bill for breakfast and it was $150 for 4 people. They went to a grocery store and were eating PB&J and pop tarts for the rest of their stay.
The other islands shared a currency called the Eastern Caribbean Dollar.
Almost all the islands were exploring non-fossil fuel sources of electricity. Dominica and St. Lucia have dormant, but active, volcanoes and are are working on geo-thermal. All are putting in wind generators and solar.
And, I got the feeling that a lot of the cruisers on the ship with us were funding their trips on Home Equity. Many times home prices were brought up. One couple from Fontana was talking about how much their house was worth. LOTS from Jersey and New York. Oklahoma, Texas, etc.
I was forbiden to talk housing on the honeymoon by the new wife. Besides, it wouldn’t do any good.
On St. Lucia, I shared a tour with a guy from Atlanta that is a Realt-whore. He’s convinced housing will be back to a sellers market in 6 months. SOOOOOOO hard to hold my tongue.
Does anyone else find yesterday’s CNBC’s bit on the President’s response to the drop and interview with his economic advisor’s a bit odd? It was unprecedented and it was only after a 300 pt loss. I find it hard to believe that a 300 point loss in the market is enough for these extremely busy people to drop their schedules in order reassure America unless the economy is truly on thin ice. If the market sentiment and American consumer sentiment changes then it will bring the economy into a recession and with the lack of Savings of the average American then it is going to be severe. Anyone else think the Presidents response was odd, or took it as a reassurance that America is really close extreme economic pain rather then what its intent was which was to make us believe everything is O.K.?
“Does anyone else find yesterday’s CNBC’s bit on the President’s response to the drop and interview with his economic advisor’s a bit odd?”
It appeared to have an interesting effect on the market…
Market’s dive continues
Dow, S&P 500 have worst week in five years; Nasdaq loses 4.66%
Wall Street extended its steep decline Friday, propelling the Dow Jones industrials down more than 500 points over two days after investors gave in to mounting concerns that borrowing costs would climb for both companies and homeowners.
http://www.baltimoresun.com/business/investing/bal-bz.wallst28jul28,0,5119066.story
Some loved Alan Greenspan, while others reviled him. Regardless, the track record of a man who could play his hand so close to the vest in moments of economic turmoil merits admiration in light of the current situation.
“I find it hard to believe that a 300 point loss in the market is enough for these extremely busy people to drop their schedules in order reassure America unless the economy is truly on thin ice.”
You would think BB would understand game theory well enough to realize what a bad signal this would send…
Unfortunately. BB hasn’t had a real world job since working at South of the Border in Dillon, S.C., as a teenager.
Everyone knew it was BS. And it came off as being very desperate.
But remember, these extremely busy people only have one job - keep the confidence game going.
The late great Milton Friedman’s ideas seem quite relevant at the present moment.
But the ideas that Friedman stood for seem, if anything, more irrelevant today than they have been for a long time. Why the simultaneous success and failure?
Friedman used Abraham Lincoln in explaining his position on monetary policy: “You can fool all of the people some of the time, and some of the people all of the time. But you can’t fool all of the people all of the time.” A central bank can have occasional impact on the level of economic activity by controlling interest rates. But if this power is used too often, firms and households will adjust expectations of price changes and neutralise any impact on real activity. This is the core of monetarism, and it was and still is correct.
http://www.opendemocracy.net/globalization-vision_reflections/friedman_4132.jsp
what confidence game? not these people.
Noted by posters on several blogs, the panicky effort by the prez and his 4 horsemen was a pr disaster. The game theory comment is right on.
Pure speculation but my take on this is that there is a major prime bank in trouble.
One take away I have from the Russian financial crisis was that when push came to shove the Russian government chose to support the Russian banks and left the rouble, the equities market, the government bond market (GKO), and the banking system, to twist in the wind.
Big Money gets Big Favors. Hopefully our government is more responsible but who knows.
P’colar Popper,
any speculation on which ibank? There’s a rumor on several blogs that Goldman has been desperately trying to peddle 45b in loans with no takers. Heard anything like this?
No idea Spike but in my experience the tell would be in the interbank short term lending market i.e. overnight, one day, two day, market. First rates between banks will rise and then lines will be cut. Just need to find out/monitor which bank(s) are getting their rates jacked up.
I don’t have this access but I am sure somebody out there does…
Cash is king now. Most don’t have it, and many desperately need it. This need to raise cash to cover rising debt is leading to big drops in stocks, bonds, precious metals, real estate, collectibles, boats, cars, you name it.
The beast must be fed. Cash is king.
Time to run the printing presses and fire up the helicopters, then.
Wall Street is choking on the vomit of high-risk loans and oversized houses brought on by the end of their easy money binge.
SINKING FEELING
Fears Intensify
On Economy,
Despite Growth
Housing Woes, Turmoil
In Markets May Slow
Second-Half Momentum
By SUDEEP REDDY, MARK WHITEHOUSE and KELLY EVANS
July 28, 2007
…
The latest wrinkle is the leaking of worries about the credit of U.S. homeowners into other markets, a strong signal that easy financial conditions, which fueled abundant corporate borrowing and buyout activity, could be evaporating. From Tyco Electronics Ltd. to Chrysler Group, companies and bankers have held back bond issues and loan sales, meaning that lower-rated companies may have less money available to expand — or will be forced to pay more for that expansion than they had planned. As of Friday, the borrowing cost for the typical investment-grade corporation stood almost 0.8 percentage points above the rate at which banks lend to each other, up from a “spread” of about 0.4 percentage points at the end of June, according to the CDX credit-derivative index. That is, however, offset by the bond market pushing down long-term Treasury rates on which other lending rates rest.
Mark Kiesel, a corporate-bond portfolio manager at Pacific Investment Management Co. in Newport Beach, Calif., estimates that the backlog of unsold bonds and bank loans exceeds $300 billion — a situation he sees as similar to that in the housing market, where the backlog of unsold homes has also reached new highs. At June’s rate of existing home sales, it would take 8.8 months to unload all the houses on the market — a 15-year high.
‘Big Picture’
“The big picture is that you’ve got an inventory problem in both markets — you’ve got too many homes for sale and too many bonds for sale,” says Mr. Kiesel. “So prices need to adjust: You need lower house prices and much bigger credit spreads. It means the economy is going to slow.”
http://online.wsj.com/article/SB118553827579780254.html?mod=home_whats_news_us
I found this REO house listing in the Phoenix area, and thought that it illustrated the bubble here pretty well. A relative lives in this same 3 bedroom, 1870 square foot model in this same subdivision. This model was selling new from the $130s to the $150s in 2003 and 2004. At its peak, the model sold a few times in late ‘05 for $300K or just under that, without a pool. There was a recent short-sale listing of the same model listed at $199K that sat for over a month, and is now “pending.” This one is listed at $219,900. The MLS # is 2810722.
While I understand that there is always a little spin in selling, I really object to the agent highlighting the 11/28/05 sales price. Actually, I don’t even object, I find it amusing. That date may very well be the exact peak price closing date for Maricopa and Pinal Counties, Arizona. Sales slowed in late summer ‘05, and the price rises pretty much petered out by November. We all know the rest of the story, with inventory skyrocketing in ‘06 and still at record high levels. Of course, no mention is made of the pending sale at $199K or less. Either way, it is still a lot of money for houses with a realistic value of $140K or less.
LENDER OWNED, NOT A SHORT SALE, WE GET ANSWERS AND CLOSE ESCROWS! IN GOOD CONDITION,SOLD 11/28/05 FOR $290,000.. WOOD TYPE FLOORS, SOLD ‘AS IS’ PLEASE WRITE NO SELLER’S PROPERTY DISCLOSURE STATEMENT AND NO CLUE REPORT ON PAGE 7. SELLER’S ADDENDUM FOLLOWS AN ACCEPTED OFFER. ATTACH A LOAN STATUS REPORT OR PROOF OF CASH + A COPY OF AN EARNEST MONEY CHECK PAYABLE TO FIRST AMERICAN TITLE KATHY SCHMITT…BUYER TO VERIFY ALL ITEMS OF MATERIAL IMPORTANCE.
Earlier, GS said “Countrywide will now have to service the loans that it writes”
GS, to you mean “service”, or do you mean “keep as portfolio”? Servicing is when you sell off the loan, but keep making money month after month as fees for taking in the checks, billing the customer, keeping the escrow account, paying the taxes, etc. Those fees were part of why banks didn’t really care what kind of cr@p loans they sold into the secondary market, because with no risk of default (house prices always go up), they could make $$$ on these fees month after month after month.
However, if they are require to keep the loans on their portfolio, it is then *Countrywide* taking (and keeping) the risks.
So is it “they are required to service the loan”, or is it that “they are now required to keep all of their loans as portfolio loans”? Also, do you have a source?
Actual inflation (the kind that actually effects the consumer) anyone?
“But behind the stewing in Lanzhou is a global surge in food prices that is driving up the cost of such things as a latte at a Starbucks in L.A. and a tortilla in Mexico. Food prices worldwide have risen 23% in the last 18 months, according to the International Monetary Fund, partly because of soaring demand for corn to make ethanol.”
LA Times
Chinese city stews over rising cost of beef noodles
A global surge in food prices hits the popular dish.
http://tinyurl.com/248ccw
Early market reports are for a 1% drop on the opening Monday.
China plans to restrict imports of petrochemical equipment. Total imports from the US last year 100B Yuan, now 75% must be made in China.
China cuts any additional exports of Rare Earth Metals.
Paulson goes to China to beg for dollars on Monday, Europe starts summer recess. BOJ not decided if it will raise rates.
Hoz,
did you notice that AHM has simply decided not to pay its announced dividend, due today, to shareholders of record as of 7/9/07? Ever heard of a REIT pulling this stunt? Announcement made last night after 7pm.
I had not noticed that AHM had omitted its dividend. Historically there are some excellent companies that have omitted dividends in difficult times. And a lot of superb companies omit dividends when the company perceives that it can do better with the dividend in furthering its own growth. e.g. McDonalds Corporation, Microsoft Corp.
But I have never heard of a company omitting its dividend because of Margin Calls.
“Early market reports are for a 1% drop on the opening Monday.”
I will go out on a contrarian limb here and suggest the markets will magically open strongly to the upside on Monday, accompanied by some leading propaganda story in MSM financial pages which has nothing to do whatever with subprime, MBS, CLOs or CDOs.
Done!
My limb says big downside at the opening following huge sell-off overseas, followed by a 200+ point improvement from the bottom sometime during the day (which could leave the market either up or down for the day).
Fair enough — I cannot say whether I find your predicted version of mysteriously upbeat Monday market behavior in the wake of a very long and apprehensive weekend any less plausible than mine.
That is possible. It depends on how bad Japan and Australia are hit. China on Friday lost only 0.11%, trading near its all time high. I haven’t the faintest clue what is going to happen in China on Monday. If it is up - quite likely based on the news from China tonight, the rest of the world may recover. BUT, Monday HSBC reports earnings. HSBC announced this month that its bad-debt provisions for 2006 would be about $10.5bn , largely because of mortgage defaults in the US. HSBC appears to be reporting growth of 7% (last year 14%). If it comes in at less than 7% growth, there will be a lot of people looking for buyers. Most of the large Japanese and European banks are iterating “we are not in the same problem as US Banks”. UBS sent out a client warning “If sustained, the recent sharp rise in the cost of credit will bring to a halt the financing of takeovers and even new investment. It could also substantially impair equity valuations.”
What is going to change in the credit markets this weekend? Is Mr. Paulson going to be able to borrow moneys from the Chinese? Is somebody going to step in and take the banks that are on the hook “because they are now unable to persuade skittish hedge-fund managers to buy big buyout-related debt packages” . Worse, banks have already committed to provide an additional $200bn-plus of buyout debt. “If that ends up on their balance sheets, any further decline in loan prices could slam their bottom lines.” WSJ
IMHO, we have not seen panic selling, yet. There haven’t been below market bids in months. e.g. somebody looking to buy 10M+ GM at $29 current market price $31.14 In the securities industries, size takes precedence - you get out when you can.
I think we are seeing the first signs of the great unwinding. Markets will correct. I dont know what will happen next but it wont be good. There will be blood in the streets.
My only advice to people is stay out of debt.
Any of you considered that there may be just may be large companies paying reasonable stock dividends and have lots of cash - “cash is king?”
When the psychology turns, even “good” companies will be carried down.
Agreed, but that’s undershooting and they will be at bargain prices, only the experienced value investors will notice and snap up the bargains. I figure 2008 or 2009 will be a replay of 2002 when most small time investors were swearing off stocks. My brokerage account cash percentage is about 45% now. I have my eyes set on the following:
TI-A, GSK, RDS-B, EN, PCU, more of PNW, PGH, FDG, NYB, BAC and PFE. TI-A is at its 104 week low. GSK is at its 52 week low. BAC is near its 52 week low. These are not necessarily merely 6% declines, such as RE prices in Palos Verdes Estates: BAC came down from 55 to the $46.90 range, about around -15%.
Any thoughts on shorting Burlington Northern Santa Fe Corp. (BNI) if/when the economy turns? They are the arteries for bringing goods from LA/Long beach Harbor to the rest of the country.
Here’s my thoughts on plays that will be good:
Phase 1 - short UPS, FexEx, BNI, trucking companies
Phase 2 - short JCP, SHLD, Gap, other upscale/mall retailers, furniture makers, furniture stores
Phase 3 - short Ford, GM, and other automakers too dependent on trucks
After phase 3, probably 12-18 months from now, then start buying options in the same order…
“Here’s my thoughts on plays that will be good:”
Share those here, and some hedge fund analyst type will neuter your bets with the opposite bets…
Sure, it might be a good idea to invest in any well-run company that isn’t overpriced and wouldn’t be negatively affected by a global depression.
Unfortunately, I don’t know of any companies like that. And I don’t think Bill in Phoenix does either.
From latest Executive Intelligence Alert:
Bernanke understates real estate losses at $100 billion.
Standard and Poors (S&P) downgraded the once top-rated mortgage backed securities (MBS) to junk, and Federal Reserve chairman Ben Bernanke—who was warned a month ago in EIR that the mortgage meltdown was “much worse than he thinks”—estimated $100
billion in hedge fund and bank losses in the mortgage bubble his predecessor Alan Greenspan largely created. Bernanke was testifying to the Senate Banking Committee on July 19.
Bernanke’s public estimate is on the far low end of bank and real estate analysts’ estimates of these losses, and even S&P forecast in a July 14 report that they will be in $400-500 billion range.
The London Guardian reported July 20 that S&P cut 418 issues of MBS from 2005-06, with a value of $3.8 billion (an apparently fictitious value, as has become clear in recent weeks), down to junk-bond status, from ratings of AAA or AA which S&P had given them in holding up the last stages of the housing bubble. This is another blow to the “values” of trillions of such U.S. residential real estate-based MBS in world credit markets.
Bernanke said nothing to suggest lowering short-term interest rates to deal with the credit market crisis. He cannot do so because the dollar is already falling, and rate cuts could quickly trigger unwinding of the “yen carry trade,” causing a real dollar collapse and making that crisis much worse. After Bear Stearns bank notified investors late on July 17 that the assets in its two leveraged hedge funds, nominally worth about $9 billion a month ago, are effectively
worthless, the dollar was shocked into a renewed fall by the threat of a wipeout of hundreds of billions of dollars worth of mortgage-backed securities (MBS) and derivatives like those held by these two hedge funds. The dollar fell to historic lows of $2.05 against the British pound, and $1.39 to the euro. “It’s almost as if there’s some risk aversion developing against the dollar,” a Bank of America executive warned Reuters news service.
On July 19, two financial analysts quoted in the Toronto Globe and Mail said that investment banks and hedge funds are facing widespread losses in these securities. One, Richard Bove of Punk Ziegel and Co., downgraded all Wall Street banks on July 18 on the grounds that the Bear Stearns hedge fund blowout did not reflect a problem at the bank, but “reveals troubles with the entire system.” Bove warned that Bear Stearns’ acknowledgement of complete losses in mortgage backed securities will trigger a “mass revaluation of portfolios with similar investments . . . causing big writedowns
at the banks.” He said, “The banks are overstating the quality of assets on their balance sheets. When they go back and look at these securities, it could be up to a 15- to 20-percent devaluation.”
“mass revaluation of portfolios with similar investments . . . causing big writedowns at the banks.”
Can anyone provide a plausible scenario in which this never occurs?
The Federal Reserve, at its option, can dictate the “market price of bank owned securities” . Traditionally this has been to allow banks to buy US Treasuries and keep them marked at par - if the Federal Reserve did not allow par pricing there either would be “no sales of US T Bonds to banks” or there would not be a solvent bank in the US.
So eliminate “Mark to Market” and write down when liquidated.
‘…or there would not be a solvent bank in the US.’
Is this comment specific to the status quo, or a general remark?
Specific to all banks operating at the current time in the US. For example when banks by bonds at 4.79% 10yr and the interest rate rises to 5.20% if the bond is marked to market each bond has lost over $4,000. There is not a bank in the country that could meet that margin call relative to the amount of US bonds they hold.
“Specific to all banks operating at the current time in the US.”
What about the hedges? For instance, I am highly skeptical that Bear Stearns is an isolated case of a hedge fund whose bets recently morphed into a case of ‘gambler’s ruin.’ Does the Fed have a similar scheme for keeping these elephants (collapsed hedge funds) hidden under the living room rug?
I do not know about the Federal Reserve bank, but Basel 2 might be able to be modified. from Basel 2
“…The concern is that smaller banks that cannot afford to implement more rigorous measurement techniques will end up paying more. “The cost element will be a big issue,” said Sheng. Based on his dialogue with securities houses in the Hong Kong market, Sheng said the view was that smaller providers would opt for the ‘standardised’ measurement approach, which assigns different levels of risk to different business lines. …”
You would enjoy “Basel 2 and Economic Risk” caution 22pg pdf
prepared by Citigroup look at pg 17 graph
http://tinyurl.com/2ar67z
Lots of holes, but many countries (and the IMF) have been telling the US to get its financial house in order for years and been rebuffed. Payback’s a bitch.
“Lots of holes, but many countries (and the IMF) have been telling the US to get its financial house in order for years and been rebuffed. Payback’s a bitch.”
Hoz — I and many other readers here are indebted to your insights.
I am wondering whether the hysteresical problems of the Japanese economy over the period from 1990-200? might soon resurface on a global scale, given the perfect storm confluence of a globalized hedge fund industry with unexpectedly-severe problems in the U.S. subprime mortgage lending sector?
Hoz, if you are still out there…
“The Federal Reserve, at its option, can dictate the “market price of bank owned securities” . ”
In that case, the books look tidy and the banks look fine (stability is enhanced), but don’t the bank examiners now start tightening things up reviews, with the knowledge that, yes, the book value looks nice, but the banks are probably more shaky than the books indicate (at least until conditions change for the better)? Or am I misunderstanding what bank examiners do?
Bernanke understates real estate losses at $100 billion.
Man’s just doing his job.
Papers losing real estate ads to online
By SETH SUTEL, AP Business Writer Fri Jul 27, 7:03 PM ET
” NEW YORK - It’s bad enough that a cratering housing market is leading to a slump in real estate advertising at newspapers, as a dreary series of earnings reports showed this week.
What’s worse is that a lot of that advertising may never come back to newspapers even if the real estate sector recovers. That’s because a significant chunk of those advertising dollars are moving — you guessed, online.
…But what’s worrying analysts this time around is that real estate could become the next category of classified advertising — after help-wanted ads — to mark a significant and permanent shift away onto the Internet. The stakes are big for newspapers since classifieds are highly lucrative and make up more than 35 percent of their revenues….”
http://tinyurl.com/3b3pxs
Maybe off-topic, but is this guy trying to borrow from prosper.com lenders to lend back to prosper.com borrowers?
http://www.prosper.com/lend/listing.aspx?listingID=174328
Heh heh, the Prosper Carry Trade…
In case the subprime debacle is running out of dropping shoes, The Economist has identified yet another…
Bond insurers
A monoline meltdown?
Jul 26th 2007 | NEW YORK
From The Economist print edition
A hedge fund stalks subprime’s next potential victim
AS AMERICA’s subprime-mortgage tempest spreads, Wall Street’s latest parlour game is to bet on who will be next to get caught in the storm. A fair few have placed their chips on the so-called monoline insurers, an obscure but important bunch who guarantee the timely repayment of bond principal and interest when the issuer defaults.
The two largest monolines, MBIA and Ambac, both started out in the 1970s as insurers of municipal bonds. In recent years, much of their growth has come in structured products, such as asset-backed bonds and the now infamous collateralised debt obligations (CDOs). The total outstanding amount of paper insured by monolines reached $3.3 trillion last year.
André Cappon of CBM Group, a financial consultancy, describes monolines as “rating agencies that put their money where their mouth is.” Arguably the keenest of credit-market observers, they extend their gold-plated credit ratings to paper they deem worthy of their protection, in return for a premium.
The monolines’ share prices have tumbled this year as the depth of the subprime crisis has sunk in (see chart). The cost of insuring against their own default has shot up, prompting talk of a “monoline meltdown”. This week Ambac’s second-quarter profit missed forecasts due to a $57m write-down on credit derivatives.
http://economist.com/finance/displaystory.cfm?story_id=9552987
André Cappon of CBM Group, a financial consultancy, describes monolines as “rating agencies that put their money where their mouth is.” Arguably the keenest of credit-market observers, they extend their gold-plated credit ratings to paper they deem worthy of their protection, in return for a premium.
Unfortunately the gold plating is very thin. Underneath is the same old lead.
If these “insurers” were called to pay off on 1% of their outstanding policies, they would be bankrupt. Then what would happen to the ratings of their other “insured” bonds?
Casey is setting up for his “predatory lender” argument, presumably to “go after” the lenders that unfairly made him take out all of those defaulted loan…
http://www.iamfacingforeclosure.com/
I didn’t know nothin’ about no ’stated income’, ‘owner occupied’, etc.:
“I didn’t know anything about stated income or any of that stuff, the loan app was filled out for me. I didn’t have any other real estate so they said I would be buying this house as a “primary residence”. I glanced at the app and signed it. I trusted my broker(s) to take care of me.”
In other words, “yes, your honor, that is my signature on the loan papers, but I didn’t know what it was I was signing, all I was doing was relying on the real estate professionals and what they told me.”
*SIGH*
Yes, Casey, “it’s all good”.
OK, now that my beloved Brewers went down the tubes: My baseball scenario;
top of the 2nd 0:0, UBS up to bat and hits a home run with client caution note warning of impacts to equities because of credit tightening, score 1:0; In a defensive maneuver Gordon Brown brought in as short stop and Henry Paulson sent to left field. Upto bat 400B in unsold loans.