Speculators And Home Builders A Volatile Combination
Some housing bubble news from Wall Street and Washington. “Flippers and other speculators investing in single-family homes helped drive up prices in many hot housing markets during the boom. Now they’re contributing heavily to mortgage delinquencies in several of those markets. ‘Defaults are on the rise in most parts of the country, but…it is not always the case of a homeowner losing his or her home,’ Doug Duncan, the Mortgage Bankers Association’s chief economist, said in a statement, ‘but [it's] often the case of an investor gambling on a continued increase in home values and losing that gamble.’”
From MarketWatch. “California, Nevada, Arizona and Florida were among the states with the fastest home-price appreciation over the last five years, Duncan noted.”
“‘This rapid price appreciation attracted both speculators and home builders, a volatile combination that lead to an oversupply of homes that was beyond the capacity of the local populations to support,’ he said. ‘When this oversupply became apparent and prices began to fall, many of these investors simply walked away from their mortgages.’”
“Freddie Mac’s second-quarter net income slipped 45%, primarily due to a higher provision for credit losses and mark-to-market losses on credit-related items, the mortgage giant reported Thursday.”
“‘On the credit front, we are seeing weakening,’ said CEO Richard Syron in the company’s press release.”
From Dow Jones Newswire. “Freddie Mac shares fell after the home-mortgage financier took a $320 million loss on new mortgages.”
“Freddie Mac, which is recovering from a massive accounting scandal, also predicted that third-quarter results would reflect credit-market related stress for its guarantee-related obligations.”
“Freddie also said its exposure to subprime mortgages had grown from the end of 2006. The company said its investments of non-agency mortgage-related securities backed by subprime loans rose to $125 billion at the end of June compared with $119 billion at the end of 2006.”
The Associated Press. “H&R Block Inc. on Thursday cast new doubt on the pending sale of its troubled mortgage lending arm. ‘The mortgage origination market is in the midst of the most severe dislocation it has seen in years, maybe the most severe since the 1930s,’ Mark Ernst, CEO, told analysts.”
“The company said Option One and two small non-mortgage businesses that are being dismantled lost $192.8 million.”
“H&R Block has already slashed its Option One work force by more than half. The company announced Thursday it has stopped approving any new loans that don’t comply with Fannie Mae and Freddie Mac requirements, limiting loan originations to $200 million a month, beginning in September. Last year, the company originated $27.1 billion in loans.”
From Bloomberg. “Basis Capital Fund Management Ltd., the Australian investment company, sought bankruptcy protection for its second-biggest hedge fund.”
“The Sydney-based company’s petition to liquidate the Basis Yield Alpha Fund stokes concern that the rout in the U.S. subprime market will lead other hedge funds to report losses when they disclose August valuations to investors next week, said James Chirnside, chief investment officer at Asia Pacific Asset Management in Sydney.”
“‘We will see some blood,’ said Chirnside, who oversees $70 million of funds of hedge funds. ‘The contagion spread and was at its worst by the middle of August.’”
“Basis Capital… had more than $1 billion in assets as recently as May. Losses at the Yield Alpha Fund could exceed 80 percent, according to the petition filed yesterday.”
“‘We are not quite sure what assets are in the fund,’ said Sydney- based said Paul Billingham, a liquidator for the Basis fund at accounting firm Grant Thornton. ‘There were a number of counterparties that secured the assets and the value of those was changing.’”
From Reuters. “New evidence of damage wrought by the U.S. mortgage sector surfaced in the United States and Europe on Wednesday while banks demanded a record amount of cash at a euro zone money market auction.”
“Cheyne Finance, a structured investment vehicle (SIV) managed by hedge fund Cheyne Capital Management, said it was seeking to restructure after being forced to start selling assets to pay down debt.”
“Standard & Poor’s downgraded Cheyne Finance sharply. Just two weeks ago, the agency said ratings on SIVs, including the Cheyne vehicles, were weathering turmoil caused by defaults on U.S. subprime mortgage lending.”
“‘The only thing that is certain is that more uncertainties in the direction of asset prices and volatility are on their way,’ Bank Julius Baer said in a report.”
“U.K. lenders responsible for 12 percent of the nation’s mortgages are tightening standards for loans on house purchases, withdrawing offers and raising the cost for borrowers with less than perfect credit.”
“‘There are some lenders who have pulled their current product range and not announced any new ones,’ said Ray Boulger, senior technical manager at Britain’s biggest online mortgage broker. ‘Others have put up rates until they get little or no business.’”
“In the U.K., so-called subprime lending to homebuyers with a shaky credit history accounts for about 6 percent of the market, half the level of the U.S., according to the London-based Council of Mortgage Lenders.”
“‘Subprime lending has been of a higher quality in the U.K.,’ said Kelvin Davidson, a property economist. ‘But the problems don’t really emerge until the market starts to turn down.’”
The Birmingham Post. “More than £2,000 was knocked off the price of an average house in the Midlands last month amid growing signs of a property slowdown.”
“Charles Smailes, chairman of the board of the National Federation of Property Professionals, thought this was the beginning of a stagnation in prices which would run into 2008.”
“He said: ‘The slowdown is entirely predictable after the seven interest rates we have had. If the average mortgage is over £100,000, every interest rate increase has added £16 per month. When that happens seven times, it begins to bite.’”
“Mr Smailes thought the slowdown was a good thing and would allow time for incomes to catch up with house prices. ‘It’s the best thing that could happen to the market; the level of increases we have seen since 2000 have been totally unsustainable.’”
“Only six weeks ago London’s financial hub seemed headed for another round of hefty bonus payouts from a bumper first half of transactions. But a global financial downturn has dampened the mood.”
“Bankers and traders who splurge on fast cars, vacation homes and luxury yachts with the extra cash each year may be forced to scale back their spending plans as the U.S. subprime turmoil and credit squeeze have brought dealflow to a grinding halt.”
“‘Banks are having significant increases in their costs. They can’t access liquidity as cheaply as before,’ said Jonathan Said, a senior economist at the Centre for Economics and Business Research. ‘The first costs that you take off are bonuses.’”
“One senior London-based banker said he was not expecting a dramatic fall in bonuses because of the strong first half. ‘I am reasonably relaxed about that from a European point of view,’ he said. ‘We all get paid too much anyway.’”
“The U.S. Federal Reserve is not rushing to cut benchmark interest rates because it wants to break investors of the view that the central bank is there to bail them out, an article in the Wall Street Journal said on Thursday.”
“‘Officials acknowledge the perception of bailing out investors exists and if allowed to grow, could erode the credibility they need for keeping inflation low and encourage lax attitudes toward risk,’ the article said. ‘They hope that taking time to weigh the economy’s need for rate cuts will help discourage investors from thinking Fed officials are overly concerned with falling asset prices.’”
The Tribune. “Indymac Bank has hired more than 600 former American Home Mortgage Investment Corp. employees who were recently let go by that company. Tuesday’s move comes just five weeks after Indymac announced the layoff of 400 workers, roughly 4 percent of its then-total work force of 9,200, in the face of an increasingly tough mortgage market.”
“At that time, Indymac CEO Michael W. Perry said industry loan volumes and profit margins were under pressure. Perry said Indymac’s challenges have come from a credit cycle with unprecedented liquidity in the capital markets.”
“‘You had excess lending capacity from the 2003 refi boom and you had a strong economy with pent-up housing demand, which created a housing boom,’ he said. ‘And that housing boom caused consumers - including a lot of consumers who speculated like they did on stocks - lenders, rating agencies and investors to become too aggressive.’”
The Bradenton Herald. “Since the beginning of 2007, National Association of Home Builders’ chief economist David Seiders has lowered his expectations for the housing market four times. ‘The reason for the revisions is all because of the new eruptions on the mortgage side,’ Seiders said.”
“In a teleconference Tuesday, Seiders said a recent Home Builders survey found that 62 percent of the builders who responded are feeling the crunch of tighter lending practices. That number is up from just 33 percent in March. He predicts it could take until 2011 to see a full recovery.”
“After the unsustainable boom of 2003, 2004 and 2005, prices started to return to normal. Seiders and many other economists found hope in the market’s stabilization. Then the mortgage meltdowns began.”
“‘It looked like things were stabilizing the middle of this year, but I’m sure we’ll see another decline,’ Seiders said. ‘It’s an overreaction to the subprime market that triggered other issues. Consumers feel tremendous uncertainty.’”
“He also said that while prices have tumbled in many markets, they still have a way to go until they get to a mark where individuals with good credit can get a more traditional mortgage without a skewed income-to-debt ratio. He predicts price appreciation across the nation may not start until sometime in 2009.”
“‘The reality is we did have a lot of overaggressive lending during the boom,’ Seiders said.”
‘Freddie also said its exposure to subprime mortgages had grown from the end of 2006. The company said its investments of non-agency mortgage-related securities backed by subprime loans rose to $125 billion at the end of June compared with $119 billion at the end of 2006.’
This is interesting. If Freddie is only holding this stuff, it isn’t guaranteed by anybody, and certainly not the taxpayer. Plus, if the board wants to keep taking $300 million dollar hits, rock on, but don’t expect any sympathy.
Ben, I’ve always admired your fortitude on these subjects, but you have to admit, this is getting spooky.
Really? To me this seems fairly orderly, so far.
Orderly so far, but I smell blind panic percolating up in hedge funds and board rooms from the Caymans to Wall Street to London to Zurich. Much like the levees of New Orleans, all the so-called bulwarks against the Perfect Storm are showing new cracks and fissures practically by the hour. When the first big breach occurs - not the finger-sized holes we’ve seen so far - there won’t be anything orderly or pretty about what will unfold.
But what’s going to set it off??
When foreigners start dumping agency paper, should be soon.
Foreign Central banks have dumped agency paper and US Treasuries over the last 4 weeks!
No, they are still buying.
http://www.federalreserve.gov/releases/h41/Current/
Plus, if the board wants to keep taking $300 million dollar hits, rock on, but don’t expect any sympathy.
What I found to be interesting was the big push to increase their limits. If that were the case, the 300 million would now be in the billion range for a loss.
I don’t think it is that easy … increasing the limits will probably increase home prices for some time or at least make the losses smaller. That’s how it works in the Netherlands with similar government-guaranteed mortgages. Of course, somewhere down the road this will cause massive inflation and/or taxpayer punishment and ultimately it will fail to bail out the housing market. But it buys time.
And time is all they need/want.
As aggravating as it is to listen to the pols and MSM’s hacks - they all know housing is toast. Talk of rebounds/bailouts/containment is just part of a larger delaying action. A smart seller would realize that right now they’re seeing the best price they’ll see for years and years - hey FB’s your fearless leaders are about to leave you in the dust of financial history.
Certainly to some extent, but remember, they can only buy conforming (20% down, high FICO) loans. Even if they buy 1M dollar morgages, it’s still not going to help most of the upside down specuvestors.
Freddie’s CEO/Chairman is no stranger to burning through public cash if given the opportunity:
from Syron’s bio… “While with the Federal Home Loan Bank system, which he joined in 1986, Syron was the primary architect of the policy framework that began the recapitalization of the Federal Savings and Loan Insurance Corporation in 1987.”
From wiki… “In the 1980s, during the savings and loan crisis, the FSLIC became insolvent. It was recapitalized with taxpayer money several times, including with $15 billion in 1986 and $10.75 billion in 1987. However, by 1989 it was deemed too insolvent to save and was abolished along with the FHLBB; savings and loan deposit insurance responsibility was transferred to the FDIC.”
Sounds like Syron is an expert at burning the chair legs on which the U.S. economy sits.
It cannot make the junk loans but it can buy the junk packages from Countrywide et al. That is scandalous!!!
UnStinkingFrigginBelievable!!!!
They took a $320m on “new mortgages.” Does that mean they’ve already taken a hit on ones that they just purchased?? And what about the “not new” mortgages, what about losses and mark to market on them??
Geez.
http://www.minyanville.com/articles/credit-crunch-fed-bernanke-hrb-S%26P-Nasdaq-DJIA/index/a/13935
Love the cartoon characters. But, hey, this is something Joe 6pk might actually read (or at least glance over, before returning to ESPN or surfing for porn).
No. Note the comments at the bottom looking for a hybrid of bailout and rate cut. This is from a guy who has been very bearish.
I like the site. When people ask me for beginning financial market information, I send them to Min. I learn something new there everyday.
I’ve been on it since it was an email list in the fall of ‘02. Todd-o has done a good job with it. Would not be shocked to see it IPO if the market stays good.
And he opened a discussion of Bernake and the discount window with the image of helicopters from Apocalypse now. How can you not like Todd for that? >; )
Ben’s site IS porn for many of us
How many specuvestors signed docs saying the loan was for a primary home when it was really a grab at greed? Are they going to get bailed out, too? LIke they say about immigration “but they broke the law.”
I have said and repeated this many times:
There are more homes than buyers to purchase them, regardless of price.
The demand was skewed by speculators, and HBs overshot and did not question the sudden rise in demand. This demand was not realistic.
Had a national builder (they build for investment purposes only) tell us in 2005 that their marketing department analized the market and called condos bad investments. They cancelled a condo project.
Other builders who did not do this deserve their fate.
They ‘analized’ the market? Good. I hope they used a Joshua tree, or else borrowed TXchicks frozen 20 pound trout, or whatever is is she has in her freezer, I forget, a salmon?
Anyway, I sincerely hope that was used in the process of analizing the market.
Yep, like I said on Sacramento Landing, grab the household (not family) formation data from USC and overlay the construction industry data from BEA and BLS and you get the picture really fast.
yeah ok gwynster but ..
is there an essay required too? (just BS’n you)
I don’t think this is exclusive to the Sacramento area. If you look at the San Francisco area population statistics, I believe they will show either a stagnant or declining population.
Only MORE people in an area would (partly) justify a rise in home prices. How could areas that had no real population growth experience a rise in prices? Pure speculation.
Gwynster, as you could well see from your research, it was very simple to ANALYZE (!) the market and determine that way, way, way too much housing was being built.
Just no one bothered to actually do the research.
Similar to the dot.com, where many expected people to buy online, and then discover that people really like to go OUT of their house to shop, too.
LOL omg don’t get me going on population migration as an effect of economic hardship. It’s such basic sociolgy yet no one recognizes it happening in their neighborhood or is prepared to deal with consequences.
Population in the bay area has been declining. Just take a look at the public schools they have been closing due to the low population of kids in certain areas.
And look into Silicon Valley companies. 80% of the workforce is Chinese or from India.
“He also said that while prices have tumbled in many markets, they still have a way to go until they get to a mark where individuals with good credit can get a more traditional mortgage without a skewed income-to-debt ratio. He predicts price appreciation across the nation may not start until sometime in 2009.”
He is right about prices having a long way to drop before they become back in line with incomes. I do not see price appreciation until about 2011 in the major bubble markets such as Florida.
Better count on 2015 and beyond.
From Dow Jones Newswire. “Freddie Mac shares fell after the home-mortgage financier took a $320 million loss on new mortgages.”
I’m sure that will only increase confidence in the GSE bonds! Rock on Freddie Mac and Fannie Mae!
Thank god this is contained… Oh wait… its spread to impact the GSE?!? Yikes! Why, who would have thought?
Got popcorn?
Neil
These guys are idiots for exposing themselves to subprime junk. Freddie may soon need a bailout of its own. This is a stupidity crisis not a credit crisis.
Exactly, nobody should be surprised, if you pay Wall Street idiots heavy bonuses. It’s time to get the workers wages back in balance to the executive salaries.
Does anyone else get the feeling that Freddie et al. are not being completely honest about their losses? Mark-to-model? As a former executive in corporate finance and a Ph.D. in statistics, I can tell you what kind of #@*$ that is. Models are only as good as the underlying assumptions.
Politically suave CEOs will release information only as necessary - and I don’t think Freddie, Fannie, and the rest of the family are any exception.
Well put, Statsman. I think all the big boys are trying frantically not to be the first in their league to have to confess that the emperor has no clothes, i.e. they’re staring insolvency in the face. The dominoes after the first or second never face the same infamy and consequences as their predecessors.
This credit crunch can just sail on by me as far as I’m concerned. I pay cash for everything. Just laid out 5 $100 bills to the vet, then ran back to my vehicle to grab a few dollars for some extra items.
I try hard as hell to not use a credit card. Period. Other consumers look at me like I’m an oddball when I pay w/cash but the merchants love it as it gives em instant use of the funds with no middlemen or fee siphoning.
People will only stop living beyond their means when forced to do so.
HIlarious, actually.
I do that too and have the credit score in the mid 6s to show for it. I’m considered less creditworthy because I don’t have 10 credit cards charged up the wazoo and pay cash for cars.
I just don’t care.
TXchick
Yes indeed, yer singin my song. FICO is of very mild concern to me also.
More of a curiousity really. I’ve never been denied anything vital because of a less-than-optimal credit score.
The credit industry serves a purpose of course but they sure as hell try to make it seem like average citizen kane is disreputable without an all-star FICO rating.
No, I think I will also refuse to play a rigged game.
Hilarious, actually
Ditto, paid cash for my first house, never got a load on a car, but had a crap score, got a few credit cards that I run up and pay off periodically, but it is still hovering in the mid 600’s. makes me furious especially now that employers will run a credit report prior to hiring you.
Me and my wife are the same. We do not have credit cards, save cash like mad, and so on. What’s more is that we have a higher 6 figure income, drive 15 and 20 year old cars, rent, and do just about everything we can to live as cheap as possible. But alas we live in California and even with our income, I’m PRAYING that prices will get slashed a minimum of 30% or more. Otherwise it still makes no sense buying anything here as it would drastically increase the amount of financial pressure placed on us, even though we’ve saved plenty.
I know this sounds contrarian, but I actually root for “bad days” on wall street. That’s the only way I see being wise with money over the last 5 years will really pay off in a big way.
“I know this sounds contrarian, but I actually root for “bad days” on wall street. That’s the only way I see being wise with money over the last 5 years will really pay off in a big way.”
Amen to that. Too much easy credit has really distorted the economy. Lower prices on everything from housing to equities is what I am praying for. Bring me some values baby!
There’s no way around it though– if you want to buy a house in 3 years, you need to start now with your debt management. We will be looking at minimum of 3, but probably 4 tradelines open for at least 2 years. Mortgage requirements will only tighten, and by the time houses are affordable, tight will mean TIGHT.
Or maybe I just mixed up cause and effect. Either way, start now… Unless your mattress really is stuffed cold and hard.
My “tin foil hat” personality wonders if some of the check’s have been put in place on purpose to insure we can be tracked/scored etc. Cash is now an indicator of suspicion.
Oh it’s not just tinfoil, it’s the law.
Any transaction greater than $10k is reported to DHS, and any attempt to “structure” transaction to avoid the limit is a federal offense.
Go wrap that in your tinfoil and smoke it.
Check out this story about a trucker who had $23,700 taken from him by the police unless he could *prove* that the money didn’t come from drug deals.
These days cash == drug deals and is suspicion enough to justify property confiscation.
Vote Ron Paul!
The way this is shaping up, you will be negotiating a home purchase directly with the bank. If you are well qualified, they will deal with you to get some cash flow going.
So you can have 9 credit lines open but if you don’t use them, they don’t count? Crap- that explains a lot.
You can have one credit card and still have a score in the 800s. The two things that count w.r.t a credit card are:
1. How long have you had the card? Greater than 6 years is good and shows that you did not apply/ transfer the credit balance to another card.
2. What percentage of the credit limit are you using? In other words if you have a large credit limit say 20k, but use only $100 it is good. Meaning that you manage the credit resource well! Very few americans do that ; )
I use two cards: one as indicated in the example under (2) above. The other to maximize my cash back rewards. No stinking air tickets, hotel gift cards etc for me. Plain old cash sent to me by the CC company via cheque. Also, a credit card is a matter of convenience to me. Prefer carrying it than large wads of cash stuffed on my being.
One other thing that really boosts the FICO score is to have a small loan and paying it consistently. For all the learned HBBers this should not problem: Eg. car purchased with 50% down, pay the other say, 15k via a 3 year loan. This will establish the borrowing worthiness to the loan agencies.
I got my car loan at 3% and put the cash in a CD at 5.25%.
Build your credit score and earn some extra cash at the same time!
Stupid taxes eats most of the profits though
I do that too and have the credit score in the mid 6s to show for it. I’m considered less creditworthy because I don’t have 10 credit cards charged up the wazoo and pay cash for cars.
This is another thing that really makes me mad. People who pay cash can’t get a home loan because they have no credit. It would take a moron to not figure out that someone who always pays cash is a better credit risk than someone who has a bunch of cc and loans. My father-in-law ran into that same situation many years ago when he tried to buy a house. The bank he banked at wouldn’t loan him the money; he had to go somewhere else. This country encourages debt and zero savings.
Well, not quite - many who pay in cash, quite literally have their whole paycheck in their wallet.
Paying only cash doesn’t mean you know how to manage credit. If you can use your credit card to purchase items within budget and pay-off the entire balance on the card every month, that shows you can manage credit.
I used to think it was smart to pay cash for everything, but there is actually a smartness to using credit cards. First, so many cards offer points of one type or another. This is like getting free money, a small amount per dollar charged, but still free. For example, I earn about 3 free nights at a 4 star hotel every year. Second, using the card allows you to maintain a higher average cash balance in your cash account. The cash stays in the account to earn interest and then is transfered to the card in one big swoop.
So the way I see it, using a credit card isn’t something bad if you are good with a budget and use it wisely.
Yes your right, plus using the card means writing one check (payment in full each billing cycle) and one stamp. Plus some cards offer insurance on purchases.
your = you’re - more coffee please !
Your losing out on 2% of living costs then - over the years that 2% will add up.
Just put EVERYTHING In the CC and pay it off 100% at the end of the month - 2% cash back.
If you don’t think you can remember to pay on time just set it up to auto debit from a bank account - you’ll never miss a payment that way.
I use my card when shopping online, and for a few other things. But I pay it down to zero every month. Which makes me no fun whatsoever.
But I pay it down to zero every month.
Why, you “deadbeat”, you! How dare you “free ride” on the backs of fine, upstanding revolving debtors who pay their fair share in fees, interest and penalties. Carrying zero debt is positively un-American.
I am reporting all of you to Homeland Security!
Thank you Harm, people like this are destroying the “american way of life” sarcasm off…
My wife and I use an airlines card. Never carry a balance but get about four flights a year free!
just upgraded using points on an airline credit card to business class, was worth everypoint, card is paid and actually showing a negative balance(few dollars) FEELS GOOD.
My mother and father (from whom I learned my aversion to revolving debt) had a credit card cancelled because the company considered them deadbeats.
Translation: They refused to carry a balance. And they seldom used the card anyway.
Happened to me a couple of time in the past yr. Card canceled due to LACK of use.
Had to get a car loan (my wife is a sales rep who puts MILES on a car). Bank said no despite having 4X car cost in Bank. (wife gets reimbursement from co for car so let co pay for car) Why? Not enough debt. Go figure.
Actually, one of my cards got cancelled recently, not form being a “deadbeat” per se, but because I hadn’t used it in one or two years. Non-usage of a no-fee card is almost an invitation for them to cancel you.
But all it took was a call to the bank, and they reinstated it, with the suggestion I use it to keep this from happening again. Hmmm… So I bought $8 worth of gasoline with it.
By the way, two good uses for credit cards:
(1) Gasoline, to keep from queuing up inside to pay cash, and (2) Online shopping.
Other than that… I like cash and got very used to it overseas, before moving to the land of ubiquitous credit. My friends who own shops and restaurants like me to use cash as well, of course, so they don’t have to pay the credit card companies a percentage.
Jay, here’s some more trivia: Closing tradelines hurts your score! Having someone run your credit hurts your score. Having 0% loans hurts. Paying old collections hurts your score!
It marks the collection paid but brings it current… which is more damaging than being old and unpaid. The caveat is if you can negotiate before paying to have it expunged, or go through the hassle of trying to remove it yourself afterward.
That system is so F*ed, but it’s the only game in town.
haha HARM! Maybe he’s okay if he pays it off with the HELOC.
I’m with ginster about the airlines card. I just got one a few months ago and ran up $1700 right away (ahhh, family vacation). Ha! 1700 miles with a flick of the pen. I couldn’t help but look at the $17 minimum payment and think about people who like to get spanked at 15+% interest.
“Owww! I’ve been a BAD debtor, baby… Spank me again!! Except 20% harder this time..”
I signed that one with a smile.
Your loss.
I have 10+ credit cards, a credit score over 800, and use cards for everything. No credit balance ever, I pay online to avoid stamps/checks, and I’ve got a huge savings rate. I’m getting around $500 back from credit cards this year — which is actually paid for by those who carry monthly balances. If a company offers a “cash discount” I’ll use it, but without that I’ll use cards. On top of that, it’s a lot easier than going to the bank all the time for cash.
The guy at My Money Blog goes even farther than me, of carrying thousands of $$$ on 0% interest cards and investing the money at 5% in FDIC savings accounts.
’m getting around $500 back from credit cards this year — which is actually paid for by those who carry monthly balances.
Uh, no. The merchants pay your credit card fees… which means you pay - in the form of higher prices. 2.2% is lowest I have seen, most “cash back cards” charge merchants more - like 4%.
Unfortunately, you will pay this “extra” charge even if buying with cash. If merchants start to charge extra for credit card purchases then I’ll start using cash.
Uh, no. The merchants pay your credit card fees… which means you pay - in the form of higher prices. 2.2% is lowest I have seen, most “cash back cards” charge merchants more - like 4%.
Show me a world where you can get a lower price without a credit card. At least 95% of merchants charge exactly the same for cash, check, ordinary credit card, or cash back credit card. So, I use cash when it is cheaper.
My cash back/reward cards charge more INTEREST to users than the other cards, but since I pay them off I don’t care. The card vendors bundle good credit (mine) with bad credit to increase the average credit score of the pool. The interest paid by those with a balance (often 15%-25%) subsidizes my 3% to 5% rewards.
It’s a lot like the mortgage mess, but until it goes away I’ll game the system hard.
If you don’t use a rewards card you are leaving cash on the table. That’s reality.
Many Gas stations in Wisconsin offer cash discounts of $0.04 per gallon. Not a large percentage when gas is $2.85, but it was large at $1.67
Uh, no. The merchants pay your credit card fees… which means you pay - in the form of higher prices.
And, by the way, banks are trying very hard to wean people away from checks. It costs a lot more in time and money to process a check than a credit or debit card transaction. The next time you are in a supermarket watch the old lady in front pull out her checkbook, show her ID, and the cashier process the check. Now, imagine what the bank has to go through to process that same check and preserve the scanned image.
Cash involves its own risks for stores, from theft to embezzlement to errors. People get robbed on the way to the bank to deposit a lot of cash (a happened to my mother).
These credit card fee stereotypes seem to linger from old practices.
If you like credit cards, and you know of a store that charges different prices for cash/credit card spending you can inform the credit card company and they’ll pull their affiliation with the merchant.
Credit cards bring a huge amount of business to merchants, and one of their requirements in exchange for that business is that the merchant must not pass on the transaction costs to credit card customers.
To be honest with pin pads at every register cards sure seem fast enough to be overall cheaper if you include overhead savings than any other form of payment.
“The guy at My Money Blog goes even farther than me, of carrying thousands of $$$ on 0% interest cards and investing the money at 5% in FDIC savings accounts”
That’s brilliant. I never thought of something that simple.
Otherwise I am with you , I never use cash and use credidt cards only as long as they are paying me to do so. Free hotel rooms, flights and my favourite is Fidelity credit card that builds up money to invest like crazy.
I’ve been floating as much as 20,000 on various cards for much of the last 15 years at zero interest.
Its easy if you just pay attention and hold the corresponding cash in a money market.
But aren’t there transaction fees for getting the cash off cards to do this?
I was assuming you put all your expenses on credit card for the year with no payment due to the 0% financing, then invest the money. I may be wrong as I have never held a cc balance.
Ignore those pompus idiots who give you strange looks when you use cash. Those looks will become jealous looks when you use cash and they are using food stamps.
Almost everyone here is a fiscal conservative. But, I see a credit crunch coming and I am currently getting a 1st morgage 30 year 5.85% and stashing the cash in a 5.25% CD. I am losing 0.60% today, but when the credit crunch hits hard my borrowed cash will earn 12%.
Ignore those pompus idiots who give you strange looks when you use cash. Those looks will become jealous looks when you use cash and they are using food stamps.
In Ohio food stamps are on a cc also, so no one even knows they’re getting them.
Same here in Michigan . They’re called “Bridge Cards.” If you don’t look real close at it, you’d never know.
I know what the Arizona food stamp card looks like from 10 feet away.
Or…just look at what they’re buying. If its mostly diapers and snack chips - there’s a food stamp card nearby.
I usually see food and non-food items, what they do is use the Bridge Card for the food, and have some cash for the rest. But the non-food stuff has to be rung up separately, which takes them longer to get through the line.
How will your earn 12% in a credit crunch? The serious crunch may be deflationary.
Unless the government strips the tax benefit to paying interest on a mortgage, you’re still ahead. Remember, you’re getting 1/3 of your money back on interest (because the deduction is on the highest tier of income), so the REAL mortgage rate is closer to 4%
Well, the real mortgage rate might be 4%, but likewise tha also applies to his interest income, so that 5.25% becomes 3.5%.
Actually, for some people in no-income-tax states like FL, TX, TN, etc., they use up much of their mortgage interest deduction on what would have been their standard decduction anyway, so they aren’t saving a lot of tax using the mortgage interest deduction.
“Actually, for some people in no-income-tax states like FL, TX, TN, etc., they use up much of their mortgage interest deduction on what would have been their standard decduction anyway, so they aren’t saving a lot of tax using the mortgage interest deduction.”
That would be true for me. I suspect it is true for many folks who don’t do the math and assume they’re better off; still others get a greatly reduced benefit if the mortgage deduction exceeds their standard exemption by only a relatively small amount. But I guess the California folks are all over that deduction.
I live in Texas and we take the standard deduction. It’s not worth it to do the paperwork for a possible small difference. It also makes us pretty much audit-proof, which is worth more to me than saving $100 or so even if that were the result of itemizing.
We buy everything we can (gas, groceries, travel) with a credit card, and get several free flights a year. And on average, we get an interest free loan for 15 days to make all of our purchases. I have automatic bill pay and have paid off in full every single month for the 5+ years we’ve been doing this.
Why pay cash when you can get a free loan and perks to boot with a credit card (not to mention the convenience)?
Because I don’t want oufits like Lexus-Nexus and Choicepoint to know I bought the new Harry Potter book and a bag of topsoil from Meijer?
And now stores ask for your phone number for “research” purposes. I tell them it’s 202-456-1414. White House switchboard.
I have used 650 (my area code) 555-1212
FICO Scores are CHANGING Sept. 1st, where you will rewarded for using 10% or less of your available credit. Available credit use to be used against you. So those of us who are conservative with our credit (low balances paid off in full each month) should see a tick up in our FICO score. New credit modeling.
http://www.advantagecredit.com/corporate_information/index.aspx
I read all three credit agencies will be using this method.
So are you saying from now on the trick is to open up as many credit cards as possible to get a higher FICO score? If I open up 20 credit card accounts, there’s no way I’ll ever come close to leveraging 10% of available.
I went to a lecture on what this credit orgy has done to the ‘authorized user’ status (will not boost your credit score anymore-abused scheme for FB’s with low fico’s), and how they are going to reward conservative credit users, and yes, if you have sizable unused credit, it says you aren’t a dumb*ss with your credit. Opening up a bunch of accounts will actually lower your score. Its a hit against your FICO every time a creditor checks your credit, or/and you open a new account.
My Fico is in the 800’s.
Not necessarily. I have “negative” info on my score because I am using more than half of my credit limit on the only card I use regularly. That card is an American Express card. The card has no limit, but I pay the balance off every month.
When I use the modeling tool, it tells me that I would gain 10 points if I paid the card off. The problem is that it always has a balance because I always use it, so it will never be “paid off”.
Still, I’m over 800, so it doesn’t hurt that much.
actually, chris it hurts your score by opening up more credit within a short amount of time. That’s the behavior of someone who is insolvent desperate for cash trying to eek out another month. I’m not going to say “Countrywide” here, but there it is.
If you manage to keep your new credit current for a year, then yes your score would go up. Also, the primary need for change in FICO scores is to eliminate Authorized User benefits. For instance, simply being a college kid ringing up sales on a credit card whose bill goes to the parent (that promptly gets paid) will no longer zing up that kid’s score.
I think one agency will start using the new method in september, and the other 2 will follow in 2008. So it won’t affect mortgage loans right away (since only the middle score is used).
I was a huge beneficiary of the authorized user loophole. My sister and I both were authorised on a sky miles card that my folks have had and paid off monthly for 20 years. It had some sort of rediculous limit so I started life with a 90% untapped 20 year old current account to my name (not bad for a 22 yo). That ended up ok, because they instilled good credit practices into both of us, so we’ve both remained there.
We went to a local Subway (the sandwich shop) for lunch last week. It’s on 47th Street. They had a sign that said, “Cash Only”. I guess they are sick of getting bled by the credit card people. Unfortunately for Subway, we watched a lot of people walk in and walk out. This is a credit card town. Most of these young punks, with their expensive bags and Blackberries don’t know what cash is. They are leveraged to the hilt and probably don’t even know who Ben Franklin is. The “beautiful people” in this town are pathetic. I’m merely somewhat cute and I always have cash.
Credit cards are still an incredible utility. I pay mine off in full every month, reap rewards, and have pockets that don’t jingle with loose change. It’s realy like any other tool, stupid people misusing them are going to lose a finger.
NYCBoy — that’s pretty sad, considering what the tab at Subway would be.
Also a cash-only guy for just about every purchase. Most of my friends and colleagues are solidly middle-class professionals, and almost to the person they put EVERYTHING on plastic. I just don’t get it. I paid cash for my ten-year-old Acura back in 2001, and have maintained it meticulously since then. I’m always amused by the pleasant surprise on the face of merchants when I pay cash for fairly big-ticket items, and of course waitresses & restaurant owners adore customers who pay cash AND tip well when appropriate.
In addition, the more of us who stubbornly pay cash, the longer it will take to get to the Cashless Society that will strip away the last vestiges of individual privacy, and ultimately, liberty from Big Brother.
You paid cash for an Acura? What did you do, bring a suitcase full of cash? That’s nuts (if not low-class).
The people who use cash that I see are all dirty pot farmers.
interesting that the UK now seems to follow the US in (some) tightening of credit conditions. In the Netherlands there still is no sign of that, on the contrary. Mortgage rates are declining again (near the lowest rates in 400 years, just like last year), lending is stil extremely loose (after all, risk is considered zero by all players) and homeprices keep rising (currently around +10% yoy). Government is very busy with new subsidies for people at the bottom of the housing ladder, in order to keep the pyramid game going.
Just for the record: after 1.5 years on the market and five price drops (last one about 25% below initial price) my neighbours home was sold this week. The new buyer has the same family name, so we guess maybe his family purchased it as an ‘investment property’ because they don’t want to lower the price any further. In my area there are many empty (expensive) homes. Some of them have been on the market for years without a bite, and some are just sitting, collecting the yearly well-deserved equity gains … In most of Europe nobody tracks investment/second home properties, so it is anyones guess how much of them are out there. We will see when the tide turns.
“California, Nevada, Arizona and Florida were among the states with the fastest home-price appreciation over the last five years, Duncan noted.”
Think of all the other markets that this equity money poured into over the last few years. Take the equity locusts away, and it won’t be pretty. Anyone from the PNW care to comment? Boise? Hawaii? The Carolinas?
A grand total of 14 July home sales in Bozeman, MT (peak sales month)… over a thousand homes on the market. Yeh, I think the lack of equity locusts has had an impact.
Good. I’ve been waiting for the slide to get going in Montana & the PNW. Sounds like it is really steep!
You and me both, waiting verrrrrrrrry eagerly. Ah, slide, pretty, pretty cascade of doom…and I do think it’s arriving. I gnashed my teeth to read a few days ago that Seattle, for instance, I think went up in price 7.9 percent, or something, on the Case/Schiller index, one of the few major cities that went up? Anyway, seems to be behind in dramatic poppage of bubbleness, but hey—the funny money has just recently REALLY evaporated, hasn’t it? So we shall see!
Bwahahaha!
olympiagal, I arrived in Seattle a little over two months ago. On my walk to “work” at my local cafe in Ravenna, I pass three houses. One started at 839K and a month later was at 759K. Now there is no price listing outside. The fliers post has disappeared. Another house was listed at 450K and was taken off the market completely. No one has moved in. The third started at 639K and dropped to 599K a month later. It too hasn’t had a flier with a price listing for over a month. It’s slow indeed watching this bubble burst, but interesting nonetheless.
Oooh! Ooooh! I like that story!
Thanks, Lionel.
If you should feel inclined, maybe tell us more of these good stories as they come along. Good bedtime reading. Good lunch time reading. In fact, just plain good reading, especially to me.
Lionel — those are healthy one-month drops. If they have the cojones to reduce by that percentage each month, they will sell while the competition languishes.
Bozeman is probably a year ahead of the PNW. The Bozeman market started tanking (rising inventory, precipitous drop in sales) in late spring of 2006. We saw the same thing here in Pullman May of 2007. From my visit to Bozeman last week, every single person I talked to acknowleged that the local market was crashing (all of whom adamantly denied the possibility of a crash as recently as 2006). Here in Pullman, there is still quite a bit of denial.
I’m hoping the credit crunch will accelerate the crash in the PNW, but right now we are still in the standoff stage.
It’s a little early yet, but indications so far from the Southern Oregon MLS (jackstats.com) is that August sales in Ashland will turn out to be the lowest of the year. Lower than January. Really.
So far 16 closed transactions in August vs. 19 in January.
We had 46 in June, 33 in July, so August is looking really slow.
Turning off the California equity spigot, along with rising rates on Jumbo loans is definitely starting to have an effect here.
Sorry. That link for Jackson County housing sales stats should be http://www.jacstats.com.
Ashland Renter - Wouldn’t it be nice if prices dropped enough so that locals could actually afford a house there…without having to resort to suicide financing to “compete” with CA money.
I watch the Ashland MLS, and indeed, it looks like very little is selling.
Indeed, Lisa. Prices are coming down here, but they have a *long* way to go.
My wife and I were originally thinking about buying here in ‘08, but have made the decision to hold off until ‘09. Rents are just so cheap here compared to owning, it’s ridiculous.
We looked in Ashland early 2006, thinking of retiring (we lived there in the 90s and loved it). The hideous new homes we saw (for example, a 3 story townhouse with no bathtub, one bedroom off the garage) not only kept us out of the market, but made us abandon Ashland entirely because of the way developers have spoiled the look of the town.
A lot of those new McMansions in Billings Ranch and other subdivisions are in various states of foreclosures now. Probably specuvestors from California who got in over their heads.
I drove through Billings Ranch a few months ago, and only saw one or two occupied houses. The others were either for sale or empty.
“A lot of those new McMansions in Billings Ranch and other subdivisions are in various states of foreclosures now.”
And those townhomes in Billings Ranch! Started off at $500K plus and are now around $350K or so. I walked through those and thought they were the most bizarre floorplan and very near a busy road.
I would love to end up in Ashland, but will probably wait until 2009. If I can get a small home above the boulevard for $300K or less, I’m there.
Wow, just 14? I thought everyone wanted to live in Bozeman!
I once thought it might be a good time to buy a cheap house in the depressed Lincoln area near Sacramento, CA. But, after looking around I got the feeling that my neighbors would be the idiot flippers who got stuck.
What changed my mind was the thought of my children making friends with the children of idiot flippers. I don’t want my grandchildren containing genes from that pool.
What changed my mind was the thought of my children making friends with the children of idiot flippers. I don’t want my grandchildren containing genes from that pool.
At least on economics there is often a trend of reversal in the next generation. The 60’s hippies who followed the button-down prom-dress 50’s?
My theory is that while collar crime was such a cool thing in the 1980’s that Joe6Pack wanted to get in on it after the internet boom of the late 1990’s. The housing bubble was about about “Joe6Pack” making money like a “pro” (white collar crime).
Hear hear. I plan on sending my kids to private school next year, even though it will mean a bit of belt-tightening. We’re in a good school district, but even so, the cretin quotient gets worse every semester. The kids are dolts because the parents are utter morons - and they’re the ones that ALWAYS seem to have four or more kids. IDIOCRACY, here we come!
It’s very refreshing to find those rare parents whose priorities are actually in order. I’m hoping to find an enclave of them here in Colorado Springs so I can buy a house and live among somewhat like-minded people.
Sammy — I have two close friends who are HS teachers, retiring this year. To hear their descriptions of the kids they find in their classes, it’s pretty awful, and their “government” school is (or was) one of the most desirable in the Orlando area. I agree with your view about priorities — sorted mine out, strangely enough, by following the instructions that came with my first Franklin Day Planner in 1987 — first I had to list my priorities in life, in order. Next, I had to look at my written daily task lists and note how they applied to those priorities, relative to the time devoted to them. Changed my life forever.
So how does this work? I guess the 600 just laid off desperate workers will work for less money than the 400 that he laid off recently. “Indymac Bank has hired more than 600 former American Home Mortgage Investment Corp. employees who were recently let go by that company. Tuesday’s move comes just five weeks after Indymac announced the layoff of 400 workers, roughly 4 percent of its then-total work force of 9,200, in the face of an increasingly tough mortgage market.”
No, no…no! Those former American Home Mortgage Investment Corp. employees are simply taking the jobs that Americans won’t do. Think of them as intra-state illegals, migrating from county to county, willing to work for less money. Besides, if Indymac Bank can’t hire them for less, it could cause the collaspe of our very way of life.
“Bankers and traders who splurge on fast cars, vacation homes and luxury yachts with the extra cash each year may be forced to scale back their spending plans as the U.S. subprime turmoil and credit squeeze have brought dealflow to a grinding halt.”
Boo-hoo-hoo! I feel so sorry for them! (sarcasm off)
These are the people who Dodd’s bailout plan will help — we need to force America’s much-maligned middle class to help these bankers and traders continue to enjoy their vaunted lifestyles. FBs will remain FBs no matter whether they are enabled to refinance at (taxpayer-) subsidized interest rates, as this will not make their unaffordable principle go away.
What are the odds that Freddie and Fannie will need to be bailed out by the government?
I think the odds are high and will increase by the end of this year.
“Standard & Poor’s downgraded Cheyne Finance sharply. Just two weeks ago, the agency said ratings on SIVs — including the Cheyne vehicles — were weathering turmoil caused by defaults on U.S. subprime mortgage lending mainly to poor people.”
How in the ladeedaa do they come up with these unbelievable conclusions?
Reading about all these sudden downgrades is becoming very entertaining indeed. Think about it, it’s getting scary, what else out there right at this very moment appears solid - only to melt away in one, two, or three weeks?
the S&P 500
An article in USA Today saying rents are going up because there’s a shortage in apartment construction and rising foreclosures are turning homeowners back into tenants? Huh? What about the fact that there are countless desperate FBs out there who are competing for tenants? The reader comments following the article are especially amusing…
did they say where? because here in SoFlo they are going down by large percentages.
Rents went down every year in Bozeman from 2002 to 2007. In July 2002, it took us a day to look at all available Bozeman 2-3 bed rentals. Now there are hundreds and hundreds of vacant rentals even when school is in session.
USA today evidently does not have a “fact checking” dept.
Wait until desperate FBs and flippers start renting out every spare basement and bedroom. Then there will be thousands and thousands of rental options, and the market, not landlord costs, will set the rents.
This could be true in some markets that weren’t overbuilt. I’m reading Peter Schiff’s Crash Proof and rising rents is one of his predictions. It’s very important because rent is 40% of the core CPI which puts the Fed in an interesting spot.
Just like ‘affordability’ when you don’t like the stat, change the method. The core CPI will change if it becomes a problem
I dunno, but my gut tells me that if you shop around and come up with some comps for similar apartments/condos, you can probably get a nice 10% to 15% discount on the “asking” rent price in many metro markets (Miami, DC, LA, Chicago, et al).
And another sign of the times that indicates that it really is different this time is how all the car makers have followed the Big 3’s lead in zero-financing, employee pricing, and these other ways save the consumer money….I mean Toyota was able to grow their market share in the US without cutting prices, but it looks like it’s a whole new ball game out there as Toyota and others are having to cut prices to keep the inventory turning. Bet apartment rents will be no different.
I got a real charge out of the final sentence in this comment on the article:
“Even if people pay higher rent in some areas (not mine) it will be much less than the ongoing house price depreciation and we will have a much better selection. Most of the higher rents are due to landlords paying higher property taxes just like the homeowners. Also renters get to take the standard deduction on their taxes and homeowners don’t.”
Now *that’s* positive thinking. Wouldn’t have the heart to tell him/her that homoaners also have the option of taking the standard deduction, if they wish. Presumably the commenter meant that many homoaners lose much or most of the value of the standard deduction by claiming the mortgage interest deduction.
“Flippers and other speculators investing in single-family homes helped drive up prices in many hot housing markets during the boom. Now they’re contributing heavily to mortgage delinquencies in several of those markets. ”
Duh………………..
“H&R Block Inc. on Thursday cast new doubt on the pending sale of its troubled mortgage lending arm. ‘The mortgage origination market is in the midst of the most severe dislocation it has seen in years, maybe the most severe since the 1930s,’ Mark Ernst, CEO, told analysts.”
“The company said Option One and two small non-mortgage businesses that are being dismantled lost $192.8 million.”
“H&R Block has already slashed its Option One work force by more than half. The company announced Thursday it has stopped approving any new loans that don’t comply with Fannie Mae and Freddie Mac requirements, limiting loan originations to $200 million a month, beginning in September. Last year, the company originated $27.1 billion in loans.”
What are the chances Cerberus might just say “oh, never mind”???
The chances are very good. The fact that Cerebus is still considering this deal does not bode well for the old saying three heads are better than one.
Doug Duncan, the Mortgage Bankers Association’s chief economist, said in a statement, ‘but [it’s] often the case of an investor gambling on a continued increase in home values and losing that gamble.’”
So, Doug, where were you a year ago? Two years ago? Publicy dissing bubbleheads who were saying the exact same thing is my guess.
Actually, HARM, the Washington Post reported a year ago (I think, maybe two years ago) that Doug and his lovely wife sold their suburban McMansion and moved into (whincing) a RENTAL.
“we just needed a change of pace,” or somesuch, was his explanation to the reporter. So watch what he does, not what he says.
You don’t have to guess, because you can read what he said in June 2006 right here: http://equinoxco.com/offshoring_best_practices/june_2006_issue/interview_ducon.html
“There will be few markets where the prices will fall, so you are going to hear bunch of stories that price bubble blew up but the normal state of US housing market will witness prices falling in few markets and in most market (sic) the prices will rise.”
“There will be few markets where the prices will fall, so you are going to hear bunch of stories that price bubble blew up but the normal state of US housing market will witness prices falling in few markets and in most market (sic) the prices will rise.”
‘ . . . speaking of which, I have a lovely house for sale, because my wife and I need a change of pace. for work. the kids outgrew it. $1.5M asking price, as-is.’
I was sure I read in Wash Post that Ducan said he wanted “to take some of the money off the table.”
I’ve been waiting to pounce on this topic for a few days now, but have been on the road. Apologies if it was discussed in a previous thread. I hate taxes, but what I hate more is paying mine while the next fellow evades his.
1099s and Countrywide. From Gretchen Morgenson’s 8/26 NYT article about the lender: “One broker who worked with Countrywide for seven years said she never got a 1099. ‘When I got ready to do my first year’s taxes I had received 1099s from everybody but Countrywide,’ she said. ‘I called my rep and he said, ‘We’re too big. There’s too many. We don’t do it.’’ ”
How about, “What happens in Countrywide stays in Countrywide.”
If there are any budding young IRS revenooers reading this who want to earn a Bloodhound of the Year award, talk your bosses into letting you demand records of all such payments by Countrywide over the past five years and cross-check the income-tax records. Wouldn’t be a bit surprised if you turned up a huge amount of unreported income and it is handed to you on a plate. There are a whole lot of folks who would love to see tax-cheat mortgage brokers pay a price for their role in the mortgage debacle. (With apologies to the honest ones, a few of whom post excellent observations here.)
No kidding. Bust that nut and use it to launch yourselg into a State Treasurer position in 15 yrs. Political careers are made from leads like this.
‘We’re too big. There’s too many. We don’t do it.’’
Absolutely incredible. There’s a gold mine just waiting there for a few ambitious IRS staffers.
It’s blindingly obvious (to me, in IT) that being big means that you have an IT department and staff who CAN in fact do it, probably easier and cheaper on a per-1099 basis than any of your smaller competitors in the industry.
Heck, I work for a HUGE employer, probably even bigger than Countrywide, and huge turnover. Maybe I can suggest to them some big IT cost savings by just saying, perhaps, that “we’re too big to handle all those W-2s”!
Then again, perhaps the lack of a 1099 was actually a very intentional “benefit” that Countrywide provided its brokers.
Tax fraud has to be eventually figured out. I have to believe that some government agencies are going to be heavily underfunded and start searching around for money to pay their employees.
Why do I get the nauseating feeling that a movement is underway to shift mortgage losses from the entities we could all do without (hedge funds, non-bank subsidiaries, mortgage brokers pushing non-conforming products) to the entities that are the financial foundation of our economy and MUST BE bailed out (banks, conforming mortgage securitizers Fan and Fred)?
This is one case where the (stupid) wealthy have more to lose than those living paycheck to paycheck, EVEN IF THE LATTER ARE FORECLOSED ON! So they are seeking to take the rest of us down with them, so we’ll have to preserve their excess share of the pie!
Bingo! That’s exactly what the PigMen are advocating. In addition, they want the government to warehouse all the junk loans. It’s too big, however.
That’s an excellent point, WT Economist.
Thanks for the cheerful thought, WT. I hope you’ll keep us apprised of how you see this falling into place as it happens.
Ugh.
Yep — we are their human shields.
“Flippers and other speculators investing in single-family homes helped drive up prices in many hot housing markets during the boom. Now they’re contributing heavily to mortgage delinquencies in several of those markets. ‘Defaults are on the rise in most parts of the country, but…it is not always the case of a homeowner losing his or her home,’ Doug Duncan, the Mortgage Bankers Association’s chief economist, said in a statement, ‘but [it’s] often the case of an investor gambling on a continued increase in home values and losing that gamble.’”
Senator Dodd wants you to help pay for the excesses of flippers, speculators and the bankers who foolishly loaned them the money. Save our overpaid financial speculators from their gambling losses!
P.S. I recommend funding a bailout of the low income households who were duped into purchasing homes they cannot afford by charging the cleanup tab to Wall Street investment banks and hedge funds that provided the financing. Leave the rest of the country (including FHA, FNM and FRE) out of the deal!
The credit crunch keeps growing wider and wider. Risk is back with a vengeance. The only question left is do we take the bitter pill now or spread it out over time like the Japanese. What’s your preference?
By all the evidence I have seen to date, it looks like we will follow down the path Japan took. This would be the natural consequence of official denial coupled with futile bailout measures which merely serve to spread out the consequences over time.
That’s absolutely terrifying:
http://en.wikipedia.org/wiki/Japanese_asset_price_bubble
This looks interesting for us!
http://www.cboe.com/AboutCBOE/ShowDocument.aspx?DIR=ACNews&FILE=cboe_20070827.doc
Chick — only if you interpret what it means. Greek to me.
Especially during Happy Hour. Melody — you still out there in the ’sphere?
I don’t know about Melody, but I just got done with a spinach enchilada, a vienna lager and a shot of 1921. Good to hear from you Chip!
Wonderful. And the CBOE has “AAA-rated clearing”, that’s comforting.
Why do I get the feeling that someday soon, say 10:30 a.m. on a Tuesday, some news (of an insolvency probably) will just completely lock up the entire financial system? And it’ll take years to divide up the 1% real collateral behind all the derivatives. When Buffett bought Gen Re, it took him a couple years to unwind their derivatives book, which was pretty small really, and that was in a good, liquid market. Live by complexity, die by complexity.
“‘This rapid price appreciation attracted both speculators and home builders, a volatile combination that lead to an oversupply of homes that was beyond the capacity of the local populations to support,’ he said. ‘When this oversupply became apparent and prices began to fall, many of these investors simply walked away from their mortgages.’”
So I am guessing that it is home builders, banks + other financial entities that currently hold the bag on these properties, and which are holding their list prices up in the stratsophere in the hopes of a Federal govt bailout of a bid which fundamental demand cannot reach? Now is the point when gamblers should face the consequences of their folly, through unloading the oversupply of unneeded supersized houses at fire sale prices.
A federally engineered bailout at this point would merely serve to reward malinvestment and set the stage for ongoing future waste of the national wealth on ponzi schemes. Any policy makers who push for bailouts of the irresponsible and clearly stupid financial decisions which created the mess at hand can look forward to harsh judgment through the lense of history, which will recognize the important role of poorly targeted free risk protection (aka free rewards for finanical stupidity) in the dissipation of U.S. national wealth.
I agree. The government should not reinforce negative behavior.
PB — nicely put.
From the first link in the blog:
“As of June 30, in Nevada, 32 percent of all prime mortgage in default and 24 percent of subprime defaults were on non-owner occupied properties, according to the MBA. The numbers for Arizona were 26 percent prime and 18 percent subprime. In California, they were 21 percent and 15 percent respectively.”
What they are neglecting to mention in that article is that these numbers only include non-owner occupied purchases that were recorded as such. There were likely just as many where the purchasers lied on the mortgage application.
Ditto my comment above — such sharp critical thinking by GH and other posters is what constantly enriches my thinking about, and understanding of, all this. A big bonus: my kids are impressed. “Ol’ Dad — where the heck did he learn that?”
“‘Officials acknowledge the perception of bailing out investors exists and if allowed to grow, could erode the credibility they need for keeping inflation low and encourage lax attitudes toward risk,’ the article said. ‘They hope that taking time to weigh the economy’s need for rate cuts will help discourage investors from thinking Fed officials are overly concerned with falling asset prices.’”
Invester game plan:
If I think the Fed is going to lower the FFR today, buy more stock.
But if I think they will hold off on lowering the FFR until next week, still buy more stock.
Didn’t we just read yesterday how Indiana is in the tank? Here’s your chance! LOL
http://dallas.craigslist.org/rfs/409944863.html
Must’ve been good, because it is g-o-n-e.
And now for something completely different…
Has anyone noticed all the media discussion of the ability to give inheritances prior to death? One discussant showed how you can give your married son/daughter about $50K tax free.
I find the topic strange, but interesting given the timing. Could this be a precursor to many baby-boomers begging their parents for advances on their inheritances so they can save their house? Sometimes the underlying psychology of the concept gives insights into what kind of trap we have gotten ourselves into. When we have to tap into the previous generation’s wealth just to “survive”, something is about to hit the fan, and it doesn’t smell good.
This is a topic that wanders in and out of the financial planning media with time. The basic scheme is to give tax-free gifts while you are still alive to reduce the taxable inheritance after you die. When this topic gets old, it will be replaced by a new one (probably dollar cost averaging, or planning for college, or calculating your requirement needs). You will see the same topic surface again as “news” in a few years.
Some commentators are questioning the wisdom of trying to put out a fire with a flame thrower.
August 29, 2007
Creative Mortgages: Did Bernanke Really Say That?
In his letter to Sen. Charles Schumer, Fed Chief Ben Bernanke said:
“It might be worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance. Such products could be designed to avoid or mitigate the risk of payment shock and to be more transparent with respect to their terms. They might also contain features to improve affordability, such as variable maturities or shared-appreciation provisions for example…”
Hold on: Isn’t that what we’re trying to get away from? Didn’t we already have a “broad range of mortgage products” that helped create this mortgage mess? Didn’t we just learn that if you can’t afford a standard mortgage you shouldn’t get one? And should the Fed really be encouraging people who can’t afford homes to find a “broad range of mortgage products…designed to avoid or mitigate the risk of payment shock”?
http://blogs.marketwatch.com/greenberg/2007/08/creative-mortga.html
I just put in an order to sell all my mutuals in my IRA! On August 6th, I sold all the mutuals tied to my life insurance… Today, I sold out of KIMCO shares in my IRA! I’m 100% Cash in my IRA and Insurance funds!
Anyone, saying this market is going to crash soon? I’ve got over $100,000 in sidelined cash waiting to strike at a lower market.
And where is your cash? In an FDIC-insured bank?
It gets a little more complicated when your portfolio is in the seven figures, it’s not all that convenient to open up accounts with $100,000 at thirty different banks. I just adjusted my allocation to moderate conservative (about 60% in cash/fixed income) but now I’m starting to worry about the safety of the significant percentage of that in California tax free municipal bond funds. I think I need to stop reading this blog, it’s making me crazy.
be happy that you are in the US; in Europe the FDIC-like insurance is only 10-20K euro. So even a six figure savings account is already without any protection …
Anyone, saying this market is going to crash soon?
Andy, I’ll give it a 1 in 3 chance that U.S. stocks crash by 25% to 50% by end of October (and/or that the whole financial system goes into gridlock). And I have speculative money riding on that, but only what I can afford to lose. Short term predictions are just wild guesses at best. Don’t forget you can lose by being in cash too, so be careful.
Andy, I’ll give it a 1 in 3 chance that U.S. stocks crash by 25% to 50% by end of October (and/or that the whole financial system goes into gridlock). And I have speculative money riding on that, but only what I can afford to lose.
I wish you the best of luck trying to cash in your winnings if the financial system goes into gridlock.
Not that I think that gridlock is unlikely; I don’t. But the problem is getting paid when you’re right about the financial system collapsing.
My apologies if a link to this Time Magazine article has been already posted, bu I REALLY like the picture.
http://www.time.com/time/magazine/article/0,9171,1655723,00.html
“The only clear beneficiaries of rising house prices are those, generally older, who want to sell their home and buy a smaller one or none at all. These people, on average, have benefited the most from the spectacular rise of real estate prices over their entire adult lives. If they have to forgo part of that windfall, it is no tragedy. If they borrowed against a value for their house that turns out to be fictitious and spent the money on ephemeral things like vacations, as the commercials urge them to do, that was foolish–in some cases, maybe even tragically foolish. People want the government to do something, and presidential candidates are beavering away at plans. But any plan that would prevent home prices from declining would be foolishness squared. Genuine tragedy deserves sympathy and help, even if it is the result of your own foolishness. But when we do not even guarantee basic health care, it would be nuts to think about making protection against real estate losses part of the social safety net.”
Is that the exact same house as the one the dude is hugging on this Time magazine cover?
http://www.time.com/time/covers/0,16641,20050613,00.html
I don’t always agree with Michael Kinsley but that is the first intelligent observation I’ve seen in Time Magazine in about 20 years.
*Everybody* screws up, sooner or later.
I would think that you will definetly see a spike in older people living with their kids and even grandchildren as this real estate bubble of the last decade or so blows up. It’ll wreck their retirement plans at the minimum, and on average I assume that they will be the first generation in history to gain wealth unimagined by people before and then lose it over the course of a decade. My honest belief is that this real estate collapse will probably damage the USA permanently, and we won’t gain back most of the losses at least on a national level. Prices will likely go back to 1999-2000 levels at the minimum (without inflation since the “inflation” of the past 7 years was fraudulent in its nature) which will harm even the relatively non-bubbly areas. Even in 2000, we had something of a real estate bubble over in the Twin Cities area and other large cities throughout the upper midwest. Even if prices drop back to 2004 levels, we are in serious trouble. Even in the Twin Cities area I would estimate around $5 - 10 billion in losses on real estate if the prices revert to 2004 levels. Chicago would be even larger, likely around $50 billion. As for NYC and L.A., I estimate around $160 - 400 billion in losses for NYC and around $200 - 300 billion for L.A. just if prices go to 2004 levels. This is a very conservative number, BTW. I would estimate at the national level housing would lose around $1.6 trillion USD if housing went back to just 2004 levels. If we go back to 1999 levels that number will be around $4.9 trillion. It is possible that we may see 1992 levels of pricing nationwide, which would result in $5.8 trillion in losses. At that rate it is likely that your larger homebuilders will fold up and disappear.