The Housing Bubble

great article!

Herb’s viewpoints about American’s living beyond their means sounds like good old common sense that I agree wholeheartedly with, and then I read the whole article that was referenced in the url and get to this:

“Herb Greenberg is senior columnist for MarketWatch and contributor to CNBC television based in San Diego. He does not own stocks (except for shares of his employer), and he does not sell individual stocks short or invest in hedge funds.”

However, the following statement about Herb goes against all sane personal finance advice given by people respected in the industry such as Vanguard’s John Bogle to name one:

“He does not own stocks (except for shares of his employer)”

Wise investment advice for the individual investor:

1. maintain your asset allocation appropriate to your goals/age/risk tolerance through the holding of stocks/fixed investments. Stock mutual funds hold stocks - does Herb not hold a broadly diversified stock mutual fund? If so, yes he holds stocks beside those of his employer.

2. It’s common knowledge in the personal finance world that holding only your employer’s stock in your portfolio’s stock allocation is a big no-no.

Although what he says is not earth-shaking (but common sense), I must believe that this Herb fellow sounds to wise not to be broadly diversified in low-cost, risk-appropriate investments.

It would be nice if that hand would punch Schumer right in his piehole.

It’s no longer the invisible hand…it’s the invisible fist.

this came through much later than the subsequent post - sorry!

“the anticipated defaults will disrupt local housing markets for the next few years, experts say.”

Oh, so now it’s the “next few years” and not just the next few months. Glad we have those Experts to help us figure it out. And note that only “local” housing markets will be disrupted, not the national market which is greater than the sum of its parts!

I agree. Unlike some others here, I am concerned that there is no real safe haven for your $$$ and everyone will lose something.

Actually, I think this is probably a lot more widespread than the story leads us to believe. I mean, what other occupations are there that offer the hope of making anywhere near the money of 2000-2005 for people who have only a basic education and few marketable skills?
Just another effect of the bubble is that it is causing more of our daughters and sons to turn to prostitution. Thanks, Alan Greenspan!

I’m in shock,” she said, “because these people were business people. I can’t believe they would be involved in prostitution.”

She’s just a little confused as to exactly what business they’re in.

“…even funnier than the cartoon…”

Er, sorry to say, but that is a news story — not actually intended to be humorous. Mortgage brokers falling back on prostitution shines a whole new light on the expression “house of ill repute.”

Really bright operators — a red ribbon on the mailbox when they were open for business. Guess they thought that a red light bulb on the porch would tip off the neighbors or cops.

No one commented on the report that the brokers were offering dominatrix services?

And why do businesses and companies go bankrupt? Because they don’t have any money, DUH! Which just goes to show you, as far as the events that have taken place during the housing bubble, it’s all done with mirrors.

>Homeowners can file claims, but so too can subcontractors that file liens when work on a house goes unpaid.

Elsewhere I’d read title insurance is required by and covers the lender. The buyer would not be covered except by an additional optional policy.

This is my recollection and applies to Florida — don’t know about other states. In the “old days,” title insurance was uncommon — an “abstract of title” was the document that changed hands at a closing, after being examined by the buyer’s closing agent. I still have an abstract or two in a safe deposit box somewhere. The abstract examined ownership and liens dating back as far into the history of the property as was possible. Then, on each subsequent transaction, the recorded abstract was simply updated. The process worked very well and the only downside I can remember was the telephone-book size of some abstracts. Nevertheless, they gave me a great sense of comfort.

My understanding was that title insurance took over as a shortcut. It was a way to pool risk in exactly the way all insurance works — premiums would more than offset the occasional claim. When we discussed this topic here maybe two years ago, it was noted that successful claims against title policies were relatively rare — thus, title companies were incredibly profitable.

The key point about title companies with regard to today’s posts, I believe, relates to the reserves for potential claims that should have been required to be held. Those reserves should be in the hands of a trustee that will survive even if the title company fails, just like any other insurance company. Further, I don’t see how actions taken subsequent to the issuance of a title policy, that affect the property (such as a mechanics lien) can have any effect at all on the issuing title company.

Dimedropped probably knows about this stuff, if he’s on today, as should other posters who are in or near the business.

Bolivar Peninsula, Matagorda Island . . . those are names you hear in the news in August, September and October.

Nuff said.

>Stopping development is a pipe dream, he said.

“Here’s what we’d have to do. First we’ll run every real estate agent out of town and, second, we’ll make it illegal to sell property,” Pearson said. “I’m always amazed at the restrictions people want to put on property they don’t own.”

Wouldn’t the mayor represent the people vs. the developers. Want to be amazed by restrictions on property try spots on the west coast.

it’s about time

” as has been the case throughout the housing downturn so far, median home prices managed to hold their own. August’s median dropped slightly from its record July level to $579,000, though it was still 5 percent higher than year-earlier levels. Condo prices actually hit a new peak of $460,000, up from July’s $450,000 and from $415,000 a year ago.”

Ha ha!
you get a situation where A tiny handful of miilion$+ properties along the tiny LA coastal slivers are the only homes selling while the rest of LA county RE goes into the toilet!

“Holmes said that “shock to the system” washed out almost all the buyers with less than prime credit or those who were unable to come up with 20 percent down payments.”

That would be the entire Comptom,SCentral LA,inglewood,east-central SVF, 80% of SGab valley, all of Palmcaster, 80% of Santa Clarita, much of the southbay, 80% of Long beach, the entire Shithole crap region called the alameda corridor cities:(bell,maywood,lynwood,southgate,montebello, east LA)where they have been selling hastily-remodeled POS’s in bombed out gang-infested hoods for 1/2 million. Should say had been beause with the end ofsubprime that entire market will get, or is now getting, carpet=bombed, and entire Scental hoods are starting to degenerate with the foreclosed,rented out,empty, reo properties which will cause property values over most of LA county’s shithole burgs to plunge. That is not a laughing matter-80% of LA county is pretty marginal and/or plain vanilla/or third-world degenerated hellhole.

Only fraud has propped up these areas-no more! the end of fraudulent lending starting August 2007 means real price plunges in such LA landmark beauty spots as Compton, Wlimington, Pomona, N LB, Lennox, east LA, Baldwin Park, La Puente, Palmdale,Sylmar, Pcoima, bellflower, southgate, Inglewood, hawthorne, Norwalk, Jefferson park, lincoln hts, N hollywood, ad nauseum.

“1/4 point higher…” The broker got an additional rebate of 2% of the loan amount, paid to him directly by the lender, for delivering a higher interest rate. That is an extra $10,000 on a $500,000 loan. It is done EVERY DAY and should be illegal.

proving no doubt that Lehman should start producing coke.

Gee, I cannot understand why the “give 100%+ loans to people with terrible credit who lie about their income and have no savings, buying a product that is decreasing in value” segment is unserved. Where should I sent my money to get into that? Oh wait, I already sent it all to that Nigerian Prince.

Tx … could I ask for some advice? I’m been tinkering a bit with a few shorts. Small amounts with play money. I shorted CFC at 24 and 28. I believe I’ve read several comments from you regarding longer term resistance at $18 share. Do you think I should get out now and take my gain or hold on for lower lows?

Very funny tx. Have to admit he has 1 or 2 economic facts buried in the piles of numerological claptrap.

I’ve been hearing you no way no how want be short this week or next.

Beware the man behind the curtain.

The continued failure of any of my borrowers to default must be due to my ignorance of credit scores and credit-scoring models. (Boy will I have egg on my face here on the blog if my clientele suddenly become uncooperative.)

“Standard & Poor’s said less than a year ago that Lehman continued to merit an A+ credit rating because of its ‘exceptional liquidity, strong cost controls and excellent risk management.” Lehman went on to earn more than $150,000 per employee in 2006 and pay Chief Executive Officer Richard Fuld $40.5 million…Today, bond yields show that Lehman is considered more risky than Colombia, where the government has been waging a four-decade war with drug-funded rebels and one in 10 members of the workforce is unemployed.”

Yes thats right its been a financial bubble in the S&P. Looks like thats going to change. I guess a Recession starting about now.

The “C” word morphed. (Containment –> contagion)

Financials account for approximately 40% of S&P 500 earnings - double the normal proportion. Much of the differential has been due to draining loss reserves at the banks and absurdly low assumptions for future losses. Much of the rest is due to the additional risks taken on through conduits and high-risk lending. 20% of the S&P’s earnings never existed in the real world. Now we’ll see how much of the rest was unsustainable as well.

We’ve already experienced the equivalent of bank runs on many non-bank financial institutions. That’s what shut down the mortgage lenders, SIVs and I-bank driven M&A. Further runs on other elements of the financial system are likely to come soon.

What do you mean JWM, according to the article the median is still up. Nothing to see here everyone, please move along. sarcasm off - LOL

I’m with LAIG. Next spring will be a buying opportunity, to buy on the dip. Especially in all the areas Peter M mentions above. okay sarcasm really off now - LOL

It’s a klassik set-up auction, with 2 lots being sold for whatever they sell for, (easily remedied by having a few shills, merrily bidding along) the rest all reserved prices…

“I’m in shock,” she said, “because these people were business people. I can’t believe they would be involved in prostitution.”

Shocking, that there are unethical businesspeople. LOL

Just as an SUV is not environmetally bad if it is transporting 8 people, so a McMansion is not environmentally bad if it is housing 20.

Well, 42% of the population is extra large now (read XXXL). Got to keep that in mind!

voz
Which asset class are you looking at?

“I expect the FED to lower short term rates in Sept at their meeting.”

I can already hear Cramer crowing to BB, “I’m in control here.“

“I think we were all right and now a recession is here. I expect the FED to lower short term rates in Sept at their meeting. I fear the FED will try the old time tested inflate your way out but this time longer term interest rates will go UP as the dollar goes down and the foriegn buyers of treasuries find better ways to invest their money. We’ll see. ”

Yeah, that monopoly money printing press has smoke coming out of it and springs hanging out everywhere… BB will just keep kicking it till it spits out another trillion…

I wonder if any of Cramer’s post-rant contrition had to do with some PTB calling him on the carpet (because he’s blown their credibility, as they had already planned the cut and the last thing they want is to appear to be catering to him/the Street).

“‘It now appears that housing and capital market corrections will be worse and longer lasting than even we expected,’ Killinger said.”

“Even we,” is it? My, my — that sounds pretty exalted.

Next they’ll be having to let their relief drivers go, just to save some cash. Awful. Awful.

Very good post, seesaw, thanks!

Pretty funny. Did you make that up?

Yep! From 124 yen to 113 in 3 months. That’s gotta hurt.

goodbye dollar.

http://quotes.ino.com/chart/?s=NYBOT_DX&t=f

Interesting considering the 5 year bond yield is now under 4%. I would yank my money from a 9% CD because it must be invested in something risky to be that far above treasuries.

There’s a $2,000 min/max on the CD. They’re just trying to increase their market share of deposit accounts with a modest promotion. Pretty common among credit unions.

“7% and 9% on CD’s new money only”

I had a similar high-interest CD at an S&L in the late 1980s, just before it went belly up.

I wouldn’t pull my own money over that, since the $2K max means it’s just a teaser for new business. If you invest $2K at 9% for 7 months compared to at 5% elsewhere, I think it’s costing the CU about $47.

Instead of a panini maker.

Your post increased my happiness by five utilities.

“…it would take four years to sell a home in Santa Ana (lol)…”

The estimate is overly optimistic because it fails to consider the common practice of relisting stale listings as “new” in order to create the misleading appearance that homes have not already sat on the market forever.

–
As prices drop more and more homes would become eligible for “Walk Away!”

There would be no need to sell most of the listed homes and some not listed. It would become a whole different game during 2008-10 (read as during 1930-32).

Jas

Click on the 1-month view for a far more convincing visual take on my point.

It appears the PPT decided to set the B-put strike price at the psychologically-important 13K level to help “contain” the credit crunch.

How can the Fed continue to maintain that they are against bailing out fools, when empirical evidence persistently suggests otherwise?

whoops, forgot the link:
http://tinyurl.com/2byhzt

“do you think this house would be worth an offer of 75k?”

Not to me, it wouldn’t. 2 hours into nowhere and looks like a Flip This House slap-on paint job. Nice curb work at the street — maybe it’s sculpture, to tie in the landscaping. I’d check the sales history back to Moses and see what it “used” to sell for. If not enough history, check the records of comparable houses nearby.

Sorry to put the place down, especially if $75K is your limit, but I wouldn’t pay that much for that house here in central Florida, much less in the boonies out there. Have you thought about trying to find a $10K lot and put up a pre-fab? With construction unemployment headed up, you might be able to build from-scratch the same square footage for the same amount, assuming no basement.

Once upon a time bankers forced most consumer borrowers to be financially prudent. Accordingly, the prudent borrowers strove to spend no more than 25% of their pre-tax income on principal repayment, interest, taxes, and insurance (PITI). Also, a long, long time ago, if you bought a residence you borrowed no more than 80% of the purchase price and that borrowing was a 30-year, amortizing loan at 8% interest. Using those arguments for the parameters of PITI, loan amount, and loan cost, see what you get for home price in relationship to annual income.

Note that for high income, high cost areas of the country the old rule-of-thumb was 4X annual income.

Once upon a time, bankers required consumer borrowers to be financially prudent. As a result, “financial prudency” was somewhat ingrained into the fabric of most middle-class Americans. Such persons considered it wise to spend no more than 25% of pre-tax, annual income on the major housing expense components. For home-owners this is loan principal repayment, interest, taxes, and insurance (PITI). Also, way back then, house purchasers, other than veterans, borrowed no more than 80% of a house’s purchase price and the transaction was financed typically with a 30-year, 8% loan. Using the above arguments as the parameters for PITI, debt cost, and loan amount, see what you get as the relationship between house price and annual income.

Note that for high income, high cost areas the rule-of-thumb was 4X income. In New York, San Francisco, Boston, etc., it was ok to spend more than 25% of your high income on the basics of housing (PITI or rent).

Well, Seattle Renter, I think this is a rule of thumb that banks figured out by observation. Maybe I’ll google it later if I get a chance. Another course of action would be to call up a bank and ask the manager of their lending department about it. Not like he/she will have anything better to do.

Seattle — bought my first house in 1970 — $25K and daddy came through with the $5K down payment. My salary (our household income) was $10K and we were OK but did not eat out a lot or buy a luxury car. We were just OK. 1973 - Salary/HHincome went to $15K and we traded up to a $48K house with 20% down. That’s roughly 2.5x income. We were OK. We still didn’t eat out much, but could buy a better used car and that’s about all. Couldn’t even afford to sod the large back yard. We were just OK.

That is why these limits exist. There are just too many other things, expected and unexpected, that eat away at the rest of your money. Big time, if you have kids. Now, I suppose that for Dinks making $500K a year, the rules might have changed change because you can only spend so much on eating out and cars, but by and large it was a very sane stricture that meant very few foreclosures. Look around today and see the result of not holding to the old rules.

Good timing

The tide in the War on Savers seems to be turning. Maybe it is time to go b_mb another country?

Meanwhile, back at the ranch, Schumer wants to laden Fannie’s black hole of a balance sheet with lots more mortgage debt. Never mind that we don’t have a clue how far underwater it is already (thanks in part to that “$170b of securities backed by subprime mortgages which have a strong investment rating” you mentioned).

And with what are you going to pay for them? Planning on issuing junk bonds or commercial paper? Getting a bank loan?

Now that’s just confusing.

August was a terrible month for Thornburg. Look at the spikes and gaps on this SOB. It looks like Wylie Coyote ran off a cliff:

http://bigcharts.marketwatch.com/interchart/interchart.asp?symb=TMA&time=&freq=

Thanks! I had a feeling there was something odd about the divergence between the Libor and 3-mo T-bill yields. Normally both are quite closely aligned with the FFR, but they currenty are diverging in opposite directions. Perhaps the Libor is market-set, and the 3-mo T-bill yield is not?

They need to change the terminology. You don’t “fall” into a recession. You “stub your toe” into a recession. You “fall” into a depression.