‘Eight Year Housing Lovefest Done Like Dinner’
Danielle DiMartino has this at the Dallas News. “The mortgage market remains a mystery to virtually every American. For starters, the sheer size is inconceivable; it’s hard to get your mind around a fast-growing $8.7 trillion market. Even saying it’s more than twice the size of the U.S. Treasury market doesn’t put things into perspective for the layman.”
“Try this bit of context, then: The mortgage market is so big that it has the ability to introduce systemic risk into our financial system. The last time systemic risk reared its head was in 1987, when a steep sell-off in stocks triggered a huge number of Wall Street firms’ portfolio insurance.”
“Reactionary, simultaneous, automated selling pressures succeeded in overwhelming a stock market that was supposed to be impenetrable. Similarly, every time there are large swings in the Treasury bond market, automatic sell or buy orders are triggered in the mortgage bond market.”
“Sound too alarmist? Consider a few facts: The collateral backing mortgages is stretched precariously thin, one in 10 homeowners has zero-to-negative home equity. Recent estimates put one-quarter of all mortgages underwritten last year in the subprime, or riskiest, category. That’s well above the 13 percent average share for the decade through 2005.”
“Mortgage delinquencies ended last year at 4.55 percent, an 18-month high. And subprime delinquencies are pushing 12 percent. Despite historically low borrowing costs, households spent a record amount of after-tax income at year-end to pay required principal and interest payments. In the next two years, about a quarter of all outstanding mortgages, or more than $2 trillion worth, will reset at higher rates. A record 62 percent of commercial banks’ earning assets are mortgage-related.”
“For good measure, Goldman Sachs recently recognized the elephant in the room: ‘These are the early days. An ongoing deterioration in credit quality in an environment of improving labor market performance and rising home prices is therefore quite significant.’”
Paul Muolo at National Mortgage News has this inside report. “Nonprime wholesaler MILA Inc. of Washington state has been quietly trimming its staff through attrition and layoffs. Since year-end, about 100 jobs have disappeared.”
“More tidbits from the Rudman report: On Nov. 29, 2004, a few weeks before Fannie Mae’s board found the courage to can then-chairman/CEO Franklin Raines and CFO Timothy Howard, ‘presiding’ Fannie director Ann Korologos sent a broadcast e-mail message to all GSE employees, asking them to come forward in regard to ‘any unusual or atypical transactions’ that had transpired over the past five years. In response to that e-mail, 10 employees and one seller/servicer came forward. One allegation became the ’subject’ of a ’significant, standalone review.’ What was the allegation? The report doesn’t say.”
“Genworth Financial of Canada soon will begin insuring 30- and 35-year mortgages in that country.”
Garth Turner thinks that is significant. “The real estate boom is over. You may or may not like that news, but it is now official. I am calling the eight-year-long housing lovefest, finito. Done like dinner. Toast.’
“My friend Peter Vukanovich, who came to visit me in my riding office, pulled the trigger. His company, Genworth Financial, has now become the first mortgage insurer to cover 35-year home loans. And the country’s best-known mortgage guru, whom I spent time with as well last week in the boardroom of a Toronto law firm, told me in hushed tones he is preparing for the advent of the 50-year mortgage.”
“So, why does this show the real estate market has peaked and is about to hit the down escalator? Simply because this is the third major indicator that housing prices have passed the ability of the average family to afford them. And anytime that transpires, the writing is on the garage wall. amortizations which have gone from 25 years to 30, then to 35 years and quite possibly now to 50.”
“This is irrefutable proof that houses at these levels are unaffordable if you play by the rules that have influenced real estate supply and demand for the last three generations. And layer on top of that the effect of five recent mortgage rate increases, with the prospect of a couple more to come, and you can see what’s going down.”
“Over the last year, Vancouver house prices rose 26 per cent. In Calgary, 24 per cent. In Toronto, just six per cent. I would argue that the inevitable correction in real estate prices has already started in the GTA and will soon be spreading west. The only way they’ll make money on those houses is if they find somebody to pay even more. And behind that indebted buyer will be a generous lender. And behind that lender, a creative insurer. And you don’t want to know what’s behind him.”
“For good measure, Goldman Sachs recently recognized the elephant in the room: ‘These are the early days. An ongoing deterioration in credit quality in an environment of improving labor market performance and rising home prices is therefore quite significant.’”
The labor market is really outperforming these days, unless you are one of the 105,000 blue collar employees at GM who was recently offered $35,000 or so in exchange for the value of your future earnings prospects with the company. Ahem…
‘In response to that e-mail, 10 employees and one seller/servicer came forward. One allegation became the ’subject’ of a ’significant, standalone review.’ What was the allegation? The report doesn’t say’
Remember this report was paid for by Fannie Mae’s board. No telling what a real investigation would have turned up.
’subject’ of a ’significant, standalone review.’
Think Abu Ghraib…
Accountability? NEVER! Unless we’re talking about blow jobs. [rolleyes]
OT - Anyone got the lowdown or insight on the Wachovia upgrade for Toll Bros.?
They know the gig is up and they’ve got some to sell you.
“it’s hard to get your mind around a fast-growing $8.7 trillion market”
Get your mind around this: If you tried to count to 1 trillion it would take you 145,000 years, about 72 numbers per minute! Practice counting to 1 billion–it should only take you 26-1\2 years.
Cute. 72 numbers per minute might be a bit high. Try saying 4,556,789 in less than a second!
LOL, like I want to count that high
It’s a counter, where each additioanl tick-tock adds to the running total. Sorry, technicality
ditto
Casual guess: Pump and dump with no perceived culpability, in celebration of Quattrone’s good fortunes…
http://www.mercurynews.com/mld/mercurynews/news/breaking_news/14182836.htm
The Wachovia analyst mentioned an “upsurge,” I think, in the Washington, DC, market that will help Toll. Scroll down Ben’s posts over the past few days - there are some doosies on DC and its “upsurge.” These guys really are unbelievable.
Just FYI from insiders I know at major lenders.
Major lenders have been changing and altering their commissions for sales reps. Sales associates are making less and less, also there have been lay-offs but from what I have been told the attrition rate (folks quiting on their own) is much more than they want to see leave. The average broker lasts about 6 months or less with your big subprime lenders.
While I agree that the market is over-cooked, I look at the 50-year mortgage as more of a desperate move by the real estate/mortgage industry to keep the party going just a bit longer. It won’t work, and the longer the party goes on, the worse it will crash.
Think about it, though, and it makes sense. There are a lot of people whose income is riding on this bubble growing, and growing, and growing. They are going to fight as hard as they can to keep it growing too.
-X
BubbleTrack.blogspot.com
Maybe on topic:
Money&Investing right column of today’s WSJ –
“Housing Banks May Be Forced To Cut Dividends
A crackdown by regulators of the Federal Home Loan Banks threatens to shrink lenders, including giants such as Washington Mutual Inc. and Citigroup Inc.”
P.S. In case Ben does not have an online subscription to the WSJ, he should request donations. I would donate $1 in order for him to get these gems up more quickly…
I am in for a buck….
We are all finally being proved right. Rock on
I’m short the stock market via summer and fall index puts (large positions) and it has been a cruddy experience so far but something tells me that’s about to change. Danielle rocks. I am suprise the local real estate whores haven’t run her out of town.
Your fall puts should do well.
One more reminder for California. AT&T/SBC/Pacific Bell (all merged) has been the largest private employer in California, with the biggest presence in the BA. They are shedding tens of thousands of jobs, and more to come with the now pending Bell South merger. Also, several in many other states also (NJ for ATT). There goes a lot of high paying jobs. I can only speak for CA, as that is where I am familiar.
There is more good news here about the strong labor market in addition to the GM announcement!
Furthermore, what’s up is down, and what’s is down is up. Or as my older son likes to say to his younger brothers, “No means yes and yes means no. Do you want me to hit you?”
I guess there are more and more jobs being created in the statistical inference department … the more layoffs, the more presumed new jobs
Exactly. There are alot of us out here who see the same thing. It seems to be the new paradigm instituted by GWBush &Co.
He ran a couple of companies into the ground before he took over as CEO of American Industries, Inc.
This guy (and Cheney / Rove) are not Republicans.. They are Neo-Cons. As a Republican voter, these guys make me sick. They have outspent any of the “Spend-O-Crats”. Shameful what they have done to this country.
Last election was voting for the lesser of 2 evils. Both idiots with silver spoons born into their mouths.
The hyphen in Neo-Con puts the term in an entirely new light for me. Thanks for the insightful punctuation mark
I think that the gist of it was a better job market. The problem comes with the point of view. If it is from an employers perspective, a better job market might mean more unemployment, ie, a larger and cheaper job base.
Notice how most major corporations are doing away with pension plans? Notice how Social Security is about to run out?
I think that We gen X, and Y, and post 9/11 are royally screwed.
How many people lost their 401K that where their only way to retire, and are still working? My former boss 1 year from retirement, invested heavily in MCI, Global Crossing, and Cisco…. Guess he is still working.
“The last time systemic risk reared its head was in 1987, when a steep sell-off in stocks triggered a huge number of Wall Street firms’ portfolio insurance.”
Oh really???
1994 Mexican peso crisis
1997 Thai baht devaluation
1998 LTCM bailout
2000 .com bubble collapse
Early 2000s massive credit bubble inflates
2004 Federal regulators accuse Fannie Mae of serious accounting problems and earnings manipulation to meet Wall Street targets, and the SEC ordered the company to restate earnings back to 2001
2005 Fannie Mae is offered indefinite forebearance by the NYSE despite its inability to produce financials
The last time systemic risk reared its head was in 1987
sounds correct to me. 1987 is when Greenspan found out that he could postpone the inevitable by stepping up the printing presses. This has been repeated with every new crisis since then, it is now official FED policy and works like a charm
The d@mn thing about the repeated running of the presses is that systemic risk has a way of feeding on itself, as parasites (e.g. hedge funds) gradually adapt their strategies to take advantage of the predictability of policy response to a crisis. Pretty soon you have the makings of a much bigger crisis on your hands, and nobody wants to be the guy in charge of the show when the dam breaks, so there is a tendency to keep postponing the inevitable…
My respect for Paul Volcker grows with each passing hour.
yes, I agree (also about Volcker).
I think the FED has no other choice left as a result of past policies than speeding up the $$ printing press until it blows and takes the economy with it; the only question is when this will happen and who knows …
Letsnot forget the Bankrupty of Russia..?
Look Several Middle Eastern stock markets are systemically blowing right now! Dubis (UAE) Saudi, Egypt and Turkey….I know who cares…waht sdoes that have to do with me?
But here is a piece of history…..Prior to the late great Solomon Bros. in 1973 ish Mortgage backed securitites industry securities were never rated AAA/aaa…
It truly is different his time…It was Solly that talked the government into this pyramid sceme. NOW $3trillion guarenteed by the frequent filer FNM ae.
What I keep wondering is,” if all those Wall Street firms made so damn much money trading last quarter when do we hear WHO LOST this money..? Or Maybe it is was Goldmans customers who bought GOLD , while they shorted the stuffing out of it in Japan! @ $465 last year! (31 thousand contracts)Or who owns the other side of Morgan chase $31 trillion in derivatives? Or the tens’s of billions of GM Ford Delphi and Dana bonds.?
I’m really curious about this number. I want to know if its calculated based on the current, bubble-inflated numbers. If it is, and house prices decrease, say, 20%, then I want to believe that a lot more than 1 in 10 will be under water. The fact that 1 in 10 might be under water at today’s inflated prices is scary. Thoughts?
You have put your finger on one of the lingering concerns about one of the biggest elephants in the room which the RE industry shills choose to ignore: We don’t really know how far prices could fall, nor how many folks have leveraged themselves to the hilt on the questionable assumption that real estate prices always go up.
I agree with both of you. As the inventory grows how much of it is people wanting to cash out (yet don’t have to sell) and how much of it are people that have to or will have to sell? The bigger the number the bigger the declines. I am willing to bet it will be a fairly large number of people, especially is the most bubbly markets.
That’s what we’ve been talking about for the last 6 months at least. The trillions in ATM housing extraction aren’t even always included in those calculations. If we subtract out the $6-$8 trillion to revert to the mean we are going to see 1 of 3 houses upside down.
And assuming a fair number of occupants of those one of three houses is employed in a RE-dependent line of business (not to mention the telecom, airlines, oil, automotive, or retail sectors), I would say there might be a bit of a problem here…
If GetStucco’s and Robert Cote’s estimates are right (I have no way of knowing), then I don’t see how it could be anything other than a depression kind of crash. I still don’t know where to put my money…
Unfortunately the 401(K) education campaign of the 1990s did not mention that it is not a good diversification strategy to invest in sectors of the economy which are highly correlated with your employment income (which would likely cover most of the Wilshire 5000 these days…)
I still don’t know where to put my money…
I’m loadin’ up the gun locker w/AK’s.
7.62cal. ammo at the moment is better than gold.
My pre-ban ‘89 guns doubled & tripled in value.
Hillary in ‘08 and the prohibitioners will be back.
In BC, Canada, recent stats show that 38% of homeowners have taken out equity loans against their house. No amounts given, but they obviously aren’t nickel & dime loans.
Assuming that 38% is fairly representative (our spending habits are the same as in the US), and as Robert Cote suggests, easily 1/3 of owners could be FB’s.
what are FB’s?
I was in toronto 2 weeks ago and watched a sunday am ritual where family members calculated how much wealthier they were by looking at comparables in their neighbourhood. They have bought a million plus $ home and probably poured several 100 k into re hab in the last 6 months. I am hoping that they bought well and expect that they’ll be alright since they have high equity in the property and good income.
I also saw Toronto Magazine spinning how the condo craziness was different this time when it took more than 10 years and the latest craze to consume the last glut of condos (short memories).
I’m living in the US and thankful that I found the bloggg that educated me not to be one of the last buffalo’s over the jump (humble thanks).
FB’s = F’d Borrowers.
Up in the list of links you can find one titled ‘Another F’d Borrower’. That’s a blog set up by a guy in the industry who used to post on here a lot as SoCalMgtGuy. It’s well worth a look.
I would consider everyone with up to 10% POSITIVE equity in the same group, since that’s about what it costs for realtor fee, closing costs, repairs, etc to sell a house. The press never seems to account for that group, which I assume is rather large and growing by the day now.
LinOrlando, How do you think independent mortgage brokers are doing?…Are their commissions getting squeezed also?
This is scary, and what seems to be perceived newsworthy is 50 year mortages. How is 50 year mortage going to help all those businesses that were booming due to unlimited $ from ballooning RE. This weekend, on saturday, on my way to WORK I passed a car dealership in which a cheesy guy was using a loud stereosystem to sell cars. Between cigarettes, he spoke directly to the passing traffic as the only audience in the lot was a tattered looking couple with a child. This is big dealeship, namebrand dealership!!!! What is going to happen to our overall economy? What is the plan?
after the 50 year mortgages, the plan is more self certified, interest-only loans and even more fraud; just look at Europe for what will follow in the RE market when a 40/50-year mortgage gets too expensive.
P.S.: I just read a report about mortgage trends in the Netherlands over the last year and I’m totally shocked to read what kind of totally stupid, irresponsible products the banks have developed and pushed in the last years (without a doubt with all the blessings from the central bank). Even the US market could learn some dirty tricks from this.
No wonder that home prices continue to defy gravity here. If the predictions of the banks come true (they use a conservative extrapolation from the last 10 years), by 2015 the average Dutch home will be nearly 2000% more expensive than in 1990.
I think they are going to improve on the tulipmania ;(
That’s it! I want to buy a house when they get to the 200 year mortgage! And I want an ARM with negative interest for the first 30 years!
This article regarding mortgages was on the front page of the Los Angeles Times:
Bonuses to Loan Brokers Scrutinized
Lenders often reward those who arrange high-interest mortgages. Many borrowers don’t know they qualify for a lower rate, officials say.
http://www.latimes.com/business/la-fi-kickback27mar27,0,7888441.story?coll=la-home-business
Here’s a fact. 100% of renters have zero equity in their homes.
I still think the downside for me personally in a mortgage industry meltdown is very low.
Not necessarily… if you live in a rent-controlled apartment, you could consider the value of a below-market rent as a form of equity. In addition, if such a residence ever goes condo, you will probably be given a “below market” purchase option. That might count as some sort of “future equity.” Oh no, I sound like Andrew Fastow…
Renters don’t have homes or mortgages, so it doesn’t make much sense to apply the concept of equity to them.
And equity (the negative kind) is one of major risks facing new home owners now…
In most places renting is cheaper than owning now, and you don’t have be concerned with the possiblity that negative equity may prevent you from even being able to sell your home at all, move to find a new job, etc.
i am only lightening up the gloom and doom found here daily. haven’t seen in on this thread, but normally there is a lot of sky is falling. i was positioning the 10% have zero equity as a “so what”- if people are in this situation they are just like renters with extremely long leases and do not add or subtract to the situation. I am of the camp that increases in foreclosures, bankruptcy of banks and builders, unemployment of RE agents and mortgage brokers will all be absorbed.
Also Renting in MA - People in the zero equity situation are NOT just like renters. This renter, for example, is debt free. I don’t owe anybody, what, five, six years income, for the roof over my head.
And don’t forget, when you get a conventional mortgage, the interest is front-loaded. You don’t build equity in a meaningful way until about year 8 on your loan. And that is a conventional mortgage - the Interest Only/ARM variety is a lot worse.
I agree, folks get carried away with the doom and gloom around here sometimes - It’s a bit overdone. But for what its worth, you and I are not immune to a mortgage industry meltdown, any more than we are immune from say, a stock market crash. The repercussions touch everybody.
I am of the camp that increases in foreclosures, bankruptcy of banks and builders, unemployment of RE agents and mortgage brokers will all be absorbed.
Yes, “evetually” all the market excess will be absorbed. However, the sheer scale of the current bubble, as well as how many recent specuvestors will end up as NEOs (Negative Equity Owners) means that this process could be very painful and protracted indeed. Consider how long it took for the speculative execess of the 1920s to be “absorbed’ and, well, you get the picture…
NEOs (Negative Equity Owners) = Neo-Conneds
Renters don’t have homes or mortgages, so it doesn’t make much sense to apply the concept of equity to them.
Of course there is “equity” if you are investing the differential between rent and the costs of owning which are exploding at the moment.
And how much is “peace of mind” worth?
Sad to say, a really big “IF” nowadays.
“The real estate boom is over. You may or may not like that news, but it is now official. I am calling the eight-year-long housing lovefest, finito. Done like dinner. Toast.’
“Lovefest” , “Orgy”- whatever…
but it’s definitely COMING OUT OF THE CLOSET.
or, as someone more witty than I posted previously, “real estate auto-erotic asphyxiation”
We have renting in MA and closely following the housing market here. We have seen five homes of interest in the past three weeks. To obtain the advantage in any future negotiations, I checked the online county deed records for each of the homes. All five houses have large helocs or outright loans obtained in the past two years. So while the prices were running up, instead of counting their blessings, each owner was busy counting the home atm cash. Now prices are sliding downward but prices are extremely sticky. No one wants to lower their price more than a token few percent. No one wants sell their home and get nothing. In the end, many owners will be foreclosed or will just walk away.
What they want and what they can do are two different things. You’ll get one of those places when someone “has” to sell. Can you imagine being in that position? Like being squeezed in a vise you can’t get out of.
rob-
i was in the same position a couple months ago. Ended up renting a flipper’s unsold condo conversion. Still would like to own, but have now pushed it out at least a year, probably two.
I would definitively wait. Those owners are not going to be able to drop the price. They will not be able to sell either. Nothing is gained by lowballing them, as they have a bank set minimun payment that they cannot negotiate… yet.
Sales and Tax Records are public. Just look up the house, see what they paid. It literally takes seconds to get this information.
grim
Be polite and explain that all the signs point to a 20-30% price decline. Expect the seller to be insulted, but tell them you have cash and that you really will take the house at the reduced price. Give them your card, and tell them to call you after they’ve had a chance to think about it. And, of course, point them to this weblog!
The question not explicitly asked or answered by this article is can the American and world economic system survive if/when $2T of real estate market value (or more, if you consider the global bubble) goes up in smoke? Can the cascading defaults be handled?
Tom - an interesting question. It will be a thriller show. Nobody knows what the script is, including Helicopter Ben.
Just like no one could guarantee that the bubble would grow forever, no one can guarantee that it is about to burst. The Fed always has the option of lowering the rates, from a relatively low, 4.5%, 4.75%, to well–0%. They even have some other ammunition in terms of Treasuries–for which I don’t exactly understand the mechanics. It IS conceivable that, in the face of an all out implosion, the powers that be stimulate yet another bubble that takes housing prices, and inflation, to substantially higher levels. HB stocks and REITs have yet to fully tank, so there may be some “promise” of this by the Fed. Again, we on this board don’t want to become mantra-slaves like those NAR clones. Finally, remember, the mainstream media is always the LAST to know. If they are reporting on something–like the bursting bubble–it’s gotta be last year’s act. The future remains unwritten
Keep your eye on those long bond yields, which are mysteriously stuck in the trading range between the very round figures of 4.675 to 4.775 since March 7…
http://www.marketwatch.com/tools/quotes/intchart.asp?symb=TYX&sid=11421&freq=1&time=1mo&siteid=mktw
in Europe the long bonds are already declining again, despite the latest ECB rate increase.
I should have said: interest rate (yield) is declining.
In the updated version of Irrational Exuberence one of the things that Schiller does is address the myth that lower interest rates are associated with higher demand for housing and higher prices. Apparently this is NOT the case. Some of the highest home prices have occured during times of high interest rates and vice versa.
Low interest rates may have helped start the bubble, but they are not the fundamental cause of it… and thus, I suspect, could not be used to sustain it somehow.
Great observation. I am reading the book right now. I think human emotion (fear/greed) ultimately are the reasons that drive all capitalistic markets. Once the sheeple’s mentality towards RE changes, there will be nothing stop the decline.
Awesome book. A bit dry… but filled with invaluble information about financial markets and people’s behavior.
Knowledge like this is the difference between “smart money
and “not so smart money” I suspect.
The dry tone helps contrast Shiller’s unbiased position with that of the shills (like Lereah) who keep telling us not to miss out on the boom du jour…
yes, BUT my mentality is heavily influenced by what someone’s telling me HOW MUCH THEY’RE WILLING TO LEND ME.
and I had a new thought recently: perhaps all these lenders have been overcharging borrowers with real credit and real incomes. it’s a sort of tax to cover all the looney loans, no-doc, neg-am, etc. Maybe these good borrowers could have gotten 30-year rates of 4% or less…
the fed has repeatedly warned they wont act to protect asset bubbles.the homeowners are on there own.
I just figured out something I haven’t thought of before.
In the stock market, your stocks are as good as everyone else’s and you get the real time price people are willing to pay, so you will always be able to price your stocks right for a quick sale right at the current market price.
But with a RE property in a down market, you have no idea what price potential buyers are willing to pay, so you either overshoot and lose money to sell below what buyers have in mind or price it too high and no one is interested. By the time you realize the price is too high and then you price it right for the market weeks or months ago, the market is no longer the same, so you end up holding it for months or years not being able to sell.
That’s why sellers will be killing each other to sell their homes well below what buyers can afford. You always fear other sellers are undercutting the market to beat you.
Yup! Dat’s what I like about “my” market. No guesswork, can’t take it any longer? Hit da bid and it’s over! It hurts but you can then move on.
Good observation Goleta,
And in our neck of the woods where crackerboxes start at $1mil, those sellers are playing with mortgages of $5 or $6k per month… and when their A.R.M. mortgage clicks up (sometimes up to 50%), they are really playing with matches.
Their whole financial will go “poof” if they don’t play it right. Probably better to slightly underprice what the lowball cash buyers are willing to pay IN ORDER TO GET OUT NOW! before all H@ll breaks loose.
That is why some of us suspect the inventory correction underway should be properly interpreted as a free fall in housing prices.
Correct. You know that the price of your house has fallen when no one is willing to buy at your listed price. Eventually, the seller will get it, and they will lower their price and sell their home.
The real problem is if sellers are too dense to realize it, and they hold out for more. Then the market becomes disfunctional. Selling price too high means NO SALE. But there are buyers willing to purchase at a lower price.
The question is how low do they need to go before people are willing to purchase? If the trend is clearly downward, and there is enough supply, there is no urgency on the buyer’s behalf, there is no sale. People do not ever NEED to buy, they can rent, or simply not move. People WILL need to sell.
When you have lots of sellers needing to sell, and buyers who don’t need to buy, buyers percieve themselves in a “catching a falling knife” scenario–it’s just better to watch the knife hit bottom before picking it up.
OT but telling, on Yahoo’s finance home page, Today’s poll asks if you think that the coming month’s new home sales will continue to fall. I think all the bloggers here will be pleased with the response, with 58,000+ responses.
I just checked and the poll is about the stock market in the middle east? What yahoo finance page are you looking at?
Thanks for mentioning the Middle East, so I don’t have to be completely OT here, but I suggest the Peak Oil crowd members who sometimes read and post here have a close look at the lead article in the Money&Investing Section of today’s WSJ:
“Mideast Feels Stress of Stock Slide
Drop Threatens Oil-Fueled Gains And May Hurt Emerging Markets; Scrambling to Avoid Burst Bubble
The Persian Gulf’s highflying stock markets, suffering their first serious correction after years of gains are raising concerns that a speculative bubble may burst and hurt emerging markets more broadly…
Analysts say the selloff in teh Gulf shows few signs of spilling over broadly to other developing countries — as happened in 1997 when a currency crisis in Thailand sparked broad losses throughout Asia, or when Russia’s debt default the following year rolled global markets — because few investors outside the Gulf own its stocks.”
Phew! For an instant there, I was concerned that systemic risk might be rearing its ugly head again for the first time since 1987. Luckily for the many of us who had personally invested in Thai bahts just before the 1997 devaluation, we can rest assured that few own Gulf country stocks which have plummeted in value since last Fall. And further, after the Asian crisis of 1997-1998, the first world economies have built a fire wall which protects the developed economies from the nasty effects of those emerging market crises.
This all naturally leads to a discussion of why those who have recently gambled on the Peak Oil theory are hosed. The credit bubble explains lots of other bubbles: housing, oil, and SUVs, to name three. But the housing and oil bubbles resulted in such rapid runups in prices, chased along by speculative fervor, that they are unsustainable and in the process of extingushing themselves. What is worse, the feedback of high oil prices and the end of home equity ATM financing for SUV demand is leading to a buyout offer for the entire GM labor force. Naturally, when fewer people buy and drive SUVs, and when the housing construction boom on all developed continents of the planet fizzles, we will also have less demand for oil, and oil prices will crash.
P.S. After a recent talk in San Diego by nobel prizewinning economist Thomas Schelling, a Peak Oil wacko in the back of the room launched into a five minute diatribe to enlighten Schelling and his audience on how the world is on the brink of running out of oil, and how this would result in WWIII, etc.
Schelling’s response was a masterpiece of brevity: “I don’t think so.”
don’t judge Peak Oil by the lunatic fringe, any more than you should judge Christianity by a polygamous Mormon sect.
We’re not running out of oil, but we’re rapidly depleting cheap oil reserves. Read “Twilight in the Desert” by Matthew Simmons - an objective report by an engineer, not an alarmist, available free at your local library.
Have you read the book “Limits to Growth” by Meadows and Meadows (engineers, not economists, mind you…)
Just requested it from the library, thanks!
Regardless of future growth - i.e. even at current rates of consumption, we’re using cheap energy at exhaustive rates.
No doubt higher prices as we exhaust reserves will slow consumption rates, but - just like with cheap credit - the bill eventually comes due.
Betamax –
We are only using it at exhaustive rates thanks to the encouragement of economic policies which encouraged such folly. Recently the energy market’s price signal has flashed the red warning sign, and behavior is adjusting in response, much as it did in the 1980s, after the end of the last energy crisis.
“Peak Oil wacko”
Ummm… I usually enjoy reading your (generally) well reasoned posts, Getstucco, but calling anyone (myself included) who thinks there’s a finite limit to the earth’s supply of fossil fuels a “wacko”?
Now, I’ll be the first to admit there’s an extreme fringe element to the Peak Oil crowd (or any large group for that matter) who lay on the ridiculous Doomsday-speak. Even so, there are plenty of sane rational scientists and oil indistry insiders who recognize the plainly obvious: eventually, we will be past the point of world peak oil extraction (notice I didn’t say “production”). Count among them M. King Hubbert, who famously (and accurately) predicted U.S. oil extraction would peak around 1970 –which it did.
For a reasoned, rational look at the best evidence that we’re at/near peak oil, I’d recommend “Twilight in the Desert,” or “The End of Oil”. Well researched and good reads.
Sorry, Harm, you must know I enjoy stiring the pot by now. Please don’t take it personally.
“Words ought to be a little wild, for they are the assault of thought on the unthinking.”
John Maynard Keynes
P.S. Harm, for a very interesting opposing viewpoint, I suggest you look for works by the late, great resource economist Julian Simon.
people are driven by emotion,and guided by myth,the old story was real estate always goes up,the story i hear more and more frequently is “bubble bubble,toil and trouble.the story has changed….and lowering rates will not change the story,reagan was elected because he told a story people wanted to hear,not for any rational reason,markets are not rational,the story (perception) is now “crash”.like it or not it is over
Crap! It was there honest, LOL. It must have been yesterday’s poll, (I thought 58K responses was a bit much for just a few hours) Anyway, 75% of the respondents thought that new home sales would continue to fall in the coming months, while the remaining 25% thought they would not. I was rather suprised that the percentage was that high for falling home sales. Although anyone reading yahoo finance pages probably is keeping up a bit more with the markets.
Then again, maybe it was today’s poll and was yanked by hidden, malevolent forces?
this reminds me…did anyone hear NPR’s Sunday morning version of Marketplace? I love that guy Kai Risdahl (sp? I have no bloody idea…) ’s voice…wake up to him often…
but they did a little segment on how sellers might be “unrealistic” if they expect the run-up to continue. I was listening to a transistor radio while doing the dishes, so I missed a lot of it…it had a hmmmm…maybe this is a tanking happening tone to it, that maybe it’s not a great time to get on the RE train right now, but then they also had the obligatory quote from some real estate dude saying that hey, on the other hand, if you didn’t buy in the last couple years just think of all the appreciation you missed!
How can any report calling itself “marketplace” let a story end on that note, which I believe they did?! All *what* appreciation? the appreciation that you either cashed out on last year before they told us RE might not actually go up forever and put in the bank while renting, or the appreciation that you didn’t actually see….
oh, wait, it’s the appreciation that you HELOCed to buy bling with!
And the self-proclaimed prophecy theory comes into effect.
If 75% of people feel that new home sales will fall, then they WILL fall, because you better believe that the feeling is fairly pervasive that housing has peaked–no one will hurry to buy anymore.
Not to mention that a significant portion of the 25% may have felt that new homes sales may be better this month because of seasonal factors, and not because housing is on the rebound.
At the Money and Metals blog, I have a post on the new ’standby bank.’
‘The Bond Market Association announced today that it has accepted an invitation by a private-sector working group established by the U.S. Federal Reserve Board to develop and lead the creation of a so-called ‘NewBank,’ a standby bank that would only be activated if one of two existing clearing banks in the U.S. government securities markets was suddenly forced to leave the business. Both government officials and market participants have long been concerned about the possibility, even if remote, of one of the banks suddenly exiting the markets and have agreed the NewBank concept is an appropriate precautionary measure. Micah S. Green, President and CEO of the Bond Market Association (said) ‘Establishing NewBank is a prudent market-based initiative aimed at mitigating any potential problems caused by the sudden involuntary exit of one of the banks.’
The Mogambo guru had a nice post on this NewBank. He and I both were unable to ignore the similarity between the words NewBank and Newspeak (surely BB must have read Orwell’s 1984?).
Mogambo is long winded but I enjoy reading his articles
Hard to believe this is a legitimate article. Sickening if true. No more M3 and now “NewBank”? Would make a great movie.
Coming Soon, a Backup Bank for the Treasury Market
February 28, 2006, Tuesday
By ERIC DASH (NYT); Business/Financial Desk
Late Edition - Final, Section C, Page 3, Column 1, 674 words
Here is evidence the Mogambu Guru at least has a factual basis to back up his assertions, thanks to LexusNexis (TM). Not sure where he gets the details, though (aside from the similarity of NewBank and Newspeak)…
———————————————————————
Copyright 2006 The New York Times Company
The New York Times
February 28, 2006 Tuesday
Late Edition - Final
SECTION: Section C; Column 1; Business/Financial Desk; Pg. 3
LENGTH: 646 words
Coming Soon, a Backup Bank for the Treasury Market
By ERIC DASH
A bank created to provide emergency backup for the Treasury market will be ready to operate in the next 18 months, a bond industry group is set to announce today.
The so-called NewBank exists largely on paper, but like a superhero on standby, it can spring into action to stabilize the government securities market if a legal or financial disaster strikes.
The bank is a result of a five-year effort by government and banking officials to draw up plans in the unlikely event that either J. P. Morgan Chase or the Bank of New York, the only existing clearing banks in the Treasury market, are suddenly unable to operate.
The two clearing banks play an obscure but crucial role in the government securities market, processing more than $1.9 trillion of very short-term trades each day between investors who want small but safe returns and dealers who want to finance securities positions. The industry’s dependence on just two big institutions has long concerned the Federal Reserve, which fears the fallout of a potential trading disruption.
”All of a sudden half of the securities would not be able to clear their overnight positions,” said Donald H. Layton, the former vice chairman of J. P. Morgan Chase who will lead the NewBank effort. ”This is a very low likelihood event but it is highly disruptive if it occurs.”
The terrorist attacks on Sept. 11, 2001, underscored just how vulnerable the clearing system was: Bank of New York’s trade-processing operations were troubled for days, causing problems across the banking system that took months to correct.
Shortly after, the Federal Reserve and the Securities and Exchange Commission began raising concerns about what would happen if a clearing bank’s activities were severely disrupted again.
Both J. P. Morgan and Bank of New York built backup facilities outside the New York metropolitan area to stay ahead of federal regulators and make sure their clearing operations could never be physically shut down. J. P. Morgan has upgraded an existing operation in Dallas; Bank of New York now has a clearing center in Florida.
But in a May 2002 report, the regulators also expressed fear that sudden and unforeseen legal problems or a credit downgrade would cause either bank to abandon the clearing business. Their proposal called for a quasi-public entity that could perform emergency clearing functions for the entire Treasury market. The government-led idea drew a cool reception from the banks.
In response, a working group of banking executives and government officials was formed by the Federal Reserve to examine other ways to address the problem. Their solution, a privately organized ‘’standby bank,” emerged in 2004. This dormant bank would leap into action only if a credit or legal crisis caused investors and dealers to withdraw their business from either of the two existing banks and if no other qualified buyer, like Bank of America or Citigroup, stepped forward to buy the clearing operations.
Regulators released formal plans for the NewBank in December. The Bond Market Association, an industry group, is expected to announce today that it will take responsibility for enacting them over the next 12 to 18 months.
The NewBank will have no physical location and no full-time employees. It will be funded with roughly $500 million from 24 banking industry shareholders so that, if needed, it could immediately have money available to begin clearing trades. It will be set up as a limited-purpose trust company under the New York state banking laws and will also be regulated by the Federal Reserve.
In a crisis, however, the NewBank would take over the legal position of the existing clearing bank and replace its top officers with a small group of designated executives from other institutions. The NewBank would then take over the troubled bank’s existing operations to process the trades.
URL: http://www.nytimes.com
LOAD-DATE: February 28, 2006
me simple man. me frightened by things i do not understand. me know that gold is valuable. me buy more gold until i understand.
hehehe…$8.7 trillion with three-quarters secured by trash appraisals.
The appraisal management company credo:
Are you going to play ball with us and give us the number the client wants?
How fast can you get it done?
How cheaply will you prostitute yourself for?
LMFAO…Gonna be one f*ck of a wipe-out
If I hear or read the name Gary Watts from a realtor one more time I think I’m gonna puke. I guess if they say it enough, they’ll believe it. It still makes me sick!!!!
Gary Watts = the 21st century’s answer to Charles Ponzi
Read about Price reduced from 2399,000 to 1900,000..
Gee Watts, if you reduced these homes, 15 percent will go away fast!!!!
At least this alarming statistic is self-correcting:
“A record 62 percent of commercial banks’ earning assets are mortgage-related.”
I bet that goes to 50 percent, real quickly.
Are you sure NewBank is not an AppleProduct? I thought they had a patent on TwoWord names joined together but still capitalized.
I’m not sure how a 50 year loan helps the situation. Interest rates on a longer duration loan will be higher and will offset a decent chunk of the lower amortization benefit.
Furthermore, we have already determined that at prevailing interest rates for 30 year loans, rents/rental cash flow do not justify current home prices. An “investor” who takes out a 50 year loan would need to generate a higher cap rate to justify the higher interest payment (imho, a hurdle above your loan rate is the most appropriate way to analyze an investment).
Longer duration loans are just gimmicks to help increase the earnings of banks/investors rather than help struggling homeowners.
It’s the negative amortization and interest only loans that fueled the current mania. Now that the mortgage curve has inverted, the market will correct itself.