The Frenzy, The Froth, Is Finished In California
The Press Enterprise reports from California. “An economic forum dubbed ‘The Coachella Valley: The Last Urban Frontier?’ Wednesday had less to do with settling an untamed landscape and more to do with harsh warnings for the desert’s not-so-distant future. The country and the Inland region — ‘ground zero’ as Christopher Thornberg, founder of Beacon Economics, called it — burst amid a housing crisis that has since stung financial institutions.”
“‘The frenzy, the froth, is finished here as well,’ said Thornberg, referring to the Coachella Valley’s housing market.”
“Ray Osborne, managing partner of New Home Marketing Network in Rancho Mirage, said the number of homes built in the desert far exceeded the number of homebuyers. ‘This time I think we really overshot demand,’ he said.”
“Home builders, including national, publicly held home builders, would need to lower their prices once and for all instead of repeatedly dropping prices in increments, a practice that makes potential buyers wary, he said.”
“‘The downturn will be over when the industry says it’s over,’ he said.”
The Desert Sun. “Brace yourselves for a long ride, Thornberg said of the housing market. ‘We are in turbulent times,’ he said.”
“Thornberg posing these reasons: Housing sales have fallen about 25 percent over the same period last year. Fifty percent of all first-lien mortgages in the Inland Empire have subprime characteristics. Home vacancy rates are up.”
“Consumers are fueling the economy and have tapped into home equity to bolster their spending, as only half of the mortgage draws were taken to reduce debt. He forecasted a slow drop in prices of up to 25 percent throughout 2008.”
“Osborne said the housing industry long has responded to market demand. ‘I think we overshot that demand and got oversupplied,’ he said, citing an inventory of detached homes across the valley that represent about a nine-month supply.”
“‘I’m a silver lining kind of guy,’ so the solution will be to stop putting projects in the pipeline for a while and work through the situation in the first nine months of 2008.”
“‘There’s a lot of pressure right now on local retailers, and local government,’ said Thornberg, and the local tourism economy may feel the pinch.”
From The Sun. “Is the recent subprime fallout a bump in the road or a full-blown recession for residents living here? That question is a hard nut to crack, said Greg Hunter, economics professor at Cal Poly Pomona.”
“But he does know one thing: Local residents, just like people across the nation, are starting to spend less money on consumer goods.”
“‘The housing bubble created a lot of wealth for people, and that created a lot of consumer spending,’ Hunter said. ‘People are pulling back on their spending.’”
The Orange County Register. “More bad news from William Lyon Homes from Newport Beach. Net loss of $60 million for the three months ended Sept. 30. Impairment losses on real estate assets of $59 million. Net new home orders for the three months decreased 33% to 337 homes, compared to 2006.”
“Cancellation rate for the three months ended September 30, 2007 was 42% vs. 39% for the three months ended September ‘06.”
“Resulting in this: ‘In November 2007, the Company took additional actions to reduce its overall cost structure and improve operating efficiencies by reducing its Company-wide headcount by approximately 134 positions, or 25%. Since the beginning of 2007, the Company-wide headcount has been reduced by approximately 226 positions, or 35%.’”
“First American LoanPerformance pegged California as the nation’s worst housing market in August with a 10.66% drop in home values. That beat out Nevada at minus 8.35%. Hawaii was the best at plus 16.93%.”
The Sacramento Bee. “Now that the housing boom of 1999 to 2006 has cooled and become downright frigid, it’s an appropriate time to consider what this boom has brought the city of Sacramento.”
“In a mere eight years, developers have constructed 15,000 homes in north Natomas. That means a collection of neighborhoods planned for development over 25 years has materialized in a third of the projected time.”
“A financing plan that was supposed to make Natomas self-sufficient has become a major bust. It depended too heavily on developer fees that were later reduced by officials. The city also overestimated the property taxes that would come from office development.”
“The boom is over. Sacramento now faces budget deficits that are partly due to the downturn of development revenues from Natomas. The response of some city leaders is to push for more Natomas growth.”
“No doubt, the continuing deflation of the housing bubble will be brutal for local governments. But the city must be wary of repeating the mistakes of the past. The wrong reaction would be to increase the city’s dependence on residential developments that generate an immediate influx of tax dollars and fees, but don’t pay for themselves over the long run.”
The Recordnet. “The auction block is coming to San Joaquin County next week in what will be watched as a test of whether the buzz of the auction stage might boost sales of some of the many foreclosed homes clogging the area residential market.”
“Hudson & Marshall, is staging a series of auctions throughout the state next week to try to sell about 600 foreclosed homes in cities throughout Northern California. That includes an auction night for 60 homes in Stockton.”
“‘There’s so much in the pipeline right now that any method, even a departure from the traditional, would be good if they sell,’ said Frank Orello, a real estate agent in Stockton.”
“Orello, who has a half-dozen of his foreclosure home listings in the auction, said the houses set for auction are there strictly as a call by the banks after the homes failed to sell after several months.”
“He expects to see bargain-hunters mostly.”
“The auctions are reserve auctions, with no minimum starting bids, but sellers have the right to accept or reject any bid. Orello said he doesn’t expect the banks to play hard ball and not accept top bids.”
“‘I think they really just want to dump these properties,’ he said.”
“Ben Balsbaugh, residential sales manager in Stockton, said he isn’t sure whether the auction is a desperation move. The banks are finally realizing they have to cut prices to sell, he said.”
“More than likely, a home will sell at less than the listing price, he said. ‘It certainly is a good thing,’ he said. ‘The real estate community needs all the excitement it can get.’”
“Hudson & Marshall spokeswoman Crystal Wright said the homes up for auction have been on the market for three to 12 months, so the sellers are highly motivated to move the properties.”
“Most sales are significant savings off the current list prices, she said, and it’s not unusual to see a property go for 20 percent below its listing price.”
The Mercury News. “Here’s an unexpected consequence of the subprime mortgage crisis: a West Nile virus season that was worse than it had to be.”
“Officials blame neglected swimming pools at foreclosed homes throughout California that attracted mosquitoes that carry the potentially fatal disease.”
“In Santa Clara County, about 200 pools, green and black with algae, were identified this summer through aerial surveillance, at least three times as many as in 2006, Kriss Costa, spokeswoman for the county’s vector control district.”
“‘A lot of people are just walking away from their houses,’ Costa said. ‘We were getting calls from the public saying, ‘My neighbors just left.’”
“Here’s an unexpected consequence of the subprime mortgage crisis: a West Nile virus season that was worse than it had to be.”
This is the sort of thing that happened in TX in the past bust. Literally entire blocks abandoned. You had to see it to believe it.
It could have been worse! It might have been Anapheles mosquitos. (It still might be the anapheles.)
I do remember reading about the Texas bulldozers.
Anapheles mosquitos are the ones that transmit malaria. BTW, a local public health official told me that malaria is endemic in Florida. And I know from Tucson history that it also was quite a problem during the 180ss.
Oops. I’ve got the Keyboard Fumbles today. I meant to say, “during the 1800s.”
We got it, Slim. No correction needed. Only those who bought homes in the last 3 years would’ve believed there was a second century Tucson.
Wow, how do you get malaria in a bone-dry desert climate such as Tucson’s?
Lots of mosquitos here in Phoenix, it has to be all the stupid water ponds we have.
I’ve heard tall tales of that last bust in Texas. Supposedly prices fell so much that, near the end, the wealthier types were buying homes with credit cards. Not sure if that was true, though.
Felice would have done so
A friend of mine bought 30 or 35 condos for like 10K apiece. She used them for section 8 housing and by 1995 or so, she was set for life.
My conservative uncle owned a strip joint and a law firm in austin.
Yeah, and Carleton thought it was such a great idea he sold it to millions this time around.
If you are talking about the 1980’s, I lived there in Houston. What once was a georgeous neighborhood turned into ghost town in less than 12 months. My husband and I lost our jobs and sold our home at for $0.65 on the dollar at the end of 1985. Original price was $65K (2100sq ft in Sugarland) I have such a bad feeling with this issue in California since relocating - but can not for the life of me understand why the prolonged and much anticipated price dropping has not begun in earnest.
Does anyone have a good flow chart on how this entire mess with MBS and CDO’s and everything else involved looks like starting with a dollar bill gets printed to be used to purchase a sub prime home loan…… I have no economic degree, but when I comes to following the money trail, I am lost, lost and really lost. In the 1980’s, it was financing our thirst for oil back then.
I don’t think that data really matters in this thing. It is trumped by businesses lying about future losses, and by government interventions, and the flighty finger of remaining optimism.
That’s true…during the Denver 1988’s bust I was buying 2 bdrm condos for $15,000.
I would like to buy a house in California for $250K, 3 bedroom, 2 bath, about 1,600 sq. feet, nice ample lot. Only then I will move to CA. Right now I am happy with my 2,350 sq. feet, 4 bedrooms, 2 1/2 baths, corner lot, build in 1999’s for 155K, everything including options with no closing cost. So what do you say, CA people ? Can you spare a brother “A House” ?
Still waiting for the huge price drop and return to affordable price levels in housing. The big difference is that the question is “when” not “if” because everybody seem to agree that the crash has started.
Good luck with that if BB’s off-the-cuff suggestion for a “temporary” increase in GSE limits to $1m goes into effect. I personally don’t much care — I will rent the rest of my life at affordable levels if we keep building out the housing stock beyond 17m vacant units thanks to Fed punchbowl-respiking operations.
Couldn’t agree more Prof. Bear. Obviously, in this day and age, more than ever, in this country, you have to lok out for you and your family. Maybe some friends. Because obviously the goobermint isn’t going to do it for you.
I had a friend looking out for me during the Y2K fiasco. She had hoarded up dozens of cans of food and cases of water, “just in case”. She told me quietly one day in Nov’99, “there’s a place for you in our home, just in case.”
I was deeply moved. I had never felt so much love.
Nevermind that her “just in case” scenario involved the spontaneous combustion of all crops and the instantaneous evaporation of all water at midnight on January 1, 2000.
It’s the thought that counts…
Nevermind that her “just in case” scenario involved the spontaneous combustion of all crops and the instantaneous evaporation of all water at midnight on January 1, 2000.
—————————-
LOL!!!
There were so many scared people in those days preceeding Y2K. It was crazy! Software workers made tons of money, too.
LOL! Check out the used car lot in the next 12 months.
Lots of Realtors BMW will be hitting the swelling inventory. That how I got mine back in 1991.
What a sweet deak i got.. and only 10K miles…
Half of orginal list…
never did, never will
can’t even make healthcare FREE-er
the people paying for healthcare are getting 25% a year increases…I dont even go to the doc unless a limb is sticking out.
dentist…however, I see him a couple times a year.
“Good luck with that if BB’s off-the-cuff suggestion for a “temporary” increase in GSE limits to $1m goes into effect.”
I don’t think it’ll help.
Who in the hell is going to QUALIFY for these $1m loans? Aren’t they raising lending standards? Are these loans going to be subprime, no-money down liar loans? I would think folks that make enough $$ to qualify to borrow $1m to buy a home under tighter standards have seen enough in the media to think twice before buying into this obvious downtrend…
DOC
The raising of GSE limits may help but just a little. It will be affordability that will drive the market going forward. Unless lending standards get loose again, raising loan limits will be little help.
I agree here. Conforming loans still require not more than 2.8 x income, right? With 20% downpayment if you don’t want to pay mortgage insurance (which will be costing more and more). Hard to see how this will make much of a dent in the big picture.
You know the Groundhog Day house is for sale? They’ve marked it down. Started at 599, down to around 549 now.
Exactly! There are more reasons than the interest rate premium on a “jumbo” loan as to WHY people aren’t getting approved for loans. Ben Bernanke is an IDIOT!
“Who in the hell is going to QUALIFY for these $1m loans?”
I am thinking perhaps hedge funds and drug lords — basically people with big pools of money they need to park in inflation hedges while the Fed takes the value of the dollar down to unprecedented lows?
$/sq. ft. price in LA county is already down, year over year…it’s only a 1.25% drop, but it’s a start.
That’s enough to kill the FB in hoardes.
In 93552, it’s down 25% YOY by sq.ft. The fire burns inward from the fringes.
Oh goodie. Gobment loans to 29% LTV.
I think allowing the GSE’s to loan to a million will accelerate the market downfall (as people realize how many are locked out).
But also don’t forget, the mortgage insurers are all looking at a downgrade. Its not the people with 20% down that drove this market crazy.
This will happen folks. Its just a question of when. If it had been implemented in early 2007, it would have respiked the market. Now look at how many people qualify for a $1M GSE loan.
…tumbleweed drifts buy….
Ah! I found someone in the distance who qualifies!
Just look at the fraction of FB’s with conforming size loans who cannot refi.
Got popcorn?
Neil
If Fannie and Freddie are going to buy $1,000,000 loans then it is likely that there would be standards attached such as a 20% down payment and housing payments/income ratios being less than 28% and total debt service to income ratios being less than 35%. This is how it should be. I would imagine this would then become the new jumbo standard that everyone else would follow. The problem is that home prices would then be tied back to incomes and given that there isn’t enough income to qualify at current prices in most jumbo home markets, it is likely to accelerate the decline.
Who is going to originate a jumbo loan that doesn’t meet Fannie Mae standards when you can then package and sell Fannie Mae jumbo loans so easily?
What makes you think that they are actualy going to make people qualify for the bail out loans or the future gov. backed loans for amounts up to 1 million . These are going to be low down loans and don’t think they won’t be easy qualifying ,low down loans . Absurd for amounts up to a million . BB said the lending would only be for short term and that smells bail out . I say no no no no .
Could be very easy qualification. Those with maybe a few payments late. Or retirees with income under certain amounts. Or say teachers, police, etc. The real problem would be the rates I’d think. They’d have to be something very low - maybe 2% or 3%?
Whatever the criteria I’d bet there will be a real uproar from the majority of mortgage holders who don’t get something like the same deal.
Personally, I don’t expect this to happen. But Fannie and Freddie are not going to indiscriminately buy jumbo loans under any terms just because Bernanke and the Congress want them to. Fannie and Freddie want to be able to grow again. The growth in the conforming loan market slowed as a result of the rise in all the non-conforming loans, which they don’t buy. If Fannie and Freddie are able to buy jumbo loans they will want to cherry pick from the good jumbos out there or from new originations that meet their criteria. If a loan doesn’t, then it will likely require insurance or some sort of government guarantee. Obviously, the mortgage insurers may not be around to insure. Our Government’s ability to offer unlimited guarantees is somewhat limited if you haven’t noticed the stress that the decline in the dollar is having on our foreign creditors. So Fannie would buy under reasonable terms. The price of California real estate is still NOT reasonably priced. In my opinion, it is likely that all the other lenders would follow Fannie Mae guidelines for jumbos so that they could originate and package and sell their loans. This would further undermine the market for non-conforming loans. So the whole mortgage market under, say, $1,000,000 would be forced to Fannie Mae guidelines. Remember, the agencies have guidelines. They won’t just buy a 100% LTV, stated income, subprime loan. Guidelines are bad for home prices because they tie mortgage availability to income. So prices would need to adjust to income qualifications. That would be the unintended consequence of Bernanke’s plan. He is not saying the government should just buy any loan Citibank wants to get rid of. He is saying that the $417,000 limit should be raised. Again, no bank would want to make a non-conforming jumbo loan if they could make a conforming jumbo loan. You’re assuming Congress would allow the agencies to buy any loan. I doubt that would happen.
Of course they would pass on junk and easy qualify loans to Fannie and Freddie .They want to open up the tight money market and this is the way to do it as well as pass on some old money junk loans to a different bagholder .
–
“Ray Osborne, managing partner of New Home Marketing Network in Rancho Mirage, said the number of homes built in the desert far exceeded the number of homebuyers. ‘This time I think we really overshot demand,’ he said.”
Come on, Ray, ‘we’ overshoot demand in every boom. It is the nature of the beast. This time the beast, a pig, grew to a weight that was fatal. The pig is dying.
Jas
Carnitas for everyone!
I live in CV. In about 2004 there were barely 200 homes available and there are now over 9000, but the sellers are being stubborn and the prices are not dropping quick enough. Right now the thinking is the Canadians are going to save everyone because of the devalued dollars, they will all buy here. Just because our money is becoming worthless doesn’t mean they are lemmings.
That makes all sorts of sense. Because people around the world are losing confidence in our economic security, they will all start buying property on our land. Why? Well because, because, because they can, that’s why!
Just put lipstick on it. Should be fine.
“More than likely, a home will sell at less than the listing price, he said. ‘It certainly is a good thing,’ he said. ‘The real estate community needs all the excitement it can get.’”
Yes, it’s a good thing. I agree with a REIC person after a long time.
Bubble sitters, meet your new friends.
We know better than that.
But if our new buddy wants to take a rafter-ride in the ol’ basement, I’ll be happy to kick the stool out from underneath him…
Let me get this straight - you’re gonna kick his stool out with a rafter? Wow! That might be as brutal as my Joshua tree treatment.
“The auctions are reserve auctions, with no minimum starting bids, but sellers have the right to accept or reject any bid. Orello said he doesn’t expect the banks to play hard ball and not accept top bids.”
What a complete waste of time.
Not a waste of time at all, Imma go and have a GREAT time. I just know that the winning bidders will get their rejections in the mail, those there will not know that the banks reject the bids. This auction site is 5 minutes from my home, outta be a great load of fun.
Are they serving sandwiches and beer? Hope the weather is good. Sign me up.
“‘The real estate community needs all the excitement it can get.’”
How about all the mentally distraught/psychotic FB’s you railroaded standing on your front lawn–uzi in one hand and joshua tree in the other…that exciting enough for ya? Huh, Dumbass?
DOC
“The boom is over. Sacramento now faces budget deficits that are partly due to the downturn of development revenues from Natomas. The response of some city leaders is to push for more Natomas growth.”
Bail out of Natomas, now! The only thing that can happen is greater taxes. Incompetent city leaders that allowed unchecked development are not in any residents interest. Cutting impact fees, I would have liked to have been on the receiving end of that bribe.
Are you familiar with the area? They literally took the worst of the flood plan just south of the airport and slapped up mcMansion after mcMansion right next to each other. You are staring into other people’s bathrooms and even the postage size front lawns are kept green by an embarassment of water waste.
The major streets dividing the different developments are so wide, the lights run out before you can run across. The good news is that are wide enough to support lightrail if only the people of Sac were smart enough.
You got that right, Gwynster! I was an early homebuyer in Natomas Park in Nov. 2000. There was very little out there at the time. But the building was relentless. By Dec. 2004, I had seen enough. It’s not that the area is so bad, but by then the bubble was obvious. The aspect of lots being so close together and being able to see through neighbor’s windows was not enjoyable. And I never felt comfortable living under an HOA. Seemed like they had me by the short hairs if they wanted to.
The mayor of Sacramento lives in Natomas. She was indignant last year at the idea that Natomas residents should be required to pay flood insurance premiums. This was after Katrina. Sigh.
http://www.sacbee.com/103/story/479981.html
Im getting grandma out of the muni’s.
Anyone with an ARM reseting soon should be tagged with a GPS tracking device. That way when they walk away in the cover of darkness they can still be traced via sattelites and brought back to clean the house and pool .
Since most of them are also RE agents, they will probably be happy to take a job as a maid or pool boy for the bank
“Ray Osborne, managing partner of New Home Marketing Network in Rancho Mirage, said the number of homes built in the desert far exceeded the number of homebuyers. ‘This time I think we really overshot demand,’ he said.”
Bubble era demand was a Mirage!
The entire building industry is nothing but a bunch of super wealthy, irresponsible speculators who have no control over themselves.. this time they jeopardized the entire economy and it looks like they helped cause a recession.
hey Hillary, only you can protect us from the builders. Nationalize the building industry .. get a special committee working on it, asap.
Later, perhaps in your 2nd administration, you can go for the entire banking system. By then people will be hurting so badly they will surely support you.
Former poster, longtime lurker here (you can’t post from a blackberry, unfortunately!), but wanted to post since I’ve left my old job and am now free to invest in (read: short) stocks related to the housing bubble.
It seems to me that the easy names like New Century, MTG, Radian, IMB, CFC, BKUNA, DSL and WM are either gone or are trading at huge discounts to book value. While some of these will certainly go to zero, I think the easy money has been made and it’s better to go after the stuff that isn’t considered distressed (yet).
What names are you looking at to short now? Are there other banks that had a ton of Alt-A or were aggressive in shoe-horning people into jumbo loans that are going to blow up just slightly after the subprime implosion? Any thoughts from the (reformed) mortgage brokers that post here would be MUCH appreciated.
Also: are we finally ready to start shorting stocks in Canada and the UK? TD is still trading at over 2x book value, but did the Canadia market have the excesses of fraud and very high LTV+debt/income that we had here in the US? Has the market really cracked yet in Toronto, Vancouver, Calgary, etc?
How about the UK? I was told that outside of London things are starting to go down but that market already did a major head-fake back in 2005. Also the only bank stock there that I know of that I could borrow would be Barclay’s which is already being whacked by its US subprime exposure.
I feel like this is the biggest, most obvious thing in my life since the telecom bubble and I’m p!ssed that I haven’t been able to make any $$ on it yet!
Thanks,
Lauderdalian
Why did you wait this long? With talks of bailouts, it may be risky to short now. You should have done it two years back!
I disagree, this is just the beginning.
I have no idea where the market is going tomorrow or next week, but I do not believe that the financial problems are more than 10% corrected. In other words more bad news to come!
It does not matter if you shorted BAC at $52 or $42, it is still the largest owner of 2nd mortgages in the US. It still has a lot of CDOs marked level 3. Washington Mutual has so many problems that the litigation may cost as much as Fannie and Freddie forcing WaMu to eat their sold loans.
There are 5 major banks in the US, at least one is going BK. The other 4 will be walking wounded. The US does not have enough moneys to bail out the financial institutions. There are $415 Trillion in derivatives backed by less than $4T.
Some of these contracts are similar to out of the money “puts” sold for a teeny and now worth $20. There is no moneys to back up these losses.
You can have a perfect hedge on, but if the counter party cannot pay up…you’re toast. Who is guaranteeing the transaction, the Clearing Corp? Not a chance. These are unguaranteed risks, based on a faulty business model.
Some player got out of his bank stocks tonight after the close, I was offered a lot, 1.5pts below tonights settlement price. I declined.
You, my friend, seem like a guy who is truly on the ball…
Hoz, I wish I could give you some of my money to manage….
There are a lot of excellent funds and advisers in the WORLD! Not just in the U S of A. CLSA in Asia, Sprott in Canada, just to name a few. The biggest difference - they are not greedy for Wall Street salaries. 8 hours of work will find you the investment strategy that fits your personality. From an investment viewpoint the US is the now the riskiest country. It is as bad as Russia in 1997, Bolivia in 1984, it is third world economics - at its worst.
Cass my love,
If I were to lose moneys like I did decades ago and the moneys were yours, I would probably kill myself. Losing my own moneys is bad enough, losing your hard earned moneys is an unacceptable risk. The fear of losing would make me a lousy investor.
As for me, I am now off to the infamous “Dew Drop Inn” for a few (taking the 4-wheeler cuz of the weather) talk to some friends, shoot some billiards and snooker, and watch some football. Lars is wonderful - always cheers me up, “Hey, I forgot m’wallet, put it on the tab.” (I wonder if he has ever paid? I’ll ask him tonight.)
Hoz,
Although I am sure there are numerous “Dew Drop Inns,” are you from places near Marinette WI?
Losing my own moneys is bad enough, losing your hard earned moneys is an unacceptable risk.
Hoz, I see what you are saying. Someone just approached me to invest a little hard earned money in agriculture. I said, of course, no way, it’s too risky an investment.
I am dumb-founded that you just outed Sprott.
hoz:
please keep telling me, what is so.
my thanks in advance.
Amen brother Hoz. This is just the tip. The comment about 1 major bank going kaput and the other 4 becoming walking wounded is very telling.
I think it was you who mentioned yesterday that this iceberg is one reason they keep letting the news and losses out slowly. Wasn’t it you?
Could you imagine a WaMu, let alone a SheetyGroup saying it was here today, gone tomorrow. Talk about panic. I would hasten to say that if Sheety or BofA ever declared outright that they are toast, the DJIA would lose AT LEAST 33%. Forget all those stop measures. Not only would you have a serious selloff for about a month, but everyone and his/her brother would be pulling serious casg out of every liquid asset they had. It would make eBay look like a piker’s gargage sale.
Talk about freezing up the entire market.
Got cash (in the mattress)?
“Could you imagine a WaMu, let alone a SheetyGroup saying it was here today, gone tomorrow. Talk about panic. I would hasten to say that if Sheety or BofA ever declared outright that they are toast, the DJIA would lose AT LEAST 33%. ”
Amen. If there’s one extremely pervasive realization I have come to from research and lurking here with you all is this…
The number one rule of the money grinders running the USA’s financial show and their corp buddies is NEVER, EVER, STARTLE THE HERD.
They’ll spin, fudge stats, lie, forstall and do pretty much anything necessary to keep fleecing–while things slowly go down the crapper…
DOC
Got dough?
Actually, that’s very good advice. I read a book a while back, about surviving holocausts like tsunamis, weather related incidents.
The author suggested that everyone “should have a certain amount of cash in a safe place at home”. The idea is that in the event of some kind of societal breakdown, the ATM machines would be disabled. You wouldn’t have access to cash. If there is a run on the bank, the same thing might happen: no dough.
It’s excellent advice: have about $100.00 in emergency money. It should be in small bills, like $1.00’s, and some coins in change.
You just never know…..
I had 5$ in my pocket after the Loma Prieta quake in Sunnyvale, CA, traveling on business - don’t want to be caught like that ever again. (Short version: I had deposited $3000 in travel advance travelers checks that had accumulated before leaving home. Didn’t keep any because I hadn’t used the pesky things.) Was waiting to drive to an early dinner and an ATM with associates when the quake hit.
Luckily, our new Motel 6 didn’t even loose power, and the bar around the corner didn’t gouge me for food. We didn’t want to drive anywhere after because of all the downed power lines in the area. No ATMs working anyway. Not much phone service early on. Means no credit card confirmations either. The IHOP across the road did lose power. They had to chain the doors shut because the 24 hr restaurant had never closed before.
My wife doesn’t really understand the whole no ATM idea, but the recent CA wild fires and stories of people driving out with what was in their pockets thankfully made her more amenable to the idea of emergency cash reserves.
I was at a major money center bank in the mid - late 80’s, at that time BAC was struggling with a glut of bad [primarily agriculture] loans. An economist who was providing a conditions forecast was asked about BAC. “They’re gone” he said, “they will not survive”.
Isn’t that when it reorganized? Yes, the crowd roared.
“BankAmerica was dealt huge losses in 1986 and 1987 by the placement of a series of bad loans in the Third World, particularly in Latin America. The company fired its CEO, Sam Armacost. Though Armacost blamed the problems on his predecessor, A.W. (Tom) Clausen, Clausen was appointed to replace Armacost. The losses resulted in a huge decline of BankAmerica stock, making it vulnerable to a hostile takeover. First Interstate Bancorp of Los Angeles (which had originated from banks once owned by BankAmerica), launched such a bid in the fall of 1986, although BankAmerica rebuffed it, mostly by selling its FinanceAmerica subsidiary to Chrysler, and by selling the brokerage firm Charles Schwab and Co. back to Mr. Schwab.”
Wikipedia
A completely different company than 1985. And the South American loans were a few Billions.
I remember looking at the stock and it was $5. And you could have bought the entire company for something like $800 million. It was at that time that the Japanese RE market was on fire, and B of A sold what I think was their regional manager’s home in Tokyo for over $200 million.
I looked at that and thought, “what else have they got that makes the company worth more than $800 million?”
Should have mortgaged the house and bought the stock.
HOZ:
Who are the 4 major banks? Is CFC one of them? If so, it will probably be the one that fails.
My guess: Citigroup, Bank of America, JP Morgan Chase, Wells Fargo. Hmm, where is WaMu. CFC is toast but its failure would not be regarded as undermining our Financial System. It’s a newfangled sort of machine that we did without entirely, until quite recently.
Those are my bets, as well.
I’d heard about Wells Fargo back in August, that they were having some serious problems related to their mortgage loans.
But then all went quiet! They submerged.
Bank of America is another one that’s leaked out recently. I read that they are in dire straits right now.
C’mon banks. You can’t hide from your investors forever.
“My guess: Citigroup, Bank of America, JP Morgan Chase, Wells Fargo. Hmm, where is WaMu.”
WaMu is a “trust”… a savings and loan, not a bank.
Hi Hoz,
I look foward to the case of beer I will buy you (hubby thinks I’ll lose).
CDOs marked level 3…
This is getting (I’m afraid) scarey.
Either way, looking forward to meeting you!
OH, I’ll take a case of de spotted caaaaaaaaw
Best to you, my friend,
Leigh
–
My time sequence to accumulate shorts was: Hopebuilders, Mortgage Lenders, Fraudentials, and, most recently, Techs. Techs are still fat. The goat must be fattened before the kill (for a feast, of course).
I plan to throw a Deflation party, some time in 2008, with Indian-style goat curry. Someone is fattening that goat.
Jas
I like shorting tech too. Got the taste for it in 2000 and beyond. It looks to me like you might have a short term bottom there but come January . . .
–
Come January would be a massacre in the tech land. There would be fewer and fewer recession deniers and recessions are particularly bad for tech Scams. That techs are growth Scams is a joke; they are more cyclical than some of the traditional cyclicals.
During the 2008-10 depression I expect my current holdings of tech Jan’10 puts to be 20X. Today was a big start in that direction.
Jas
If/when the economy tanks (consumer spending contraction led recession), maybe BNI (Burlington Northern Santa Fe)?
They will most likely be transporting less and less cargo containers from LA/Long Beach harbor out to the rest of the country.
I’d look at the fallout or ancillary players who still are hanging up there. Upscale retailers. Cruise lines. Maybe Schwab.
I agree that there is going to be a consumer discretionary derivative play, but I’m certain that there are a ton of levered entities (i.e. financials) that have yet to blow up. I’ll let you know if I put on any positions, but would love to hear from the guys in the mortgage business if they think there are any more shoes to drop.
I know I’m late for the easy money, but for the past 2 yrs I was precluded from making investments outside the telecom sector due to my job. I made more money at my job than I would have shorting NFI in my PA, so I think it was still a decent trade.
You might think about commercial reits too. I’ve heard some fairly smart people who said that the extent of their correction will be return on capital, not return of capital I don’t know. I saw that sector trashed pretty severely in the 90s also.
You could also follow Chanos and look at Moody’s.
I’m thinking that sooner or later consumer goods and tech is going to get hit. Some already is, but most isn’t - yet. I’m short AAPL, GOOG, WSM, DAI, TPX, HPQ, HOFT, and also still short some homebuilders. Biggie is Capital One - COF (yesterday was awesome).
this is so,
its in this thread.
Re: This is so
The economy is slowing, confirmation of fed chief is a function of
testing the downdraft on eonomic expansion in the Main stream media.
(MSM).
I heard today for the first time that the US is BI-POLAR, the rest of
the world is expanding and we are contracting? Why…….credit
bubble.
Bubble boy is coming back did you see the 25% move in QCLN?
astounding, it pulled back late in the day though.
Tech took one on the chin as a function of the retailers reporting
pathetic numbers. Why? As the consumer pulls back, so goes spending
on gadgetry.
We are witnessing sector rotation and the market is confused as no
clear trends exist. Is this so? Tech was the safe haven and got
blasted… safety in the markets is absolute bullshit.
there is
no safety. that is so.
get ready, focus on what you want and need….the entry points are
approaching. and quickly.
“the rest of
the world is expanding and we are contracting? ”
Maybe that’s because they’ll contract later. No matter how much US companies and politicians try to hide the truth, in the end, and sooner rather than later, they have to give it up. We have an open system that makes it damn hard, even for a President, to keep secrets from stakeholders. They can delay for a while, they can hem and haw, and they can lie. But when the prying eye of the public begins to demand to know, the gig is up. U-P up.
If its gonna be the precious,
is it pb.au.ag?
“Officials blame neglected swimming pools at foreclosed homes throughout California that attracted mosquitoes that carry the potentially fatal disease.”
Lenders who hold this REO should be forced to pay medical expenses for anyone infected with West Nile virus.
http://www.websitetoolbox.com/tool/post/sdcia/vpost?id=2279488
Anybody see this? It is about Ben Bernake testifying before congress. It’s funny and sickening at the same time. Apparently, a congress woman from Orange County complained to BB about the spiraling home prices and demanded that BB do something about it. Of course, this woman is currently vested in housing prices right now.
The original story does not have a link but it was posted by Robert Campbell, who is rather reliable so I posted it here.
What was that comment about using creative financing to buy a house without having to get a mortgage?
“People are screwed.”
-Big V
Planning to drive from Phoenix to San Fran over Christmas, up 5 through the IE. Maybe I should mount a 50 cal to the roof rack and get bulletproof tires for the drive! I imagine I’ll see a lot of deparation in the “Empire” if 50% of first loans are subprime - I’m already dreading the “do you have a few extra dollars” I”m sure to hear at every gas station ($5 per gallon I’m sure) on the way up.
Fortunately we’re taking the PCH back, maybe it will be a little less “Road Warrior” there.
“up 5 through the IE”
I don’t think that the 5 will get you through the Inland Empire…if you want to do that, take 15 (the “Las Vegas Freeway”), or 10, or 40, or take the old route 66 (National Trails Highway).
Interstate 5 *will* give you good views of the recently overbuilt Santa Clarita valley, though, as well as the central valley (the other ground zero).
Instead of taking the 5 all the way up to the 580, take the 152 to the 101, and drive through Gilroy…and stop off at the Casa De Fruta for me and pick up some nuts.
And ask the people in Gilroy why they would pay so much for a house in GILROY.
Definitely. Since you’ll already be properly geared, why stop with just the IE? Take the 99 straight up through the Central Valley and check out the overbuilding and housing carnage through Bakersfield, Visalia, Fresno, and Merced on your way too.
Mind the fog though.
http://tinyurl.com/ytgc9m
“take the 152 to the 101, and drive through Gilroy”
Exactly the route I take to my daughter’s school in Palo Alto - beautiful country!
Quote:
“And ask the people in Gilroy why they would pay so much for a house in GILROY.”
Because they are GARLIC lovers. They eat garlic for breakfast, lunch, dinner, and midnight snack. They also carry garlic in their person all the time to prevent the vampire from approaching them. GILROY: The GARLIC concentration camp of 2007’s.
Fortunately we’re taking the PCH back, maybe it will be a little less “Road Warrior” there.
Less Road Warrior on PCH? That drive is like the “Road to Hana”, awesome for the first hour and hell for the next 12.
Ha ha…spot on. Whenever relatives fly in to visit and ask me to take them on that drive I cringe.
Heh. I got horribly carsick on the Road to Hana. And I was the one driving.
“Planning to drive from Phoenix to San Fran over Christmas, up 5 through the IE. Maybe I should mount a 50 cal to the roof rack and get bulletproof tires for the drive! I imagine I’ll see a lot of deparation in the “Empire” if 50% of first loans are subprime - I’m already dreading the “do you have a few extra dollars”
The way to get a real ground-level taste of the nastiest part of the IE is to simply take the 10 then divert along the 60(indio fwy) going thru riverside cty westbound, hopefully going straight past banning-a hellhole-, then continue on westbound passing thru Moreno valley, exit any main street goin south to get gas and yes, plenty of IE nasties abound. Keep driving as the 60 merges with the 215 and the real fun begins as you go thru riverside city . The portion from the 215 /91 intersection northword to the 10 fwy , which comprises dwtn riverside/colton, is a classic IE hellhole . Don’t stop in Colton!
If you just keep going straight west on the I-10 to San bernardino Metro region you pass the nastiest IE wasted portion which is Redlands, rialto, fontucky, SBerdoo City metro, upland. All are extemely derelect slumvilles abounding with gangs,illegals, Heavy truck traffic, wasted polluted industrial acreage, crapped-out seedy shopping strips, ect. When you get to Rancho Cucamonga and Ontario it improves a bit but not by much. As a matter of fact the 10 fwy going thru IE/LA basin is one of the worst fwys in Scal due to heavly truck traffic, lots of gangland areas , and extremely heavy comuter traffic going into and out of LA coastal jobs region to and from the SG Valley/IE.
Avoid the 10 altogether and use the 60, then divert north on the 57 all way to the 210, then west on 210(pasadena fwy) to the foothill portion(where 210/134 splits). Take 210 foothill fwy all way to where it merges with the 5 fwy. This will avoid the heavily populated, worst traffic parts of LA inner regions while going thru mostly safe clean cities. Of course you miss all the beautiful sights of LA dwtn/hollywood/westside /OC/the fabulous coast but my path guarantees relative safety and bypassing the worst LA traffic clogs. That is if you are in a hurry to bypass LA altogether!
If you really want to miss LA, take the 10 to the 15 to SR 138 through Palmdale (lots of nice Exhibits A to the housing collapse there) and on to meet up with the 5 at Lebec.
It is literally one mile longer than the standard route via I-10, and you avoid the 95% probability that at least one LA idiot will have wrecked his car and backed up traffic for an hour or two.
Chula Vista California is having a major budget crisis and is removing city services. One fire station got spared mostly due to the recent fires. The Fire Chief resigned today:
http://weblog.signonsandiego.com/news/breaking/2007/11/chula_vista_wont_close_fire_st.html
Obviously this is a budget crisis because of property taxes:
http://www.signonsandiego.com/news/metro/20071011-1721-bn11cvbudget.html
The whack from lower property taxes hasn’t even kicked in yet, and probably won’t for another year or so. The problems Calif. municipalities are facing now are due to lower sales tax collections and lower permit charges.
cool- the aparachnics always threaten w fire and police
how about councilors and other puffy sht
elementary school guidance councilors
But like many, including Thornberg, Reimers said the Coachella Valley’s future in the long term looks bright. The desert continues to evolve into a year-round economy not entirely dependent on shifts in tourists, he said.
See Palmdale/Lancaster for the actual future that happens when you overbuild this badly. The neighborhoods fill with Section 8 and other detritus, and they never, ever recover from that.
so the solution will be to stop putting projects in the pipeline for a while and work through the situation in the first nine months of 2008.
A builder that stops building goes out of business, unless I’m missing something obvious.
The housing bubble created a lot of wealth for people
As most of us surmised all along, it created a lot of debt for people, but not so much wealth as the illusion of wealth.
wealth is created by the physical work of transforming natural resources and intermediate goods into a usable consumer good.
Home valuations are not wealth.
Actually, the worst thing about bubbles is that they create the illusion of prosperity. Based on this illusion of prosperity and the false belief that tomorrow will be just as bright and sunny as today seems, people make all sorts of ill-advised decisions.
“Most sales are significant savings off the current list prices, she said, and it’s not unusual to see a property go for 20 percent below its listing price.”
20 PERCENT?
20 PERCENT?
20 PERCENT?
Is that a joke? Those houses’ list prices are four to five times what they should be. At an auction, I wouldn’t pay a penny over 20 percent of the list price. Or I would just wait. Make the banks suffer as more cities enact fines for vacant homes, like Manteca has…Then get it for 20 percent of the current list price or even less…
no you really must mean 20 % of the listing price
“Make the banks suffer as more cities enact fines for vacant homes, like Manteca has…”
OK, I take back my wondering if CA cities would really play hardball over more wishful thinking. I hadn’t factored in their budget crises…
Most sales are significant savings off the current list prices, she said, and it’s not unusual to see a property go for 20 percent below its listing price.
That sounds like a good deal until you consider that it’s probably still 30% overvalued or more at that price.
not to mention the 5% sir charge the buyer must pay to the auction house! That shit made me LOL, all the RE brokers there waiting for their 6% commissions and the aution hous waiting for their 5%!!! HAHAHAHAH, F*&k me running!!!!
Going to this “auction” should be very entertaining.
An i.e.d. in every other newish house, in the i.e.
(inland empire defaults)
“Thornberg posing these reasons: Housing sales have fallen about 25 percent over the same period last year. Fifty percent of all first-lien mortgages in the Inland Empire have subprime characteristics. Home vacancy rates are up.”
Hey everyone!
Long time reader (2+ years) and infrequent poster here. I have been tracking sections of La Verne CA for the entire time since my wife and I wanted to trade up to a bigger house there in 2005. We sold our small starter home in December 2006 and have been watching ever since.
A proprty identical to ours sold a month ago for $50,000 less than ours. Today I saw another identical home for sale at $72,000 less than our final sales price. So things in the “nicer” areas of the IE are finally moving in the right direction. using our home as an example the price has tumbled 15.6%.
In terms of the move up homes. We wanted to purchase a nice home in a gated community at $750,000. Today there are a few homes that are identical to the one we liked for sale at $649,000. A nice depreciation of 8.6%.
So, slowly but surely we are gonna get there. Hopefully the ARM resets will do their thing and help these price trends accelerate…
A nice depreciation of 8.6%.
So… assuming a roughly 150% price increase from pre-bubble (2000-ish) to price peak in SoCal (early 2006), we’ve only got 52.4% more to go (not inflation adjusted).
Amen. The IE pain train has just started rollin’. Have you noticed the unseasonal inventory spike of the last week. All time highs I believe. By January those folks out there are going to think Armageddon has begun. And as for anyone considering buying any house in the IE for over 500K, this Joshua tree’s for you! I don’t care if the house sits on top of a hill with a 360-degree view of the most disgusting landscape imaginable, it’s still over-priced.
And one more thing - If you sell a starter home and are looking to “move up”, you need to leave the IE. Moving up means getting the heck out of that hell-hole.
And one more thing……..just kidding. I think I pummeled your sack hard enough.
Yea, we’re looking in La Verne/San Dimas.
Prices are just beginning to come down.
Be patient
” have been tracking sections of La Verne CA for the entire time since my wife and I wanted to trade up to a bigger house there in 2005. ”
Those prices even at discounted $649,000 are quite high for La Verne, which is dropping rapidly YOY % wise. Must be for the parts up in the mountain areas north of the 210/baseline. I only know the lower half of Laverne below foothill blvd all way to arrow hwy which looks a bit ragged in parts. Went through the old historical residential section of the city once and saw signs of residential decline common in older LA burgs built before WWII(LaVerne is in LA County). Rule of thumb: the lower end section of La Verne bordering on Pomona gets the rot from that Crapburb.
The upper hill section is probably OK and in line with current Claremont prices for nice hill neighborhoods . I think that 2008 prices will fall another 5-10% in the nicer San Gabriel foothill communitys-La Verne is not a SGValley City but has similar characteristics:, a ragged lower flatlands and a hi-end mountain upper half.
Sold our house in ‘06. (No $$ given).
Pardon the personal question, are you renting now? (None of my business).
We wanted to purchase a nice home in a gated community at $750,000.
Pardon me…you sold and then…
I’m not the brightest crayon in the box, so please help me with this one…
“Hopefully the ARM resets will do their thing and help these price trends accelerate… ”
Errr?
As you may guess, I’m not living in California, however I am on planet…
Dang,
Leigh
We wanted to purchase a nice home in a gated community at $750,000. Today there are a few homes that are identical to the one we liked for sale at $649,000. A nice depreciation of 8.6%.
$649K is 86.5% of $750K, so it’s a depreciation of 13.5%.
“He expects to see bargain-hunters mostly.”
I expect to see falling-knife-catchers mostly at today’s auctions, as any real “bargain-hunter” knows that prices are falling and still too damned high to make a profit by renting them out.
“The auctions are reserve auctions, with no minimum starting bids, but sellers have the right to accept or reject any bid. Orello said he doesn’t expect the banks to play hard ball and not accept top bids.”
If the banks are really willing to accept *any* top bid, then why have a reserve?
“‘I think they really just want to dump these properties,’ he said.”
When I see one of two things, I’ll know this statement is true:
1) no reserve price, secret or otherwise
2) a published reserve price that is at least 50-70% off peak bubble price
anyone have the BULL_DOZED report
forget foreclosure and arson
we need bulldozed home reports
Game is definitely over. The MSM is finally understanding what is happening. Housing deflation, a falling dollar and consumer inflation are all around the corner. The next few years should be quite interesting.
we’re about halfway thru a 17 year super cycle that started in 2001. Higher inflation is here to stay for awhile. The last cycle (one of low inflation and high growth) started in 1983 and ended in 2000. The last previous cycle similar to this one ended in 1982 and started in the 60s.
The jobs they think will save the CV are a joke. Very few professional jobs and tons of service, low pay jobs that won’t support the crazy housing prices. To add insult to injury, the pay rates are well below even Riverside, let alone LA. There is a larger year round economy here, but the bulk of the service jobs lay off in the summer when tourism dives. The Desert Scum (what we call the local Gannett joke) barely can print the AP reports and rarely can do anything investigative so the local public is clueless
So far, including myself, I have 7 confirmed and 2 tentative for the Bay Area HBB party. If anyone else is interested, please RSVP below.
November 17th, 6 PM
Chevy’s
2907 El Camino Real
Redwood City
I will reserve a table under the name “Ben Jones”
Big V
I encourage the dinners, but we each do ours locally.
Just me, but I wouldn’t want a bunch of people reserving restaurant tables in my name!
Good luck! Let me know how your dinner goes. The next South Bay one will be in December. I’m thinking Saturday the 8th. Where? Oh… I’ll have to start thinking ahead.
Got popcorn?
Neil
Watch out re: the reservation name. I was at Mimi’s in Costa Mesa the other night, and I overheard one waiter telling another that the rate had reset on “one of” his condo properties.
A real Robert Kennedy moment, that was.
Anyway, if you run across another erstwhile Waiter/Real Estate Tycoon — especially one who knows his way around the blogosphere — you might not be happy to know what gets mixed in with the salsa on your carne asada.
I’m sure there are a ton of Ben Joneses around these parts.
Yeah, friggin Costa Misery, my current stomping grounds unfortunately. The Mimi’s - isn’t there one at Harbor & Newport? Is that the one?
Anyway, for an overpriced sh!thole of a real estate miasma, it’s hard to beat Costa Misery. It’s basically a pocket of Santa Ana right next to Newport Beach. Triangle Square is a financial disaster (except for the Yard House) - last I heard they want to tear it down and turn it into condos. Go figure.
The starter homes around here are asking $500-$600k, in neighborhoods you wouldn’t let your kids walk around in. Not that it makes much difference what asking prices are - nothing is selling in CM anyway.
If I may suggest? The center piece should be a Joshua Tree (small). Who started that idea? Help me here!
howdy…I’d like to switch from tentative to confirmed, will be there…
Eggselent.
“‘I think they really just want to dump these properties,’ he said.”
I think they really want to give them away!
I’m not giving it away.
The bank really wants to give them away.
The bank can afford to give them away.
Then just give them away.
Nobody wants to grow old in the Inland V.
Not me, not in this life.
A lot of buying ~ during the Slide.
I’m guessing a lot of people will do a lot of buying over the next 1.5 years. As prices start to slide down, they will guess “Well, this is the bottom” so let’s invest.
A year from now, the same thing will be happening. By next November, real estate might be marked down 50 cents on the dollar. Our economy will look quite different by then.
There will STILL be people who are estimating, “Yes we’ve NOW hit the bottom and I’m ready to buy”.
People will be buying, the whole time as the market convulses and craters and goes down.
You can hear it already: there was an ad on the radio just this afternoon: “This is the time to buy a house. Prices have never been better. Yes it’s true there are a lot of foreclosures. “In Washington state home prices are different from the rest of the country they are going up. Contact a Realtor”.
I couldn’t help it: I laughed as I listened to the ad.
Shocking truth.
I believe the banks are Dead Broke. I think the whole financial system is a Hologram. Turn it sideways and it’s gone.
Economic growth as we have known and understood it for the past 50 years is over.
So we have the option to lock the doors and stop population growth. Leave some of the country unspoiled. We can all (mostly) have enough water.
Since we are going to get the pain of reconfiguring the economy anyway, might as well set up for the future as a non growth-through-increased-population-and-increased-consumerism economy.
I wish.
So if the big banks “failed” - would all credit cards stop working too? Would it all become cash only? Or would people still be able to operate their accounts?
thats not gonna happen, the system of payments is secure.
True, it is the system of payers that are shaky
Ha, OT for this thread, but just to serve as a reminder that this bubble is worldwide and hasn’t even begun to pop yet in earnest:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aVY1uFR0DGvw&refer=home
Kam Leung emigrated from Indonesia to Australia in 2003. While the 24-year-old has earned enough as a cook in the Sydney suburb of Epping to think about buying a house, he says he won’t vote on Nov. 24 for Prime Minister John Howard as his local representative in Australia’s parliament.
That was my question on the Wall Street thread.
What happens when all the other bubbles (China’s stock bubble and house bubbles in India, Austrailia, England, France, Spain, the Netherlands, etc) start to pop? What effect will that have on the comparitive value of the US dollar? Could BB be allowing inflation right now because he knows something about other world currencies? I mean, the socialist countries that have been propping up their house values will fall even harder than us when the ball gets rolling.
The growing mismatch between the dollar and other currencies is temporal. As in, the bubble is popping here first. I expect that over time, relative values will move in the opposite direction. But at the end of the day, the US has to add value. Financial Services and Healthcare insurance carriers will not lead the US out of this.
I was in Dubai last week. Folks in the office said home prices have gone up 7x in the past 5 years. The bubble is global.
Try India if you want to see real madness.
Do you have a good link with info on India? (I can google India bubble if you don’t, just wondering if you had one handy). I’ve heard dribs and drabs about it but I have seen any articles on it yet.
Get Set for Wave of Debt Downgrades
With Investors Frazzled, Real-Estate Softening,
Three Rating Firms Have Their Markers Out
By AARON LUCCHETTI and SERENA NG
November 9, 2007
The credit-rating downgrade deluge that’s been rocking financial markets isn’t over.
In the next few weeks, debt-rating services like Moody’s Investors Service, Standard & Poor’s and Fitch Ratings look poised to downgrade hundreds of mortgage-related investments worth tens of billions of dollars, creating the potential for more market unrest.
The three major rating firms — owned respectively by Moody’s Corp., McGraw-Hill Cos. and Fimalac SA of Paris — have been maligned by critics for originally underestimating the danger of bonds backed by subprime mortgages and other investments tied to mortgages.
Now they’re moving in the other direction, aggressively reassessing where they stand on a wide assortment of debt. Behind the about-face: a worsening real-estate backdrop and frazzled investors.
Credit-rating firms have lowered their credit ratings on more than $70 billion in mortgage-related bonds in the past few months, setting off waves of distress in the stock and bond markets. They’ve also expressed concerns about the outlook for a range of related industries from banking to bond insurance. Banks and Wall Street firms including Citigroup Inc. and Merrill Lynch & Co. took large charges when they were forced to reassess the value of even their highest-rated mortgage debt.
The latest turmoil to hit markets has been a reminder that the raters — despite all of the criticism about their approach — still have great sway. Many pensions and other institutional investors are bound to hold only investment-grade debt. A downgrade into junk territory can have an impact on demand for securities.
Moreover, because many mortgage instruments are so hard to value, some banks and hedge funds rely on credit ratings even when they know the ratings could be flawed.
“We are going to be seeing ratings actions coming for awhile” on mortgage-related debt, says Yuri Yoshizawa, a group managing director overseeing U.S. derivatives at Moody’s.
Collateralized debt obligations, or CDOs, look primed for more distress. These are investments often backed by portfolios of mortgage-backed securities. They’re sold in pieces, or tranches, with varying levels of risk and return. The CDO tranches — widely held by banks and investors — haven’t been downgraded as quickly as the underlying mortgage securities they hold.
As of Nov. 1, S&P had lowered ratings on 381 tranches of residential mortgage-related CDOs. It still had a “Credit Watch negative” on 709 CDO tranches, meaning the bonds face a good chance of a downgrade.
Fitch has 609 CDO tranches on negative watch and plans to act on them by later this month. Through the end of October, Moody’s said it had downgraded so far this year 338 CDO tranches worth $13 billion, backed primarily by mortgage-backed securities. It was still reviewing for downgrade another 734 tranches worth $48 billion.
Moody’s says it hopes to finish its current crop of CDO downgrades in the next few months. Further downgrades could happen depending on the rating firm’s assumptions about the underlying economy, where the outlook could be changing fast.
Just want everyone to know my petition is still out there. If you haven’t signed, please do so.
http://www.petitiononline.com/bailout/petition.html
art bubble ending
http://finance.yahoo.com/q?s=BID
could get violent on antiques roadshow
Okay, bear with me - had a conversation this morning with two FBs sitting in the offices on either side of me. They both know about the dollar devaluation and one (with a $4,000 a month mortgage on $60,000 salary) calmly agreed that she had heard we are headed for a recession/depression. The other guy is convinced that the government will just keep lowering interest rates to keep people in their homes (I have a sneaking suspicion he has an ARM, I know he has an interest only mortgage). I tried to tell them that this would lead to crazy inflation, but he is convinced that all our problems are due to the subprime and people losing their houses. Can someone explain how lowering the interest rate causes inflation in layman’s terms so I can explain more clearly next time this comes up? Sorry for the dumb question:)
You’re right about his ARM. Only the ARMS were i/o. If it hadn’t been i/o, he would have gone for a much lower fixed rate. Inywayz:
When the Fed lowers the interset rate, that makes it cheaper for people to borrow money. Cheaper means easier to get, which in turns means less valuable.
Another way to look at it is that there are 10 dollars out there. If you have to pay $1 to borrow that 10, then you have 9 dollars. But if you have to pay 0.50 dollars to borrow it, then you have 9.5 dollars. That means there are more dollars in circulation. When you divide all the resources in the world by the number of dollars in circulation, you get the value of a dollar. A higher denominator yields a lower quotient.
Big V,
Forgive my ignorance.
In my neck of the woods, FEW can get financing, no matter how cheap the credit. Zero interest rates would save how many? (Next to zero around these parts!)
“When the Fed lowers the interest rate, that makes it cheaper for people to borrow money. Cheaper means easier to get, which in turns means less valuable.”
When the Federal Reserve lowers interest rates (IMO) the dollar declines. (deflation).
When our government lowers rates, how does that affect the dollar vs other currencies?
Perhaps I’m a bit jaded on this subject, as I am an avid saver. Nothing personal. I honestly could not conceive a devaluation of the dollar…sigh.
Hi Leighsong:
Decline of the dollar is actually inflation. Things cost more when the dollar is worth less.
Our dollar vs. other currencies depends on (the amount of resources available to the U.S.)/(# of dollars in circulation) vs. (the amount of resources available to another nation)/(the # of their currency units in circulation), with a “confidence factor” added in. If people believe that the dollar will decline in value by x%, but the Euro will only decline by .5x%, then the Euro will gain against the dollar.
That resources thing is important too, I think. For instance, they just discovered oil in Brazil. I guess that means Brazilian currency will get more valuable now, because they have more resources per unit of currency.
Yes… think of it like a P/E ratio in stocks.
Lowering the interest rate by 25 pts (1/4 percent) will increase the price of oil by $4 to $6/bbl.
Don’t explain. They won’t listen today. But when oil shoots higher due to a weaker dollar… They’ll remember what you said.
Got popcorn?
Neil
“Can someone explain how lowering the interest rate causes inflation in layman’s terms so I can explain more clearly next time this comes up?”
The interest rate is the price one pays to rent money. If the rent price of money is set too low then borrowers will have a great incentive to rent a big bunch of this money and used this big bunch of rented money to bid up the price of most things.
Good question. My take. It encourages borrowing which increases the money supply when you have fractional reserve banking.
This has always been a gray area in my understanding of economics though.
It’s simple:
1) Lowering the rates causes more people and entities to borrow money.
2) Banks create money by loaning money they don’t have. Really.
3) More money flowing around in the economy chases up prices.
Hi Pele…I am not in the position to advise you.
The best I can say is do NOT engage those who are in their own mindset. (nothing good will come of this).
Best,
Leigh
I know Leigh, I’ve been very good about leaving the subject alone. However, I’ve had to put up with a couple years of them all crowing about their homes (one person in particular that drives me nuts) so you can be darn sure I’am not going to keep quiet and feed their fantasies when we are on the way down. I limit these discussions to people aren’t one of the bosses even though they are in trouble too. I’am not that dumb:)
Price is what you pay, value is what you get.
Simple explaination:
“Total $s”/”total units of wealth” = price per unit of wealth (stuff).
When the fed lowers interest rates, it pushes more dollars into the system without increasing the units of stuff available to buy with the dollars.
More complex:
Every month we buy almost $100 billion worth of “stuff” from other countries MORE than they buy from us. Those countries then need to do something with those dollars. If they trade thake them to the international monitary exchange, then there is more supply of dollars than demand of dollars. When supply is high and demand is low, exchange rate drops. Then, when we go to borrow a barrel of oil, countries want more dollars for a barrel because they already have a bunch of dollars they can’t find buyers for.
The other option is to get them to lend us the money back. High interest rates gets people with dollars to loan them back to us. In this case, they don’t take them to the international monitary exchanges and keeps the value of the dollar up. This is what China has been doing.
They sell us crap, then loan us the money back so that we can use it to buy more stuff. If they didn’t loan us the moeny back, then the dollar would have been losing value a long time ago, and we would not have been able to continue to buy their crap.
China has been doing this eversense Japan quit in the 1980s. Japan had been selling us stuff, then loaning us the dollars back. As soon as they stopped lending us the dollars back, we could no longer afford to buy their stuff, so their economy went into a 25 year recession.
Now China is stuck in the same situation. They’ve “made” a ton of money off us… numbers in the trillions. Unfortunatly, they HAD to loan us the money back to keep the exchange rate stable.
So, we’re lowering interest rates, meaning fewer other countries are loaning us money. This is lowering the value of the dollar. China either has to keep thier currencly tied closely to ours and ride the value of the dollar down, or they can stop lending us all our money back, and devalue the dollar in relation to their currency. If they choose the former, they are paying more for oil, metals and other resources they need to make the cheap crud they sell us. If they choose to “diversify out of U.S. Assets” like they threatened yesterday, then we stop buying from them and their economy STOPS! And the value of their remaining holdings crash.
For the past 35-40 years, we’ve lived far above or means by buying cheap crap from other countries, which forces them to loan us our money back to keep their economy growing. Then, when they try to get their money back from us, adjusting exchange rates makes the investments nearly worthless.
I wonder when other nations get sick of getting worthless dollars and demand we buy no more from them then they buy from us. In (mythic being) we trust, all others pay in commodities.
I never get tired of the If the US fails China fails argument.
Why does their economy stop?
It might sputter for a bit but they can move on to do usefull things instead of making useless junk for the US.
Supplying 350 million Americans with idiotically useless junk pails in comparison to supplying a gloabl market of 6 billion people with basic necessities.
There is going to be a vary simple division of labor in the future.
Europeans will manage, design and furnish high tech infrastructres (water,power,comm, etc.)
China will furnish basic necessities, Asia will handle the middle stuff.
Russians will run the energy market with an iron fist.
And we will wallow in misery with useless cash stuffed in our mouths.
glow-bubble.
its coming to a retailer near you.
I have a custom search of my zip code on Zip and have noticed an influx of overpriced POS’s coming up for sale. Clearly FB’s, they bought their homes at peak, for peak and JUST NOW realized they can’t afford them! They will NEVER EVER be able to sell them for anywhere near what they were stupid enough to pay for them a year ago. In the last few months, homes in my search haven’t moved unless they are priced under $800K and these idiots are listing them at or near one million dollars (dramatic music and pinky to the corner of my mouth). Rot’s o’ ruck.