A Painful Lesson In Financial Engineering
Some housing bubble news from Wall Street and Washington. MarketWatch, “Countrywide Financial Corp. said Tuesday its total October mortgage-loan fundings fell 48% from a year earlier as the lender continues to struggle against a slumping housing market and the credit crunch.”
“In Countrywide’s $1.47 trillion loan servicing portfolio, delinquencies as a percentage of unpaid principal rose to 5.94 percent from September’s 5.85 percent and 3.97 percent a year earlier.”
From Reuters. “Countrywide said it funded $22 billion of home loans in October, down from $41.9 billion a year earlier. Adjustable-rate lending totaled $3.1 billion, down 81 percent from a year earlier and 19 percent from September.”
“Subprime loans totaled just $42 million in October, down 84 percent from September, and 99 percent from $3.3 billion a year earlier. Home equity loans totaled $1.36 billion in October, down 15 percent from September and 68 percent from a year earlier.”
The Street.com. “‘October’s operating results continue to be indicative of current market trends,’ said David Sambol, Countrywide’s president and chief operating officer. ‘Total fundings were down substantially on a year-over-year basis…and production funded through the Bank has now surpassed 90% of total fundings.’”
The Investment Executive. “Royal Bank of Canada today announced it expects to record a charge in its capital markets segment in the fourth quarter associated with the valuation of subprime collateralized debt obligations and subprime residential mortgage-backed securities of approximately $360 million pre-tax.”
From Bloomberg. “Legg Mason Inc. invested $100 million in one of its money-market funds and arranged $238 million in credit for two others as a cushion against potential losses on commercial paper linked to subprime mortgages.”
“Legg Mason holds about $10.7 billion in debt issued by structured investment vehicles, the company said in a Nov. 9 filing with the U.S. Securities and Exchange Commission.”
“‘The investments have not affected the $1 per share net asset value of the funds and Legg Mason does not expect that they will, although no guarantees are given,’ the company said in the filing.”
“German bank WestLB has warned that it expects a loss this year instead of a profit. The bank is the latest victim of a global credit crisis set off by US sub-prime mortgage lending.”
“WestLB says it expects to report a full-year pretax loss in the low, triple-digit, million-euro range. ‘The substantial price losses of structured securities in the past weeks are the main reason for this development,’ the bank said in a statement.”
The Irish Times. “Several of the country’s leading business figures are nursing losses on their investments in a Dublin finance firm which yesterday said it was writing off at least €70 million in assets due to the global credit crunch.”
“International Securities Trading Corporation, which was set up in 2005 by former Anglo Irish Bank executive Tiarnan O’Mahoney, yesterday suspended trading in its shares, postponed its results and scrapped plans to raise €150 million through a bond issue.”
“The highly specialised firm, which raises money on international markets to lend to banks, made the decision after writing off at least €70 million on investments totalling €210 million in high-risk financial units called structured investment vehicles (SIVs).”
“O’Mahoney previously described the share register as ‘a who’s who of Irish business.’ ISTC said in a statement yesterday: ‘The turmoil experienced in financial markets since July last is unprecedented, and has represented one of the most difficult and challenging market environments experienced by the banking sector over the past 30 years.’”
“Mr O’Mahoney said, ‘We can weather this storm. It will need a lot of work and agreement from our banks.’”
“Most of the company’s estimated 250 shareholders are sitting on losses, given that they bought the company’s shares above the €100-a-share mark. ISTC shares traded at €60 in an unofficial market operated by Goodbody Stockbrokers, down from a high of €345 earlier this year, before their suspension yesterday. The company is now valued at about €115 million, down 83 per cent from its peak.”
From Forbes. “According to a recent E*Trade’s Securities and Exchange Commission filing, 70% of the firm’s total assets are related to residential real estate loans and mortgage-backed and asset-backed securities.”
“According to Citi analyst Prashant Bhatia, there is a high risk that the company will lose its high-end clients, who have accounts with more than $100,000 (the investment limit that is insured by the government’s Federal Deposit Insurance Corporation). These accounts represent $15 billion, and make up 50% of deposits or roughly 25% of E*Trade’s funding.”
“The mass exodus of clients, could force the company to sell-offs assets. The liquidation could total $5 billion in losses, ‘more than wiping out tangible equity,’ Bhatia said.”
“The U.S. credit crisis deepened on Friday as Wachovia Corp…lost as much as $1.7 billion related to mortgages in October. Wachovia also expects to boost loan losses by $500 million to $600 million this quarter, largely because of ‘dramatic declines’ in housing values.”
“The bank paid $24.2 billion in October 2006 for Golden West Financial Corp, a California adjustable-rate mortgage lender.”
“‘It now becomes even more obvious that Wachovia purchased the thrift at the wrong time of the cycle,’ Deutsche Bank Securities analyst Mike Mayo wrote.”
“‘This is now worse than Long-Term Capital (Management),’ said Jack Malvey, chief global fixed-income strategist at Lehman Brothers Inc., referring to the hedge fund whose 1998 collapse threatened to unhinge global financial markets. ‘This is a painful lesson in financial engineering.’”
“There’s a greater than 50 percent probability that the financial system ‘will come to a grinding halt’ because of losses from mortgages, Gregory Peters, head of credit strategy at Morgan Stanley, said.”
“‘You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer’s balance sheet in the banks,’ Peters said in an interview in New York. ‘That’s all toppling at once.’”
From The BBC. “The slowdown in the housing market is becoming more pronounced, says the Royal Institution of Chartered Surveyors. Almost all surveys have suggested the market has been cooling since the summer.”
“‘The housing market is seeing the awaited slowdown that many had been expecting, with modest falls reported across most UK regions,’ said Rics spokesman Ian Perry. ‘Credit market turmoil has yet to put downward pressure on prices in the capital, although prices have now stabilised even here,’ he added.”
The Star Telegram. “Fort Worth-based D.R. Horton, struggling with falling home sales amid the national housing slump, sold nearly 7,000 acres in Arizona for $70 million to two real estate firms. The property is zoned for 23,050 residential lots, which will be sold to home builders.”
“Horton, which reported its first quarterly loss in its nearly 30-year history this year, said last month that sales of its homes nationwide fell 39 percent in the third quarter of the year, and that nearly half its customers backed out of purchases.”
“Home prices in Arizona, as well as in California, Nevada and Florida, are declining after years of strong demand that sent prices soaring.”
“In July, Horton, the largest U.S. home builder, said it owned 252,000 lots as of June 30, representing a 5.4-year supply.”
From Builder Online. “If the normal industry cycle had run its course, there would have been a correction in 2001 and 2002, and, says real estate consultant John Burns, builders would be in the middle of another cycle.”
“But as Larry Mizel, CEO of M.D.C. Holdings, put it, ‘Everyone forgot that there are cycles in housing.’ Since builders have ‘borrowed demand from the future,’ says Burns, the industry is in the second year of a 3-to-5-year correction.”
“When the downturn ends, he says sales activity will correct back to 1995 levels. But when will that be? Burns says it will hinge on…downpayments. ‘When [current] renters can save up a downpayment, [to buy a home] then we will see the end.’”
The Edmonton Journal. “I’m sitting in the sun-splashed boardroom of a small real estate office, chatting with a friendly young realtor named Kacey Fotopoulos about the state of Calgary’s housing market.”
“Since local house prices peaked earlier this year after a record-busting run, buyers have dried up, prices have slid and new listings have soared. With some residents cashing out and heading home to Saskatchewan or the Maritimes, Calgary’s once-torrid housing market has stalled.”
“‘From January to June I felt like a rock star,’ says Fotopoulos. ‘Now, there’s so much to choose from, buyers can take their time. It’s not unheard of for people to offer $100,000 under list.’”
“After sitting on the market for 111 days, one new two-bedroom condo in northwest Calgary recently sold for $255,000 — $64,000 below the initial list price. A luxury executive condo in trendy Eau Claire recently sold for $450,000 — $150,000 below the asking price.”
“For Fotopoulos, who was born and raised in Calgary, Canada’s perennial boomtown, these are uncharted waters. After four years in the real estate game, she has only seen local house prices go in one direction: straight up. Until now. Ditto for her friends. For most, it’s their first taste of anything vaguely resembling a slowdown.”
“‘Calgarians just aren’t used to this,’ she says. ‘They got very greedy. Now, they have to realize if they want a nice, balanced market, they have to price more appropriately, they need patience, and their realtor has to work a lot harder.’”
The Seattle PI. “The housing market really is quite good. That pretty much sums up what members of the National Association of Realtors had to say at the opening session of their annual convention in Las Vegas Monday.”
“It was a stage show of ‘Realtor Scene Investigation’ (after a show with a similar name set in Las Vegas) complete with association Chief Economist Lawrence Yun sitting in a ‘crime lab’ wearing a white coat.”
“‘While 2007 is not a record-setting market, it still has strong fundamentals,’ Yun said.”
“But, Yun said, there are problems: High foreclosures brought on by ‘toxic’ loans and, in reaction, tighter credit making it harder to get mortgages.”
“So, who’s to blame? Suspects include the Federal Deposit Insurance Corp., the Treasury Department, the Federal Reserve, Fannie Mae and Freddie Mac.”
“‘They let some baaaad people into the (mortgage) business,’ one of the Realtor ‘investigators’ reported. Investigators also faulted federal officials.”
“At the same time, the Realtors said they had ‘a DNA match,’ with 2007 looking a lot like 2002, when the market was good, but not spectacular. One difference they did not note is that 2007 comes after several of the craziest years ever in American real estate.”
87 Billion delinquent $traw$ on the back of Le Tan Orange…
How longer before 1 more, is too much?
“In Countrywide’s $1.47 trillion loan servicing portfolio, delinquencies as a percentage of unpaid principal rose to 5.94 percent from September’s 5.85 percent and 3.97 percent a year earlier.”
Servicing the loan and being the bag holder of the MBS may be and are likely to be different entities. How many default mortgages CFC is forced to swallow has not yet been determined. That will be up to the courts to decide.
CSI: Housing Bubble
“At the same time, the Realtors said they had ‘a DNA match,’ with 2007 looking a lot like 2002, when the market was good, but not spectacular. One difference they did not note is that 2007 comes after several of the craziest years ever in American real estate.”
“‘This is now worse than Long-Term Capital (Management),’ said Jack Malvey, chief global fixed-income strategist at Lehman Brothers Inc.”
Anyone care to conjecture how the quantitative hedge funds are doing right now?
from wikipedia:
Stochastic model: “A stochastic model is a tool for estimating probability distributions of potential outcomes by allowing for random variation in one or more inputs over time. The random variation is usually based on fluctuations observed in historical data for a selected period using standard time-series techniques.”
I wonder if the quant funds populated their models using historical periods with financial properties similar to this one…or are the funds still running on models derived from historical data from the boom times of just 6 months ago?
This could get interesting.
TAG AND BAG….
“I wonder if the quant funds populated their models using historical periods with financial properties similar to this one…or are the funds still running on models derived from historical data from the boom times of just 6 months ago?”
You have hit upon one of the key (unobserved) facets of the housing bubble. Part of the ‘blame’ lies on mathematicians/statisticians/physicists who entered the booming field in Stochastic Models (after the success of Black and Scholes in modeling option prices using arbitrage models, for which they eventually won the always pathetic Nobel Prize in Economics). These models are, of course, heavily dependent upon their assumptions which include assuming that what has happened in the last year or two will continue to happen ad infinitem. One of the causes of the boom was the development of mathematical pricing models for CDOs and other asset backed securities. These were (probably) used by rating agencies, and certainly used by hedge funds, to price these bonds. This gave them a false sense of security. As you can tell from the ‘mark to market’ problem, at this point I expect all of these models have completely failed- there isn’t enough arms-length transactions anymore to even base a new model on.
The funny thing about this stuff, is that with all their ‘high falutin” modeling, they’ve totally missed the forest for the trees and that fancy model is nothing more than a good old fashioned Ponzi scheme that any unedumacated immigrant could pull off. LOL Nothing reason why when I see someone in a suit, I automatically assume they’re full of shit, so much so that they’re in all probability bullshitting themselves as well.
Get ready for the massive lawsuit against Citibank. It’s not that Bhatia just downgraded E*Trade, he recommended that brokerage clients move to larger and more stable banks. A move which raises questions about impartiality.
What goes around comes around though. I’m just waiting for someone to say the same thing about Citi itself, which isn’t smelling too fresh these days.
I spent my morning liquidating my E*Trade portfolio and preparing to move it to Ameritrade. Who knows how many others are doing the exact same thing right now…
You didn’t have to liquidate it. You could acat the positions over.
Hi txchick57,
What do you mean by “acat the positions over.”
Thank you.
It’s a procedure where you transfer open positions from one brokerage firm to another.
“At the same time, the Realtors said they had ‘a DNA match,’ with 2007 looking a lot like 2002, when the market was good, but not spectacular. One difference they did not note is that 2007 comes after several of the craziest years ever in American real estate.”
And also forgot to note that house prices double from 02 to 07 but income did not double (unfortunately), rent did not double, and population did not double.
Next year, 2008 will have a DNA match with 1988.
(And in 2002 we still had a national surplus, baby boomers were further from retirement, the US dollar was unquestionably the world’s reserve currency, we weren’t wasting billions on a war in Iraq, the American consumer was still strong and nobody knew what a credit bubble was).
There was a credit bubble in the late 90’s that SHOULD have busted. 2002 should have been a lot worse than it was. The dot com, telecom and house prices in markets like Denver were all bubbling just before that and had just busted.
I agree. I saw what I thought was a RE bubble getting going in 1999. Who knew it would take 6 freaking years to burst.
I thought I saw the same thing. The dot.bombers were overpaying for everything at that point, including housing. I remember the EToys employees in Santa Monica - both their arrival and their departure
But I was wrong - the RE bubble regained some serious legs in a matter of what seemed like months after the dot-bomb crash. As we know, it turned out to be finance-driven with EZ Loanz.
I clearly recall a conversation with the girl doing my manicure. It was way back in 2001. She was kvetching about not being able to settle into a home with her new husband because they were outbid every time they tried. Clueless old me just said, real estate is cyclical, prices will come down again. La-dee-da, la-dee-dah.
She shot me a dagger look: “OH REALLY”, she began sneeringly…”when are prices going to be lower?” It was more an accusation than a question.
At that time I didn’t have the answer, but I certainly didn’t think it would take until 2007.
HEY FAT MANICURE GIRL - if you’re out there - prices are starting to come down!
She shot me a dagger look: “OH REALLY”, she began sneeringly…”when are prices going to be lower?” It was more an accusation than a question.
You have to forgive them. As far as they could see prices were only going up, year after year after year.
Of course I recall SoCal in the 80’s. Real estate only went up, and up. But by the early 90’s it was over and prices did tumble. Had the EZ Money not appeared it might still be reasonable in SoCal.
Hook her up with my subway riding carpenter.
Didn’t Fremon S&L go under in Santa Monica? A bunch of split tails loaning $ to everyone even if you were ‘unqualified’.
I was telling friends to stay out of RE in 2001 because prices were going to come down. Guess my timing was off a bit.
I love comments like this by the RE goons. Ahh yes, we’re back to 2002 except for one other minor thing:
2002= Tightening supply of housing, with loosening of credit
2007= Glut of houses with tightening of credit
I’m barely moved to even shake my head, tut tut tut. After awhile, institutional zaniness isn’t even faintly amusing anymore.
“‘While 2007 is not a record-setting market, it still has strong fundamentals,’ Yun said.”
“Fundamentally, we have the Americans just where we want them, surrounding Baghdad.”
Baghdad Bob (not really)
I loved Bagdad Bob - even bought my sweetie the doll that talks and says all his outrageous lines. He was a cult classic - where did he end up? Is he now working for NAR on a visa?
He now runs the Bush press office.
“Complete with association Chief Economist Lawrence Yun sitting in a ‘crime lab’ wearing a white coat.”
If I had been the wardrobe manager, I would have had Yun in a straight jacket, surrounded by men in white coats!
i was skimming a couple realtor blogs and those guys aren’t happy with Yun either.. his rosey predictions are beginning to hurt their credibility.
beginning to hurt?
(hee hee)
Out damn italics.
italics off
Can you send a link to the Realtor blogs?
Thanks!
He should wear not a white coat, but a khaki uniform, and a black beret.
A white coat? As though he is a doctor or scientist? No way. He should be in a a cheerleader’s outfit. Urp. Just threw up in my mouth…
“For Fotopoulos, who was born and raised in Calgary, Canada’s perennial boomtown, these are uncharted waters. After four years in the real estate game, she has only seen local house prices go in one direction: straight up. Until now. Ditto for her friends. For most, it’s their first taste of anything vaguely resembling a slowdown.”
Hard to zigzag from being a cheerleader, to leading nothing…
She should have asked her parents what is was like in the late ’80’s early 90’s in Calgary after the last boom.
I’ve got friends up there in Alberta, and they swear to me that “It’s different this time”! Seriously! They say that this time oil will not sink in price, so the boom will go on indefinitely; they’re ignoring the rising cost of extracting it, as well as the new government bite.
But these friends have to be positive on real esate just in order to keep their sanity: They own their house (and a big mortgage) as well as several condos bought on spec. Oh my gawd. They are convinced that there is no way but up. Sound familiar? “Hey, but this is no Miami, it’s different in Calgary!” Yeah, it sure is: weather is colder and taxes are higher. And the RE cycle is a couple of years later.
Seeing those condo prices in the article, my friends are so hosed and don’t even know it.
Huge case of denial here in Calgary. Many youngsters (debtors) keep telling me that Calgary is the next New York!
Idiots
More like the next Houston.
Indeed. Isn’t Calgary about 400 miles south of the huge tar sand deposits? Isn’t there about $100 bn of new investment being poured into tar sand projects right about now?
If Calgary’s business sector gets it into gear, might be a great place to be in a few years.
More like the next Houston
If you’re talking about RE prices, that means a 50% drop. Yes Calgary is that expensive.
It was telling that immigrants were moving [i]back[/i] to the Maritimes, et.al.
“In July, Horton, the largest U.S. home builder, said it owned 252,000 lots as of June 30, representing a 5.4-year supply.”
Think they might have overbought a bit, but what do I know?
You never know when you’ll need to build a 1/4 of a million houses…
anyone have a site
“foundation poured, utilities installed — now abandoned dot com”
that would be a deal on a lot
‘When [current] renters can save up a downpayment, [to buy a home] then we will see the end.’
With skyrocketting fuel and food prices, and people losing money hand over fist on their “investment” properties I wouldn’t be holding my breath for that to be any time in the near future Burnsy-boy.
Not for nothing, but the only people I know who are able to save money at all today are boomers who are close to retirement and have no mortgage, and 30ish X’ers making $120K-150K+ combined incomes. The caveat with this group of my peers is that they all own houses/condos purchased between 2001-2002 and in most cases got a deal from family members when they bought (didn’t pay market). Those I know who make less (
Sorry, got cut off. To finish the statement:
Those I know who make less (
Sorry, got cut off. To finish the statement:
Those I know who make less, live paycheck to paycheck and have no savings. Taxes, food, energy, daycare, healthcare, mortgage and car payment leave very little at the end of the month for people whom I consider solidly middle-class.
I just don’t see many saving up 20% down payments given the cost of living (in Mass.). Even 10% down on the median priced home here is going to be $30K plus closing costs and a cash reserve to show the bank. Figure $40K at least. You should see the kind of reaction I get from friends when I ask them if they have $10K cash reserve in case of emergency… looks of disbelief and shock are the norm. “Isn’t that what credit is for”, tends to be the response.
That’s me and my oldest son - though in his case he rents a 3 bd condo for +/- $1400 a month. And renting ( for X’ers at least) is about the safest way to survive today.
Rest of story: He was REALLY into buying about 2 years ago. I sent him to HBB and a week later he called with a ‘My God, is this true!? question. He still rents.
Congrats on raising a son who listens to you!
IMy wife and I are boomers who are close to retirement. We went from a mortgage to a lot of CC debt, and no savings, to no mortgage, no debt, and enough in savings to retire on. Unfortunately, the money was from the insurance proceedings from the death of our eldest son, who was hit by an illegally-passing logging truck.
I’m sorry to hear about your loss .
Very, very sorry to hear about the loss of your son, Doug.
“Global credit turmoil has spilled over into the market for bonds backed by US commercial mortgages, threatening to push down property prices and scuttle deals…investors have become risk-averse. They are hysterical about anything related to mortgages.”
http://www.ft.com/cms/s/0/e5dfd7dc-915c-11dc-9590-0000779fd2ac.html?nclick_check=1
“The bank paid $24.2 billion in October 2006 for Golden West Financial Corp, a California adjustable-rate mortgage lender. It now becomes even more obvious that Wachovia purchased the thrift at the wrong time of the cycle.”
The folks who founded Golden West were reputedly about the savviest mortgage bankers out there. People said at the time that if they chose to sell, it probably wasn’t a good idea to buy. I read it here first.
Wachovia agreed to purchase Golden West Financial for $25.5 billion on May 7, 2006….
..Golden West, which operates branches under the name World Savings Bank, is the second largest savings and loan in the United States. The business was a small savings and loan in the San Francisco Bay area when it was purchased in 1963 for $4 million by Herbert and Marion Sandler. By the time Wachovia announced its acquisition, Golden West had over $125 billion in assets and 11,600 employees…
http://en.wikipedia.org/wiki/Golden_West_Financial_Corporation
The Sandlers almost could not have timed it better. Now they’re laughing all way *from* the bank
can’t find a bio for the Sandlers.. i wonder where the 4 million start-up money came from.. found this, tho..
Forbes calls these the “Selfless” who fell off the list of the USA’s 400 richest, not because their businesses went bust, but because they gave too much away.
Herbert Sandler of Golden West Financial has a net worth of $500 million; his wife and former co-CEO Marion Sandler, $650 million. Both fell off the list in 2005, each having given $650 million. Bernard Osher, Marion’s brother, has a net worth of $200 million and has given away $830 million.
I would do the same thing in that position. The most money I can possibly imagine “needing” to provide every conceiveable need would be about $3M, and that’s pushing it.
slightly more than enough is enough for me too.
Give me a freaking break. Realtwhores are blaming mortgage brokers for the bubble? Talk about the kettle calling the pot black.
Not only that, but the problem is foreclosures, not prices, as they see it.
How can we get to the bottom of this debacle when the criminals are running the investigation?
what bottom is there to get to? Everyone involved can claim temporary insanity, and it’d be the truth.
Round up the usual suspects!
But who do we get to play Keyser Soze?
LMAO! I just have to share with the blog this little ditty by Tom Waits. A buddy of mine who is familiar with my fixation on the housing bubble told me about it and I have to say, it’s quite an anthem for the average Joe living in a neighborhood during bubble times. Waits must have been psychic, having written it just before the bubble really took off.
http://www.purelyrics.com/index.php?lyrics=uiawnnxj
It’s a creepy little number, for sure.
I like it! So…how does it end? What’s he building in there?
“‘When [current] renters can save up a downpayment, [to buy a home] then we will see the end.’”
Meanwhile, the carnage continues….
How the heck are people going to save in this highly inflationary enviroment?
That and the amount you need to save for a downpayment on a house is so huge. For a entry level home we are talking 300K+ in La La land. 10% down is 30K… How long would it take the averge joe to save that much. I make upwards of 100K, have 1 child and my wife is a stay at home mom. We can probably save 600-800 per month.
So its about two years to get that money together if you have a high income.
Metals!
Pork Bellies!
“One word…plastics!”
Frozen concentrated orange juice!!!
“Pork Bellies!”…Which are used to make bacon…Which you would find on a bacon lettuce and tomato sandwich.
Sampo!
James, I posted something similar above before I saw your post… I completely agree. For the average person, saving a sizable down payment and delaying the “gratification” of ownership just won’t happen given the current environment. Wait until employment really becomes an issue.
BTW, if you are willing to make sacrafices in your quality of life, you can supercharge your savings by living dramatically lower than your earnings allow. My family’s combined is $121K. We have two children and we both work fulltime. Figure we can save roughly $3000 per month (on a good month) because we have no debt beyond car payments and my tenants pay the mortgage on the multi in which we live. This is in Mass, which is far from affordable.
This is the one area where the gov’t should step in - with tax advantaged first home savings accounts separate from the $10K someone can pull out of their 401K. Instill saving for a downpayment into the public mind. And, if someone never buys just let it roll into an IRA.
Nonsense! I’m very opposed to special little earmarked savings accounts for one thing or another. If there was no special help for buying homes, then house prices would track wage inflation and nothing else.
house prices track wage inflation? Since when? Seems to me there’s a lot of price volatility unrelated to wages lately.. and it seems to be causing a bit of trouble.
we need to shift from a nation of people who spend more than they earn to one who’s people save money, imo
Or just stop taxing the first $10k or so of interest income. That would encourage saving without every special interest having a separate exclusion.
House prices might track wage inflation in the long run, but not in the short run, as we can see in recent years (or by looking at historical charts).
In the shorter term, like over a couple of years, what house prices do seem to track is a combination of (1) wages, and (2) how much current financing schemes can stretch those wages. You can all see what a good “stretching” can accomplish.
If all we had were 6.5% 30-year fixed mortgages, then house prices WOULD track much closer wage inflation. But as the mortgage field continues to evolve (or devolve?), and rates change, prices get pushed one way or the other away from the more stable track.
We’re so far off the average that who knows how many painful years it will take to get “right”.
I agree with Reuven. The tax system is complicated enough with traditional IRA, RothIRA, Educational Accounts, etc. Another special account for housing? The government has already done the following for housing:
mortgage interest deduction
exclusions on some capital gains for housing
subsidized loans for some buyers
Fannie Mae and Freddie Mac
What more do you want? The federal government to send flowers to everybody who buys a home?! How about a free propane grill?
None of those things you mentioned are incentives to save money.. you do not get those rewards until you’ve spent on a home.
GPBLank referred to saving accounts.
Look.. i want to agee with reuven too.. i do not like tax-based social engineering.. But encouraging non-savers to save money will save all of us money.
They’ll save money when *everyone* needs a 20% downpayment to buy a home!
I like Joey’s idea, but would eliminate all the other subsidies (HMD, F&F, grants, etc.).
Me and my wife “slum” it up pretty good here in CA. We make around 200k combined, rent a house we’ve been renting for 4 years with another house mate. We each pay $550 a month. Both cars are old, but paid for and in great shape. We shop at cheap grocery stores, check out videos from the library ( because its free), carpool, refurbish furniture that has been thrown out, and a whole slew of other cheapy-cheap things.
We’re probably saving well over 60% of our monthly pay combined, investing in mutual funds, CD’s, and simply saving up a load of cash. This is about 6-7 times less per month than what the typical mortgage-indebted Californian pays.
We will keep right on living the same way until a time comes that buying a house actually makes sense and I can more or less retire early.
We’re probably saving well over 60% of our monthly pay combined, investing in mutual funds, CD’s, and simply saving up a load of cash.
Now that is the way to do it… I figure between our net free cash, tax returns (average return about $7500/yr), and our extra paychecks (26 pay periods per year, but budget monthly), we save about 40% of our gross income, but 60% is off the chart. If we as a society could focus more on saving than speculation and consumption, we’d be better off…
Who starts the up turns in new bubbles? Can’t be the tapped out barely still survivings. Must be those who saved during the most recent bubble?
Look for the next bubble.
Talk about wishing on a star! Who is to say renters with any savings will even want to come close to buying after that carnage? There’s still that hardwired mentality that buying is always best - even though in HBB post after post the arguments against the hegemony of that notion are mounting. (illiquidity, HOA, taxes, volatile neighborhoods, horrible commutes, etc.)
Edge: You got that right. I’m one of those dreaded boomers and the last thing I want at this point in my life is to be tied down to a house. I’d rather be able to move about and rent. Even with the cost of fuel, I’d rather have a big old motor home and take my house with me. Fuel is probably cheaper than a mortgage.
can someone explain to me why ANYONE should have confidence in investing in american stocks. considering what this exposes about the stunning level of criminality across the board, this country is no better that some fourth-rate banana republic(an).
you just get a mortgage reset notice in the mail or something?
A good question and one which has been much on my mind lately. Kleptocracy is a way of life in most of the world. Most of the cultural conflicts and resentment of “foreigners” in the US is based upon certain cultures’ perceived tendencies toward “dishonorable” actions such as breaking contracts or renegotiating as you go along, haggling over set prices, delaying payments to obtain discounts, exaggerating benefits and discounting losses or bad aspects of deals, and so on.
Since the US financial leadership has apparently chosen to adopt these traits, why is there any advantage to buying into the overly-regulated, bureaucratic, union-dominated, lazy and corrupt US system?
There is not. I submit this is why the dollar is dropping so dramatically, and why there is no apparent bottom. The US was once a nation which was widely admired. As a consequence, there was high demand for everything US, including stocks, bonds, dollars, real estate, clothing, movies, everything. Now?
Now, the foreign currency will be worth much more than the dollar, and it may or may not choose to cherry-pick assets which could generate future returns: abandoned factories and mines, industrial centers, etc. We’ve already seen it try to buy ports and transportation facilities.
After that, the only thing left is Congress. Can the international money pay more than the domestic lobbyists? Stay tuned…
but hey- Wal-Mart is doing well and Wall Street is all giddy about it today. Oh boy! I guess that huge credit issue is really nothing to worry about huh?
Linda,
Investing in the US used to be my favorite thing. When a mope causes a company to lose billions of dollars and then gets shit canned with $161MM parting bonus from a board of directors that the departing executive hand picked. Of course I wish to leave my moneys invested in that stock! That is one of the cheapest buyouts this decade for incompetence. Not only will I keep my moneys in US stocks, I’ll buy more. Eventually, the directors will have slaked their thirst for moneys and actually do something for the shareholders. The US went from being the premier place to invest to a third rate place to trust my moneys.
I’d rather bet on my Uncle Vinnie’s book than on corporate responsibility.
I am long in half a dozen countries (non European) and short financials in the US and short luxury car manufacturers in Germany.
I resent that. We are at least a third-rate banana republic.
“So, who’s to blame? Suspects include the Federal Deposit Insurance Corp., the Treasury Department, the Federal Reserve, Fannie Mae and Freddie Mac.”
Pretty much everyone in the REIC except for the NAR is to blame.
it’s just a veiled threat..
NAR runs the largest PAC in the USA.. they throw millions at the politicians, and expect servitude in the area of favorable federal regs in financial services… or else.
“…Likewise, Basel I is inadequate for dealing with capital markets transactions such as highly structured asset-backed securities. Basel II, on the other hand, provides a much more refined approach by requiring banks to hold capital commensurate with the actual risks of such transactions. Recent market events highlight why a robust and independent assessment of risk on the part of banks is so important. The enhanced risk-sensitivity of the Basel II advanced approaches creates positive incentives for banks to lend to more-creditworthy counterparties and to lend against good collateral, by requiring banks to hold more capital against higher-risk exposures….”
Governor Randall S. Kroszner
At the Standard & Poor’s Bank Conference 2007, New York, New York
November 13, 2007
Its funny, but under Basel I (banks did not have asset backed securities) only 2 banks went under, now under Basel II bank risk has gone up 400% (credit default swaps on bank debt). From 1986 to 1989, 2,500 hundred banks went under. The credit default swaps are suggesting the same failure rates.
This line is such crap “provides a much more refined approach by requiring banks to hold capital commensurate with the actual risks of such transactions.” The “actual risks of such transactions” is based on a computer model projection. That is why banks haven’t had any losses this year and they will be healthier as time goes on. (disgust off)
Justification for opening the floodgates.
Legg Mason holds about $10.7 billion in debt issued by structured investment vehicles”
Wow! Legg Mason is the next E-trade.
““So, who’s to blame? Suspects include the Federal Deposit Insurance Corp., the Treasury Department, the Federal Reserve, Fannie Mae and Freddie Mac.”
“‘They let some baaaad people into the (mortgage) business,’ one of the Realtor ‘investigators’ reported. Investigators also faulted federal officials.””
And not one of them blamed “The Realtors”…need I remind Realtors of what some of their brethren have spouted over the last 3 years:
“It’s a great investment!”
“Buy now, or you may not be able to afford to buy in later.”
“Don’t worry, my mortgage guy has some loan programs that can make this $600,000 house cheaper than renting!”
“I know you don’t really like the house, but you should put a bid in on it soon anyways…you wouldn’t want to lose it like you lost the last 3 you bid on, do you? You may get priced out of the market”
“Real estate always goes up”
“The market may go down in other places, but not here…real estate is local…location, location, location!”
“Everyone wants to live here.”
“This place is special.”
“The rich baby boomers will be buying here soon, and price it beyond your reach if you don’t buy now.”
“Buy now while prices are relatively low…this place is going to be the next Manhattan/New York/Honolulu/Santa Barbara/’Great American City’”
“You had better put some bids in while it’s slow, when the spring selling season starts, you won’t have this good of a selection”
“Increase your bid, the seller isn’t just going to give it away, and you don’t want to lose this house!”
“Don’t worry, when the teaser rate expires, just re-finance into another one…it’s savvy economic planning!”
“You are making a wise decision; after all, you won’t be throwing money away on rent any more!”
Just called Century 21 office (w. my Caller ID Blocked) to inquire about a trashed house sitting for several months … the agent responded with ” oh that one actually has a pending on it . . . ” .
Translation; ” mr caller, you better submit a bid in a hurry if you want it because the other offer may be accepted ” !
HA! HA HA !! The ‘ol, ‘ phantom other bidder ‘ scam. Of courssssse, got to create a sense of urgency . . . keep the sales price high, dontcha know.
I just said ” ok, good luck ” ,then hung up the phone. Not worth wasting another second on the typical BS that was sure to follow. You can almost probably write the script for the next several sentences of the ensuing conversation. Just insert any/all of the usual reasons to buy now from the NAR machine.
Bet you $50 that place is still listed 3 months from now.
Realtors. lying scumbags. Will anyone trust a realtor after this fiasco ever again?!?
(oh yes, there was no ‘pending’ addition to the for sale sign, nor on the listing website. While it MAY be possible there there IS another offer, based on our long observations of realtors tactics, its highly unlikely.)
yeah, Aqius, I was checking out some foreclosures online last night. Don’t know if you recall where Thonotosassa is from your time in this area, but there was a Fannie Mae foreclosure at $49,000 listed for months. It then went into an auction and now it has popped up on another foreclosure “management” website at $79,000 with a contract pending. Go figure.
You nailed. Realturds and in particular NAR STILL uses language in a way to communicate a sense of urgency to buying. They are really playing hardball but I think the invisible hand will provide us with plenty of vindication over the next 5-10 years.
You missed the best one of all:
“Suzanne researched this!”
class action on suzanne and NAR
=cool
200 potentially fraudulent mortgage deals… in a single building.
But fraud accounts for a sizable share of the bad bets on mortgages, according to many industry experts, and lenders may have been victimized as much as anyone else.
(From your article).
It’s disturbing that I haven’t seen brokers/appraisers/borrowers who committed fraud held accountable yet.
Many people here have suggested things ranging from holding people accountable for the income tax on their “stated incomes”, criminally prosecuting people who lied on a mortgage application, and making sure people who took mortgage interest deductions didn’t do it on property that was actually “investment property”.
If there were a few well-publicized prosecutions in each area, it may make borrowers/brokers/appraisers more careful about entering into shady deals.
However, I doubt if culpable FBs (not all were, some were simply stupid) will ever be prosecuted because it would be politically unpopular.
Just wanted to announce. Trading curbs are in place.
So the market is up 210 points because of Wal-mart?
LOL I guess so. I don’t shop there. I see this as an anomoly. Why? As people get poorer, they move down the food chain. Instead of shopping at Kroger, they are now shopping at Wal Mart.
Neither do I Tom. Was scanning the business news to see if there was any other reason besides Wal-Mart. Oops now the Dow is up to 228 points.
“now the Dow is up to 228 points.”
Almost laughable, isn’t it? I know almost zip about the markets, but my prediction: it’ll sort of level off there, the evening news will hyperventilate about it, then it will go down close to another 300 points soon. Wash, rinse, repeat. Controlled crash. I’m just putting this out there to look back at some future date to see if I’m right.
The market was oversold and shorts had to cover. You can only short the market no matter how bad it is for only so long. Even if the market trends down, which is what I think it will do, you will get days like this here or there.
Agree and it is why I am shorting into this close.
i do some shopping at WMart .. a loaf of bread was like $3.50 and i said woah.. wtf is going on here.. So, being a habitual penny pincher, i bought a 20 pound sack of bread flower and a pound of yeast at another store and fire up the bread machine a couple times a week.
Not even Walmart is getting my money..
We have a bakery outlet near us and get bread for under a dollar. I can bake but usually don’t want to heat up the kitchen. Also, I tend to like to eat homebread just a little too much.
Hey Joey in Calif, a loaf of bread is $3.50 at Wal-Mart?? What kind of Wal-Mart is that? OK, I admit it, I hardly ever set foot in the place. But basic bread in the grocery stores around here (Food Lion, Safeway) seems to be about $1 to $1.50 per loaf. If all the prices there on that level, you need to move out of California, my friend. That’s just nuts.
who’d you give your money to for the bread machine?
bread machine was from a local thrift store .. nice, heavy older model with a glass dome..i found it about 10 years ago. $30 if i recall.
dump in 2 cups flour, 1 cup water .. about a tsp of sugar, salt, 1 Tbl olive oil… 1.5 tsp yeast.. wait 4 hours.. fresh bread for a few pennies.
yeah.. $3.50 for the bread at walmart.. and extra supply was stacked on shelves near the registers where you nab something you forgot..
Good bread had been normally like $3.00 in the supermarkets. Even the cheapo $1 bread is about $1.89 or so now.
Prices must have shot up when i wasn’t paying attention.. maybe cause they started using corn to make alcohol for cars and grain price went up.. not a lot of corn is grown in Calif, afaik.
I posted this on another site but it fits here too. “From Manti,Utah. The last time we went to Wal-Mart in Ephraim,UT about two weeks ago.(Seven miles from Manti) Black Plumbs were $.50 lb, yesterday (11-8-07) they were $2.24 lb up 348%. Cantaloupe was $.97 each, now $2.50 each up 158%,Cabbage was $.40 lb now $.58 lb up 45%, Sour Dough Bread 24 oz was $2.12, now $3.07 up 45%. Bananas were still $.54 lb. And I will get 2.13% raise on my Social Security, Oh and Gas went up $.24 to $3.05 in the last two weeks. The Gov. inflation numbers look OK to me. Right? Sarcasm Off. You can use this if you want to. Thanks for all the good information you give us each day.
Even if they don’t grow corn in California, seems like bread shouldn’t be that much different in price, unless the stores here are using it as loss leaders. Grain is more expensive thanks to ethanol-demand side effects, but not enough to double the price of bread.
We make our own bread occasionally, but it doesn’t seem that cheap, not when I include that expensive Fleischmann’s yeast and bread flour. Then again, the quality is a heck of a lot better than the 89-cent loaves of sandwich bread we buy at Safeway.
Maybe in California groceries are like real estate, priced double what it is in most other places.
Never knew until the last year that EVERYTHING in CA is more - not just housing, food, restaurants, gas, cable, utilities, etc. And that’s before the taxes. I paid over $4/gallon for milk last week. Everyone says the wages are so much less in the rust belt states, but housing is so much cheaper and everything else is also. Only thing you pay more for is heating, but then we pay through the nose for AC nearly 6 months of the year in the desert.
Walmart sells more pots and pans and all is well? Or is it the good news about BOA writting off $3 billion. Maybe the good news about CW loans falling 48%? Maybe the record high heating and fuel costs are sparking the market? Or maybe this tidy bit of good news propels stocks in a frenzied fashion upwards:
BlackRock’s Fink Says Subprime Credit Losses to Rise
http://tinyurl.com/327k4l
Nov. 13 (Bloomberg) — Laurence Fink, who helped create the market for mortgage-backed securities, said the credit losses that already cost banks and securities firms $45 billion are about to get worse.
“Many institutions don’t understand what the credit crunch is going to do to earnings and their balance sheet,” Fink, chief executive officer of BlackRock Inc., said today at an investor conference.
Everyone probably getting ready for the good news at 3:00- Pending Home Sales Report. Its BOUND to be good!
Ya gotta love a financial pioneer named Fink.
link?
Trading curbs? Could you elaborate please? You mean like what gets put in place after a huge drop (if so isn’t that fishy after a surge up)? How do you find out about this stuff? Trying to further my financial education here.
SIVs have no business purpose in a similar sense to which the Enron off-balance-sheet off-shore accounts had no business purpose.
JPMorgan’s Dimon Says SIVs Will `Go the Way of the Dinosaur’
By Elizabeth Hester
Nov. 13 (Bloomberg) — JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said structured investment vehicles, which have dwindled by at least $75 billion since July, will “go the way of the dinosaur.”
The entities, also known as SIVs, borrow in the short-term commercial paper market to invest in longer-dated securities ranging from mortgage bonds to bank debt.
“SIVs don’t have a business purpose,” Dimon told a conference hosted by Merrill Lynch & Co. in New York today.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aXDXgFnYGojU&refer=home
When they stated (this past weekend) that the new SIV fund would change the rules for investors, they sealed the fate of those things. Who would buy into that?
Off balance sheet stuff should be banned entirely. Period. Did we learning nothing from prior business failures ? C’mon people, wise up !
“There’s a greater than 50 percent probability that the financial system ‘will come to a grinding halt’ because of losses from mortgages, Gregory Peters, head of credit strategy at Morgan Stanley, said.”
And the DOW is up over 200 points today, largely on the back of WalMart’s announcement that their sales are going to rise. Talk about investor stupidity !
We need to wipe out a whole class of stupid investors (speculators) in order to restore some sense to things. Its just stupid on so many levels !
Wal Mart sales up should be validation that the economic environment is getting bad. Someone also said look at McDonald’s. These are DEFENSIVE plays.
Buy on dips. Or is it the dips that are buying?
Bottom pickers abound.
Hedge Fund programs have bought closed end funds trading at 50% above liquidation value, free moneys, short the fund buy the underlying securities. Is it stupid for buying such a fund, the answer is yes.
Does anybody really believe that Cerberus’ Chrysler LLC is going to survive?
That S&P is getting blasted for its ratings of CDOs, but nobody comments on the S&P ratings of corporate debt being 75% junk (and it is getting worse). “What, me worry?” The companies can pay it off.
“…but nobody comments on the S&P ratings of corporate debt being 75% junk (and it is getting worse).”
Subprime = 2007 crisis
Covenant-lite = 2008 crisis
Toggles = 2009 crisis
“You should see the kind of reaction I get from friends when I ask them if they have $10K cash reserve in case of emergency… looks of disbelief and shock are the norm. “Isn’t that what credit is for”, tends to be the response.”
Yes, available credit has taken the place of saving for a rainy day. People who are under the limit on some of their cards believe they have downside protection.
Stressed Money Market Funds
Today Bloomberg reported that BofA, Legg Mason, SEI Investments, and SunTrust are taking measures to keep sponsored/managed money market funds from “breaking the buck.”
This is very serious. Nearly all non-Treasury, money market funds are invested heavily in junk paper. The sponsors/managers will prop up these funds only up to a point; then the investors eat the loss. These funds are the investors in the SIV paper and who knows what loss potential is there.
If you want a place to park your cash look at brokered CDs, internet MMDAs, and Treasury, not government, money market funds. Also, within the SIPC $500k limit broker cash is covered up to $100k. I spotted the credit risk of MMFs last year when I looked at Fidelity’s Reserve Fund’s holdings - - lots of trash. Apparently, now other’s are noting this also.
“It was a stage show of ‘Realtor Scene Investigation’ (after a show with a similar name set in Las Vegas) complete with association Chief Economist Lawrence Yun sitting in a ‘crime lab’ wearing a white coat.”
Oh, golly, where to begin!
A waaaay better show would have been to be digging up FunYun in the desert, with serious cop faces on and the little crime measuring utensil thingies, and Grissom would say, ‘Over 20,000 stab wounds in this vic! Possibly a record?’ And Sarah would say, ‘Looks like it was personal’, and then like, oh, 20,000 FB’s stand up out of the sagebrush where they were hiding and say in unison ‘He said real estate only goes up. We took turns. One stab each. We only quit when we ran out of room’.
The rest of the show would be the booking of 20,000 FB’s, none of them saying they were sorry. And then end credits.
Gas prices hit working class…
http://money.cnn.com/2007/11/13/news/economy/gas_burden/index.htm?postversion=2007111313
“At the same time, the Realtors said they had ‘a DNA match,’ with 2007 looking a lot like 2002, when the market was good, but not spectacular. One difference they did not note is that 2007 comes after several of the craziest years ever in American real estate.”
A ball that is thrown high up in the air passes a height of ten feet once on the way up and again on the way back down to the ground. Is this proverbial ten foot height what the NAR refers to as a ‘DNA match?’
FORECASTER OF THE MONTH
Two-time champ Morici climbs his soapbox
Top forecaster says Bernanke is ‘naïve’ and Wall Street is ‘corrupt’
By Rex Nutting, MarketWatch
Last Update: 3:34 PM ET Nov 11, 2007
WASHINGTON (MarketWatch) — The people running the economy are either naïve or corrupt, said business professor Peter Morici of the University of Maryland after winning his second straight Forecaster of the Month award from MarketWatch.
http://www.marketwatch.com/news/story/two-time-champ-morici-climbs-his/story.aspx?guid=%7B803B6C19%2DFB79%2D4FE8%2DBE44%2DB7CE7952BE01%7D
Why do they have to be “naive or corrupt”?
Why can’t they just be incompetent?
“sold nearly 7,000 acres in Arizona for $70 million to two real estate firms.”
Last week we had a story about some shadow firm looking to spend upto $800 million, or maybe $1 billion on a theme park outside Casa Grande. Much of the money would be government subsidised as a means of economic development and raise the tax base and blah, blah, blah… Govt money used to benefit the few.
Anyone that understands theme parks (they make 70-80% of their revenue and ALL of their profit durning summer) and has been to Castles and Coasters in the summer would immediatly see that this theme park would be a financial disaster. I’m made of hearty stock, but I can’t take on hour at a theme park when it is north of 105-110.
My response to that story was that the way these things work is that some multi-millionaire buys up a giant chunk of land, then makes campaign contributions to get govt money to build a development, then they sell off the land for a huge profit.
And POOF… less than a week later we get a story about some unknown developers buying 7,000 acreas of land, RIGHT near the proposed sight of that government subsidized theme park.
Yeah, the nearby Castle Boutique looked like it had about as much business as Castles and Coasters in the summertime.
“Knights and Damsels welcome.”
Different sort of theme going on there…
The condo madness continues here in Canada
http://tinyurl.com/2sya79
“Kazakhstan-based firm”
CASEY!?!?!?!?
Yep, insanity knows no borders.
Meanwhile,
Royal Bank to record $360M charge on subprime obligations, $325M Visa gain……..
“TORONTO - Royal Bank of Canada (TSX:RY) will record a $360-million charge related to the subprime mortgage market but will also post a $325-million restructuring gain related to Visa credit cards.”
Good thing us Canadians love our credit cards too! ;- )
http://tinyurl.com/2rlyy5
The good news seems endless today. Oh, the only piece of good news is Walmart? Sorry.
This should help the markets keep in positive territory:
Report Forecasts $223 Billion Decline in Property Values and Lost Taxes As Foreclosures Surge
http://tinyurl.com/ysq5aj
“These foreclosures are wiping out wealth that people often took a lifetime to build,” said Martin Eakes, the center’s chief executive. “Many families will never achieve homeownership again”
Walmart will be their only refuge.
Mortgage Woes to Sink Property Values
WASHINGTON (AP) — An expected surge in home foreclosures will cause U.S. property values to sink by $223 billion, with the most severe impact in minority communities, a new report says.
http://biz.yahoo.com/ap/071113/foreclosures_spillover.html
Why Mortgage Insurers may survive or Eat it American Home Mortgage et al.
“On November 5, 2007, American Home Mortgage Investment Corp. and American Home Mortgage Servicing, Inc. filed a complaint against Triad Guaranty Insurance Corp. in the U.S. Bankruptcy Court for the District of Delaware. The plaintiffs are debtors and debtors in possession in Chapter 11 cases pending in the U.S. Bankruptcy Court. The lawsuit is an action for breach of contract and declaratory judgment. The basis for the complaint’s breach of contract action is the cancellation by us of our certification of American Home Mortgage’s coverage on 14 loans due to irregularities that we allegedly uncovered following the submission of claims for payment and that existed when American Home Mortgage originated the loans. The complaint alleges that our actions caused American Home Mortgage to suffer a combined net loss of not less than $1,132,105.51 and seeks monetary damages and a declaratory judgment. We expect to rescind additional loans originated by American Home Mortgage and we intend to contest the lawsuit vigorously.”
Triad Guaranty inc. Q3 filing sec.gov
http://tinyurl.com/2td9y3
“There’s a greater than 50 percent probability that the financial system ‘will come to a grinding halt’ because of losses from mortgages, Gregory Peters, head of credit strategy at Morgan Stanley, said.”
“‘You have the SIVs, you have the conduits, you have the money-market funds, you have future losses still in the dealer’s balance sheet in the banks,’ Peters said in an interview in New York. ‘That’s all toppling at once.’”
Tumblin’ Dice