Another Sign Of The Collapse
Some housing bubble news from Wall Street and Washington. CNN Money, “In another sign of the collapse of the market for new homes, builder Lennar Corp. has dumped a portfolio of 11,000 properties for 40 percent of their previously-stated book value. Lennar, the nation’s largest builder in terms of revenue, is selling the properties to a joint venture it has established with the real estate arm of Wall Street bank Morgan Stanley.”
“It is selling the properties for $525 million, even though it said their book value as of Sept. 30 stood at $1.3 billion.”
“The sale raised the possibility that Lennar’s results in the just closed quarter could again be hit by a large charge for the reduced value of its holdings. Lennar took a $847.5 million third-quarter hit for valuation adjustments and writeoffs of options.”
The Wall Street Journal. “‘There is a lot of money out there right now trying to do deals like this,’ says John Burns, who consulted with Morgan Stanley on the sale. ‘The problem has been the gap between what the buyers are willing to pay and what the sellers are willing to accept. This sends a strong message that somebody is willing to part with land at a significant loss.’”
“Tax considerations are pressing builders to do deals that involve losses. The builders can only claim losses on land that has lost value once the assets are sold.”
“When the housing market sank, the builders got stuck holding the land. The land that Lennar sold includes 11,000 home sites in California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey. At the end of its fiscal third quarter, Lennar owned 86,412 lots.”
“‘Land is a nonearning asset. The builders have to get it off their balance sheet’ says Jeffrey Gault, CEO of a land investment company that has raised $350 million to buy land from builders across the country.”
From Bloomberg. “Moody’s Investors Service is preparing the biggest credit rating cuts since subprime mortgages contaminated the bond market, foreshadowing losses for investments that pay Florida teachers and money market funds.”
“Moody’s may lower ratings on $105 billion of debt sold by structured investment vehicles after the average net asset values of SIVs sponsored by firms including New York-based Citigroup Inc. declined to 55 percent from 71 percent a month ago, Moody’s said in a statement Nov. 30. The assets were valued at 102 percent in June.”
“‘In recent weeks, Moody’s has observed material declines in market value across most asset classes in SIV portfolios,’ the ratings company said in the statement.”
“Values on Citigroup’s six SIVs under scrutiny fell as low as 56 percent, Moody’s said. Orion Finance Corp. has a net asset value of 54 percent, down from 61 percent on Sept. 5.”
“An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.”
“In 2005, the peak year of the subprime boom, the study says that borrowers with such credit scores got more than half — 55% — of all subprime mortgages that were ultimately packaged into securities for sale to investors, as most subprime loans are.”
“The surprisingly high number of subprime loans among more credit-worthy borrowers shows how far such mortgages have spread into the economy — including middle-class and wealthy communities where they once were scarce.”
“They also affirm that thousands of borrowers took out loans, perhaps foolishly, with little or no documentation, or no down payment, or without the income to qualify for a conventional loan of the size they wanted.”
The Arizona Republic. “It’s hard to talk about the mortgage meltdown without mentioning Countrywide Financial Corp. The nation’s largest residential lender, with 22 retail offices in Arizona and a major operations center in Chandler, has become a poster child for the crisis.”
“But senior Countrywide officials in Arizona insist the company remains viable for the long term. ‘It sounds like an oxymoron to say we’re growing while laying people off,’ said Lisa Farrar, a Phoenix-based executive VP for Countrywide.”
“‘The recent layoffs were designed to right-size the company to what’s happening in real estate,’ Farrar said. ‘We’re geared to grow in a smaller market.’”
All headline News. “Analysts say that problems in the nation’s fractured housing market is so far-reaching that a proposed Bush administration-backed plan will not help borrowers or bankers from escaping increasing foreclosures and defaults.”
“Christopher Thornberg, a principal with Beacon Economics in Los Angeles said in an AP report, ‘It’s not the mortgage that’s the problem,’ adding that homebuyers paid too much for their homes in a soaring market and now they are facing the dire consequences.”
From Fortune. “The weekend papers were full of reports about the Treasury Department and Federal Reserve Bank meeting behind closed doors with mortgage lenders, servicers and investors to work out a plan for a voluntary freeze in interest rates for some subprime borrowers.”
“As I read, though, a niggling thought took over my brain: If anyone is getting their rate frozen on their adjustable-rate mortgages, I want mine frozen too.”
“The harm I suffer by this measure is philosophical. The impact on others is clearer. A group called the American Securitization Forum, which represents hedge funds who bought repackaged subprime loans, appears to be resisting the most the ‘voluntary’ freeze proposal because its members stand to lose a lot.”
“A rate freeze would cut into their returns. Who’d be helped? Lenders and servicers who can keep collecting on the mortgages they sold.”
National Mortgage News. “The big event in Washington is the Office of Thrift Supervision summit on the mortgage mess…officially, OTS is calling it National Housing Forum. The there is plenty of talk in the media about Treasury unveiling a big plan where servicers will ‘reset’ subprime ARMs.”
“One mortgage executive told us that the big problem is payment-option ARMs where the consumer has a rate of 3%. A rate that low cannot be artificially maintained by servicers. In other words, if Treasury thinks a servicer (or end investor) will roll over a 3% rate, the government is dreaming.”
“One industry veteran — requesting his name not be used — raised another issue: ‘OK, so you keep the rate the same for the subprime borrower. Then the prime borrower who has been current all along and who also has an ARM says, ‘Hey me too. Keep my rate the same.’”
“This industry vet said Treasury has to either come up with a plan where all ARM rates are frozen or none are. ‘Think about the lawsuits,’ he said.”
“Loan Abuse Story Of The Week: ‘We had a client come in to us a month after closing with another broker because she thought she was ripped off. The client was recently divorced and had to refi her ex-husband off the deed and mortgage. She had not worked for several years being at home raising the kids.’”
“‘We reviewed her closing docs and realized that this other broker put her in a stated-income subprime loan, created a job for her as an attorney working for the closing attorney’s firm, and the attorney verified her employment. They charged her one point on the front and two on the back (YSP) on a $600,000 loan.’ — R.S., Mass.”
The Seattle Times. “Frances Taylor was 93 when she took out a high-cost, high-interest mortgage against her home of more than four decades. Within months, her lender foreclosed. More than one in three borrowers in King County who got loans from the same lender that foreclosed on Taylor were 50 or older, and one in seven was 60 or older, according to a Seattle Times analysis of more than 4,000 loans by Ameriquest Mortgage.”
“Not only that, nearly all of those borrowers already owned their houses.”
“Taylor refinanced her home three times in just three years. Those loans stripped away more than $50,000 of her home equity in fees alone and eventually obligated her to mortgage payments that were nearly three times her monthly Social Security check of $761.”
“Her loans, like many subprime mortgages, came with hefty fees, prepayment penalties, and interest rates that adjusted upward.”
The Sydney Morning Herald. “The prospect of home owners being hit with another interest rate rise increased yesterday after the newly merged Bendigo and Adelaide Bank became the first lender to push up borrowing costs by an extra 0.25 percentage points.”
“The cost of these loans has soared in recent weeks after the financial damage caused by the subprime loans meltdown in the US. In particular, the Commonwealth and NAB have both warned they will soon pass on these higher costs to customers.”
“Analysts at Goldman Sachs said yesterday that market rates on 90-day and 180-day bills were now up to a half of 1 per cent higher than the RBA’s official cash rate of 6.75 per cent. ‘It’s purely because the global cost of funds has increased and we’ve been absorbing it since August and we’ve just had to pass some of it on,’ said a bank spokesman.”
“The cost of borrowing pounds for a month surged by the most in more than 13 years. The London interbank offered rate that banks charge each other for such loans due after the end of the year rose 63 basis points to 6.72 percent, the highest since December 1998, the British Bankers’ Association said today.”
The Associated Press. “Mortgage financier Freddie Mac said Monday it will not sell a reference mortgage bond in December. The company did not provide a reason for the move.”
“The market for mortgage-backed securities has withered in recent months amid a worsening housing slump and a spike in defaults on subprime mortgages. Some $360 billion in subprime mortgages are slated to reset next year, leaving investors leery of buying any mortgage-related securities.”
From Reuters. “Fannie Mae, the largest U.S. home funding company, on Monday said it plans to sell $3.0 billion of three-month benchmark bills due March 5, 2008, $1.5 billion of six-month bills due June 4, 2008 and $1.0 billion of one-year bills due Nov. 28, 2008 on Wednesday in a Dutch auction.”
“In such uniform price auctions, successful bidders pay only the price of the lowest accepted bid rather than the actual price as in a conventional multiple-price auction.”
Minnesota Public Radio. “Ray Kvalvog thinks it’s a no brainer. Farmland is the best investment going. ‘We’re kind of in the heyday of farming right now. It’s about as good as it’s probably ever been and is going to get for awhile,’ says the Fargo farmer and real estate investor.’”
“Kvalvog is among more than 30 people crowded into a large room at Pifer Auction Service in Moorhead. Ray Kvalvog is the top bidder at $2,500 an acre. He says he wouldn’t have been surprised to see the land reach $3,000 an acre. Last week he paid $5,000 an acre for land near Austin, Minnesota.”
“Kvalvog says he owns about 10,000 acres across Minnesota and Eastern North Dakota. And despite the rising prices, he’s still buying. Kvalvog says he expects only about a five percent annual return on his land investment. But he says the land value is rising by up to 20 percent a year and he expects that trend to continue.”
“Farmland values increased 14 percent nationwide in the past year. Experts say high quality farmland has increased in value much more rapidly.”
“Farmland prices exploded in the 1970s driven in part by speculative investors. Those high land prices played a role in the farm crisis of the 1980s.”
“Knowing that history makes the rising land prices a little unnerving for North Dakota State University Agricultural Economist Skip Taylor. ‘It never ends well,’ says Taylor of rapid rises in farm land prices. He says rising land prices in the 70s were oftne driven by emotion, not logic and he worries this may be the same scenario.”
“University of Minnesota Economist Steve Taff agrees there are many reasons for caution. But Taff is not convinced the land market is overheated.”
“‘Some days I can convince myself there’s no sign of the bubble bursting, unlike in the housing market,’ says Taff. ‘Because I don’t think the land market shares some of the risk prone behavior of the housing market in the past several years.’”
“Taff says land prices can be driven as much by psychology as by economics. ‘They’re fortune tellers, they have to be. They have to think about how this is going to be not just this year or next year, but in 2010 and maybe 2015,’ says Taff. ‘It’s not a science, it’s an art that everybody has to be engaged in.’”
‘ Also needed — to prevent a recurrence of today’s problems — are tighter restrictions on mortgage lending, said Robert Toll, chief executive of luxury homebuilder Toll Brothers Inc. ‘
‘Toll said home prices ‘may not have stopped falling yet,’ adding that it may not ‘be the best time to buy a home.’
Now that he has sold his stock. Nice.
What about the “Europe” comment - MR. Troll???
“In Britain you pay seven times your annual income for a home; in the U.S. you pay three and a half.” The British get 330 square feet, per person, in their homes; in the U.S., we get 750 square feet. Not only does Toll say he believes the next generation of buyers will be paying twice as much of their annual incomes; in terms of space, he also seems to think they’re going to get only half as much. “And that average, million-dollar insane home in the burbs? It’s going to be $4 million.”
Sounds like Great Britain is running out of land
Guy must be trying to drive prices down so he can pick up a few bargains at fire sale prices…
But these stock sales are preplanned. Meaning, he sets up the sell a year or 6 months in advance knowing he only has to lie for a year or so before the sale executes before saying what he really thinks.
I think some of them were, as you state, Rule 144 sales.
However, haven’t some press reports hinted that this might not be the case in all of his selling?
If so, it will be interesting.
See CFC insider sales going back to June 2006:
http://finance.yahoo.com/q/it?s=CFC
My apologies - CFC - that’s for the Tan Man (Mozilo).
Here’s for Bob Toll:
http://finance.yahoo.com/q/it?s=TOL
********
This may be a double post.
If that is not the case, I added in another post that perhaps it was the Tan Man and not Toll that could run into trouble selling outside Rule 144.
IIRC, Toll has been selling stock since 2004, as has Mozilo.
Interesting that many of the bubble-heads were becoming very suspicious about the same time.
Toll and Mozilo have both been around a long time & know exactly what they are doing. No problem with “planned” sales, as they knew when things were topping out long before the masses had a clue.
Back in 2003 or 2004, they could have easily seen the writing on the wall and plan gradual sales over the next couple of years.
As things slowed down over their planned sales period, they could pump up the stocks via buybacks to help with the timing of their exits.
Nice job if you can get it.
IMHO.
“The sale raised the possibility that Lennar’s results in the just closed quarter could again be hit by a large charge for the reduced value of its holdings….”
More non-recurring charges…
The recurring non-recurring charges?
I live about 2 miles from Burbank CA media center. Last night just to kill time I took my family there at around 7 pm. We had no shopping in our mind. We first entered IKEA around 7 pm and guess what. Its almost empty. Just a few checking the warehouse cheap stuff on the first floor. I told my wife how empty the place is inspite of being Sunday and holiday season. Then we went to the mall next door. My daughter was playing in the play area and i was walking around checking out the stores nearby. The lady in toy store called out to the Hawaiian smoothie seller asking why are they open till 10 pm. The smoothie seller said the mall is supposed to be open till 10 pm for holidays and at that the lady shouted back saying but its been very slow since 6 pm today. The time was 8.30 pm …we left around 9.30 pm and boy I have never seen Burbank media center mall so empty since past 9 yrs I have been in Burbank CA.
My friend owned a bunch of mall stores (I think 5) in the Midwest area before going bankrupt last year. During the holiday seasons, the mall requires stores to be open during mall hours, or they face hefty fines. The mall is a BAD deal for most retailers, which is why the turnover can be quite high. I know that when he went bankrupt, the malls tried to go after him for millions in his broken 9-year leases (even though they quickly re-leased the empty places within weeks). So they get millions out of bankruptcy (yeah right) and then still make the same cash flow from new leases.
The malls also love to fine shops that place signage (inside or outside) without approval. I remember he tried to put up a “Sale!” sign after a previous holiday season and was fined because he never received a signed approval for the signage.
It is private property of the malls, so I am fine with the restrictions, but it still makes little sense to me. Last Christmas he was open until 10pm (paying employees through midnight) when many days the traffic dropped off after 6pm, except in the week before Christmas.
My wife and I went to the mall this weekend to pick up a customish battery, and it was dead. Then we went to Walgreens (drug chain) and it was packed with people buying little things. Weird.
pick up a customish battery, and it was dead.
The battery?
lol.
Not weird. When people don’t have much money, they shop at the cheap stores — Walmart and Target.
The addicts need their fix. Gotta shop! Hey, when drug addicts start running out of money they use cheaper drugs until finally they’re huffin’ paint under the bridge. So it goers with the American consumer. Yesterday it was Nordstroms, today it’s Walgreens, tomorrow it’s shoppin at the local thrift store (and huffin paint under the bridge).
A bit anecdotal, but good to know. Thk you, M Nair, and happy holidays.
During what little shopping we’ve done this holiday season I’ve been nothing short of AMAZED at some of the great parking spaces I’ve been able to get! (Even a few my wife actually “approved” of!)
Gauging shopper sentiment is always anecdotal at best but I can actually say that in spite of this being the height of the shopping season I’m seeing less traffic than you would during normal times. It seems there was a quick burst out of the gate and then… thud.
Got the oil changed this morning at the local Jiffy Lube. The manager says last month was the worst they’ve seen since opening 6 years ago. Volume off over half from a year ago.
Unless all of a sudden clueless dapper guys and material girls are now changing their own oil, I’m going to guess foregoing routine car maintenance is not a good idea, unless said people have had their cars reposessed.
The man said he’s seeing a lot of the vehicles coming in several thousand miles over the recommended change, which wasn’t happening as much in the past. Surely a sign that folks are strapped and pushing stuff out.
They’ll also forego other boring auto expenditures…like insurance. Watch out everyone!
Whose recommedation, the lube shops or the manufacturers? The lube shops still try to claim “every 3K”, while most car manuals seem to spec 5K (city) or 7.5K (highway) or more (e.g. if using synthetic).
According to my cars computer I could go about 12K between oil changes. I usually do it every 6-7K miles.
Or they might be getting the oil changed at WalMart.
Daughter went to DMV this am and she said it was empty - she couldn’t believe it. They told her there’s hardly any registration transactions going on.
I was just at the DMV (daughter just turned 16) and line was out the door, around the corner. That’s the one in Pomona, CA.
all these little anecdotes are meaningless.
but, hey i got one…went to the grocery store last night. i can’t remember the last time is was that packed. must be folks are buying more groceries to cook at home and save money from eating out.
all these little anecdotes are meaningless.
———————-
Hogwash! It was anecdotal evidence that made most of us question what was going on with housing prices & what led most people here to the HBB.
Anecdotal evidence, gathered from around the country by a variety of people is THE BEST WAY to know what’s going to happen in the future.
It’s how we at the HBB have been able to so acurately predict what was going to happen, long before the “experts” were (supposedly) aware of the “subprime crisis.”
I agree, these anecdotes are meaningless. The opposite ones are also meaningless. They only show examples. Some places are having snow and wind storms and it’s too cold to go out. Some places are having the big game tonight, so people are staying home. Other places are balmy, so people are out packing restaurants.
Puzzled.
Bill,
You’ve got to admit that, over time, when we see the same patterns (and address the variables like the ones you mentioned) across many geographic regions, you are closer to understanding what is going on.
My hairdresser buys a $500K in LA on a $12/hr salary, yours does to (in AZ or MD), another in Texas, etc… pretty soon you understand something is awry (sp?).
We saw things really going south WRT lending back in 2002/2003. People we wouldn’t loan $50 to were suddenly qualifying for $500K loans — something wasn’t right. But it was only anecdotal stories/evidence that led us to understand what was going on.
If people are skimping on car maintenance… that’s a bad sign. In the long run they’ll pay more. Its analogous to why dentists were the one profession to maintain their standard of living during the great depression after a so-so start to 1930. (You can pay a little to take care of a little cavity or a LOT to take care of a bad tooth…)
You know what’s funny… I’m going to have to pressure the wife to get a new car in 2008! (maybe a ‘new for us’ but used car, lets see how the incentives go). Sorry, but its time to replace the 1992 Honda.
Got popcorn?
Neil
Ask her if a 1993 Honda is a good enough upgrade……
i love my ‘92 honda…only 112,000 miles…about half way there I figure.
If you consider that ‘about half way there’, then my wife is ready for a new car.
My ‘91 Honda had 331,000 miles on it when I got rid of it (and it was still running).
M Nair - wow.
I go to the IKEA in Burbank quite often, and try to avoid weekends if possible, as its normally rammed with people.
Unfortunately, I have some equally compelling, perhaps ‘negative’ anecdotal evidence in my neck of the woods in the Bay Area. The traffic. I’ve worked in Silicon Valley, and the Peninsula for several years now. For the first few, traffic wasn’t that bad. I could leave at 5:00 and be home to the East Bay in 40 minutes or less.
I’ve watched a fairly pronounced swing in the amount of traffic over the last 6 months or so. It is getting so bad around here that the drive home is pretty much a slow crawl. It takes me over an hour and a half, two hours to get home now.
This points to a sudden growth in the tech industry. In other words- the Bay Area started the decade with a Tech bubble the drove up RE prices, survived the Tech bust with a replacement- the housing bubble, and now that the housing bubble is going bust, are back into what appears to be the start of another tech boom, which in effect means yet one more cycle that will perhaps prevent home prices from falling, and could even make them go up.
I’ve looked at rentals all along the Peninsula since I’m thinking of moving closer, but the cost of rent seems to be going through the roof in that area. Even rent in the East Bay seems to be going up now.
Bottom line- I’m not sure if I’m willing to have to wait and hope that at the end of ANOTHER Bay Area bubble prices will perhaps be lower.
Sorry, I’m just sort of depressed about the situation here and the fact that even with the bubble popping, most homes around me are over 600,000 bucks. I swear- I make a very good salary. Why I feel punished for doing so seems nonsensical.
I work in the tech industry in silicon valley and I can tell you that it is definitely the start of a new tech boom around here. Jobs seem to be plentiful, with salaries increasing and it is becoming harder and harder to fill slots with qualified people. However I know that talking to my fellow geeks, most of them see the bubble here for what it is and are staying on the sidelines until things go down further. One good thing about living in such a technical area is that most people understand the simple math of mortgages and realize now is not the time to buy.
Ha Ha! Yes… we geeks do have that in common, which is the comprehension of at least basic mathematics. You know one thing that is rather interesting is that many of my Techy friends are like me and make decent incomes. Yet you’d never know that by our cars. I think mine’s the newest, being 13 years old.
Yes- I hear much of the same as you mentioned, which is that amoungst my friends who do not own, most are waiting for the drop despite the fact that some actually could afford if they wanted to squeeze into something. I was actually looking around my neighborhood, and there’s a few I could afford and actually pay slightly more for the mortgage than what I pay for rent. But the homes in question are the crappiest, smallest, most dilapidated 1-2 bedroom cottages in the hood. Nope- there’s still lots of room to drop before I start to get interested.
maybe they all use mobil 1
“the comprehension of at least basic mathematics…”
… stopped only a few of the many tech workers that I encountered around here who were considering buying in 2004 and 2005.
Around that time, with historically low loan rates that were due to rise, I recall reading that 70% of buyers in the Alt-A Bay used ARM’s.
[Alt-A Bay = SF Bay]
The current client I work for and its subsidiary I worked for the previous 4 and a half years as a software engineering consultant have had a terrible time finding qualified engineers. It’s kind of a niche job. The money is very good. They have offered $15,000 referral fees for several years now. They also just offered $2,500 referral fees to non-employees (consultants). Still, this referral fee program lacks success (maybe they should up the referral fee to $30,000?).
I am not saying these are prevalent examples. These are just anecdotes like we saw before about shopping. The fact is by the end of this year I will have made $900,000 AGI since New Years Day 2003 and all from my own work and none from real estate or investing.
I am a realist and my own philosophy is that everything works in cycles. I’m anticipating that I may have to downsize my income significantly sooner or later. The more $ you make, the more unstable that source of income is (Bill’s Law).
I cannot say this is the beginnings of a tech bubble. The Chinese and Indians have to catch up to us in wage parity first. Then I will consider suggesting that America may have a tech boom again.
I see a whole new area of endeavor in the techy area. Canned appraisal software with declining valuation formulas. All the present tables only work going up.
Hang in there, Jetson. I saw my first ’short sale’ sign in Campbell yesterday and I’ve been told values NEVER go down in Campbell, Los Gatos or Saratoga.
I’ll second the increase in SF traffic. I started taking Caltrain from SF to PA after I saw drivers reading and essentially sleeping on 280. Caltrain is more crowded than last year for sure.
MrBubble
Rent is high because FB’s are trying to recoup their mortgage payment. I’m paying $1700 in rent for a 4/2 home in Campbell. Landlord owns the home outright. The house a few blocks from us being rented out for less!
It was always bad going to the East Bay. That is why I don’t go there (even on the weekends) if I don’t have to. I also noticed there are alot more construction going over there.
Maybe traffic is worse because ppl are working two jobs.
Funny, my wife was at Toys-R-Us and the mall next next door last Friday night. Said she could not find a parking space it was so crowded (Dayton, Ohio area)
same out in the DC suburbs - MD side - everyplace in packed
M.Nair, I’m sure we’ll all be having similar experiences this holiday season. Retail is beginning to feel the pinch. Yesterday I spent the afternoon at The Grove, no less. I had to hang out there because my son was at a birthday party nearby. There were A LOT of people browsing, but not that many people buying considering the time of year. I purchased some clothes for my children and did not have to wait in line to pay. That threw me off a little bit. This is a high-end mall in a high-end area, on a Sunday, around Xmas.
I’ve sold at malls before. This is dead week - the second full week after Thanksgiving. Moreso this year with an early T’giving. Main Christmas shopping season is the weekend after Thanksgiving and the 10 days before Christmas. Early December is no-man’s-land (in so many ways).
Paul, thanks for that correction. It will teach me not to extrapolate little personal experiences into the big picture. So why is this supposed to be a dead week? Is it because people are exhausted from shopping after thanksgiving?
Builders and “investors” are dealing with real losses on the land value, buildings they built, and properties they bought to overhaul but haven’t started on. Some people look at the paper losses and feel that it is inconsequential to the economy since paper losses are not real losses. This is completely untrue, and part of the reason we have to fear even bigger price increases through more monetary inflation, especially with the various government bailout schemes ahead.
First of all, the non-paper losses on land and asset values is real. The builders borrowed money (newly created liquidity in some cases, investor dollars in others) and bought land. The money they overpaid for land is out there — including the newly created liquidity in the form of deposits in various bank accounts. That new money exists, and will be used to make price increases worse as bailouts create more money to “help” builders and investors. First, create money to buy land; next, create money to help the land buyer, but ignore the land seller.
Secondly, more money was borrowed to either build or overhaul. In the case of existing and completed buildings and flips that have NOT been sold, the loss is beyond a paper-loss as well. The builder/flipper took that loan (either newly created liquidity or investor money) and put it into the market. That money, including the new money, still exists in the banks of the marble seller, the fridge manufacturers, the wood farms, and the laborers who produced the finished but unsold good. Now, the government will again try to bail out the new seller of the new goods while ignoring the money that the previous seller and laborer still has (money created and in the market). Again, double monetary inflation.
Thirdly, HELOCs taken against properties actually bought add additional monetary creation to the picture: HELOC money that is spent, or even invested, still exists. Some (or much?) of this money was newly created liquidity. If the government bails out people who HELOCed and spent, they’re again doubling monetary creation which will have an effect on prices (increasing) or on future investments (new money and old new money available for malinvestments and bubble making).
The long term situation: more prices going up, more malinvestments from new money and old new money and old old new money, etc, etc.
“Etc, etc, etc” the slogan for all governments who never changed.
The money spent to buy depreciating assets is money that is disappearing. Buying a house for $500,000 and selling it for $400,000 results in a dispaaearance of $100,000.
Deflation is in our future, not inflation.
IMHO.
Where did the original $500k go?
When I buy a hamburger for three dollars and eat it, is $3 destroyed forever?
Not unless you HELOCed the three dollars and then defaulted on the debt.
The $3 loss would have to be passed on from the bank to the hamburger shop owner. If the govt. prints money to make sure the hamburger vendor doesn’t lose the $3, then the $3 is not destroyed.
No, the $3 is not destroyed, but is now somewhere in the sewer effluent.
The person who sold it for $500K got the $100K! And if he was smart, he’d pat himself on the back for not being the “greatest fool” and not buy real estate for a while.
results in a dispaaearance of $100,000.
Only from the perspective of the person who paid 500k. You have to look at the larger economy, the 500k is still out there in terms of money supply. What you are describing is not deflation (a decrease in the money supply).
The $100,000 IS gone. Think of it the same way as a car that’s been totalled, or a house that’s burned to the ground. The value hasn’t transferred somewhere else, it’s just gone.
Only if the bank passes the loss on to the depositor whose money was lent out.
No. If something has a certain value, whether it’s a hamburger, a house, a company, and that value decreases, that value doesn’t go somewhere else, it’s gone. I build you a bookcase, you pay me $100 for it. If that bookcase burns up, who benefits? It doesn’t help me as the bookcase builder, but now you’ve lost the value of something to hold your books.
I think you miss the point.
I bought a house for $100K and sold it for $500K. I put that $400K in the bank (or, if I spent it, the person I gave it to put it in the bank). The bank then lent that money to the guy that bought the house from me for $500K. Now the guy that bought the house from me short sales for $400K. The bank eats a $100K loss.
Great… IF the bank eats the $100K loss. But multiply the 100K loss by 30 million+ houses and the banks are insolvant, and really it is me taking the loss out of my $400K “in the bank”.
If we count my $400K in the bank as “real”, then the $100K loss has to be real also.
Any attempt by the government to keep the bank from actually losing the $100K, going insolvant, and passing the loss along to me will result in extra money in the system (my $400K in the bank) chasing lower total priced assets. The extra money in the system will mean inflation in the remaining assets.
money = total price of all assets. If the price of some assets fall, then the money needs to exaporate or other assets will have to increase in price.
I had been dreading stagflation for the last 2 years but I agree with you Combo, I’m seeing more deflationary adjustment currently. That has to have BB spooked.
Taking a bigger picture…
The ultimate bag holders of the U.S. is the Chinese and oil states. We bought stuff from them. Now they have dollars and we don’t. The only way we could keep buying from them is if they loaned us the money back.
We bought stuff, they loaned us the money back so that we could buy more stuff, so they loaned us the money back so we could buy more stuff…. repeat. $1 trillion, $2 trillion, $3 trillion, $12 trillion at last count.
As U.S. citizens go bankrupt, the losses have to be passed on to the banks. Those losses have to be passed on to the investors. Their losses have to be passed back to the Chinese and oil states. Otherwise, the $12 trillion in sovereign funds will have to chase fewer and fewer dollar based assets, jacking up the price of those assets (inflation).
Ha HA
(in best Nelson from the Simpson’s voice)
So how does that work out anyway? The Chicoms said that they would hang us with the rope we sold them. Or was that the rope they sold us? But it turns out that the rope they are hanging us with we bought from them with money we printed out of thin air backed by debt they purchased that we are going to default on. Sounds like both our heads are stuck in the same noose.
Ha HA.
“So how does that work out anyway?”
Well, either we let the finaicial system crumble, and since they own a lot of U.S. assets, their assets devalue and the $12 trillion goes poof….
Or we print the dollars needed to make sure the losses don’t get passed along to the investors, and there is $12 trillion dollars chaising non-house assetts currently valued at substantially less than $12 trillion… and those assets inflate in price to suck up the money.
Depression or hyper-infaltion or some middle ground of stagflation. Take your pick!
> Now they have dollars and we don’t.
We can print as many of those pieces of paper as we want.
That Lennar deal is quite a haircut, but sounds like they got rid of a lot of bad lots in the main bubble areas all in one fell swoop. They seemed to be the first builder to recognise the magnitude of the collapse and have been very agressive at dumping garbage as quickly as possible.
No way they come out of the downturn smelling like roses, but they’re still my pick of the big boys to actually survive. While some of the other giants might technically “survive” it’ll be in name only as a shell. Lennar will cut back to bare bones but still have a viable construction operation going when we come out of the trough.
Is this really a sale? From the WSJ:
The venture, which is 80% owned by Morgan Stanley Real Estate, enables Lennar to move the land … off its balance sheet and into the venture. Lennar has the right to buy back the lots but is not obligated. Lennar will have 50% voting rights in the venture.
Lennar has 20% ownership, yet 50% voting rights???
This smacks of self-dealing.
partnerships have great flexibility.
i am sure lennar gave up soemthing for that additonal 30% voting right.
With this new Republican bailout, capitalism and the free markets are being turned on their heads. How can you ever call our system a free market? This is Soviet style engineering, with better marketing.
And it comes from the supposed “free market” evangelical Republicans.
I’ve seen everything now.
And it comes from the supposed “free market” evangelical Republicans.
Almost… as if… there’s no difference between the parties. (/light_bulb)
Politicians tell 51% of the people what they want to hear. It’s what they’re skilled at because it’s how they get elected.
“…Almost… as if… there’s no difference between the parties”
The only slight difference… is that…the votes have been 5 Yay to 4 nay…the 5 yes votes that carried their great ideas & control of it came from:… Republicans, let’s see…. how many months are there in the last 8 years? Go get’em Chrissy Cox… you SEC Pit Bull!
I’ve been saying the same thing for a while now and getting stares that make me wonder if I have snakes growing out of my head. I’m still saying the parties are in cahoots, but now the stares have stopped and I’m getting general agreement. I think we are entering a very interesting political period of time for this country (interesting as in being trapped in a house that’s burning down around you with no chance of escape).
could the paulson communist plan be a ploy to artificially increase interest rates so the fed want have to?
Don’t worry, Joe, the engineering works to prolong the agony, but the laws of markets always come back to haunt you in the end. They can freeze interest rates all they want to keep a few people in their homes, but then they’ll have to deal with the unwanted consequence of further credit tightening, which the inevitable reaction from investors and banks. I still think it would be cheaper if we gave every FB 10K to turn in the keys and start over and let the chips fall where they may with irresponsible lenders. Of course, that’s not going to happen, I know.
I guess my problem is…in the long run we are all dead. Watching in wonder as nobody did anything about this bubble as it inflated was bad. Seeing the same assholes do everything they can to keep it inflated is much worse.
When was the last time Republicans were Capitalists? Taft? Reagan was less socialistic than any other Repub since Taft. Could not call him a Capitalist though. Barry Goldwater should have won in 1964. I was 5 years old at the time so I did not know better. It is a nice feeling to go into the Barry Goldwater Terminal at Phoenix Skyharbor or to drive on Goldwater Boulevard. Kind of a libertarian rush.
Couple of comments. First of all, the speculative nature of farmland buying in the Midwest and up North is based on what I assume if the general assumption that Ethanol production will naturally require more land, hence creating demand. Investors thinking that route need to do their homework and realize that Ethanol is turning into one of the biggest flops in the fuel industry. Ethanol stocks are being dumped like mad, and there is now even legislation against it since it actually takes more energy to produce it than it creates. Stupid stupid stupid.
In regards to the bailout, why in the hell are people even realistically discussing this still? I find it rather difficult to believe that anyone beyond the lending and RE industry will think this is a good idea. Secondly- expect pissed off people in the streets if it passes.
Someone will write a book someday about the ethanol fiasco.
At least it was a short and sweet bubble, unlike housing and mortgage finance.
It’s nearly impossible to get a consensus from the big hitters.
Politicians, bankers, and investment firms (they are opposed to the bailout) all seeing eye to eye?
I’ve got a handful of Neil’s popcorn…this is all so interesting!
Leigh
Not necessarily. Farmland buying is also popular with “the coming collapse” types. Eventually, we’ll have to stop importing so much of our food because the fuel cost will be prohibitive. At that point, anyone set up to farm in the US will be in a pretty good position.
So the theory goes, anyway.
“Eventually, we’ll have to stop importing so much of our food because the fuel cost will be prohibitive”.
Bingo! add to the fuel costs the falling dollar, the inmigration of native working class families, 1st generation & illegal hispanic families into the midwest. Is defaltion and a return to ag and manufacturing the new, unspoken policy?
If we do go this route, we also need to expand our availablity of other ag needs like fertilizers, pest control, and machinery.
Is defaltion and a return to ag and manufacturing the new, unspoken policy?
——————————
I’ve been thinking along those lines.
BTW, I read somewhere (I think Forbes???) that Ted Turner is buying up farm/ranch land like crazy. Interesting…
I have a longtime friend in Minnesota who is a farmer. He grows golden flax. He’s made a freaking fortune in the past few years and I’d hate to think what his land is worth. My husband’s mother owns a bunch of farmland in Nebraska - same thing.
The article says “$2,500 an acre.” An acre of decent, mid-western farmland should yield 150 bushels of corn per planting and about 70 bushels of wheat, I think.
With four dollar corn and eight dollar wheat, I don’t see how $2,500 is too disconnected from what the land is actually worth.
Forget about “coming collapse.” This probably has more to do with Asian food demand. Ag usually goes sky high once a generation or so, then collapses. Supply and demand. We shall see.
I grew up on a farm. Wheat was $6 a bushel in 1976. And from there it was all down hill until a year ago.
Ethanol drove all this. Its totally stupid, like other bubbles. Only thing is the ethanol play is rapidly running out of steam. Corn cost too high and the wholesale price of ethanol is too low.
oil at $87 and going down and no headlines. wow-is cnbc biased. You would think it would be a big enough story say..oil hitting $100 but no…I think thats a good signal the economy is on the downside.
I can’t help but think that energy is our next bubble. Conventional AND alternative energy.
Oil bubble is popping. You wouldn’t want to publicize that, though… sheeple might run off a cliff…
“Oil bubble is popping.”
Doubtful. Where was the capitulation? None on Main street nor any on Wall St.
“is popping” means work in progress; “has popped” means there has been capitulation. I guess by these definitions, I would have to also claim the housing bubble “is popping.”
Oil isn’t a bubble at all. The demand for oil in Asia and India far exceeds supply. The reason oil is down is that there’s an increasing sentiment that OPEC will increase supply. (I doubt this. OPEC is done with the dollar and the USA).
And for all those you point to Ethanol as being a “replacement” for oil, you might want to check those numbers. It only works in Brazil because Brazil has so few cars on the road and so much agricultural land (& cheap labor). Ethanol isn’t a viable solution for the US as a whole — although a small amount of Ethanol production will certainly help. Oil is here for at least another generation. And it’s going to $150.
Also, Brazil makes ethanol from sugar cane, not corn. Way more BTUs from sugar than corn.
“They” must have found another Ghawar. Riiiiiight!
Not budging a penny at my pump since the decline began. Something smells rotten.
It’s dropped 20, 30 cents here lately.
It’s a latency effect. The petrol currently in the pump was delivered last week, and in any case the forward sport price of oil and the actual price of delivered oil are not the same thing at all.
Same thing with foreclosures. It takes at least 6 months to foreclose somebody, so what we’re seeing now is from the beginning of this year. At this point i imagine it’s rather more than 6 months, just because the entire system is overloaded with paperwork.
Oh, such interesting, interesting, times.
And to think, they want OPEC to raise production quotas. Why? Certainly by now OPEC must see what’s coming - why should they raise now of all times? Don’t they want to make more money to buy more of our troubled banks?
“And to think, they want OPEC to raise production quotas. Why?”
It’s BS…. It’s a scam by the Oil Crime Syndicate. Don’t you see it? These pukes dial in production just under the point of price capitulation. The DON’T want $150/bbl oil as they know that capitulation WILL happen at that price. They can keep the slow squeeze on indefinitely if the price is just under the breakpoint.
Isn’t that what ever seller of goods and services does? They do their best to balance sales volume vs. margin to maximize the dollar amount their profits. OPEC and the oil companies are not charities.
LMAO…. We thank you for a kindergarten lecture on fairy tale free markets.
Puleez…
LOL.
Yes - basic economics is sometimes confused for something else around here!
For a single company, yes. But this is a cartel and wouldn’t be legal in the US. Unfortunately, we have to live with it.
Yes… lets all make excuses for monopolies in the name of “free markets”….. even when doing so is at your own economic peril….
fools..
I wonder.
I can’t help but think the big oil companies were moving prices around, trying to find the sweet spot - the “maximum price times quantity” point. They were making tremendous profits on the oil runup, so it wasn’t like their costs were high and they were merely passing these on to the consumer. No - thus the massive profits.
My guess is that perhaps they have found a new ‘maximum profit point’ - the ups and downs of gas prices gave them a tremendous amount of data regarding how much consumption there is at various price points. This gives them a new demand curve against which they can set their price.
“big oil companies” don’t control the price of oil. Sorry to burst your “hate big business” bubble.
so, last month it was complaints that MSM is hiding the “true” inflation value, now complaints that MSM is not covering the fall of oil prices. which is it? Hyperinflation or hyperdeflation?
“‘The recent layoffs were designed to right-size the company to what’s happening in real estate,’ Farrar said. ‘We’re geared to grow in a smaller market.’”
That pile of crap is still steaming…
Steaming AND stinking!
Sheesh, I guess they really DO believe we’re that dumb? Some really great quotes throughout but that takes the cake.
“right-size the company”
Last time I heard that phrase was almost 20 years ago. The word “down” just isn’t in some people’s vocabulary.
I prefer the term, “happy-size”
A Scott Adams fan!
Book value of RE has to be lower of cost or market, right? So 60% off (40% of book) is 60% off whatever Lennar paid, not necessarily 60% off the peak. I’m sure some of that stuff was bought at the peak, but adjusting for stuff that was acquired pre-2005 would make it more like a 70-80% haircut.
Sounds like home prices are following the ABX index levels in terms of the magnitude of the correction.
They need the cash. It’s a cash crunch. From the Journal:
Tax considerations are pressing builders to do deals that involve losses. The builders can only claim losses on land that has lost value once the assets are sold. If they close these deals by year end, the builders can recoup taxes all the way back to 2005, the peak of the housing market, when they were churning out huge profits and paying hefty taxes.
Lennar, which finished its fiscal year Nov. 30, will likely recoup about $250 million to $300 million in taxes from the recent sale. “Recouping the taxes is secondary,” the builder’s chief financial officer, Bruce Gross, said in an interview. “We wanted to turn hard assets to cash and further strengthen our balance sheet.”
NO… 60% off book. If they bought in 2003, then in 2005 they could have adjusted the book value up, right? They profited on the land they own getting more valuable.
I think the 60% off is from peak.
I’m pretty sure you can only adjust the book value of RE *down*; that is, recognize an impairment. That might be only in cases where RE is not your primary line of business, though. I’m 99.8% certain timber companies have to carry land at cost, for example.
The rule may be different if developing and selling RE is your primary business, but there’s a reason the phrase “lower of cost or market” is well-established.
My understanding: Unimproved land is held on books at purchase price. Adjustments would be made to value as permits, infrastructure, and eventually buildings were added.
Yeah, that sounds right.
“Farmland values increased 14 percent nationwide in the past year. Experts say high quality farmland has increased in value much more rapidly.”
“Farmland prices exploded in the 1970s driven in part by speculative investors. Those high land prices played a role in the farm crisis of the 1980s.”
“Knowing that history makes the rising land prices a little unnerving for North Dakota State University Agricultural Economist Skip Taylor. ‘It never ends well,’ says Taylor of rapid rises in farm land prices. He says rising land prices in the 70s were oftne driven by emotion, not logic and he worries this may be the same scenario.”
“University of Minnesota Economist Steve Taff agrees there are many reasons for caution. But Taff is not convinced the land market is overheated.”
+++++++++++++++++++++++++++++++++++++++++++++++++
AMEN!
Speaking from experience, this is the next under the radar bubble. Thanks for posting this Ben!
Except higher farmland prices at this point is driven somewhat by fundamentals. Ethanol subsidies, food inflation, 1.3 billion chinese blah blah blah and all that. Sure it can get bubbly like anything else, but farmland strikes me as the one thing that SHOULD be going up right now.
For example - Open land here to grwo Almonds was $2-$4k. Resonable to make a profit once you were all in. 90% of the worlds almonds are grown in the Ca Valley. Now that land is going for $10-$12k. There is no way to make money with that level of investment. I dont care how many Chinese and Indians buy these products (which they do). The commodity price has gone up (demand, decling dollar, etc..) however, not enough to cover this debt load…
I was at two conferences last week and most of the people are involved in ag production in some way. I got a chance to talk with some people who went through previous land cycles, they are very concerned, not only about the prices crashing back again (which they seem certain about) but also about the stewardship of the land when people are selling, renting to the highest bidder and everyone’s just jumping around.
Prices of almonds at trader joes $5.99 lb … I stopped buying them… there are lots of “other nuts”
… why I just got some top sirloin for $2.47 a pound at Stater Bros… steak or nuts? Beside, I come to realize I’ve been eating too much of “Neil’s All Natural Hot Buttered Derivative Popcorn” 
The world is awash in too much cheap and easy money.
I commented about this earlier, but my comment didn’t show up. In regards to ethanol, well at this time ethanol is doing AWFUL on Wall Street. In fact, ever since Bush made it an agenda, Ethanol has been a huge flop. The stuff takes MORE energy to produce than it actually makes, it pollutes more, causes food prices to rise, and lastly, as mentioned by this post, makes land more espensive.
People ‘investing’ in farmland because they think there is a gold mine in ethanol are idiots who will get burned.
The stuff takes MORE energy to produce than it actually makes, it pollutes more, causes food prices to rise, and lastly, as mentioned by this post, makes land more espensive.
Testify, jetsonboy. I cannot even look at people who talk about ethanol like the next big thing. Even the Brazilians will be turned off the thing now that they found oil. They only started this thing with sugar cane because they had no oil, but even the sugar cane ethanol is not that good and uses up more energy than it produces (not to mention the incredible acreage of natural forest that have been burnt down to produce more sugar cane). The whole thing makes me sick to my stomach, exactly like the housing bubble.
Ethanol has always been a scheme right out of a Little Rascals episode … the one where Alfalfa wants to race Waldo in their homemade boat but they don’t have money for gas, so they go to Buckwheat’s uncle’s farm, get his corn, boil it into fuel, which Weazer gets drunk on while Robert Blake shoots a pigeon. A laughable subsidy scheme.
Raw land, not even just pastures, is up 70% in Texas in the past three years.
Good farmland in Iowa, where I am from, is up close to 300% in the last 5 years. It is mostly owned free and clear and is priced way above fundamentals.
Has that Iowa farmland always gone up (before those 5 years?). Tell me that the Iowa farmland is not cyclical, that it always goes up. My buddy kept bragging about it and sending me the same frigging URL about it.
And as we know so well, land in Texas is awful darn hard to come by.
Heard from friends/relatives in the midwest that there’s a rumor that the FED will cave re: hemp and so many “are betting the farm” on it.They are buying land like crazy with dreams of making big money on hemp. Hemp can be used as fertilizer, it grows like a weed even in drought, it can be used as food, for clothing, and for fuel. If you read about hemp, it sounds like something that can save the planet.
1031 money and national home builder buying has driven land prices beyond what is profitable to grow any reasonable commodity. That money will dry up soon *HB money died last year) and then we will be foreclosing on “poor farmers” (ie speculative morons!
Speaking of 1031, that provision forces commerical real estate owners to buy for as much as they sell or (gosh!) pay taxes.
A similar provision once forced homeowners to do the same, but now they can sell tax free up to (what is it?) $600K in gains per couple? So those who sell don’t have to buy if prices are falling.
“‘Land is a nonearning asset. The builders have to get it off their balance sheet’ says Jeffrey Gault, CEO of a land investment company that has raised $350 million to buy land from builders across the country.”
“Farmland values increased 14 percent nationwide in the past year. Experts say high quality farmland has increased in value much more rapidly.”
“Farmland prices exploded in the 1970s driven in part by speculative investors. Those high land prices played a role in the farm crisis of the 1980s.”
This is what really, really chaps my hide. Here in WA, farmland is being taken out of production, and sold at hideous prices for, you guessed it, houses. The price of raw land around here is absolutely insane. There is no way, whatsoever, to profit on it aside from building some monster house that nobody wants, or can afford.
Now, we have more “land investors” purchasing that land from builders to do what, sit on it? $#%% that. I wanted 10 acres for an organic farm, but watched in horror as it disappeared at prices I couldn’t even dream of affording, much less turn a profit on. It’s all good though, because we, as Americans, can just import our produce from China, where the average farm is 1/3 acre, and irrigated with toxic waste water. Brilliant.
Raw land prices frustrate the heck out of us too. We’ve had similiar ideas in the past about a small farm and watch the lot in back of us increase 4x in 6 years.
There’s nothing to do but sit and wait for it to pop.
There’s nothing to do but sit and wait for it to pop.
That’s what Neil’s doing. Ha! Both popcorn and farmland will pop!
“As I read, though, a niggling thought took over my brain: If anyone is getting their rate frozen on their adjustable-rate mortgages, I want mine frozen too.”
OK, so I don’t have a mortgage. But when I upgraded to DSL, I got a teaser rate from my ISP of $29.95 per month. After the teaser rate expired, I pleaded for Worldnet to keep it, threatening to go to Verizon, but they called my bluff suspecting I wouldn’t want the hassle, and raised it to $39.95 per month.
I want my teaser rate restored.
And how about all those people who take Home Depot up on their “no payments until 2009″ offer? Can’t that be extended?
Can somoeone please explain what happens to the lost interest on a “frozen” rate, anyway? If my 2% that was to go to 7% gets frozen for 5 years, what happens to the extra 5% a year? Does it get added onto my loan at the back-end, or am I getting a nice gift from the investors that bought these securities?
As much as I’m pissed at this plan as a fence-sitter, if I bought a modest house within my means these past few years and got a fixed rate, I’d be livid. The plan itself sounds ridiculous since if people can’t afford the higher rate now, they won’t in a few years either. Every day, this absurd plan is starting to look more like it’s going to become a reality.
I want my first month rent free teaser extended too!
I can do one better. Something similar happened to my DSL service (actually it was an extra charge they refused to remove after three attempts), so I decided to quit paying my bill. There’s plenty of competition, and there’s nothing they can do to my credit.
But Taff is not convinced the land market is overheated.”
dude, read the first paragraph
60% off and those are 2007 prices- from 05 peak must be awesome
By freezing rates the market is going to respond by increasing rates for all the new buyers. As a result, home prices are going to fall further faster because there will be even less buyers.
Silver lining: At least the govt seems to have finally stumbled upon a quick and highly-effective means of restoring affordability!
It’s nice to see that Paulson can work that football with the best of them.
Here in DC we like to call two timeouts in a row.
Hah.
(That call was kinda painful.)
I think the class action suits may put a halt to the entire debacle. I hope.
A few thoughts about this bailout.
Let’s say I am the lender. Would I even offer teaser rate loans anymore? If I do, there is a chance they will become “fixed” teaser rate loans. So I would expect these products to essentially disappear. Not a bad thing in my book, but an obvious consequence. Maybe these loans have dried up already. If not, they will soon.
I also think the view of our mortgage market in general takes a hit, from an investor perspective. Not that it hasn’t already. But why would people want to loan in an environment that now resembles the old Soviet system? Contracts mean nothing.
Another thought. The lenders gave the money at higher rates to compensate for the higher default risk. Specifically, they knew some loans were going to go belly up, so the ones that did pay off the loan insured/compensated for the rest. So now those people that could have made ends meet are going to want the fixed teaser rates too. This leaves the lenders with massive losses from foreclosers and no upside for the ones that would have made the payments, but will now grab the fixed teaser rates. I don’t see why lenders will continue to offer loans under these circumstances.
This is really no different than the disastrous results the Soviets had trying to manage their economy. I thought the die-hard anti-Communist Republicans learned this lesson long ago?
And no one has still answered my questions: Who and how will they determine people “can’t” afford the uptick in their ARM? I guess the best way to play the game is quickly go buy tons of stuff, run up the credit cards, buy luxury items and then plead they can’t afford the rate increase. Are the same loan officers that gave the loans to begin with going to decide who gets the freeze? Who is entitled to this deal? What if flippers and/or specuvestors have been able to keep payments current, do they get the freeze? Does someone who either refied or HELOCed ever in current abode get the freeze? What about those that paid more and got a 30 yr fixed this past year - do they get a decrease in rate? Will they look at the original loan and make sure there was no fraud on the application? Leigh implied the other day that there won’t be the resources to look at loans on an individual basis.
The ones entitled to get this deal have to prove that they can make their teaser payments and did not ever fall behind - not sure how many that would apply to. I’m also thinking that there will be some quitting of jobs going on here — going from $12 ph to $10 ph? No, speculators do not qualify for this.
Under our “patriotic” leaders’ plans, the most irresponsible will get the most out of this and the most responsible will get their pockets picked the most to pay for this socialism. Welcome to the New Soviet Amerika!
in other words ….
” How come Andrew gets to get up? If he gets up, we’ll all get up, IT’LL BE ANARCHY! ”
TBC
It’s nearly impossible to get a consensus from the big hitters.
Politicians, bankers, and investment firms (they are opposed to the bailout)–look at the sheer magnitude and cross section of these people–they all have an their own agenda!
Crazy,
The reset chart speaks volumes–how many resources, in terms of time, money, and warm capable bodies, would it take to go through each package a deem who are/not qualified?
Now back to the consesus and terms–it’s madness baby!
I do not have the answer–seems the best course of action is inaction.
Sigh,
Leigh
er…they all have their own agenda.
They need to just sit back and watch the carnage like the rest of us. I can already hear their conversations…
“Boy, fellow Senators and Congressmen and women, it’s getting downright fugly out there. It looks like a war zone, what with all of the foreclosures, violence and depravity. I reckon we underestimated the effects of our raping and pillaging of this country. Pour me another one of those single malt scotches please, would you kind sir? I need to call the wife. She’s getting her third breast augmentation today. If it weren’t covered by our health care plan, I might be annoyed.” Leaves briefly, then returns. “Anyhow, back to the lawlessness problem and the headache it is causing me. I really want a larger wall around my compound, er gated community. So, I’ve come up with some wonderful pork to get the job done. You see, I’d like to tie it in with body armor for the troops, or educational funding. What do you think? I don’t know. We’ll talk later tonight at the party. Meanwhile, I need to get going so I don’t miss my tee time. Life’s grand.”
Good one, B Bear.
I think this shows just how desperate the industry is. They know this has long term problems but, their currents ‘books’ are in serious touble. This is an effort to deal with the short term emergency, the heck with the long term.
“In another sign of the collapse of the market for new homes, builder Lennar Corp. has dumped a portfolio of 11,000 properties for 40 percent of their previously-stated book value.”
Sounds like lots of comps just got screwed up to the tune of a sixty percent discount off last week’s new home price…
Will never be used as comps . . . not arms length transaction and bulk sale discounts do not equal single purchases.
“One industry veteran — requesting his name not be used — raised another issue: ‘OK, so you keep the rate the same for the subprime borrower. Then the prime borrower who has been current all along and who also has an ARM says, ‘Hey me too. Keep my rate the same.’”
———————
I’m not sure that those who aren’t being “rate extended” need to be so envious of those that are. These people are being kept in homes that were probably sold at a much higher price than they should have been, and are now being set up to continue to pay on a loan based on that high amount, but with no chance of ever building real equity, even over dozens of years. I’m sure that the “bailouts” will be structured so that the additional “market interest” is actually added onto the pricipal in some way (maybe at the time of sale), so that even 20 years from now the properties will just barely be worth what the present debt value implies.
Maybe someone who bought the exact same house with a fixed 30 at the same time as an APR bum has a case to be angry (if their rate is higher than the “freeze rate”), but for the rest of us, this is like watching someone be allowed to pay 6% interest on their $40,000 loan on a 2004 Honda Civic, instead of 12%. Either way, the car is only worth about ten grand now, and the buyer is a fool if they continue to pay on that debt.
In a few years, buy the houses around the “bailees” for half of what they paid, and see how smug they are about their extended APR term. The way things are going, you’ll probably get a lower 30 year fixed rate then than any freeze rate they get now.
“In a few years, buy the houses around the “bailees” for half of what they paid, and see how smug they are about their extended APR term. The way things are going, you’ll probably get a lower 30 year fixed rate then than any freeze rate they get now.”
Hey, I’d like to have moved into a high priced POS at a 3% teaser rate and have it frozen for 20yrs. What great rent control. I could even let the maintenance slide, park cars on the lawn etc, and take wonderful vacations every year while banking moola and playing the stock market for my equity. I’m sure you wouldn’t want me for a neighbor even if house prices dropped by 50%!
“An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000…”
$2.5 tr…tr…tr…???
Wow, that matches my estimate of mortgage losses once this thing unwinds. I may need to raise my number.
Don’t worry.
Sen. Clinton’s freeze includes a $5 Billion bailout. In other words, 0.2% of the assests will be saved. Yep… one in five hundred.
In investing, its best not to panic, but if you’re going to panic, be the first to panic.
Got popcorn?
Neil
Sounds like HC is order-of-magnitude challenged…
I think not…she once turned $1000… via wall street… into $100,000 in less than a week…guess she had enough left over to send Chelsea to Stanford.
Yeah. That’s a new number. Maybe a bit of honesty for once?
Exeter I think that # is only Half..I can’t understand why the MSM and the WH would be honest NOW?
$2.5 Trillion… a skosh more I am guessing.
“Lennar Corp. has dumped a portfolio of 11,000 properties for 40 percent of their previously-stated book value. Lennar, the nation’s largest builder in terms of revenue, is selling the properties to a joint venture it has established with the real estate arm of Wall Street bank Morgan Stanley.”
If they had reduced the prices of these home for regular buyers they would have gotten more that 40 cents on the dollar. But most just want to add in more granite counter tops and refuse to lower the prices much.
Granite counter tops..and Stainless steel …
have you ever wondered when that Fad is going to be Out? Like when in the 70s it was Harvest Gold, and Avocado green
gotta understand one thing . . . the granite and stainless steel thing was de rigeur in high end ($500K plus) houses in the mid-1990s and has now matriculated down to the great unwashed, much like the cell phone and Rolex watch (fake of course). The million dollar places (custom that is) are into different materials now.
“The million dollar places (custom that is) are into different materials now. ”
Are they going back to Formica? It’s funny, some of my kids freinds don’t know what formica is. Kind of like roll up window knobs on cars.
Please do tell how much longer until these fads are gone? Almost as stupid as dual sinks in the master bath. Like I want to stand right next to my sweetie as I do my personal hygiene - talk about romance - why not dual potties next to each other - people are so lame somtimes.
http://tinyurl.com/323xa3
LOL. I had a cultural anthropology class way back in the late 70s. The teacher told us that in Korea couples would use toilets while holding hands. I would’t have researched this if you did not bring it up.
At least one thing will last as long as the 100 year mortgages on these houses.
Oddly enough, this ‘classy, state of the art’ stainless and granite will look ‘government issue’ 35 years from now because the owners, the ones dumb enough to stick it out, won’t be able to afford to replace it 35 years from now.
Like when in the 70s it was Harvest Gold, and Avocado green
Hey, I love those avocado green appliances. Not joking.
I also miss the car colors of the ’60s and ’70s.
I looked a place in 2002 that had all dark brown bathroom fixtures. Brown sink, brown tub, brown toilet. Butt ugly!
Brown toilet won`t show the “dirt”. HA HA HA
I think much of what Lennar put into the joint venture is just dirt, not homes.
These are primarily unbuilt lots, right?
I don’t get how so many people have loans that they know nothing about or misstated information on their applications. You end up having to sign or initial tons of documents at closing. There’s the HUD one page that clearly states what the loan is, rate, what total payments will be, etc. You at least initial every page of the application. How did little miss divorcee end up with an application that stated she was an attorney? We always received proposed settlement docs at least a few days before closing - if they changed her app, she should have seen it. We people going to closings with blindfolds on?
None of those numbers match or add up on the closing documents. The fact there are so many documents to sign should be a clear indication that fraud is the main objective of the real estate industry. There is no other eason to have such a mess for peopel to sign - other than to ensure that they don’t actually read the paperwork.
Fraud in the RE industry and the paperwork of dozens of pages is perpetuated by attorneys.
Devil, I call BS. People are lazy. We many times questioned the proposed settlement docs and required changes. We walked away from a lender that was suggesting we fraud on the application. Lot’s of the forms are standard legal mumbo jumbo, but the application and HUD one page stating the loan terms are clear and straight forward.
Agree, 100% Devildog!!!!!
The best way to ensure borrowers understand what they’re getting into is to keep the loan package under 5 pages. Easy to do — I’ll design it myself, if they need me to.
With all REIC contracts now, 90% is CYA for the brokers/realtors & other players — and it is VERY REDUNDANT!!!
Don’t assume every borrower knows which page(s) are the important ones.
Which raises the question of exactly how many homes were bought with lies, lies and more lies. And why these lies would deserve a bailout?
“The surprisingly high number of subprime loans among more credit-worthy borrowers shows how far such mortgages have spread into the economy — including middle-class and wealthy communities where they once were scarce.”
But… but… but… I was promised containment. They just said middle-class and wealthy communities are going to be hit!
chuckle…
Got popcorn?
Neil
They are contained. Everything will be fine.
Now just get back to the work work of our country and borrow more money.
PriceMan, is that you? What are you going to fix next, PriceMan?
It might be a decade or more to see how this reshapes our local landscapes, adding yet another reason not to buy anytime soon. There’s no telling what a particular neighborhood’s socioeconomic composition will be until things get sorted out. This especially applies to areas that have seen lots of new construction - stay away!
I am worried about this very issue in DC. High-priced condos in what have been, in recent history, the heart of the ghetto.
A lot of gentrification has happened in this town in the last few years, but I’m wondering how much of it was real and how quickly it could retreat.
I share those exact same concerns, tulips. IMO, capital can shift around quite quickly in a city. Just because the urban decay of the 50s-70s seems like ancient history to many doesn’t mean it didn’t happen.
A lot of gentrification has happened in this town in the last few years, but I’m wondering how much of it was real and how quickly it could retreat.
Oh, I’m guessing it could retreat rather quickly. I grew up right across the river in VA and I’m consistently amazed at neighborhoods that are now considered desireable (or liveable) — in the ’80s and early ’90s, many of those places were marginal. Shaw and the U Street corridor, for example, are much different beasts than when I moved away.
The retreat could happen in Chicago, too. I shudder when I pass through those big soul-sucking condo canyons. We have plenty of neighborhoods that’ve done a 180 degree turn in the past decade, and that trend could be reversed.
In LA, my parents used to live in the Silverlake area back in the 50s and 60s. Even then, it was a crime-infested ghetto where you didn’t walk alone at night.
It was here on the HBB that I saw people referring to it as “upscale.” Obviously NOT people who grew up here and know the history of the area (at one point, it really was upscale, but that was a long time ago).
I’m more concerned about the places that aren’t ghettos and are far from good jobs, with lots of soon to be unneeded floor space on what was very, very inexpensive land. Also concerning are the inner ring of burbs.
Two DC “renaissance” anecdotes:
1. Did some paintwork in a townhouse that the guy bought for 90K and sold for $400-plus. This up and coming neighborhood featured a complete burnout in the same row, as well as a functioning crack den. The dude was relocating to Portland, was stoned and laughing all the way. He knew. Interestingly, he worked for a non-profit that promoted retirement savings.
2. Early 30s gov’t lawyer bought a condo renovation in an old school, in the middle of the ghetto, that was surrounded by a high chainlink fence. And not so hidden, or simmering, resentment. Big concern was the security door that wouldn’t close properly. He thought he’d scored and was pretty smug about it. Not. He’s in jail, both in terms of his job and his domicile. The have-nots will be coming over the wall soon.
I am worried about this very issue in DC. High-priced condos in what have been, in recent history, the heart of the ghetto.
It will be a corrollary to HBB. Some new social phenomenon to write about. Think about it: If rates are frozen for 5 years while new loan applicants have to have the docs and traditional loans, the current residents of an upscale area could be slum culture, but the only ones who could afford the unoccupied places for sale in the same neighborhoods would be upscale professionals. Ask yourself if you would voluntarily decide you want to go and integrate with a culture you do not feel comfortable with. Few people want to discuss this because they want to be politically correct. But they are no fools. They will nod their heads silently and wait it out. If the freeze on rates does not happen, we will get to mingle with other professionals sooner in upscale condos. Otherwise we will continue to rent and use the on line apartment reviews to find the most peaceful apartment complexes to rent in.
I coulda sworm that flippers bought in upscale wealthy communities as well. No? I saw a show once…
“‘It sounds like an oxymoron to say we’re growing while laying people off,’ said Lisa Farrar”
“‘The recent layoffs were designed to right-size the company to what’s happening in real estate,’ Farrar said. ‘We’re geared to grow in a smaller market.’”
If it sounds like an oxymoron, quacks like one and walks like one…….
It sounds like an oxymoron to say they are growing the company while the stck price is crashing and they are booking billions of dollars a month in losses. Growing toward insolvancy.
You’re too kind. It’s pure bullshit. Farrar is delusional.
If the size of a market shrinks 50 pct from 1 billion to 500 million, all the sellers get whacked including CFC.
Sounds like the morons are on OxyContin.
Pensacola, FL
This rate freeze talk by Paulson, et el., makes me wish my wife and I didn’t have so much equity in our house. I would seriously consider jingling the keys to my lender and saying - “lower our fixed rate, or I’m walking”.
I hope fixed rate borrowers with little or no equity will protest this break for ARM borrowers by demanding a rate reduction. Of course, it is unlikely to happen unless people actually start turning in their keys.
I heard somewhere that homes/townhouses for around $200 - $300K are selling; it’s the higher-priced properties (upward of $300K) and condos that are sitting on the market. Is there any truth to this?
Depends, what market?
“‘The recent layoffs were designed to right-size the company to what’s happening in real estate,’ Farrar said. ‘We’re geared to grow in a smaller market.’”
And some day we’ll grow to the size we were before we decided to make ourselves smaller. Am I reading that right? My brain hurts.
“Moody’s Investors Service is preparing the biggest credit rating cuts since subprime mortgages contaminated the bond market, foreshadowing losses for investments that pay Florida teachers and money market funds.”
Imagine that, there are investors on the other side of these mortgage investments ! I can’t believe it took this long for everyone to realize that you can’t just change the terms of the subprime mortgages because those interest payments are income to someone somewhere ! Sheesh !
As far as these rating agencies go, its just tragic that they were asleep at the switch. Its their job to be prudent and they were NOT anywhere near prudent and diligent until well after it was too late. They deserve to go down, just like the accounting firms did in the wake of Enron and company.
Little by little the country is waking up to the harsh reality behind the housing bubble. Sleeping bears only sleep so long. When they wake they are hungry and irritable.
We have a long, long way to go before this is all over. I love how the media keeps printing forecasts of when the downturn will end. You know when it will end ? When housing prices become reasonable again so that the backlog of unsold homes can clear. Not before then. House prices will have to fall 30-50% before we reach that point. And people will need to have jobs and banks will once again have to want to load money for mortgages. This will take a long, long time.
I’m renting. Every time I see the house prices drop I do another calculation of how many months of rent it is. In some cases I’ve lived the last 5 years rent free versus if I had bought a house !
Wow …..IMHO,the new teaser rate bail-out plan is a attempt to spread out the foreclosures into the future . If lenders add the interest owning to the back end of the loan in 5 or 6 years and recast the loan ,the increase in payment would be sky high and create a foreclosure at that time ,unless real estate goes up .
The only viable answer is to give borrowers a 5% or 6% fixed interest rate for 5 to 7 years and than adjust it to the market rate in 5 to 7 years .if the borrower can’t afford that payment verses the 7 to 12 %rate they would of got on the adjustable than they cant afford the payment or they were just speculators .Of course at the same time the Feds would have to bring the fed rates down to 1 to 2% .The only reason I’m saying that it would have to be a fixed rate for 5 to 7 years is because the borrower needs to pay down equity . The idea would be that at the end of 5 to 7 years inflation would increase the value of the home a little and the equity buy down would give the borrower some skin in the game .Also , the fixed rate would buy time for the borrowers to get cost of living raises in those five to 7 years .
Many borrowers can afford a 5 to 6 % rate but they can’t afford the 7% to 12% rate they would of got .
I would really like to know if the real interest rate is being added at the end of the 5 or 6 year period of freezing the teaser rate or not .
I am not in favor of any bail-outs ,but if the lenders are going to play with bail -outs, than come up with something that will work for borrowers that can pay ….not speculators or liar borrowers .
I’m sure a lot of prime borrowers expected to refinance into a fixed loan but now the credit crunch and low appraisals prevent this . I don’t see why these people should be stuck with a 8 to 12% adjusted rate .
Again ,I’m not in favor of any bail outs , but a lender and borrower can change the contract if they want to at their own expense .
There is little to lose in terms of a willingness of investors to buy mortgage bonds of changing the terms after the fact. That willingness is gone anyway.
The question is wheter it is gone for just ARMs, teaser rates, stated income, no-doc etc. Or is it gone for conforming, self-amortizing loans as well. The former we are better off without. The latter could be a disaster.
Isn’t this bail out attempt for the purpose of bailing out the major lenders and investment banks holdings that they can’t mark to market or can’t sell in the secondary market .In other words ,they want to take old money and restructure it so they don’t need to come up with new money because of the credit crunch . The banks can’t sell the property either because of excess supply and to many foreclosures ,so keeping borrowers paying is the best answer for lenders that are carrying those notes right now . You can only do this bail out with lenders that are bag-holders that are carrying the paper that they couldn’t sell the loans when the credit crunch hit (in other words loans that hadn’t been broken up into SIV’s yet .
I think Countrywide is a major holder of unsaleable notes and potential foreclosures .
“The former we are better off without. The latter could be a disaster.”
But there will be a price crash either way, as it was ARMs, teaser rates, stated income, no-doc etc that supported bubblelicious valuations.
“That willingness is gone anyway.”
It could become more gone if a measure is passed to modify contracts in favor of shoring up bank balance sheets.
Today in the WSJ they pointed out that E*Trade sold of its subprime portfolio for about 29 cents on the dollar. Ouch.
that’s up from last weeks 26 cents
it’s booming
Someone did additional analysis of the deal and came up with 11 cents on the dollar.
I’m watching CNBC as I work this morning.
Did I just see CountryWide “bank” advertise that it would pay consumers 5.50% for their deposits ? Did it just say something about $100B in assets and not mention that they are nearly insolvent ?
Try googling CD rates. Countrywide is offering a lot. We didn’t bite. For even more fun, look at the price of CFC bonds.
I have a co-worker/friend who informed me last week that he got a Countrywide CD at 5.50% to invest the money he made on his home sale.
I mostly left it alone and said, “My only concern would be the recent news about……” and we left it at that. Of all the places to put my cash, that’s about the last place I’d put it. Well, I might pass on the Iraqi dinars first, but CW’s up there.
Analysts say that problems in the nation’s fractured housing market is so far-reaching that a proposed Bush administration-backed plan will not help borrowers or bankers from escaping increasing foreclosures and defaults.
Good. Instead of trying to delay the inevitable, get the painful part over with as quickly as possible.
I’ve been telling you guys for over year that this is the ultimate bubble hedge:
http://finance.yahoo.com/charts#chart1:symbol=brk-b;range=1y;charttype=line;crosshair=on;logscale=on;source=undefined
Maybe, but it is an incredible amount of exposure to finance.
I’ll stick with Vale
http://tinyurl.com/zgg7c
I think some of them were, as you state, Rule 144 sales.
However, haven’t some press reports hinted that this might not be the case in all of his selling? Or rather, was that Mozilo’s?
See insider sales at TOL since December 2005:
http://finance.yahoo.com/q/it?s=TOL
Also - see the Tan Man’s selling of CFC since June 2006:
http://finance.yahoo.com/q/it?s=CFC
“As I read, though, a niggling thought took over my brain: If anyone is getting their rate frozen on their adjustable-rate mortgages, I want mine frozen too.”
Permanently-low teaser rates for everybody!!
My first month of rent was free. Call it my teaser-rent. I want my teaser-rent frozen.
The End of Consumer Credit as we know it.
As the losses mount, the credit crunch will spread from mortgages to auto loans and to all forms of consumer lending. The days of Americans borrowing to consume are finally coming to a long over due end. Although it seems like science fiction to Americans raised on credit cards, within a few years most will only be able to buy those goods they can afford to pay for with cash.
“An analysis for The Wall Street Journal of more than $2.5 trillion in subprime loans made since 2000 shows that as the number of subprime loans mushroomed, an increasing proportion of them went to people with credit scores high enough to often qualify for conventional loans with far better terms.”
We’re talkin’ HalLoanucinogenic numbers, dude.
Nope. Not going to work. This land they’re buying and selling in the Dakotas and MN won’t be worth squat in the future. The climate here is getting drier and the water quality isn’t good in some spots. While I have my doubts on global warming, changing precipitation patterns will make a good chunk of the Great Plains arid. The farmland we have now isn’t very good and most of the agriculture out here is heavily subsidized by Uncle Fed. Anyone thinking this part of the USA is a good place to bug out, well better carry a 50 year supply of MREs. Land here in SD will likely revert back to perhaps less than $800-900 per acre (yes that low). In some rural areas the land may literally be worth nothing or close to it. I saw it here before the flippers came and it will fall.
“‘We reviewed her closing docs and realized that this other broker put her in a stated-income subprime loan, created a job for her as an attorney working for the closing attorney’s firm, and the attorney verified her employment. They charged her one point on the front and two on the back (YSP) on a $600,000 loan.’ — R.S., Mass.”
One in the front and two in the back ? They really screwed her good!
What if BB lowers the interest rate down to 1% with time and the ARM teaser loans tied to the cost of funds index go down to a effective rate of 4% ,than are the powers going to unfreeze the teaser rate because the real rate is lower ?
All i”m trying to say is that anytime you mess with contract law you create more problems and more grounds for lawsuits . The bail out people can’t even pick and choose who they want to bail out because of a possible lawsuits for discrimination on bail outs . These clowns should just let the market factors sort this mess out and let the correction take place .
I think I heard the Tan Man say on CSNBC in essence that a freeze on teaser rates should apply to speculators also . Is there any question that the powers are trying to figure out how to change bag-holders ?
I hope you didn’t expect less.
“Ray Kvalvog thinks it’s a no brainer. Farmland is the best investment going.
This is the next bubble. Neil, I think there is a popcorn shortage. What goes up must come down (eventually).
There’s very little financing available for undeveloped land. I don’t think it will bubble. You need to have cash, and most folks with cash in the US these days are not investing it in the US.
Watching the Paulson show this morning made me ill, especially the part about making state bondholders take the hit for the Bush era greedfest. I think I will contact AARP and see if they will pit their lobbyists against any such bailout that would impact their membership. Of course, these sad attempts to keep the crap afloat for another year or two won’t work. The markets will eventually come along and flush this toilet, one way or another. The only question is how many responsible people will get flushed too, and this number is probably in direct proportion to government/election year involvement.
The Ventura Star did a pretty good piece on Sunday’s homeselling frenzy. Multiple offers! Hundreds of eager buyers jumping at the chance to finance 100%!
No it wasn’t 2005, it was a foreclosure auction in Oxnard. What amazes me is the guy who financed 100% and clearly overpaid. I didn’t realize these kinds of clowns would still qualify: http://www.venturacountystar.com/news/2007/dec/03/auctioneer-sells-40-new-homes-in-an-hour-buyers/