The Housing Bubble

Jeez.. Looks like CNBC has transitioned full-time into Wall Street cheerleading. They are bashing the Fed like no tomorrow, for cutting “only” 25 basis pts.

http://www.cnbc.com/id/15840232?video=607238545&play=1

These gloomsters are going to create a recession through the “self-fulfilling prophecy” effect on the labor market. When corporate managers “know” a recession is on the way, they also “know” that demand for their product will fall, and hence (according to the Harvard B-school model of instantaneous equilibrium adjustment) they proactively “right-size” their staff for a drop in demand.

Of course, once everyone “right-sizes” their staffs, demand indeed does drop.

I’ve been doing some polling of customers in the industries I do work in, regarding thoughts of a recession or a slowdown. Almost to the T, I found that the businesses I work with who operate on credit are fearing or already facing recessionary pressures. Yet the businesses that operate on a absolute positive cashflow (meaning they have money in the bank, always) are not fearing or experiencing recessionary pressures.

My main business is in consulting, and we’re cashflow positive by almost 160 days. We’re not experiencing any slowdown, and it looks like 2008 will be a growth year (that would be growth year #9 in a row). None of my employees or partners are fearing a slowdown, either.

My secondary businesses is NOT cashflow positive, as the clients we serve (churches) are very slow to pay, so we operate on a negative cashflow basis (we use credit to keep things consistent). In this industry, I already have felt the crunch, and expect 2008 to decline almost 30% in income and over 40% in collections (meaning we’ll likely lose 10% over the year).

In my third business (blogging and evangelizing for businesses), there is no cash flow need other than my labor, but I am seeing a huge growth in businesses interested in having a blog presence. There is a ton of competition, but the people with the longest histories in the new market tend to get paid fairly decently, considering you can work from the couch. My advertising income alone on my sites is up significantly (up over 70% more per visitor, YOY), and my hourly rate is also up significantly (up over 35% more per hour, YOY).

I’d say we are in a nationwide recession, but you have to look at the difference between companies: do they operate cash positive or on credit? Do they have a lot of inventory, or are they primarily labor? Do they position themselves at the low-price, high-competition segment of the market, or the high-price, low-competition segment?

This is the first time in my life that my wealthy friends are freaking out all over the place, even people I know with a net worth in the 8 figures, but my poor friends don’t seem to be having any additional pains. I guess when you’re used to eating ALDI, and you work within 5 miles of your home (retail, restaurants, etc), the cost of food and gas isn’t as large of a burden. I also noticed that my poor friends have always worn sweaters in the house, whereas my rich friends would just push the thermostat up 3 degrees.

2008 will be an amazing year for contrarians, I know that.

academics that won’t lose their jobs, cute
these guys are cheering a recession as their side of the isle advances

academic camp some of the most senior economists in the profession – Bob Shiller, Marty Feldstein, Larry Summers, Paul Krugman – are all in various degrees in the hard landing camp or very concerned about a hard landing.

The gloomsters are wrong, as today’s meteoric rise in the stock market clearly attests. No invester would be going long at this point if a recession were a sure thing.

http://www.marketwatch.com/tools/marketsummary/

Futures are bid up probably on that “new” fed news that came out last night. Don’t tell me this is going to restart that rally!

yet another indication of what a moron he is…

Quote of the day:

“In the modern, media age, it’s a lot more important to look like you’re solving a problem than to actually solve it.”

It is good finally to see an explanation of what was meant by the various assertions that “the industry” had agreed to freeze the teaser rates. According to this Asia Times article, some of the largest loan servicers are arguing that their standard agreement with bond buyers includes the authority to alter the terms of the loans (presumably, when they deem this to be in the best interests of the bondholders?) - the author points out that one lawsuit by one disgruntled bondholder might “stay” the freeze and render it useless. He ties this to the court decisions where Deutsche Bank and another servicer were denied the authority to foreclose, on the grounds that they did not have the actual title to the subject properties, and therefore lacked standing.

The real reason for the “Freeze” is that bondholders have the right to sue for face value of all bonds if there was “fraud in the origination process”.

There is a very real threat that thousands of global banks will turn on US banks with legal suits demanding full payment of bonds. (as is their legal right).

This would result in instant insolvency for US banks, and necessitate a transfer of bank ownership to their foreign counterparts.

The “freeze” is an effort to save the US banking system — from both collapse, and foreign ownership.

I was wondering the same thing too. I work in an industry that is usually the first cut when it comes to spending (IT Education) but we’ve seem to be going gangbusters lately with new business. Not complaining at all though, give me time to get my financial house in order. Thanks again Ben for running this blog!

Dec. 12 (Bloomberg) — The Florida investment fund for local governments that lost half its assets to redemptions last month has been reduced by an additional $1.9 billion since the pool was opened following a freeze on accounts.

I believe it’s expire date is longer because it is ultra pasturized.
I bought a half gallon a few months back and the difference in taste amazed me.
Makes regular milk taste like water.
Try some and see.

I never believed in the organic thing, but gf got me started on it.
Check prices and try some things.
Rice is another item where the quality kicks asz.

Carry on…….

I grew up on a farm and we had fresh milk for a couple of years - there’s nothing like it. One thing that’s different is it’s not homogenized. Homogenization is unhealthy because your body can’t properly digest the product as it pulverizes the cream molecules and permanently mixes them with the rest of the milk. Not sure how this affects the taste.

In general though, anything home grown and fresh tastes amazing, while store bought food tastes like cardboard.

Much milk sold as “organic” is from the Guernsey cow, this milk has 50% more protein and a higher butter fat content and I believe a slightly better taste. The cows do not produce as much as Holsteins and are not as profitable for modern dairy production. (There are dairy farm exceptions, primarily for the specialty cheese industry - not cheeses that you would find in any mass market store.)

As to organic or non organic, all chemicals cost moneys. There is no advantage in putting any pesticides on crops that are going to be fed to cows. The cost of fertilizers is expensive and generally used only on corn fields. I use anhydrous ammonia on the corn field, I am therefore not ‘organic’. That is the only chemical that comes near cows. from UC Berkeley “Contrary to what most people believe, “organic” does not automatically mean “pesticide-free” or “chemical-free”. In fact, under the laws of most states, organic farmers are allowed to use a wide variety of chemical sprays and powders on their crops.” I would estimate that 90%+ of all milk sold in the Midwest is able to be labeled “Organic”.

The big difference in taste is how the cows are allowed to feed. In California, the cows are kept penned in mass with regulated feed. The reason is the prohibitive cost of land. In Wisconsin and Minnesota the cows are allowed to free range. It is funny to taste milk from a cow that has been feeding on wild garlic and onions!

Most dairy farmers fertilizer is the cows manure and urine. This is dried and spread over the previous years feed range or next years crop plantings. Cows will not feed on land that they previously defecated upon. The land has to sit for a year.

Ultra or Super Pasturization is what makes the milk last longer. If milk wasnt pasturized it would only 2-3 days.

“I was browsing through last night’s California thread this morning and noticed Hoz’s thread about dairy farms and Chinese/Indian milk demand causing the price increases.”

That would be odd, if true. Chinese are almost all lactose intolerant. Most of the Chinese students I know took a while (in the U.S.) before they got used to eating cheese, as it is a rarity in China.

Anecdotally, crime is up in San Diego as well. Haven’t seen the numbers, but this from conversations with people who work for different cities in SD County.

More stories of break-ins & car thefts. Definitely more graffiti in So Cal in the past year (my personal leading recessionary indicator).

Also, heard that suicides are up. ‘Tis the season, but it’s still higher than most years. Again, just anecdotal, but interesting…

Doesn’t surprise me that crime is up in FLA. Last night we had another story on the news about a large grow house operation that was supplying big cities all over the US. It’s pretty much a free for all, IMHO, on account of the rule of law has become this sort of whim, rather than an agreement. But the example is set from the top. People at all levels think they should be able to “get away with it”, too. The attorney general of the state of Florida should be prosecuting all sorts of crime, particularly mortgage fraud and gang violence. He especially should be looking into Jeb’s role with the State Board of Administration and the sweetheart deal with Lehman. But no. So therefore, other people just sort of shrug and do what they wanted to do, anyway.

Consider this: Balti-morgue’s murder rate is up for the year compared to the last years. However, Balti-morgue managed to fall off the top 10 most-violent US city list this year (despite great efforts by the denizens to score high on the list!).

Seems to me that means crime us up across the board when an increase in crime earns a city a LOWER spot on the overall crime list.

The Nancy Boys over at the NAR have been on constant bitch that the MSM is exaggerating the problems in the housing market. Seems to me a whole bunch of their own are the main ones using words like “crisis”.

“We are convinced that the national mortgage crisis now impacting real estate markets around the country represents a temporary setback, and we remain fully committed to Asbury Park and its rebirth,” said Dean Geibel, president of Hoboken-based Metro Homes LLC.

Re-igniting the sense of urgency is the REIC’s main goal but it’s not working. Every blurb, press release and buzzword is framed around pushing the panic button…. even with all the inventory.

inventory way off as folks buy spare homes & condos for Christmas

Just wait until after Xmas. Consumer spending represents something like 75% of America’s GDP. Ready for the sh*t to hit the fan? Because it’s already flying through the air…

The state of the economy will be very clear after the new year’s hangovers fade…

Is he the one who said real estate is “going to suck?”

Yes, and their notes will say “Federal Reserve” before “note.”

Luckily, we’ll be able to redeem those quite nicely for ounces of gold, but make sure you bring at least one wheelbarrow* per ounce.

*boy does that look spelled wrong.

10. Economic cycles have not been repealed, as the bullish mantra of a Goldilocks economy (another new paradigm predicated on uninterrupted growth and free of inflation) is absurd. The economy is not “the greatest story never told”; it is “the greatest story ever sold.”

http://www.salon.com/tech/htww/2007/12/11/morgan_stanley_calls_a_recession/index.html

Was the FOMC curve ball thrown by accident or by design?

Is the LIBOR set by markets or by Central Bank committee vote?

I see nothing a little tinkering with the rules of the game can’t fix…

Loan-Relief Legislation Advances
Deal in House Would Let
Judges Revise Mortgages;
Help Urged in Ohio Cases
By DAMIAN PALETTA and AMIR EFRATI
December 12, 2007; Page A4

Several House Judiciary Committee members have agreed on a piece of housing legislation that would give bankruptcy-court judges more flexibility to alter the terms of certain mortgages.

http://online.wsj.com/article/SB119742412381022467.html?mod=googlenews_wsj

Lehigh Acres is the epicenter of the bust. Lots that were selling for $50K plus a couple years ago can now be purchased for sub $5K. Homes that were selling for $300K now less than $150K. That whole area is a mess.

If you take a card table full of crack and stick it in a playground, do you think much will be there the next day? If you do it for a few weeks, you think there might be a few addicts in the neighborhood? Then you start charging a few hundred bucks a hit, you think crime might go up?

Lehigh Acres, like Cape Coral, has all these lots, some with newly built houses. When I was hanging out in Cape Coral, just as we were about a year into the bubble, some of the locals who would get a little prosperous would put their money into a lot and build a house. I definitely got the impression that a property in Lehigh Acres was sort of a status symbol among the middle and lower middle class in the area.

My sister and her husband bought a house in Lehigh Acres at the height of the bubble in September 2005. I was living in Atlanta at the time, and it felt a bit bubblish to me, but it was not until I went to visit my sister around Christmas of 2005 that I realized what a bubble really was. Just about the only businesses in the area were geared toward selling real estate. Even my wife was able to understand why we would never buy a house there (something I still have to work to convince her of in Orlando/Celebration).

My sister bought in a new neighborhood, and my sister’s husband says that the builder did not even bother trying to collect from homeowners who were delinquent in their HOA fees, so when they turned the HOA management over to the actual homeowners there was already a considerable amount of debt. I have not seen that problem discussed elsewhere (even on this blog), but I wonder how many new neighborhoods will have the exact same issue.

The good thing is my sister is a doctor, so they will survive, but I suspect she is getting a lesson she never got in medical school.

‘Nobody will fess up, so the city is threatening to tear them down.’

Silver lining is that all the land that the tear-downs were formerly on will be available for building on for the next boom. Bring on the tear-downs and let’s jump-start the next boom building cycle in, say, 7 years.

We’ll see how this new plan plays out in the currency markets. Fed should have let the market correct, probably see $100 oil in short order.

To infinity…and beyond!!!

http://www.marketwatch.com/tools/marketsummary/

This is another non-event just repackaged to look pretty. I bought puts into the opening pop. The FED already accepts subprime slime as collateral. The FED is already lending billions on short terms via the discount window.

ROTFLMAO! Burma Shave. Haven’t heard that one in years.

I had an Interview with the Judge, at Fox news, but sad to say he wanted a cute little chicky poo to answer his phone, and be his assistant…..i guess that had to interview me for EEOC purposes. (age/sex)

This is getting stupid in America, Dan Rather wanted a young girl to be his production assistant….and here is the kicker my DJ partner worked for Walter Cronkite

You keep crackin’ me up with that Burma Shave stuff. LMAO!

NIXON GOT US IN WITH CHINA
NOW HE’S GONE TO SOMETHING FINA
BURMA SHAVE

or

Vote for Nixon In ‘72
Why change dicks In the middle of a screw
Burma Shave

Nixon said he’s /not a crook /and all we got was /George Bush
Burma Shave

“In Sweden we do not currently see that the banks have any additional need to borrow money in the short term. We are monitoring developments closely and are, as always, ready to take the necessary measures if the need should arise,” says Governor Stefan Ingves.

Sweden targets the formation of Asset bubbles.
Riksbank

http://tinyurl.com/2fvs4t

… and homeowners …

Inflation nation! Burn your dollars for heat, they are worthess as money. Look at commodities, gold…everything up. When it costs $100 to fill up your gas tank, the dollar is a paper nickel.

LOL

Not having moneys in banks hands and saying you are going to make moneys available are 2 different things. It is like saying to an alcoholic, “we opened up a cheap liquor store near you, but you will still have to pay for it.”

Fed teams with central banks on credit
By MARTIN CRUTSINGER, AP Economics Writer
http://tinyurl.com/36o3bu

“In a statement timed to occur before the start of trading in New York, the Fed said it planned to offer $40 billion in emergency funds to banks next week through an auction process.

The Fed said that it was creating a temporary auction facility to make funds available to banks and was also setting up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.”

So…..are the banks going to bid on what interest rate they will pay on this money? Is there a possibility of spooking the markets even more *if* the banks bid close to “nothing” during the auctions?

“The Fed said that commercial banks would be able to bid at auction for funds that would be drawn from the Temporary Auction Facility. The money would be intended to help cash-strapped banks raise money needed to keep making loans to businesses and consumers.”

Another question…if you are adverse to making loans due to deteriorating conditions, wouldn’t you (as a lender) shy away from borrowing even cheap money to make loans?

Bond market smells inflation:

NEW YORK (MarketWatch) — Treasury bonds fell sharply Wednesday, sending yields higher, after the Federal Reserve announced plans to ease elevated pressures in credit markets.

The helicopters start to drop money
Published: December 12 2007 18:01 | Last updated: December 12 2007 18:01

The central bank helicopters are planning a co-ordinated drop of liquidity on troubled market waters. The money to be dropped now is not that large. But if this does not work, more will surely follow. The helicopters will fly again and again and again.

One point is clear: central banks must be pretty worried to take such a joint action. For what is remarkable about Wednesday’s statement is that five central banks – the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve and the Swiss National Bank – are co-ordinating their (different) interventions. Their hope must be that this action will trigger not panic (”what do the central banks know that I do not?”) but confidence (”now that the central banks are prepared to intervene in this way, I can at last stop worrying”).

http://www.ft.com/cms/s/44eef7fa-a8da-11dc-ad9e-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F44eef7fa-a8da-11dc-ad9e-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Fus

You know, that’s the crux of my anger about all this. People who are not informed liken trading to gambling, which I guess it is for some people but if you do it right and manage risk, it is not gambling at all. But this insanity of the fed targeting short sellers and then burning them . . . it’s just nuts. It’s nuts and it’s wrong. Let the freaking market do what it should do without interference.

The new dealer isn’t working out for the house, now what?

The thing is, I have no problem with Lereah or Yun. They are doing what they are paid to do.

I have a problem with the media outlets treating these guys as the experts in the field instead of the salesman that they are. I don’t know how many times I’ve heard on NPR, “Good news in the housing market!” only to find out that the only “good news” is a prediction by Lereah/Yun.

When the media going to wake up and realize that these guys are not an appropriate source for unbiased information?

That is funny … resto’s have been hurting since this summer … a number went out of business (or came close to doing so, or are in arrears with their suppliers) by August even here in “recession-proof” Gainesville, Fl … also, look at the stock prices … as Denninger would say, a horror show …

sorry, link should be http://money.cnn.com/2007/12/06/real_estate/foreclosure_delinquencies/index.htm?postversion=2007120614

Uh, that should’ve read: Is the Al Greenspan blaming the housing and credit bubble on the collapse of communism?

The root of the current crisis, as I see it, lies back in the aftermath of the Cold War, when the economic ruin of the Soviet Bloc was exposed with the fall of the Berlin Wall. Following these world-shaking events, market capitalism quietly, but rapidly, displaced much of the discredited central planning that was so prevalent in the Third World.

you sold BBY puts? You’re bullish on it?

More importantly, dude, was it good for you?

Very funny desciption OG. I milked the cow every afternoon for about 6 years as a yute. She fell over on me once. Ouch. I inadvertently paid her back by forgettting to untie her tail and letting her out of the stall. She pulled off the last 6 inches and bled like a stuck pig.
Looking back I don’t regret it a bit, but I think if I managed to find a cow to buy today I’d hire some teenage kid to milk it for me.

It’s illegal to buy fresh milk in Arkansas. Farm animals don’t bother me. I wasn’t raised on a farm, but I’m a true country boy and was plenty raised around them. Despite that, no ,my first preference wouldn’t be to milk a cow each morning, but since it’s either that or drink the dead, pasturized crap from the store, I would at least like to give it a go.

But again, my first prefernce would be to use my well-paying job (I have a C.S. degree and work in IT and am working on a masters in accounting) to trade for milk, but that would make the farmer who takes my money a bad, bad person who deserves to be fined right off the farm and possibly thrown in jail.

From Ken Land’s commet:
“…Don’t mess with this market because we have powerful friends with money printing machines and we will bury you alive you ever think about shorting the market again”

The “Stage” has been set, the curtain has risen, the actors have “played” their parts, the well healed are well dressed, front & center & comfortable in the seats, the lights are now “bright” …now the “intermission” has just begun…time to drink & chit chat…but when the “interlude” is over & the house lights begin to flash…look carefully who is now sitting near the “exits”… it might be someone you recognize was sitting… elsewhere…The best seats in the “Theater” are not near the “exits”…unless there is a…. “panic”

Sounds like higher lending rates are on the way…

Mortgage-industry leaders argue that giving judges this power, which they term a “cramdown,” would force lenders to charge higher rates to offset any unpaid loan balances that would be reduced in court.

Won’t be signed, this is all a sideshow.

Eating metals is a bad idea.

This is absolute craziness. This makes me wild. There a lots of folks who don’t have REAL food! If I ever meet anyone who thinks it would be cool to have glittery poop, I’m gonna tie them down and force feed them packets of rhinestones from the Dollar store. In fact, I may do that to a bunch of deserving people anyway, just in case.

is that correct, 31% MOM? That’s setting quite a trend.

I vote dump…investors are starting to smell the smoke, and the mirrors are a bit warped.

The charge of the central banks

Published: December 12 2007 19:37 | Last updated: December 12 2007 19:37

Yesterday marks a turning point in the story of the credit squeeze. The world’s major central banks have united – the Federal Reserve providing dollars to the European Central Bank; the Bank of England abandoning its hardline stance – to take unconventional action in the money markets. The battle may not yet be won, but the cavalry has arrived.

When financial markets break down completely a central bank has no choice but to take their place. The situation is not as extreme as that of Japan in 2001, when the central bank provided almost unlimited sums to the banking system in an effort to increase lending, but it is time to take a step in that direction. The credit squeeze has lasted for four months and shown signs of getting worse. That it will affect the real economy is no longer in doubt.

http://www.ft.com/cms/s/8257bc28-a8e7-11dc-ad9e-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F8257bc28-a8e7-11dc-ad9e-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Fus

IMHO, this is what is happening to the financial markets:

“Up to a certain angle of attack, called the critical angle of attack, pointing the wings upward continues to produce more lift. However, beyond the critical angle of attack, the airflow behind the wing separates from the wing and becomes turbulent, the aerodynamic effects that produce the lifting force largely disappear, and the wing stalls—that is, it suddenly and dramatically ceases to provide enough lift to support the aircraft. At the same time, the turbulence greatly increases drag, which slows the aircraft down as it moves through the air; this also reduces lift. As a result of these changes, the aircraft begins to fall towards the ground.”

Sometimes you need to point the nose *down* in order to gain airspeed and get stability back.

Or you could just keep trying to pull the nose up, and see if that works just this once…

Are your glasses off? Because based on arroyogrande’s post above, what may appear to some to be wheels on a wagon are actually wings on an airplane in a tailspin. But I agree with the fire part…

I guess tomorrow will offer another chance to buy the dip

“But on Wednesday the Fed followed up with a new announcement, saying that it is coordinating a new temporary liquidity facility with other central banks to ease money market tensions. America’s stockmarkets promptly surged.

Wall Street, of course, is not the arbiter of good central banking. And the Fed’s task is not to feed Wall Street’s craving for cheaper money, but to gauge the relative risks of inflation and economic weakness many months ahead.”

Never were / we told to save / spend it all / every day (Burma-Shave)

“Great Plains State U”

Did you mean Princeton U?

Think the LIBOR is set by markets, rather than govt fiat? NOT ANY MORE.

You can bet that if Wall Street traders are cheering the move, the bailout costs to cover bad gambling debts on Wall Street will be paid for by an inflation tax on savers and others owning or owed moneys denominated in $US, loonies, pound sterling, euros and Swiss francs. Inflation is the best taxation mechanism, as few individuals understand currency dilution to be a form of taxation.

Kudos for Bernanke

Tony Crescenzi, chief bond strategist at Miller Tabak & Co., called the auction loan facility an innovative idea that was a sign of creativity at the Fed under Chairman Ben Bernanke.

“Bernanke has indicated he will take chances and be creative and think openly and act aggressively,” Crescenzi said in a telephone interview.
The purpose of the auctions, he added, “will put a cap” on important market interest rates, such as the Libor rate, and bring rates down close to the 4.25% federal funds rate.

Will the $64 bn in new liquidity be used to buy up devalued SIVs?