A General Underpricing Of Risk
Some housing bubble news from Wall Street and Washington. Associated Press, “Industry data released Thursday show January pending U.S. home sales remained at the second-lowest reading on record. The National Association of Realtors said its seasonally adjusted index of pending sales for existing homes held at 85.9, the same reading as December and just short of a revised record low of 85.8 in August. The reading was 19.6 percent below year-ago levels.”
“An index reading of 100 is equal to the average level of sales activity in 2001, when the index started. Lawrence Yun, the trade group’s chief economist, said in a statement that the reading is a sign the housing market is stabilizing.”
“‘Our members are telling us there’s been a pickup in shopping activity.’ Yun said. ‘Our hope is that the increased traffic of buyers looking at homes will translate soon into more contract offers.’”
“Home foreclosures soared to an all-time high in the final quarter of last year. The Mortgage Bankers Association, in a quarterly snapshot of the mortgage market released Thursday, said the proportion of all mortgages nationwide that fell into foreclosure shot up to a record high of 0.83 percent in the October-to-December quarter.”
“That surpassed the previous high of 0.78 percent set in the prior quarter. ‘Clearly it’s the worst it’s been,’ chief association economist Doug Duncan said in an interview with The Associated Press.”
“The percentage of subprime adjustable-rate mortgages that entered the foreclosure process soared to a record of 5.29 percent in the fourth quarter. That was up from 4.72 percent in the prior quarter, which had marked the previous high.”
“Late payments skyrocketed to a record high of 20.02 percent in the fourth quarter, up from 18.81 percent — the previous high — in the third quarter.”
“‘Declining home prices are clearly the driving factor behind foreclosures, but the reasons and magnitude of the declines differ from state to state,’ Duncan said. ‘We expect some increases in the next couple of quarters.’”
From Reuters. “Wall Street and policy-makers have worried that foreclosures will grow when many subprime loans face a built-in interest rate reset in coming months. But Duncan, blamed the current spree of failing loans on poor credit quality of the borrower rather than a rate spike.”
“‘The current delinquencies are due to credit quality rather than resets,’ he said.”
From Bloomberg. “U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said today.”
“Late payments rose to a 23-year high, the organization said in a report today.”
“‘We’re seeing people give up even before they get to the reset because they couldn’t afford the home in the first place,’ said Jay Brinkmann, VP of research and economics for the trade group.”
“‘It comes down to an overstretching of buyers to get into homes they couldn’t afford and an overextending of credit by lenders who were more willing to take risk,’ Brinkmann said.”
“About 40 percent of all foreclosures are homeowners with prime or subprime loans who couldn’t make their payments before the reset, Brinkmann estimated in an interview. Another 23 percent are borrowers who received some form of loan modification, typically a freezing or a reduction of their rate, and then default, he said.”
“The share of late payments for adjustable prime loans was 5.51 percent, from 3.39 percent a year earlier, and the foreclosure inventory rose to 2.59 percent, almost tripling from a year earlier.”
“Carlyle Group’s publicly traded mortgage bond fund failed to pay margin calls, prompting creditors to seek immediate repayment, as the burning subprime mortgage market scorches investors in even the highest-rated debt.”
“The fund used loans to buy about $22 billion of AAA rated mortgage debt issued by Fannie Mae and Freddie Mac. Carlyle said last month its agency mortgage securities ‘have the implied guarantee of the U.S. government and are expected to pay at par at maturity.’”
“The U.S. Treasury denied speculation today that the government will guarantee mortgage- backed bonds issued by Freddie Mac and Fannie Mae.”
“Carlyle’s counterparties are Wall Street firms, which use repurchase agreements to lend money and require securities be put up as collateral. As the perceived credit worthiness of asset- backed bonds declined, the amount of money that can be borrowed using them as collateral fell.”
“‘Market conditions are the worst anyone in this industry can remember,’ said Alain Grisay, CEO of London-based F&C Asset Management Plc, on a conference call. ‘I don’t think anyone has a recollection of a total disappearance in liquidity. I just cannot remember a time when for six months there are billion of dollars worth of assets out there for which there is just no market.’”
“Thornburg Mortgage Inc., the New Mexico provider of ‘jumbo’ home mortgages, lost more than half its value in New York trading after receiving a default notice from its own bankers.”
“The company may need more than $300 million to meet the margin calls and restore capital, analyst Jason Arnold said in a March 4 research note. ‘Bankruptcy is now a more likely outcome,’ Arnold said today. ‘We would expect little to no value to remain for shareholders.’”
“Merrill Lynch & Co on Wednesday said it will eliminate 650 jobs as it stops making subprime mortgages through its First Franklin Financial Corp unit.”
“Merrill bought First Franklin and much of its loan portfolio from Cleveland-based National City Corp for $1.3 billion in December 2006.”
“Taylor Wimpey Plc, Britain’s biggest homebuilder, said annual profit dropped as property markets cooled in the U.K., U.S. and Spain. Earnings in North America dropped more than 80 percent and Spain lost 70 percent as operating profit margins collapsed and sales plunged.”
“CEO Peter Redfern said markets will be ‘more difficult’ this year. ‘Conditions in the U.K. are more subdued than they have been for some years,’ Redfern said.”
“The company booked 283.4 million pounds in writedowns after reviewing its North American operations and land values, with the bulk being in Florida and California, Redfern said. He wouldn’t rule out further writedowns.”
“‘The outlook for the U.S. remains pretty uncertain. We’re certainly not expecting significant improvements during 2008,’ the CEO said.”
The Wall Street Journal. “In the latest sign of how the credit crunch is hurting even borrowers with good credit, some home-equity lenders are starting to slam the door on homeowners who want to refinance their primary mortgages.”
“Approvals from home-equity lenders used to be routine, particularly if the borrower wasn’t increasing the size of the mortgage as part of the transaction. But that’s no longer always the case — even in places where the housing market hasn’t been hit by huge price declines.”
“‘For borrowers trying to improve their situation, this is a nightmare,’ says Richard Redmond, a mortgage broker in Larkspur, Calif. That’s because getting a new home-equity loan to replace the old one in order to get a refinancing approved ‘may be impossible,’ he says.”
“Dale Betterton Betterton bought a home in Boulder, Colo., this past summer with 5% down. When interest rates dropped last month, he decided to refinance. But National City, which holds his home-equity loan, declined to approve the deal.”
“Mr. Betterton had ’superb’ credit and the new mortgage would cut his mortgage rate by more than a percentage point, making him a better credit risk, says his mortgage banker, Lou Barnes.”
“‘My understanding was it was pretty straightforward to refinance when rates go down, and there wouldn’t be any strange obstacles,’ says Mr. Betterton, who is now considering paying off his second mortgage so he can refinance.”
“David Erickson, a mortgage broker in Lynnwood, Wash., says he’s had two refinancings declined by National City that ‘would easily have gotten approval six months ago.’ In the past, he says, home-equity lenders were eager to keep the loan on their books. Now, he says, ‘they’d sure love to get paid off and get 100 cents on the dollar.’”
“A recovery in global credit markets will depend on stabilization in U.S. home prices and a massive reduction in housing inventory, former Federal Reserve Chairman Alan Greenspan told Deutsche Bank AG clients on Wednesday.”
“Greenspan, the U.S. Fed chairman from 1987 until 2006, also blamed the credit crisis on a ‘general underpricing of risk’ and a ‘breakdown’ of how assets are valued after the U.S. housing bubble burst.”
“‘The sooner we can get home prices in the United States stabilized, the sooner we will resolve all questions,’ Greenspan said, according to two sources who were on a conference call with the former central bank chief.”
“The inventory of homes for sale rose 5.5 percent to 4.19 million units at the end of January, roughly a 10 months’ supply at the current sales pace. U.S. home prices also dropped in the fourth quarter, the first consecutive two quarters of decline since 1982, according to Freddie Mac.”
“‘The level of housing has got to fall,’ Greenspan said, according to one source on the call. ‘If it doesn’t fall further we are going to be involved with a continual backing up of inventory pressing on prices.’”
“Most of the recent housing-related initiatives have focused on keeping people in their homes. But lawmakers would actually help the housing market stabilize more quickly if they took action to dislodge those borrowers who don’t have the desire and financial ability to stay.”
“This cycle will be difficult to break. But as we saw in California in 1996, buyers will flock to the market once a bottom is reached.”
“Many of these types of borrowers made little or no down payment, and due to falling house prices are now ‘underwater’ on their mortgage. Some overstated their income or net assets and cannot afford their mortgage payments. Others can afford their mortgage payments but have decided to stop making them because they have no equity in the home.”
“Although this recommendation might not be politically correct, lawmakers should make changes that would hasten — rather than extend — foreclosures for that segment of borrowers.”
“The recent housing bubble and mortgage problems weren’t created overnight, and it will take several years to deal with the aftermath. We are well on our way toward establishing an environment that will facilitate the market recovery.”
“Lawmakers should not overreact with radical changes that could cause more harm than good. Rather, they should tweak existing laws and allow market forces to work.”
‘The level of housing has got to fall,’ Greenspan said, according to one source on the call. ‘If it doesn’t fall further we are going to be involved with a continual backing up of inventory pressing on prices.’
I can assure you that AG knows prices must fall to both stimulate sales and stop the building. It’s Econ 101.
On this:
‘The U.S. Treasury denied speculation today that the government will guarantee mortgage- backed bonds issued by Freddie Mac and Fannie Mae.’
I had an exchange with a poster just the other day who was worried that the US government would have to pay GSE bankruptcies. I asked, what are you worried about? If you think this, short the company stock and make a fortune. The reply was that the stock had fallen as much as it would (even though this didn’t make sense in light of the posters convictions, I didn’t say anything). Well:
‘Fannie Mae plunged after a default notice at Carlyle Capital left the financial sector swooning. ..Adding to the worries Thursday: a rumor, since batted down by Treasury, that the U.S. would step in to explicitly guarantee Fannie and Freddie’s debt.’
‘Adding to Thursday’s selloff in Fannie Mae and Freddie Mac was a rumor that the government would issue a statement explicitly guaranteeing the companies’ debt. The rumor may have contributed to Fannie stock’s dropping to a 12-year low, by suggesting the government-sponsored mortgage companies’ balance sheets may be in worse shape than the market believes. But shares of Fannie and Freddie posted a modest bounce just after 10 a.m. EST, after a spokeswoman at the Treasury Department told The Wall Street Journal that the explicit-backing rumors are ‘absolutely not true.’
This gets to why I don’t bother following every government press conference and congressional bill. We are witnessing possibly the biggest financial event of our lifetime. Fortunes will be made and lost. And I’m sure those short on Fannie today made more than enough for a house.
I’m not recommending any position short, long or otherwise. I’m more interested in real estate personally. But for those who do nothing out of fear and worry, the outcome is pretty predictable.
In related news:
Agency Mortgage-Bond Spreads Rise; Markets `Utterly Unhinged’
March 6 (Bloomberg) — Yields on agency mortgage-backed securities rose to their highest relative to U.S. Treasuries in 22 years as banks stepped up margin calls and concerns grew that the Federal Reserve may be unable to curb the credit slump.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aWh0AFtXC9rk&refer=home
Firstly, the market is losing misplaced confidence in the GSEs. Secondly, the market is losing misplaced confidence in the FED. Thirdly, I’m going long Jergens
“It puts the lotion on it’s skin…..”
Fo’ shizzle, y’all! You can’t make this stuff up!
Bernanke getting a spankee from Big Daddy.
“It puts the lotion on it’s skin…..”
Ahahahaw! Comical.
Of course, a true cynic would say that now that the Treasury department is denying that they will guarantee the GSE’s debt, that will be precisely the next thing that they do. More of that white noise that Hoz refers to. Or is it a field day for traders, as they blast noisy rumors around to move the markets? This is why I’m not a trader - I never know how many levels of recursion are enough when Nth guessing stuff like this.
The Treasury Department will have no choice but to guarantee their debt. If the GSE’s begin defaulting on their trillions of debt, it will be Mad Max time…
Actually, you’re wrong.
The dollar will collapse, and there are some serious monies tied to derivatives if that happens. It will make the housing collapse look like a walk in the park.
They know this; we know this; they know we know this, etc.
Are you sure that “They know this; we know this; they know we know this…” is true.
(The rest is true).
No, that would be kinda subjective, and it was my little attempt at a joke.
I have never seen a situation personally (and I’ve seen more than my share) where people in power don’t actually know something. They may lie freely in public but they “know”.
Anyway, Bankhaus Herstatt wasn’t that long ago. They “know”.
Poorly phrased on my part.
The inability to assimilate the vast amount of information and turn the information into knowledge has turned the Federal Reserve into a capon.
True but my bet here was on Paulson not the academic.
He “knows” the scale of the derivatives business, and the consequences.
They know we’re playing endgame as well as anyone else. That’s why they are nibbling at the edges.
Where’s the bite, I ask? Chomp down if you can!
BS. Mr. Bernanke had to have CDOs and CLOs explained to him before the Jackson Hole conference last August. His comprehension of the derivatives market is limited to exchange traded options (also a few but not many futures.) He does have some knowledge of the swaps, but again it is very limited. Most of the work done on the derivatives markets has been washed before it gets upstairs.
This leads to Oh Shit Moments. Which is what we are in.
Possibly, Hoz.
I would want serious proof that Bernanke didn’t know back then what a CLO was, etc. I don’t trust public statements.
Why? Let’s just say past personal experience.
For the record, I’d buy you a beer (or seven.) For that matter, I’d buy most of the people here a drink. Of course, I’m a cheapskate so they’d have to drink it in my rental.
The Treasury Department will have no choice but to guarantee their debt.
Er, the Treasury Department (i.e. the Executive Branch) doesn’t have the power to guarantee the GSE’s or anyone else’s debts.
Only Congress does.
And Congress is a special-interest money whore. So what’s the predictable outcome there?
I’d say it was pretty predictable that when you were hand wringing over the GSEs last week, and I suggested you short their stock, you did nothing.
“Only Congress does.”
And that’s probably why Sen. Chuck Schumer (aka “Two-Trillion Buck Chuck”) is saying (in today’s Wall Street Journal) that there is an IMPLICIT government guarantee of the GSEs. Way to go, Chuck!
Ben,
Did you get up on the wrong side of the bed this morning or something? RE: shorting the GSEs, that was a good call last week, for sure. However, I’ve read plenty of comments here and on other blogs from people who shorted the GSEs too early (pre-Sept ‘07) and got creamed. Conclusion: shorting, while fun to play with in small amounts, is a game best left to experienced investors and speculators with a large appetite for risk –and I’m neither.
‘The Treasury Department will have no choice but to guarantee their debt. If the GSE’s begin defaulting on their trillions of debt, it will be Mad Max time…’
Ah, yes, the Mad Max argument. Very compelling. I suppose those desk jockeys got $6 trillion? But you didn’t think of that.
What do you mean by desk jockeys? And what do YOU think the scenario will be if financial institutions start imploding left and right due to losses from GSE debt?
‘financial institutions start imploding left and right due to losses from GSE debt?’
Let’s have some perspective. A hedge fund wasn’t able to sell some paper. Is it worthless? I doubt it. This is precisely the kind of market discipline that will make what needs to happen, happen. I for one am not afraid of creative destruction.
Creative destruction IS a good thing. And I personally don’t think the volume of losses the GSE’s are going to be taking will take them down. But, if they do go down, I envision a bailout of some sort for the holders of GSE debt while the GSE stockholders are shown the door. I think our fearless leaders will resort to desperate measures to try and a avoid another great depression.
And dumping $6 trillion on the taxpayer debt would likely make it very difficult to continue financing our $3 billion/day needs. What would the PTB chose; destroy the dollar, probably the central bank with it, the nations standard of living, or let some greedy, dumb corporations write down some losses?
The GSEs are too big too bail. We couldn’t help them if we wanted to. We will let them drop, then erect new agencies to take their place. When the worm turns, and oh how it turns, our future is not what we hope or imagine.
That may well be. But ISTM likely that the PTB will continue trying to bail them out when they should be getting people on the lifeboats.
“More of that white noise that Hoz refers to.”
Now I finally get it. I had been mistakenly thinking of white noise as a concept from probability theory.
Carlyle is run by a bunch of Bush and neCON cronies. Do you think they will go down without a fight?
For this fund, it sounds like they already did. I don’t think they’ll starve though.
This is little Carlyle - a scion of Big Carlyle. A mortgage arm only, if I understand correctly
The other big FNM rumor is their auditor is going to resign and they will issue the mother of all writedowns.
GSE debt holders cannot rely on the fed government to bail them out. This article suggests that GSE debt is not backed by the full faith and credit clause of the US constitution.
http://www.fma.org/SLC/Papers/GSE-FMA.pdf
Their auditor has his gloves on and is ready for a fight. Rumors stink.
‘The U.S. Treasury denied speculation today that the government will guarantee mortgage- backed bonds issued by Freddie Mac and Fannie Mae.’
Good to see this matter come to a head, as ongoing conjecture about the phantom existence of a Treasury guarantee can result in mispricing of risk.
“We are witnessing possibly the biggest financial event of our lifetime.”
Most amazing aspect of the situation: The average man in the street is oblivious to the magnitude of the event.
Most amazing aspect of the situation: “The average man in the street is oblivious to the magnitude of the event”.
So damn true! A testament to our fine public education system coupled with the guidance with our Washington brain trust.
Actually - the most amazing thing will be if the “average man in the street” remains oblivious.
I would say inflation is beginning to serve notice…
So, what’s next for the “average man” to see?
The “average man” is just beginning to notice some of the symptoms, but doesn’t understand why those “symptoms” are occurring, much less that they are tied together and will have a huge impact in the not too distant future for years to come.
For example, most have noticed gas prices are much higher than 5 years ago, but how many realize the impact of the fall of the dollar on the increase in gas prices? Most Americans don’t deal with international exchange and seem oblivious, at their peril, to the impact of the falling dollar.
With the housing and credit markets, the “average man” is beginning to notice that foreclosures are occurring in some places and prices may have dropped a little in mainly other places. The “average man” does not yet understand that the ongoing correction in housing will be massive, the largest in their lifetime, and the largest since the GD.
Maybe in another year or two the “average man” will have grasped these issues and be sufficiently awake to be concerned about the much bigger problems (credit/economy/standard of living) that will impact their lives for at least the next decade and possibly much longer.
‘doesn’t understand why those “symptoms” are occurring’
This works well for Fed officials, who can pretend the whole mess is an accident whose exogenous causes have nothing to do with the history of monetary policy since 1987 or so.
I’m still seeing brand spanking new bloatmeister Denalis, Armadas and Expedition SUVs chugging down the road. Meanwhile, regular is $3.50/gal and rising. So, what ARE people thinking? Are the dealers paying fooleos to take on these dinosaurs?
Sometimes I feel like below average man.
Hey all - I’m going to turn this thread upside down for a minute.
Why should the “average man” or “women” for that matter be interested in all of this stuff??
Long term, does Main Street feel the impact of Wall Street? Yeah, it does. That’s part of my own interest in it. But let’s face it, if the world was 100% interested in this stuff who would be left to actual real things in the world like build bridges, engineer new medical equipment, raise food? Money is only a small slice of it all that’s going on out there at any given point in time.
Day to day, Wall Street generally has very little impact on Main Street. In general, I think that’s a good thing. You really wouldn’t want your garbage guy, doctor, teacher, etc to be distracted from their work because they are worried about the ramifications of all this crap. (Sometimes you really are better off not knowing…)
And what if may be, just maybe all of this economics stuff is hard for the “average” person to understand ? (I’ll grant you many of the concepts are relatively simple, but most economists tend to lean heavy into graphs, etc for job security.) My mind is “wired” for math and science concepts for lack of a better word: I like nerdy stuff. What if instead it’s a chore to think about math and finances? I know several well educated people who let their spouses handle day to day money stuff because it’s not their forte.
So is that a lack of interest or enthusiasm a failure of our education system? Or is it a rational person deciding their talents and interests lie elsewhere?
I don’t know, I think the “average person” would do a heck of alot better to simply attend to their personal finances (which most don’t do anyway), rather worry about events that are confusing and out of their hands. We certainly would have a lot less macro economic issues if people attended properly to their own micro ones.
I agree with your last sentence.
However, in the Alt-A Bay Area, you would not have believed the over-attention to Wall Street and all things financial when the dotcom thing got going here in the 1990’s.
Your average teacher, garbage collector or doctor were totally wrapped up in it - it was simply greed.
Whereas I think more recently, with housing, it’s a bit divorced, or not as clear with regard to the Wall Street and housing connection - at least for most.
[And P.S. - Did you grow up in VT? Do you live near there now and what is that like for you re: jobs, etc?]
“We certainly would have a lot less macro economic issues if people attended properly to their own micro ones.”
Conversely, with properly aligned macro incentives, people could attend properly to their own micro ones without worrying about macro shenanigans which rob Peter to pay Paul.
However, in the Alt-A Bay Area, you would not have believed the over-attention to Wall Street and all things financial when the dotcom thing got going here in the 1990’s.
Heh. Living in VT is probably part of my thought pattern. We’re only 6 hours from New York City but I think sometimes VT is actually on a different planet. It was completely possible here to ignore all of the big run ups of the last decade with the possible exception of the housing bubble (which wasn’t a big run up either).
I did go up in Vermont and I live here now.
I love living here, although we’ve become a little too socialist for my taste. (I think most of the natives would agree with that statement - we regularly get New Yorkers and transplants from other places that lean way left.)
The job prospects are so-so. Because VT has sucessfully marketed itself as “special” (with several ski resorts)
there’s waay too many degrees floating around for not enough jobs. Also, as the years have gone on there’s been increasing regulation on said business which has not helped.
On the other hand, we tend to attach off-beat entrepreneurs that are really dedicated to the state. (Think Ben & Jerry’s - who came from Brooklyn, by the way.)
I really like living in small towns and cities. I have a hard time wrapping my head around the idea that 8 million people really want to live in NY City. Give me an end of the road town any day of the week.
To elaborate on my point a bit, consider someone who was at a transition point in life in 2005, who was faced with a rent-or-purchase decision in a new housing market. Those who ignored the macro situation and instead listened to the “real estate always goes up” crowd could have easily acquired a sufficient amount of mortgage debt to hang themselves, financially speaking. It unfortunate when the returns to paying close attention to macro issues compete strongly with the more attractive plan of minding one’s own business, but that is the world we have lived in for a few years now.
PB -
In 2005, more than enough Bay Area residents did exactly as you said - they ignored the macro and “went with” the micro with regard to house buying. Most often ignoring simple fundamentals and instead listening to others, including their ever helpful realtor and mortgage lender.
I cannot recall how many times at work in the mid-2000’s, on a whiteboard, with very successful egghead, dual graduate degree (or more) individuals, I drew out a simple graph of the disconnect between house prices and incomes. I would often finish the discussion with a comment “… someday these will come back into the usual alignment with one another.”
VTergal -
I asked about Vermont because that is where I grew up.
It occurs to me when I’m home that carpetbagger flatlanders have changed the place immensely since my youth (well known Manhattan bleeding hearts and Brooklyn socialists being the most cupable).
There are days I would prefer the small town life again, too, but with the only real base of jobs there in Chittenden County, it appears more like an objectionable big city every time I’m going through there!
OK, I’ll chime in (shock and surprise):
The average man isn’t capable of understanding macro issues becuase he’s not intelligent enough for it. Ditto for the average woman. Therefore, it’s up to the rest of us to do our best to ensure a macro environment conducive to micro success. We should engage in fruitful debate whenever possible, vote, run for office if we wish, and continue to do our own jobs to the best of our ability. Microeconomics for microminds, macroeconomics for HBBers.
There.
“Why should the “average man” or “women” for that matter be interested in all of this stuff??”
To Vermontergal, you make lots of excellent points. The average person shouldn’t have any need to care much about most of this, except when house prices get pushed to 10x income, pension funds get gutted to fund CEO bonuses, jobs get outsourced, etc., what should be a luxury of not caring goes away.
I’ve been fortunate in having a job that’s stable and income that’s above median and at least keeping pace. However, I’ve struggled with housing for most of my career for reasons I better understand now. I’d rather concentrate on other things. However, remaining ignorant in the current environment can exact a high price. Thieves are all around. You need to know at least enough to not become a victim.
“The average man isn’t capable of understanding macro issues”
I disagree. I beleive that many *can* understand the implications, but emotion gets in the way (the “herd mind”, the “greed factor”, etc.) and allows them to blissfully ignore the conclusions that they themselves can come up with. To counter the logical conclusions that they reach, they use the all powerful “BUT”:
“logic logic logic, BUT it’s different this time”
“logic logic logic, BUT it’s different here”
“logic logic logic, BUT it’s the new economy”
“logic logic logic, BUT P/E ratios no longer matter”
“logic logic logic, BUT all you need are page views/’eyeballs’”
“logic logic logic, BUT they aren’t making any more land’”
“logic logic logic, BUT everyone wants to live here”
“logic logic logic, BUT these beanie babies are going to skyrocket in price as Ty is going to ‘retire’ this type”
“logic logic logic, BUT”
yes. too much logic can make people mad. it gets in the way of their feelings.
The average man should be able to do the basic arithmetic to recognize that he can’t afford an $800k house on an $80k income. Millions apparently failed this basic sanity check.
“I’d rather concentrate on other things.”
Ditto. Though getting my brain around the housing situation to the limited extent I have has been one of the most enjoyable preoccupations I can recall.
Precisely. Even my limited math skills were adequate to grasp 5 to 10 times earnings for habitable to desirable abodes was not in the program. Ever. For any reason.
Searching for why/how things got so out of balance I stumbled on Ben’s incredible site, and remain firmly lodged here - a bastion of sanity.
The average man in the street is oblivious to the magnitude of the event.
How right you are! I just talked to a person today who bought some land chirp in glee about how their arm payments were dropping, but did not have a clue about how the financial markets worked. This person was bragging about refinancing later to a fixed rate of about 4 or 5%.
I smiled and provided the person with todays rates for the 15 and 30 year and just watched as the glee drained from their face and turn to dispair and then I walked away!
This person had thought the long term rates were tied to the short term rates and had no idea how the long term mortgage rates worked. The last I heard was they were worried because they did not think the bank would loan them the money at the higher 30 year rates.
Just yesterday I was discussing Alameda County housing with someone who said that prices close to the bay don’t typically fall like the outlying communities. I brought up the thousands of condos coming online in downtown Oakland. They said it was okay, that they had not resorted to auctions like other places. First thing this morning I read the Chronicle article in this thread. Guess what? Turns out no one really can buy condos there for $500K+. And if someone had the money to spend, why would they spend it in Oakland? Seriously, people around the bay are absolutely freaking delusional.
I had a conversation with a person who recently purchased a house here in Santa Clara. I pointed out that when he is paying a mortgage, he is really just paying rent on the money. It was a completely new thought to him.
By contrast, check out what market pros are saying (shudder)…
Associated Press
Credit Woes Take a Turn for the Worse
By JOE BEL BRUNO 03.06.08, 3:49 PM ET
…
“We are in historic scarier-than-all hell territory,” said T.J. Marta, an analyst who monitors the fixed-income markets for RBC Capital Markets. “I am hearing many people say that the market is more broken now than it ever has been.”
“worried that the US government would have to pay GSE bankruptcies”
However, then you get stuff like this (from a US Senator, no less!):
Wall Street Journal
One of Fannie Mae’s Jobs Is To Provide Liquidity
March 6, 2008; Page A13
“The GSEs have an implicit government guarantee for a reason; when the private sector fails to support the market, and it becomes more expensive to buy a home, these organizations are intended to be there to help American families and the American economy.
Sen. Charles E. Schumer (D., N.Y.)
New York”
Yes, you have freakin’ US SENATORS saying that “The GSEs have an implicit government guarantee”. Go figure.
Schumer saying there is an “implicit” government guarantee has no meaning. He is not the executive branch, and he can’t get a law passed to make it explicit. When Paulson says it, you have to pay attention.
Schumer may not be the executive branch, but he’s got plenty of company in the Legislative branch. Plus, most of the contenders for President are pro-bailout to some degree.
‘most of the contenders for President are pro-bailout to some degree.’
The way some of you posters go on about this, I’m beginning to think you are too. You realize that the trolls say the exact same thing, right?
Or if you think the FBs will prevail, then why don’t you buy a house? Seriously.
I can’t understand where this stuff comes from.
By the time there is a new president in place the size of the problem will make it impossible to do a bailout funded by government money. Bush won’t do it. This may be the first time in my life that I am glad he is still president. If his term had ended a year ago, there might have been a chance at throwing serious government money at this. Now it is already too late but not entirely obvious to people who don’t want to see. By next January? Forget it.
I think the reason this kind of talk scares us is that there may be a majority in Congress that would vote to bailout the GSE’s, regardless of the cost, because they’ll get the “rich” to pay for it.
Obviously when you apply logic and reason, there is no way a person would conclude that a bailout is reasonable, or ever feasible. Logic and reason are in short supply on Capitol Hill.
Ben,
Recognizing that democracy is often two wolves and a sheep voting on what’s for dinner, or that pols frequently cave into loud-mouthed, undeserving idiots (when they represent large enough voting blocs and/or powerful moneyed interests) does not automatically make me troll, just a realist.
Again, there are multiple definitions of “bailout”, and while any such “bailout” plan may not work exactly the way FBs and banks want it to work, it does not mean some socialization of losses by the truly innocent: people who did not participate in the bubble.
Honestly, I don’t get the hostility just for calling a spade a spade. I didn’t make the government stupid and corrupt, nor do I want it to keep acting this way.
And I am calling a spade that too. Fearful, wasted anguish is the last thing people should turn to when things get rough.
‘this kind of talk scares us’
See what I mean? There are lots of folk who can size up this stuff without the Mad Max references, the $100 loaves of bread talk. Fear paralyzes. Clear heads prevail. And if I am one of the few that will dare to say it, then so be it.
Oh, and by the way, the ‘rumors’ of government support were officially denied! And again, where are the trillions gonna come from? I expect logical support for these cases, not paranoid theory’s and tired talk of wolves and sheep.
“Fear paralyzes.”
Fear also creates opportunity for those who refuse to give in.
Fear is not the enemy, it’s quite helpfull, just don’t become an ostrich or possum.
I’m loading up on MREs and Huggies. I’m trading my Gold Eagles in for one of these http://tinyurl.com/6ukur
Wait a minute I think I hear a theme song coming on. …..
”This aint no party This aint no disco This aint no fooling around “
“Head about Houston
heard about Detroit
heard about Pittsburg Pa”
Ahh yes here it is
http://tinyurl.com/2tumr9
Got grubs?
But ,But ,that’s the master plan, to have the GSE’s be the sub-prime lenders of choice for the market . Regular investors aren’t going to put up funds in a declining market (without a big down payment ) . Why do you think the powers got the loan limits raised .Sorry, every move the gov. is making is to have a source of lending funds for this messed up real estate market . IMHO the GSE’s are going to be used to transfer the bad paper or risk to the taxpayers ,and worst provide funding for falling knife property .
Oh Please. You seriously think these guys have a master plan? Drawn up, i presume, with all the skill, care and attention they’ve shown on all their other fiasco’s so far?
right.
No, they’re all fighting. That’s what our system is designed to do. I had a revelation about that just today (see my post below). It’s quite brilliant, actually.
I am afraid that you are right….
Hi Ben. I worked as an engineer before getting laid off in 2001. And, darn it, I have been noticing that housing has been falling ever since I got laid off. I keep telling myself, perhaps if I didn’t get laid off all this housing trouble would not have happened.
And wall street is about to find out that it cannot live without main street. wall street has sh*t big time on manufacturing but the game is over. wall street has ffffeed the world bigtime and in the process has ffffed itself. I will not cry for wall street…they can join the rest of us in Hooverville.
“wall street has ffffeed the world bigtime and in the process has ffffed itself.”
Fatal error for parasites: Killing their hosts.
Was it on here that someone mentioned Henry Ford’s notion that his workers needed to afford the product they produced?
Enron should be a mandatory case study for high school students, shadows of that scandal are in so many places.
A culture that celebrates lying as “spinning” is dumber and meaner. Truthfulness, not truthiness, will set us free.
forever my favorite bottom line, as in, who’s going to buy that Escalade on an $8/hr salary?
how many Wal-Mart greeters are buying 42″ flat-screens? (wait a minute - forget that one)……
and on and on
It’s Econ 101.
And Newtons law of gravity!
Homeowner Equity Is Lowest Since 1945
http://biz.yahoo.com/ap/080306/home_equity.html
“That marks the first time homeowners’ debt on their houses exceeds their equity since the Fed started tracking the data in 1945.”
My comment: WOW.
On this radio show in 2005, I was asked about the high percentage of homeownership. I replied that it was true, but that the over-all equity was far below pre-bubble levels and was the lowest in bubble states. Nobody seemed to get it.
I can picture Steve Martin:
“What is this “equity” stuff you refer to? Sounds confusing. Where would we get this “equity”? Don’t we have to buy another house to get that?”
Equity? Its that bad thing you make go away by borrowing. Debt good, equity bad!
Equity is that thing that’s in your home. And it’s crying out for liberation through the almighty HELOC.
Love that skit!
Equity is something you have to get a HELOC to “liberate,” right?
Just a year to year and a half ago, we were told that we have a “Goldilocks Economy”, and that “you don’t get falling house prices without a recession”, and “house prices are at a permanently high plateau”.
We here were complaining that waiting for this downturn to pick up speed was “about as exciting as watching paint dry”.
What a difference a year makes.
Like Iraq, seeing how bad our possible futures look takes much of the joy out of “I told you so!” though.
Yeah, I remember that. Good times, good times.
They were right though, you don’t get a housing downturn without a recession. Sho nuff.
http://news.yahoo.com/s/ap/20080306/ap_on_bi_ge/home_equity
Sums up equity falling since early 2007 due to HELOC now falling due to dropping prices. Just crossed to
I remember listening to that. Christopher Lydon was kind of sarcastic, I thought. Didn’t he tell you they’re not making any more Golden Gate bridges?
I mean the radio show that Ben linked above. Sorry, I am new to posting.
Last year I heard coworkers and friends talking about “equity stripping”… one lady told her family it was to “protect” it from potential lawsuits. She then made the brilliant decision to reinvest in guess what… more real estate! Some very expensive real estate “mentor” program convinced her to buy slummy section 8 housing - “cash cows”… i think these “mentors” have a racket going with the “wholesalers” of distressed property and are basically churning the last of the sucker money from desperate, greedy, stupid people. Sigh. I know another guy who took all the equity out of his house and is carrying around Jim Cramer’s book, said he’s going to buy Apple… because he “needs money badly”. Just wow.
Apples like in “Apple Annie” who sold apples on the streets?
he didn’t mean the computer apple?
There was a guy on the AAPL boards on Google freaking out in January because he pulled equity out of his home *while he was in the middle of selling it for a loss* in order to buy AAPL. In retrospect he had bought halfway down the drop. I remember he was posting in all caps, completely hysterical. It was awful. I think people like that should go to Gamblers Anonymous.
Yep these same people all love Vegas.
“AAA rated mortgage debt issued by Fannie Mae and Freddie Mac. Carlyle said last month its agency mortgage securities ‘have the implied guarantee of the U.S. government and are expected to pay at par at maturity.’”
The rumor is Treasury will come out and say they will guarantee, otherwise FNM is going DOWN…
Talbot predicted ALL OF THIS in his book which I first read in 2004.
Scorched earth.
Been getting emails all morning from investors repricing fixed and arm loans. Some arm programs are off by 3 to 4 points from just two days ago. Fixed product is up 50-60bps in two days (while the 10 year has been dropping). This is gonna get interesting if agency paper is considered toxic by the market. Every bank in the nation holds agency paper; are they all gonna write down their holdings this quarter. Negative feedback loop on steroids imho.
“Some arm programs are off by 3 to 4 points from just two days ago”
Up 300 to 400 bps??
Boulderbo:
When you say “off by 3 to 4 points”, do you mean that people are now paying more for their ARMS or less?
This morning NPR said that it was Alan Greenspan’s 82nd birthday. Any wishes or special messages for him? My first preference would be that he start the quiet part of his quiet retirement, but I guess you don’t get paid speaking fees for being quiet.
Best wishes for your continued employment at this ripe old age. After all, despite all the extra payroll taxes those in my generation have paid as a result of the Social Security commission you headed, we’ll have to work that long or longer before collecting a dime.
I guess I’m the only one here who isn’t pissed at AG primarily for his regulatory or monetary policies as Fed chairman. Perhaps my memory is just better.
i think an appropriate gift for him would be a candlebox in the form of a house that blows up when you light the candle.
I think he has enough money to spend a quiet retirement with plenty of viagra and a side helping of Andrea Mitchell.
Oooooh, the visual … now I need to go Clorox my eyeballs.
Don’t forget to send some incontinence products along too!
How do you find an old man in the dark?
It’s not hard…
Oooh … this blog is full of the `big nasties’.
I thought I had mad skillz (sic) in this department but I see that y’all were JT experts long before me.
“In the past, he says, home-equity lenders were eager to keep the loan on their books. Now, he says, ‘they’d sure love to get paid off and get 100 cents on the dollar.’”
Another conundrum?
Meanwhile, here in Maine, Countrywide just lowered the interest rate on an old HELOC we paid off years ago, trying to get us to borrow money from them. “I am not interested in this,” my husband said to the salesperson. She was shocked. WAMU did the same thing, valuing our Cambridge condo at only a couple of dollars under the Zestimate (TM). This time, I was shocked.
Anybody heard from LostControl lately? Hey LC are you out there? Need to talk about something LC related.
I heard an interview on the local newstalk radio station here in DC on my way back to work. It was with a managing editor of Newsweek. Every single question asked, his response boiled down to “Housing prices have risen too far ahead of incomes and must fall. The quicker the better.”
I almost wrecked it was so refreshing. And it met very little resistance from the interviewer.
Well, certainly the Lone Voice in the crowd with a microphone.
Wagers on who else starts talking? Or……crickets…..?
yay…they were only 5 years too late with this conclusion. when will people realize that credit and debt are poor substitutes for income.
Oh, and can I just thank whoever it was on this board who recommended BEARX? I bought into it last Thursday. I don’t have time to seriously play the market, but taking a small position in a fund with a particular strategy doesn’t require the same level of research.
I had to convert my IRAs to brokerage accounts before I could buy outside the Fidelity fund family. Seems we were set up with restricted accounts back when I worked for a big law firm to prevent insider trading. The guy who walked me through the process on the phone was immensely relieved to help someone who could comprehend his answers to her questions. I even gave him my favorite ever tax planning strategy. I felt like I had done a good deed for the day. Like the person who shared the bear fund.
Thanks again.
Dunno if it was me or not. Perhaps not, but I have recommended it in other places at least, and to friends at work. It’s been a very nice piece of my portfolio lately, and perhaps will continue to improve. I’ve held it for not quite a year, though friends of mine have recommended it for longer than that to me.
It’s a good contrary play, and it actually is not terrible in a stagnant market. Should the market shoot upwards on a bull binge, it’s bad news for BEARX, but I (obviously) don’t see that as likely.
Oh, that might have been me. I love my bear fund; I’ve had it for quite some time now. I learned a bad lesson at first about putting too much money into something because I freaked out and sold at a bad time. But then I put less $$ in, and it’s making me kinda happy.
I looked it up and it said 2000 minimum, but sharebuilder will let me buy whatever…I don’t understand that. Is it an ETF?
I don’t think Bearx is an ETF. I think it’s a mutual fund. I actually ended up getting into Direxion S&P2.5x (or some such name), another mutual fund.
Polly and other legal eages,
I just read, that a man walked into a certain bank (to remain nameless) and said they were in financial trouble, and he was taking out his money. He is now up for federal charges, and everyone that heard it, brings one count against him. Is there such a law? (run on the bank issue, evidently)Even the media is writing about this bank, or heard it on the media from WS types.
This is scary, if its true. Freedom of the press, vs. a private statement?
Doubtful. You’d see a Northern Rock-like scenario in no time.
I don’t think the PTB appreciate the cellphone, insta-messaging crowd. Check out how quickly the Northern Rock stuff spread in the UK.
Folks, chill the f*ck out. You can’t panic in the third inning of the first half of a double header. Not after all this prep work.
Who won the second inning? I lost count after Paulson whiffed.
“You can’t panic in the third inning of the first half of a double header.”
But if you’re gonna panic, be one of the first to panic.
Like the guy who was arrested last week when GF reported him.
Supposedly GF says guy threatened to give GWB an early ticket off planet.Now either, guy was legitimately nuts and gf was seriously afraid, or gf was royally pissed off at bf.
Anyway, he got arrested.
Oops.
Note to self, shhhhhhhhhhh.
I am a tax lawyer. No idea if there is a federal law making it illegal to say that a bank is in trouble in a public place. Maybe there is an old rule on the books from the GD about trying to start a run on a bank?
Don’t worry too much. If there is such a law it will get tossed out as unconstitutional as applied, if not on its face. This is akin to it being constitutional to make it illegal to scream “Fire!” in a crowded theater, but it would be unconstitutional to make it illegal for a theater patron to remark quietly to his right hand neighbor that the gentleman on his left side was flicking his bic.
Polly-
I truly appreciate your reply. I said the same thing in a bank that S&P just down graded. I was waiting for an FBI visit. Phew!
“Flicking his bic” in a theater, now that’s one visual that I hope to never see.
I believe there is a statute that prohibits an intentional false statement about the solvency of a bank and at the same time stating that the FDIC won’t make good on the insured deposits. It’s designed to prevent people from starting a run on the bank for malicious purpose or profit (like steering deposits to a rival bank).
If you are correct, then the charges are only good if:
1) the speaker’s statements are false (which requires them to be statements of fact, not opinions)
2) the speaker knows they are false
3) the speaker makes the statements with an intention of gaining in some way (other than by protecting his own assets).
Sounds like a hard case to make stick. No, make that nearly impossible without a lot of documentation. If an arrest was actually made, the person should be reminded that the oath you take when you start working for the federal government includes upholding the Constitution of the US. I take that oath very seriously.
Yes, I think it was pretty much a public relations type provision from when the FDIC and FSLIC were first created. As you point out the burden of proof is tough. I think the only way there could be a conviction is if a group of banker’s conspired to create a run at a competitor and then one of the group ratted on the others. I went looking for the statute but couldn’t find it. It might have been repealed as part of FIRREA.
Thank You tuxedo_junction
I was told by an ex-employee of the FDIC, that the FDIC cannot cover $1:$1, and I believe it.
I met the retired VP of a Fortune 500 firm, and she told me that it took her 5 years to recover her $ from the S&L crisis. It was a nice chunk,and it was h*ll. The FDIC is a false sense of security, imho. Even if it was $1:$1, and waiting just 18 months, ouch!
Cost of lost opportunity isn’t replaced.
The FDIC will always be able to make good on deposit insurance. 12 USC 1825 authorizes the FDIC to issue bonds and notes that are full faith and credit US obligations.
As for waiting 5 years, insured depositors get paid the Monday after the bank closure (which happens after the close of businees on a Friday). Uninsured depositors get paid if, and when, funds become available. There are only funds available if the FDIC recovers more than the expense of the receivership plus the expense of paying off the insured deposits. I suspect the retired executive had uninsured deposits, or there was a question of insurance coverage due to multiple accounts at the same S&L.
By the way, the priority of claims on an FDIC receivership is explained pretty well on the FDIC’s website.
From a PDF at the FDIC website: “Federal law requires the FDIC to make payment as soon as possible” in the event of a bank failure. I was not able to find anything about FDIC insurance payments being made the Monday after a bank was closed. The same PDF only gave “historical” performance times.
There’s a lot of wiggle room in “reasonable time.”
Sheesh. Does a law like that allow for an actual, on-the-spot arrest to be made?
“We are witnessing possibly the biggest financial event of our lifetime.”
Mr Jones, let’s leave out the ‘possibly’. This is the big kahuna, and I am glad I am alive to witness it. I am looking forward to fireside chats with my grandchildren, if God spares me from the grip reaper until then.
Grip should read grim. You see I was right, it’s gripping.
‘We are witnessing possibly the biggest financial event of our lifetime’
- Roger That!
Joe Sixpack is done.
I read the British Daily Mail and Angus Sixpack is now starting to get his. The Brits are going to get a double portion whuppin.
We always do. You guys worry about food supplies? Britain has to import 40% of its food. Since I don’t know when - certainly before the second world war.
There’s reasons for that finely tuned, sarcastic sense of dry wit, many of us carry around in preference to a hand gun.
The state of Hawaii shut it’s last dairy last year. Milk here is 7-10 per gallon.
Oh, goodie. Shut down the dairy so they can build more 2nd homes. We WILL be learning a lesson in survival, the time is near.
British humor? Funny? Now THAT’s funny.
Yes, and your grandchildren will look at you oddly, in the same way that we looked at our grandparents oddly when they described the Great Depression. Many years later, they’ll realize that you were smarter then they thought. And the cycle continues.
(This is the big kahuna, and I am glad I am alive to witness it.)
Kind of like I should be happy I was in Lower Manhattan on 9/11? Frankly, I’d rather be witnessing something else.
9/11 was an attack by foreign terrorist. This is a self inflicted wound and the consequence of reckless greed. I believe the difference is clear.
some jackass lies on a loan app to buy 12 houses and loses everthing is not the same as a single mom with 2 kids getting blown to bits while eating a doghnut in the her office break room.
Good point, Michael. I doubt that, in the days following 9/11, many people experienced schadenfreude.
I experienced whatever the German word is for “sure glad I wasn’t there.”
You know, my boss and I WERE supposed to go down to the Pentagon that day….
Good point, Michael. I doubt that, in the days following 9/11, many people experienced schadenfreude.
I’m sure there were plenty. And I hope the US military puts several rounds into each and every one of them, as well as their families, friends, and pets.
‘Pollyanna’ Yun doesn’t believe there is any such thing as negative news. You could be dying of some horrible disease and he’d say “You don’t look too bad to me…keep praying and your miracle cure will come”.
Anyone want to guess what the increased “shopping” traffic is coming from? I suspect that vultures are circling. I’m sure that the occasional good deal is out there, and will become much easier to find in the years ahead….
I love that the objective indicators are so bad that realtors at this point have to point to subjective rather than objective data; “we’re seeing more shopping activity”, “things are heating up” etc. rather than “YOY sales are down 50%”, “YOY medians are down 20%”, “YOY foreclosures have doubled”.
Shopping, not buying. People looking at houses and DREAMING about what could or couldn’t be. This is an indicator of the market coming back? It’s more like people window shopping during the Depression.
“Contract pending” signs today means absolutely nothing, other than “We’re trying to make you think things are better than they are,” since they generally disappear a few weeks later, leaving the original “for sale”signs in all their naked glory.
The NAR is shameless, and its talking/yammering head needs to be soundly slapped.
That’s the time lag between “We’ll take it!” and “The bank said what?”
Thornburg Mortgage (TMA)… oh, the poor investors.
‘Bankruptcy is now a more likely outcome,’ Arnold said today. ‘We would expect little to no value to remain for shareholders.’
A friend of mine was talking with a group of retirees in his circle of friends about two years ago, and they were all hot to trot on Thornburg. What’s not to love? Upper 20’s stock price, 9% or more dividend yield! There was nothing I could do to dissuade him.
How times have changed. When the credit crunch started hitting, there went TMA’s whole business model. And typically, after the plunge to $10/share, he and his friends couldn’t bring themselves to sell — that would just “lock in our losses”. And so now, with the shares plunging to $1.xx, I don’t even have the heart to call the poor guy because I warned him about that so much in the past that I reckon even a social phone call would seem like an “I told ya so”.
What do I do? Nothing, I guess, just silence. I’m supposed to head out his way on business and had planned to see him next week over lunch, but…
Do what one of the posters recommended a few days ago.
Drop by in your Porsche with a nice bottle of wine to cheer them up. LOL
Oh, rub it IN! Owwwwww! (But I do like it. Nicely evil.)
Yet I will probably do as DenverLowballer below says, and just buy him lunch. Seems only fair anyway, as I’m young and working, and he isn’t, so I’d planned on it anyway. Now the question is whether to buy a nice bottle of wine with our lunch to celebrate my put options on financial firms and/or my BEARX holdings. Hee hee hee…
Serf and Turf at The Palm AND the bottle of wine. Don’t bring up the investments, point made and received.
People love me and hate at the same time……
Excellent!
DLB, if you’re waiting for universal popularity, you’ll be waiting for a very very long time.
I focus on being popular among the crowd that likes me back for being truthful, and can handle an intellectual argument without any personal rancor. It works.
Nova Sideliner,
I’d make sure they take a good look at the dollar amount on the bill.
Get yourself a cognac too (if you’re not driving.)
I’d also pay cash and leave a handsome tip. If you’re gonna rub it in, you gotta do it right. No point f*cking around like an amateur!
Then you can buy the cognac on your next trip to The Mile High City, ambassador Pussycat. Love that stuff!
I will.
Better yet, I’ll just bring the real good stuff with me.
I think “serf” here can be regarded as a Freudian typo…
I remember watching Thornberg on the business news (maybe 6 months ago ) bitching about how he couldn’t get Jumbo funds ,but the Company was a great prudent Company who only made good loans .Poor investors that got sucked into that spin on the boob tube .
Buy lunch……
“‘The sooner we can get home prices in the United States stabilized, the sooner we will resolve all questions,’
Jesus Christ. How hard is it for anyone in the know to simply say what everyone including themselves already know? The answer is that the sooner home prices fall to reasonable levels that real people with real incomes can afford, the sooner the economy will start a recovery.
Of course I realize why people like AG and Bernanke stop short of outright saying it: By doing so would demoralize the home-owning masses and create panic for those screwed by their own bubble purchases. Hence I must assume that by sidestepping the cause is a lame attempt at damage control.
The problem with this is that there isn’t any spending power from consumers, and severely lessoned lending power from banks and brokers. Either way, there’s no support for vertical movement. Only downward and sideways movement. The ONE part of the puzzle remains price.
Admit that there is indeed a price problem, THEN start some damage control. Perhaps a better approach would be to state what anyone old enough to recall what traditional home ownership means: A long term investment. So yes- you might lose say, 20-30% of your home’s value in the next 5 years. But in 30, you’ll very likely have a home worth way more than what you paid for… just like a long-term stock investment.
“Perhaps a better approach would be to state what anyone old enough to recall what traditional home ownership means: A long term investment. So yes- you might lose say, 20-30% of your home’s value in the next 5 years. But in 30, you’ll very likely have a home worth way more than what you paid for… just like a long-term stock investment.”
I agree with you BUT the big problem this time around is that people bought way too much house and they can’t hang afford to hang on for 30 years. No way. They can’t even hang on a few years, let alone 10, 20, 30.
Buying at insane multiples of your income with a suicide loan means you can’t afford the house over the long haul.
Yeah, wait until their 5,000 sfooters needs a new roof, new paint, new everything in 10 years. Instead of bragging, they’ll be a crying when those sf are calculated into every maintenance/repair bill they receive.
Speaking of WS, is today the day the Dow breaks 12k? (On the downside of course.) I got nothing but blank looks from people when I sold a majority of my non-energy stocks when the Dow was at 13,800ish, and told people I’d consider buying back in at 11k.
What’s going on with the market today? No Ambac bailout coming tomorrow? LOL
“No Ambac bailout coming tomorrow?”
Yeah, I sat here watching the last 20 minutes waiting for the daily piece of meaningless news to spike the market up to a 50 point close, but darn it, it just didn’t happen. Much to the benefit of my SPY and XLF puts.
DJA will break 10k within the next 6-9 mos. there will be a major one-day correction, probably by the end of April/early May, followed by a steady bleeding of an additional 800 to 1000 points by the end of the year. The PPT has been trying let the air out slowly, but it’s quickly getting out of hand. Critical Mass is just around the corner and when we reach it, look out below!
10k before 14k…said it before.
Actually Simon, my 18 month outlook for the Dow is even worse. I think despite the FED’s best efforts(or maybe because of their best efforts), the Dow will be looking at 8000 before this thing plays out. My “financial advisor” laughed at me in Oct. 07 when I told him 12000 Dow by end of Mar. 08. But he’s got the M.B.A, while I hold a lowly B.A. in history. He kept yammering about P/E ratios and market caps and I tried to explain to him that the earnings weren’t real. He laughed again, until I asked him to move everything into T-Bills. Mind you, this guy bought CFC back in Oct.
i can see that. i can also see a big correction coming tomorrow or monday. interest rates disconnected from the 10 year altogether today. setting up for a nasty day.
For those wanting short the market through an ETF:
http://seekingalpha.com/article/13368-shorts-rejoice-double-inverse-etfs-to-begin-trading-thursday
Hey bigwig, I’m treasuries and even though I feel like a wimp, I know my K’s won’t get eaten up by wall st. scam artists.
I’d rather pull back on the finer things in life and just eat bulgar wheat and brown rice.
I bought RXW, RMS, and DXD last week. They’re up over 10% since. I’m not selling anytime soon.
I’m kind of in the same mindset. I actually don’t have any investments. In fact, all I’ve ever had is cash and CD’s. My dad said that I should get into buying some mutual funds, which I was perfectly willing to do. Right before I called the financial adviser is when the Sh*t started hitting the fan. I’m getting a pittance of money on CD’s these days, but my old-fashioned way of thinking is that I know for a fact that what I have in the bank is what I have. Even so, I’m a little nervous that at age 30, I basically have a 401k and a chunk of cash. They say you should have at least 10k invested by the time you’re 30. So far I have none except for maybe a few grand in the 401k.
I think I’d rather wait for the bottom a bit… which is what every financial advisor tells me not to do.
Given how most HBBers feel about credit, I’m pretty curious if anyone is interested in the Visa IPO. Valuline had Budweiser and DeVry institutes as picks in the last issue, because training institute and cheap alcohol do well in a recession. I didn’t purchase either, but the reasoning sounded good fwiw.
(jetson_boy, you are not alone!).
Ella you are not alone either!
“But for those who do nothing out of fear and worry, the outcome is pretty predictable. ”
BJ, does this include treasuries?
jetson -
Every financial advisor tells you such (not to wait) because it is in _their_ best interests to tell you so.
I am very interested in it! I have no interest in buying, it is a desperation move for a few banks to get some much needed cash. Sell assets, keep losses.
savers unite! =^_^=
I’m with Hoz.
My opinion is the same as Buffett’s, “Why would you buy from an insider at a time of their choosing, and a price of their choosing?”
And in case, anyone accuses me of stealing from Buffett, I refer you to a certain T. S. Eliot: “Minor poets borrow; major poets steal”
Hee, hee.
I just went hardcore conservative on my TIAA-CREF portfolio. (Put the balances of two equity accounts into TIPS.)
The guy on the phone seemed a bit taken aback, but too bad. At my age, I’m more interested in the return OF my money than the return ON my money.
Az Slim, that is the way I feel. After the dot com bomb I regretted spending so much money on computer’s and hobbies. I wished I had saved more, so now this is my chance to not waste my funds. Remember, we Scots gotta stick togetha’
Not a bad call, Arizona Slim.
Based on, admittedly exceedingly-slim data, I am guessing Vanguard is having some problems with their crowd as well. The monkeys have been so well trained that they are having trouble imagining a situation where DCA and all the other stuff that works in a “permanently expanding credit” world stops working.
Incidentally, I like Ol’ Mr. Bogle. He’s a man with some serious integrity, and one must respect that. I just happen to think he’s wrong.
I love John C. Bogle! He seems sincerely concerned about integrity in financial products. (I have a dream to get a basset hound and name him Bogle.)
But can you expand, why do you think he is wrong? You mean a market crash when boomers cash out their funds or…
ella,
If as I read earlier, you are new to the whole investing game, my explanations are going to sound like a whole lot of nonsense.
I would not be willing to state an entire hypothesis on a blog of all places. Like any nuanced argument, it’s filled with a whole lot of if’s-buts-and-maybes that don’t come across on paper.
A short version would be: There are a whole lot of things that statistics, etc. do not capture. That does not mean you can safely ignore it.
My TSP (401k for Government Slugs) is 88% treasury now. I’ve still got some money in the International fund, but the question is which will fall more quickly, the dollar or foreign markets.
Oh, 11k. That’s my number. How cute
“‘Our members are telling us there’s been a pickup in shopping activity.’ Yun said.
BS YUN! The data shows otherwise.
What was his source - a Tammy Faye lookalike who drove a Mary Kay Caddie to one of those NAR luncheons…
gravely smoker’s voice: “Hey sugar, I’m havin’ a great month!” drag-cough-hack “Say, I’ve never had an economist before, whadda doin’ after lunch?” drag-cough-hack
“We are witnessing possibly the biggest financial event of our lifetime.”
I am quite new to financial news and economics. I started paying attention in 2005. I certainly *feel* this, and I am not really sure what to do. I am sort of standing around with my mouth hanging open. In crises there are opportunities, but I don’t yet feel confident about recognizing an opportunity. I am reading all sorts of books on value investing and so on, and newspapers, blogs etc. I feel pretty rattled, though. None of my friends have any interest in this at all. If it weren’t for this blog and a couple of others, I would find this time very difficult. Mostly I am trying not to panic and to keep saving. If nothing else, this whole mess inspired me to get out of debt, for which I am grateful. However, I am not a high stakes person, I find this a bit more stressful than exciting (although very interesting). I appreciate all the calm, sensible posters here. You make my day easier to get through.
Even at it’s worst, 75% of the people were still employed during the Great Depression. I’m not saying it was a walk in the park but it’s easy to focus on the negative.
Just remember: life marches on. Sometimes I think the secret to life is realizing there are no “bad endings”, only changes. (And yeah, sometimes those changes suck…) Just like in the Arabian Night stories, the story does stop, it just goes on and on and on…
At any rate, if you have money in the bank or any sort of investment or PM holdings you are away ahead of J6P. J6P is like that lawn tractor commercial for Ditech: up their eyeballs in debt. I’ll hazard a guess that most people on this blog will do okay simply by having even a little bit of change in the bank.
Vermontergal, you are spot on.
Well yes, but it is ALSO true that most of those 75% were making less than they had during the 20s. I certainly think that in real terms, things won’t be as bad as the GD. We’re far richer and more productive. As for endings in life, there’s really on one..
“No bad endings”
Except for people who get murdered and stuff.
“Taylor Wimpey Plc, Britain’s biggest homebuilder, said annual profit dropped as property markets cooled in the U.K., U.S. and Spain. Earnings in North America dropped more than 80 percent and Spain lost 70 percent as operating profit margins collapsed and sales plunged.”
Wimpey: “I will gladly pay you Tuesday, for a pier loan today.”
lol!
Do you sell Olive oil in a bottle? -”Why yes we do”
- Better let er’ out, Popeye’s gettin’ mad!
Oh Wimpy, your FICO score alone won’t let me do that!
Just got back from going home for lunch.
Anyway, my wife tells me there is a home for sale around the corner from us. Okay, I’ll play along. How much? 500K. Oh no she says. This is Rancho Santa Margarita. Okay, 575-600K. Oh no, this is on the man-made lake of RSM. Okay, I say 675K tops. No, this is 4bed/3bath. 725K she says. I almost fell off the barstool at the counter. I said, I’ll give you 275K for it.
The kicker, it has a shared wall with the house next door. In other words, a duplex. Good grief. 725K.
I told my wife I am going to call just to laugh at the realtor. Needless to say, my wife said the realtor was not a happy camper on the phone. I told what did you expect, she probably hasn’t sold squat in months, esp. at those pipedream prices.
Imagine 725K. Even with 20% down, you are looking at 575K, which is almost 3600/month P&I and then taxes, HOA, and Insurance. Mamma Mia, 4500/month. I rent much nicer right on the lake for less than half of that with 1 less bedroom and 100% less pain and nonsense. I might be out of this market for a loooooong time at this rate.
Anyone who calls realtors just to laugh at their lofty wishing prices is just callous and mean. I like it.
“Mr. Betterton had ’superb’ credit and the new mortgage would cut his mortgage rate by more than a percentage point, making him a better credit risk, says his mortgage banker, Lou Barnes.”
So he’ll cut his mortgage by a percentage point but have to add the points to the back end of the loan thus reducing his 5% down payment.
“But for those who do nothing out of fear and worry, the outcome is pretty predictable. ”
Ben, why can’t I do nothing? I shake when I look at my portfolio why would I want to open it up and make even more mistakes?
Hiding is treasuries is what?
I am nervous one, too. However, last year I read a ton of personal finance books, I decided to get my house in order. Of course, every one said if you don’t invest in *something*, inflation eats you up. However, they all had different investment strategies, with the exception of long term indexed funds, like Claymore, iShares, Spider, etc. which were loved by all. Except Rich Dad, who was keen on property investment. Rich Dad is kind of…weird, though.
Anyway, strategy for the spooked: I save mostly cash, and then find a little extra for tiny investments. I will buy a fund instead of a pair of boots, ie. Then if it drops, I only lost a pair of boots! The over time, as I accumulate, I am less scared of making mistakes. Because my mistakes didn’t kill me! Stepping into the cold water slowly…
As much as I admire the daring and cunning of some of the investors on this site, it’s not for everyone. If you can’t sleep at night, your financial plan isn’t working, right? Ben Graham and Jason Zweig are tops if you want comfort and guidance.
ella, your “weirdness” radar that goes off when reading Rich Dad is sound - the guy is a liar and fraudster in a personal finance expert’s clothing. The best source of debunking on him that I’ve found is on: http://www.johntreed.com/Kiyosaki.html
Ha! Thanks, that’s good to know. I borrowed my copy from a friend, so I will pass it on.
I know many people *hate* Kyosaki (or whatever his name is), but he, like us, called the RE downturn, and he (unlike some of us) went whole hog into commodities (gold, oil, mining). Not to shabby if you ask me. Does anyone have any idea how well John T Reed has done with his investing?
When did Kiyosaki “call” the RE downturn, 2005? A bit late to the party.
http://propertygrunt.blogspot.com/2005/07/cult-of-kiyosaki.html
I’m sure Kiyosaki has done very well with his “investments” — one of them being a DVD package he sold to dummies on QVC network for $500, saying it’s an “investment.”
The people that followed him, however, such as Casey Serin, were spat from the “real estate investment” wood chipper.
Here’s one thats really getting under my skin. Vinny DelJudice, Bloombergs US Treasury correspondent states repeatedly that “we’re in the 3rd year of a housing market recession”. Would someone like to explain that BS? 3rd year of declining profits for box builders? New sales volume? resale volume? Clearly prices have just begun to slide so he can’t be referring to that.
Ideas?
i marked the first year beginnig 8/02/2007
third year seems about correct. I mark the top as June 22, 2005
“Feed the Squirrels”
Yeah, me too.
FWIW - the very first “Price Reduced” sign I saw in the inner Alt-A Bay Area was in the first week of October 2005.
I believe some freaked out realtors removed it soon afterward, but I like to think air began leaking from the bubble that day.
“‘Our members are telling us there’s been a pickup in shopping activity.’ Yun said. ‘Our hope is that the increased traffic of buyers looking at homes will translate soon into more contract offers.’”
Wow. This is the kind of expert analysis you might expect from a freshman in high school, but youth would be wasted on the Yun. My own
observation is that the Realtwhore community is experiencing oodles more paranoia, sleeplessness, and income loss, which should soon translate into more alcoholism, drug abuse, and divorce amongst the “Now is a Great Time to Buy” crowd.
One of the major lessons that this housing bubble has taught me is that our political system seems to have been purposefully designed to prevent those in office from doing anything very quickly. They can pass regulations, which help to prevent future debacles, but they have very little ability to interfere with debacles as they are happening. People like to gripe about it but, IMHO, it’s actually pretty smart. It prevents the administration of hair-brained cures to acute diarrhea that are bound only to induce chronic bleeding.
I read in today’s paper that it now takes Z$ 25 Million to make one U.S. Dollar.
A U.S. $100 Bill will land you 20 kilos of Zimbabwe paper money.
May you live in interesting times…