The Bottom Card In The House Of Cards
Some housing bubble news from Wall Street and Washington. Bloomberg, “Contracts to buy previously owned U.S. homes declined more than forecast in May, a sign prices that have been sliding for more than two years have yet to touch bottom. The index of pending home resales fell 4.7 percent, the National Association of Realtors said today. One in every 483 U.S. households either lost a home to foreclosure, received a default notice or was warned of a pending auction, RealtyTrac said.”
“That was the highest rate since the company began reporting in January 2005 and the 29th consecutive month of year-over-year increases.”
“‘It’s definitely a different kind of market,’ said Devin Reiss, owner of Realty 500 Reiss Corp. in Las Vegas. ‘We used to sell homes in a day. Now, 50 percent of our sales are foreclosures.’”
“The PHSI, a forward-looking indicator based on contracts signed in May, remains 14.0 percent below May 2007.”
“Lawrence Yun, NAR chief economist, said some pullback after a sharp increase in the previous month was expected. ‘The overall decline in contract signings suggests we are not out of the woods by any means. The housing stimulus bill that is still being considered in the Senate is critical to assure a healthy recovery in the housing market, jobs and the economy,’ he said.”
“Shares of Marshall & Ilsley Corp., Wisconsin’s largest bank, fell Monday after the bank said it had an unexpected second-quarter loss as housing developers failed to repay their debts. The lender set aside $900 million to cover bad loans in the quarter as mortgages made in once-booming warm-weather states soured.”
The Whittier Daily News. “IndyMac Bancorp Inc. will lay off more than half of its employees and will no longer offer fixed-rate home mortgages, Michael W. Perry, the bank’s CEO said in a prepared statement.”
“Perry also announced that the Federal Deposit Insurance Corp. has downgraded IndyMac’s lending status from ‘well-capitalized,’ which means the bank can no longer accept brokered cash deposits without a waiver by the FDIC.”
“‘IndyMac was one of the banks that was using relatively weak underwriting standards on the basis that housing prices would continue to rise in value,’ said Jason Arnold, an analyst at RBC Capital Markets in San Francisco, in an interview. ‘With prices coming down, that became the bottom card in the house of cards built by these lenders.’”
“Barclays Plc, the U.K.’s fourth-biggest bank, will stop selling new loans at its U.K. subprime loans unit and shed about 300 jobs because customer demand is drying up.”
“‘In the past year we have tried a whole range of activities to develop our business but the market demand simply isn’t strong enough,’ FirstPlus Managing Director Neil Radley, said in the statement.”
The Telegraph. “Abbey, Britain’s third largest lender, has said it has increased the amount it requires borrowers to put down as a deposit on an interest-only loan without a proven repayment vehicle is 50 per cent, while it requires a 25 per cent deposit where a proven repayment vehicle is in place.”
“Meanwhile, two high street lenders have tightened their general lending criteria to reflect the rising cost of living. Alliance & Leicester will assume a higher cost of living on its affordability calculator than in the past and there are also changes to working out how much the mortgage is going to cost.”
“In addition, Nationwide is changing the maximum age limit by which time the mortgage must be paid off to 75. Prior to this there was no upper age limit as long as borrowers could afford the mortgage payments from their pension income.”
“Rival lenders are expected to copy Abbey’s decision. Ray Boulger, of mortgage brokers John Charcol, said: ‘When one of the major lenders makes some changes, it is not unusual for others to follow.’”
The Daily Mail. “Re-mortgaging has collapsed as homeowners are put off by huge fees and expensive rates, experts said. The latest figures from the Council of Mortgage Lenders reveal a ’steep decline’ in the number of people switching lenders.”
“Figures show just 71,000 people re-mortgaged in May, a fall of 23 per cent compared to the same month last year. It is a dramatic U-turn from the booming re-mortgaging market of just a year ago when £500million was handed out in loans every day.”
“Chancellor, Vince Cable said: ‘The continuing fall in house prices comes as no surprise, but will bring more pain to homeowners. Since the start of the decade, house prices have soared out of control, unchecked by the Government and fuelled by irresponsible lending. With living costs spiralling and borrowing becoming ever more unaffordable, a housing market crash is inevitable.’”
The Guardian. “Auctions across the country reveal the same picture with auctioneers and vendors deadlocked. The former are telling the latter that if they want to sell their houses, they have to lower their prices significantly, but sellers can’t afford to do it. Conversely buyers can afford to wait before taking the plunge, knowing that prices are more likely to fall this year than go up.”
“‘Let’s start at 50, anyone for 50?’ asks the auctioneer. The packed room remains silent until one angry man runs breathlessly through the crowd and stops the proceedings in their tracks. ‘No,’ he shouts. ‘I told you I can’t take less than 55.”
“Charles Smailes, auctioneer at Feather Smailes & Scales in Harrogate, said: ‘Demand has dropped to nothing. It’s like the property market has fallen off a cliff.’”
“At their auction last week, 10 lots were offered but seven were withdrawn owing to lack of bids. Out of the 16 properties up for sale at the Southend auction, only nine were sold. Out of those nine, six were sold below their asking price.”
“Trouble in Singapore’s property market is brewing in the premium segment, which requires yield-seeking financial investors to support lofty valuations. After surging 72 percent in the two years through 2007, the price of freehold apartments in the prime districts fell about 5 percent in the second quarter of 2008, according to a property-consulting company.”
“Luxury condominiums, many of which were being marketed last year as ‘iconic,’ are looking vulnerable. Take Goodwood Residence, located at the edge of the financial district. Guocoland Ltd.’s plan to sell a big chunk of this upscale apartment complex to a fund managed by Kuwait Finance House KSC’s Malaysian unit has flopped.”
“According to a July 2 report in the Straits Times newspaper, Kuwait’s largest Islamic bank is buying only 36 units in the project, instead of the 97 it planned to purchase in December. The investor is now paying S$2,800 per square foot, or about 13 percent less than the price it agreed on in December.”
“‘Developers are cautious about releasing too many units,” Chua Yang Liang, head of Southeast Asia research at Jones Lang LaSalle Inc., wrote. ‘Buyers on the other hand aren’t willing to participate aggressively as they are anticipating prices to moderate.’”
Oxford Business News. “Official figures show that year-on-year sales in May were down 36%. Residential sales were hit particularly hard - dropping from KD138.1m ($521.5m) in May 2007 to KD50m ($188.9m) in May this year.”
“The Kuwaiti government introduced new regulations in the first half of this year in an effort to curb inflation. Perhaps most significantly, loans to the real estate sector became harder to obtain. This has had the effect of radically curbing liquidity available to potential borrowers, and demand has contracted accordingly.”
“Sales in residential property have been in decline since the market peak last July. National Bank of Kuwait (NBK) figures published in April showed average house prices to have tumbled 60% between that peak and February 2008. Next month’s year-on-year figures are likely to be even more severe.”
From Business Daily. “The surge in property prices in Nairobi suburban area may soon start claiming casualties as consumers feel the pinch from falling rental yields.”
“With some consumers already being forced to dig deeper into their pockets to meet monthly mortgage payments to supplement what rental incomes don’t cover, this could force the level of mortgage loan defaults to rise.”
“The Kenyan banking system is estimated to have given out house loans worth Sh20 billion.”
“Even as the economy has slowed down, property prices have been rising far much faster than tenants are willing to absorb in rent. This has created a situation where increases in the inventory of vacant apartments - as new property developments are completed - have met with tepid demand from consumers, forcing landlords to either reduce rent or maintain it low to remain competitive in a difficult market.”
“‘The number of people seeking advice on what to do or looking for alternative ways to service their mortgages is rising by the day,’ said Mr Justus Munene of Daytons Valuers, a property firm, and vice chairman of the Institution of Surveyors of Kenya (ISK).”
“‘The heat is boiling under and if the trend continues and the current economic conditions do not change, it is only a matter of time before massive mortgage defaults begin,’ said Mr Munene.”
“The most recent data shows that property prices in the middle-income segment have nearly doubled in the past six months.”
“Three bedroom apartments in Nairobi’s Kilimani and Kileleshwa that sold at an average of Sh6.5 million in December are now priced at not less than Sh8 million, while in Mombasa, similar houses that sold at around Sh2 million are selling for not less Sh3.5 million.”
“Data from property valuers indicate that the average annual rent earned in the middle to the top end of the property market is way below the industry guidelines on property profitability.”
“In Kilimani and Kileleshwa areas, apartment complex after another - which years back were being bought even before the construction was complete - are now pasted with rental signs as opposed to sale, an indication that supply has outstripped demand.”
“‘High inflation means less disposable income for anybody in the middle-income and below, less savings hence less investment options as most people in that group are speculative investors, rarely long term,’ said Terry Ryan, professor of economics and a member of the monetary advisory committee of the CBK.”
“Mr Chris Chege, a senior relationship manager in charge of mortgages at Housing Finance, said the development could be a result of the way the Kenyan mortgage market is structured and the misinterpretation that rent income alone can service a mortgage loan.”
“‘Given the high loan to property value ratio in Kenya, rent alone is not likely service mortgage loans,’ said Mr Chege.”
“If the rentals are revised upwards, there will be fewer numbers of consumers able to rent such houses leading to low occupancy levels and low returns. The less bitter pill to swallow, it seems, is the revision of pricing downwards to encourage sales and to free up money tied up in the investments.”
“Either way, the property market bubble has been pricked for the middle upper income areas in Nairobi.”
The Boulder County Business Journal. “The share of expensive homes in foreclosure continues to rise in Boulder County. Homes with mortgages for half-a-million dollars or more accounted for 9 percent, or 52, of the 581 foreclosures filed in Boulder County through June of this year. That’s up from 4.1 percent for the same six months a year ago.”
“‘Like a lot of people, I just got behind on payments,’ said one owner of a local million-dollar-plus home in foreclosure. He agreed to speak anonymously to the Business Report.”
“Now there is too much inventory to compete with - even among high-end homes - driving prices down and making it difficult to sell and cover the original loan. In the above homeowner’s case, a majority of the homes in his small unincorporated Boulder County subdivision are for sale, he said.”
“The homeowner is still employed, but he had banked on a stronger real estate market. ‘A lot of people like us bought on an inclining market, and we put a lot of investment into the home assuming the value would rise,’ he said.”
The San Francsico Chronicle. “William Poole served as president of the Federal Reserve Bank in St. Louis from 1998 until March 31, when he reached the mandatory retirement age. He also served on the Fed’s open market committee, which sets interest rates.”
“Q: Should the Fed have done more to stop the housing bubble?”
“A: No, I don’t think so. We all understood that the house price increases could not continue. We did not think through the possibility of a significant price decline and large-scale defaults and foreclosures.”
“We understood there was abusive lending and practices that were stripping equity out of households. I don’t remember the issue ever being raised that it could lead to defaults.”
“Q: If the Fed had acted to protect consumers, might it have prevented the credit crisis?”
“A: Maybe. The people who should have known were the financial firms sinking huge amounts of money into this. The biggest problems were mortgage originators who were not federally regulated. At this period there was a continuous push by Congress to make mortgage credit more readily available to subprime borrowers. For the Fed to have acted would have been contrary to the intent of Congress.”
“Q: Isn’t the Fed supposed to be independent?”
“A: The Fed is independent up to a point. The financial community, the Fed, academics, didn’t see the problem brewing.”
Fed flunky (lacker) says housing bottom in 1H of ‘09
probably causing this rally
How long can the housing market sustain 20 pct + annual price declines (like those currently underway in coastal CA)? Not forever, I am sure.
However, the Japanese experience provides an example where a rapid period of price decline does not lead to a near term bottom (more like a 20 year slow motion crash after the initial decline).
Actually it can, 20% of an ever decreasing value only asymptotically approaches zero… What’s fascinates us here is that no one really knows, we’ve never been in a situation quite like this before, and there’s just too many economic, political, social, and energy-related wild cards.
Mrs. shoe is now fully on board with the idea that the right time to buy for us will likely be at least another 2-3 yrs off. At that point we still may be looking at downside risk, but perhaps not enough in real dollar terms to tip the scales, given all the other purchase decision factors.
“Actually it can, 20% of an ever decreasing value only asymptotically approaches zero…”
But the value of most housing is not zero, and there is a fundamentals-based affordability floor down there somewhere which would eventually be reached before prices dropped to the ground (unlike the share price of certain highly-leveraged lenders — check out IMB for a current example).
3 times median income is the bottom.
My first sentence was a tongue-in-cheek. My guess is that once the sharp prices declines hit some type of floor, there will be a long slow leveling off, with perhaps additional small declines. But where that floor is reached, I think there’s too many unknowns.
Will the worst foreclosure strongholds just implode under their own weight, or will government(s) step in to re-habilitate them? How bad will the banking failures really get? Will gas prices drop back to $2-3/gal, or are they on their way to $8-10? Will all of the changes in total really start driving people to re-evaluate where and how they live, or will we just kick the can down the road a ways, and pick up where we left off (with way less consumptive froth) for another decade or two?
What I’m seeing is that most people predict what they want to see happen. That goes for the most optimistic realtor hacks to the most pessimistic apocalyptics. And for me too.
But the value of most housing is not zero,
Tell that to the residents of Cleveland. I’m still in shock at the $15.5k median price. I’m not sure 3X is going to be the bottom. I see a high risk of overshoot. A huge fraction of the popultion will not be able to qualify for a mortgage until 2011+. (Save down payment, rebuild credit, pay off Hummer, etc.)
There will be a bottom, but first we have to get through 2009. That is going to be a scary year.
Got Popcorn?
Neil
3 times median income is the bottom.
That’s why I have a small dilemma right now…property I looked at is well under 3x income, has (slightly more than breakeven) income potential, great views, and is 20% lower than similarly priced properties. Owner is in his ’70s and just wants to dump it and move to Hawaii, as far as I can tell. It may go down further, however just don’t know if I want my money tied up in RE, and my mom as a business partner may not be so great long term.
Anyway, I’m probably going to pass.
I see a high risk of overshoot.
Here’s hoping!
3x median income, 2x median income w/ overshoot. Now, how low can median income go? if we reach 25-50% unemployment… then housing can literally go to near 0 or below 0 if you factor in taxes, insurance, etc.
Well, I did buy a home in 94 that was 78k, needed lots of work. Probably didn’t haggle enough with bank.
But still, it was doable.
turning Japanese= endless gov bailouts
An interesting article on MSN realestate:
http://realestate.msn.com/rentals/Article2.aspx?cp-documentid=8377648>1=35000
The author uses 180 times monthly rental thumb rule to consider buying a property. It has an example of a house in San Jose, CA currently priced at 500K needs to come down to $234K before it makes financial sense to buy the property. With this premise, the support is 53% below the current price.
A LOOOOOOOOOONG WAY TO GO STILL……
So I’m flipping channels about a an hour ago (after the Tour de France coverage on VS ends). I hit on some business channel where I find four realty agents talking about what their local home markets are like to two in-studio types.
Out of the four agents one is from Tallahassee, one from Detroit, one from Sacramento and one from Portland. Each in his or her own way tell us how great “their” particular area is doing.
Sacramento is “HOT”, Detroit “moving along”, Portland “doing great, it’s different here”, Tallahassee “sellers getting multiple offers on homes”.
I’m sitting in front of the TV wondering how anyone can possibly believe these real-estate types until the interview is finished and the four real-estate “experts” on the monitors are gone.
One of the in-studio interviewers turns to the other and says in a very sarcastic way “what do you expect them to say, that the market’s bad?”. The other laughs and responds with something like “you’re right!”.
“One of the in-studio interviewers turns to the other and says in a very sarcastic way “what do you expect them to say, that the market’s bad?”. The other laughs and responds with something like “you’re right!”.”
But some producer at the network made the decision to have them interview these clowns. There’s nothing compelling the network to have these clowns on the air. There’s also nothing preventing the network moderator/interviewer from calling these clowns on obvious inaccuracies. Very shoddy work by the network unless the goal of the network was to give these clowns a platform to spew their propaganda.
There’s a lot of demand for clowns like these on TV. So many FBs go silent and angry if you discuss what is happening in a rational way with evidence (gasp).
Watching the RE agents spin fairy tales is a much needed boost to their wounded psyches.
“The author uses 180 times monthly rental thumb rule to consider buying a property.”
The standard is 100-120, not 180.
Ha, I caught that too. I supposed 180x looks pretty good coming down from 350x. But then, 120x looks even better, and 80x better still. Unless, of course, you caught the knife at 180x ’cause you read it on MSN.
3x sure would be great.
“but he had banked on a stronger real estate market.”
Hell, I banked on that one year pay raise to last for a few yrs, less than a yr later…poof Haircut -35% and holding.
Look what “banking” on something does for ya.
180x just about fits the current situation here: Newer 3/2 would rent for 1200 and sell for 216k.
When the rule doesn’t work anymore, change the rule, right?
RE: the support is 53% below the current price.
Gosh, darn…there’s that damn 50%+ valuation haircut that has just kept coming up on this blog for the last two and half years.
I just don’t see how that could happen. First of all, note that everyone up until May was saying a housing recovery was on the way Second Half of ‘08. Before that, people were saying 08. Before that, people said that the slight downtick Dec 2006 would be resolved and prices would move 5% higher in 07.
The numbers don’t work for a recovery anytime soon. Massive Inventory is out there. No money available to borrow as banks tighten. And even more inventory is on its way, thanks to Pay Option ARM foreclosures, which will soon take over subprime as the reigning foreclosure champion. More foreclosures = more writeoffs = more contraction = no loans = bunch of housing inventory with nowhere to go but down, pricewise.
I have in hand a James Grant post in Forbes.com dated 12-25-2006:
“By a margin of almost 2-to-1, economists surveyed by WSJ.com last month [Nov 2006] judged that the worst of the residential real estate slump was history. House prices will soften in 2007, the sages predicted, but by only a little bit. In fact, 20 of the 49 respondents forecast a rise.”
Don’t believe I will bet any money on the advice of a sage, particularly one who is an economist. I wonder if I’m too old to go to Sage School and earn a Sage Certificate (CFS) and then get paid for making quotable comments or participating in surveys.
I want one of those thingys. A Sage certificate. Then a license to pastor, and then open my own church and reap the bounty!
Woo hooo.
Ed G,
Right, and remember the Japanese actually have savings. So they could have easily provided a down payment if required. Uh… we can’t say that. But Professor Bear has a point ( it’s the only model we have to work from )
“Fed flunky (lacker) says housing bottom in 1H of ‘09″
Depends on how fast it falls between now and then, doesn’t it? I don’t think the bottom will happen that fast, unless we have a real massive recession in the second half of 2008.
Fed flunky (lacker) says housing bottom in 1H of ‘09
Ahh but what will he say at the end of 1H of ‘09? I’m sure todays news will be long and forgotten by then. If my memory serves me correctly wasn’t there a call for the bottom in 2qt of `07? Or was it 3rd qt…then again 1qt `08…then again spring…
The Guardian. “Auctions across the country reveal the same picture with auctioneers and vendors deadlocked. The former are telling the latter that if they want to sell their houses, they have to lower their prices significantly, but sellers can’t afford to do it. Conversely buyers can afford to wait before taking the plunge, knowing that prices are more likely to fall this year than go up.”
“‘Let’s start at 50, anyone for 50?’ asks the auctioneer. The packed room remains silent until one angry man runs breathlessly through the crowd and stops the proceedings in their tracks. ‘No,’ he shouts. ‘I told you I can’t take less than 55.”
Wow - things are as bad or even worse in the UK and around the world. The US may eventually say - our housing ponzi scheme was bad, but not as bad as what is happening in your country. The dollar may rally…
A Full House of Cards got beat by a Straight Flush…
Wouldn’t that be a Royal Flush in the UK?
A bit off topic, but what do you guys think about TIPS for saving your cash until we do hit bottom? I’d hate to keep money in the bank with all the inflation and gold was rising so much it could crash like the housing bubble.
I’ve pondered this too. I don’t have a good answer. The best I can come up with is a savings account and CD’s. I don’t want to risk any of it in the stock market or play the declining dollar game (might be over). My thought is that a 3% gain may equal a loss in actual buying power if I was buying “stuff” but, as long as housing prices are falling, I’m not losing value to compared to the house. It may be the wrong way to look at it, but it helps me sleep at night.
As long as you don’t have your money in a bank on the list of possible bank failures (local regional, national) that the FDIC keeps in secret. Check out the rating of your institution here:
http://www.bauerfinancial.com/btc_ratings.asp
awaiting wipeout,
Great find. I’ve referred several people to that company as they had sub. holdings in some of these banks. What always seems to surprise ppl is that their local bank tried to become a major player, not through residential mortgages but by lending directly to some very shaky builders.
We should keep it as perm. link on the right hand side!
awaiting,
Thanks for the link!
Leigh
I had thought about a Treasury direct account and buying US Securities. I don’t think the rates are as high as CD but the interest is exempt from state income tax (I think). This benefit is of no use to me as Florida has no income tax. Anyone used this investment method?
Jim, I used Treasury Direct a lot in 2006 and early part of 2007. But with the miserly rates now provided, I have been rolling them back into CDs. Yes, you are state tax exempt.
I opened a Treasury Direct account and used it primarily to purchase 26 week t-bills, mostly during 2007, after I felt it was becoming a little risky to hold cds at Corus and Key banks among others. The t-bill rates at that time were comparable to the bank rates especially considering that no taxes were payable at the state level. When the t-bill rates began to drop nearly a year ago, I decided to take a chance and use banks and my credit union, all of which were offering higher rates. I am considering moving back into t-bills although the current rate for a 26 week is just over 2%. I’ve checked ratings on bankrate and bauer financial, but still feel uneasy about the solvency issue.
ING has some decent rates ~3.3%
sorry, not really ‘decent’ but ‘better’ rates
“Shares of Marshall & Ilsley Corp., Wisconsin’s largest bank, fell Monday after the bank said it had an unexpected second-quarter loss as housing developers failed to repay their debts. The lender set aside $900 million to cover bad loans in the quarter as mortgages made in once-booming warm-weather states soured
Associated Bank, the states 2nd largest bank, is also in the same world of hurt with all their bad loans.
“Fat drunk and stupid is NO WAY to run a bank in Wisconsin, son”
Acknowledgments and deepest apologies to the creators of Dean Vernon Wormer and the origional “ANIMAL HOUSE”
That web site rated Associated bank 4 stars.
Things that make you go Hmmmmm?
Solar energy, footwear, bicycles, chemicals, silver, copper, seeds and gardening supplies, canned and freeze dried foods, generators, all would be good investments with your money.
Here in Tucson, bike shops are doing a gangbusters business. And the summer is normally the slow time in the local bike biz.
Ditto with bike shops all over SoCal.
Got Popcorn?
Neil
Copper - why?
To replace what the FBs are stealing, of course……
If TIPs worked off of real inflation numbers, I’d go for it, but they use the cooked CPI books from the US Gov.
You’ll still lose purchasing power, and have your principal at risk with rising rates.
After considering the same (briefly), I’ve kept my money in short term muni bond fund, I’m focused on losing as little as possible right now–that seems the best way.
Using the old method of calculating inflation, and not the flim-flam method used today that
excludes food, fuel, and housing, we’d be much
closer to 10% + inflation. TIP’s are a great way
to lose capital.
Someone asked about TIPS/inflation-linked bond funds this weekend too.
Foreign Central Bank purchases of USTs have kept interest rates low at least for now. TIAA-CREF inflation linked bonds have been terrible for the past two decades; I know because I have been too lazy to switch out. Although USTs have made a double top (interest rates double bottom), it’s tough to forecast the speed of any long-term interest rate rise - it could take decades, unless USD completely melts down.
Oddly enough, my father sold his entire (pretty large) bond portfolio Friday June 13, 2003 at the very tippy top of the bond market, inventing his own TA and just watching Maria B! He did not even have a PC!! He was an engineer involved with shock and vibrations and did some of the original seatbelt work, going head to head with the US auto industry back in the 60’s. My investing discussion buddies say I should just buy the beer and they will talk to my dad on cell speakerphone, LOL.
Is “The Guardian” laying off staff or hiring at lower salaries? The sub-head to that article:
“Credit crunch leaves homeowners with no easy way to bale out”
Unless there’s been a recent run on pitchforks, what’s the problem? Apparently, their online content isn’t subject to the same level of copy/editorial review as the print version. This is a major UK newspaper.
See the second verb usage from the OED (remember, they don’t use Webster’s):
2. to bale out. [Usually so spelt, as if the action were that of letting a bundle through a trapdoor; but also (esp. U.S.) as bail, as if a use of BAIL v.4, to lade out.] intr. (Of an airman) to make an emergency descent by parachute from his machine. Hence also (rare) n. bail-out. orig. U.S.
CFG - very sharp. I concede to that. Kudos.
LOL - The Guardian isn’t called ‘The Grauniad’ for nothing!
Its been bad at spelling for decades.
“Q: Isn’t the Fed supposed to be independent?”
“A: The Fed is independent up to a point. The financial community, the Fed, academics, didn’t see the problem brewing.”
Got to hand it to Poole. It is really, really hard to be that puffed up and still manage such an oblivious comment.
In a nutshell - the very rich, the totally insulated, and the economically untouchable were unable to imagine a world where bills went unpaid, contracts meant something, and the real world actually matters.
A room full of Homer Simpsons are a better bet.
Ummmm, excuse me. We on the HBB, and there are more than a few people here from academia and finance, did see the problem brewing. In fact, the Problem Teakettle was boiling and whistling several years ago.
“The financial community, the Fed, academics, didn’t see the problem brewing.”
Absolutely! This was/is a total BS comment if I ever read one. They just chose to look the other way.
BayQT~
Yea, and hear ye, hear ye:
WE all have been writing about this for about 4-5 years now. I am not a highly paid government “economist” or academic. It was OBVIOUS to me that INCOMES could not support PRICES, unless the loans never got paid, meaning serial “re-financing”.
Most everyone that tuned in here got the idea pretty quickly that this BOOM would BUST.
You need to get out of your meetings with like-minded idiots who don’t have a clue about main-street America.
Captains of Industry? Financial Geniuses?
You, and all your buddies in the FED should be kicked out on the street with NO benefits.
Thanks for taking care of financial matters by idly sitting by and watching prices surpass all understanding.
They weren’t “idly sitting by and ..”
They were playing, vacationing, wasn’t the one guy?
playing a Bridge tournament?
Those folks were busy.
Busy having a grand old time, and laughing all the way to the bank,their pockets.
I don’t believe Janet Yellen “knew” and chose to look the other way.
She was clueless.
She just drank too much of the local Kool-Aid here in the Alt-A Bay.
as for academics…
Started to read “Evil Paradises” this weekend- a compliation of stories about global cities from Mark Davis (City of Quartz - about L.A.)
There’s plenty of mention in the book about a “global real estate bubble” - a figure is even given - $30 Trillion.
Great short sections about Dubai, recreations of Orange County, CA in Iran, and other global real estate fiascos. If one is interested in the global manifestations of this bubble this is some really engaging reading.
Ben,
A thought: Many of the bloggers here have recommended a lot of good books. Some of them I thought I’d remember, but in reality, the titles have slipped my memory. Would you consider either compiling a list and adding it as a link? (I know….that would be quite a bit of work, unless you’ve made notes on them). Or, perhaps, creating a topic where they can be deposited by those making the recommendations? This would also assist those of us who would like to have something tangible to pick up and leaf through, as well as help the non-participants bone up or enhance their knowledge of the markets (past and present), finance, etc.
As mentioned…it’s just a thought. I’m definitely open to other suggestions as to how we can share our discoveries.
Thanks ever so much!
BayQT~
They didn’t see the problem brewing because from their view point there was no problem.
They and their friends were making money hand over fist with the knowledge that when the bubble burst they would have sold the majority of the risk to non insiders and that the FED/ US tax payer would make their landing soft. Now they are all in cash commodities ect waiting to buy up stocks and property as prices collapse.
Where is the problem?
An article today shows Congressional approval rating at 9%. Logically, voters would vote out the incumbents. That alone could be the beginning of a rapid-as-possible correction of our ills. But too many idiots who think Congress sucks continue to vote to reelect their representative or senator. The only real solution is political pitchforks, IMO, and the only means of convincing anyone of that is via the Net.
I have no plans to vote for Raul Grijalva (my U.S. Representative) this fall. And, if McCain and Kyl were up for re-election this year, I wouldn’t vote for them either.
BULLETIN
TREASURY’S PAULSON: PRICE DATA OVERSTATE HOUSING MALAISE
Home price data may be overstating weakness: Paulson
By Greg Robb
Last update: 3:06 p.m. EDT July 8, 2008
This guy should work for Comedy Central…
A great not from the comments section of the link:
“Here’s Paulson’s explanation from the news article: ‘Paulson said that home prices typically include foreclosure sales, which usually occur at a discount. In some cities, foreclosure sales have spiked.’
In other words, if you ignore foreclosure sales, home prices are not as depressed as they seem.
Just like if you ignore food and energy, there is not much inflation.
And if you ignore the fact that he is dead, Elvis is doing just fine.”
I’m pretty sure I saw Elvis hocking some Gold Jewelry @ a pawn shop, taking care of business…
Other than that Mrs. Lincoln, how did you enjoy the play?
“Here’s Paulson’s explanation from the news article: ‘Paulson said that home prices typically include foreclosure sales, which usually occur at a discount. In some cities, foreclosure sales have spiked.’
Paulson is a dope smoker. If a seller agrees to an arms length transaction at x price, how the hell is that a discount? Is that not the MARKET price of that item? What discount is there in that exchange?
Many bubble stocks went instantly green on HP’s soothing remarks.
And when this short-lived rally ends, you’ll see a lot of investors turning green.
20+ point downside trade on SKF and I got $9.50 of it. Pathetic. LOL
Christmas has come early and often for you this year.
may see some sawtooth action but unless there’s another shock, I’d say you’ve seen the bottom until fall.
skf broke out at ~134. that might be a short term buy point but I’d like to reload at 100 or less and I’ll bet we are able to
I agree, this is looking like more than a one day wonder bull. I don’t know about going until fall though, I still will be looking for short entry later this month in anticipation of another August debacle.
WM up 16%??? Somebody(s) out there must be smoking crack. I guess it’s good news to me because it means I get another chance to ride that pig down, hopefully to zero this time.
Tx do you use candlestick charts? I saw a nice evening star where that slide began.
With interesting (negative) after-hours retracement on low volume…
Breaking news: the SEC finds the rating agencies had conflicts of interest.
One of the articles above points to the next wave of bad financial news — how long before builders and developers start going bust in big numbers?
This article points out something I didn’t know before about the price standoff in NY outer borough condos.
http://ny.therealdeal.com/articles/developers-in-a-bind-over-prices
“The developers who do discount prices can get caught in the financial squeeze because of a little-discussed item from their mortgage known as a ‘release price.’ What happens is that early on, the lender and developer agree on a price for each condo unit (generally about 90 percent of the sales price in the offering plan) until most of the condos are sold. As part of that agreement, the developer cannot go below the release price without consulting with the bank, because that revenue is reserved for the lender, so it’s the first entity to be paid off.”
So they can’t sell, but they can’t cut prices, and meanwile the construction loan is eating them alive!
“If a developer does need to go lower than the release price, the bank may ask the developer to bring on additional partners or to take out more loans to cover the bank’s reduced revenue. And now, those extra loans are more expensive because credit has dried up. Plus, ‘the lender is going to require additional equity,’ said Kevin Comer, senior managing director of Beck Street Capital. Just a year ago, banks were lending at about a 75/25 loan-to-value ratio. Now, that is closer to a 60/40 ratio.”
Looks like you’ll have to buy the condo from the bank after the bankruptcy!
Well the developer has another option… bring some $ to the table to help get the deals closed and slow the interest burn, or renegotiate the release price.
It’ s pretty much understood that the release price is greater than the bank’s proportional share of debt on the unit.
So, the bank has a loan of $1MM on 10 units, it’s $100k per unit. The release provisions that I’ve seen range from 110% to 130% of par, so you need to pay the bank between $110k and $130k per unit to have the bank release collateral. If the bank was at 75% of cost (not uncommon), this usually isn’t a problem, the unit would have cost $133k to build and likely be worth more than that….until the market crashes.
Sounds like it’s fallen pretty far for the the bank to be unwilling to make a deal on the release provisions…
In honor of L.Y.’rs everywhere…
http://www.youtube.com/watch?v=uPe0hhyUCx0
“Lawrence Yun, NAR chief economist, said some pullback after a sharp increase in the previous month was expected. ‘The overall decline in contract signings suggests we are not out of the woods by any means. The housing stimulus bill that is still being considered in the Senate is critical to assure a healthy recovery in the housing market, jobs and the economy,’ he said.”
Why is this bill critical to a healthy recovery of the housing market?
I think it beginning to “recover” just fine. To start recovery, we must first dispose of all the speculative bets gone bad. When the posers are flushed out and seen to be the paupers they really are, then those with money will fill the void at the correct market price.
Pumping tax dollars into another financial scheme dreamed up by CONgress will delay price adjustments.
Yun, you stink almost as much as Lereah.
Please go find a hole to crawl into and save us from your continual commentary. Just last month you were rah-rah’ing about the increase in sales activity.
Why even get upset as this guy? It’s like arguing about giving a cookie to a brain-damaged monkey. At least the monkey will shut up if you give him the cookie. Yun will continue to say the same things no matter what happens.
“The housing stimulus bill that is still being considered in the Senate is critical to assure a healthy recovery in the housing market, jobs and the economy,’ he said.”
It’s like giving a pack of cigarettes to a person with lung cancer and about as effective. Of course, the package of cigarettes is to be purchased with Uncle Sam’s credit card.
What’s an FB’s favorite card?
Suicide King
Sofa King?
Knock Knock:
Who’s there?
Fore!
Fore! who?
Foreclosure, you got 30 minutes to clear your stuff out of here.
The biggest problems were mortgage originators who were not federally regulated. At this period there was a continuous push by Congress to make mortgage credit more readily available to subprime borrowers.
Huh? So, if these mortgage originators WERE regulated, wouldn’t the regulations likely have followed Congress’s wishes: to push more mortgages?
And how are originators the biggest problem anyway? Originators can’t do jack without the easy money coming down the pipe. Originators made loans that the financial institutions indicated they wanted by virtue of what they were paying for them. Their standards largely reflected the standards of those above them.
In spite of some Mortgage Companies not being under Federal Regulations ,there are laws against mortgage fraud in general . To suggest that it was allowed to put any figures down on loan applications and help borrowers commit misrepresentation/fraud to the secondary market, is just absurd. So many of the loans that are going bad were fraudulent on the origination level and just made to look like a good packages .You could have all the Federal regulation in the world ,but if the originators where breaching their duty to prevent fraud ,or underwrite loans , than that is where the problem lies . The loan companies (like Countrywide ),thought they just could not underwrite loans and pass them on to the secondary market and real estate going up would cover the loan fraud ,or breach of duty to underwrite loans . The loan agents were helping the borrowers make out the loans applications to conform with what the underwriting called for .A RE mania was going on and borrowers were willing to do anything to get the opportunity to get in on the appreciation ,or not being priced out forever . Many different front line players were seeking out borrowers to be “straw buyers” for the real estate Ponzi Scheme of the Century . So, IMHO , a lot of what went wrong with lending was done so on the origination level .Not to say that Wall Street hook-winking investors on risk wasn’t equally as bad.
Mozillo excuse from day one was that the Feds and Country and borrowers wanted these loans ,therefore he gave them these loans .As I said years ago ,there was no memo that came down from on high saying “Commit all the loan fraud you can and pass it on to the secondary market ,or give any Joe a loan he can’t afford to support the American Dream .” For the secondary market to wait for defaults to determine loan fraud ,rather than a constant checking of what was being pass on from the agents they bought from ,was a breach of duty on their part to underwrite what was being given to them .
You had a chain of fraud that was allowed ,and the check and balance system was not in operation . Why do you suppose that loan Companies are paid to make a loan ? Certainly not to pass on a fraudulent piece of junk loan to investors in the secondary market .Combine the breach of duty to underwrite loans and prevent fraud with the rating agencies rating this junk as investment grade AAA paper and you got the problem .
It doesn’t matter if the Secondary market had a lot of money looking for a place to invest . There would be a general expectation that the investors in the secondary market were not given fraudulent junk paper with bogus appraisals . There would be a general expectation that the borrowers could pay the debt .While a lot of investors didn’t expect defaults because of a general notion that real estate going up would reduce the risk ,still, I don’t think investors wanted to give
750k loans to cherry pickers making 15 dollars a hour .
So, because of a real estate market warping into a big investment mania ,fraud in lending on the front lines, (which included borrowers and agents of the lenders and real estate people) the loan crime wave occurred . People were sold on the concept that they could just refinance out of some toxic loan because it didn’t matter because they would come out ahead . Real estate no longer became a long term investment and needed shelter ,but became a short term investment and it didn’t matter what the loan or income ability to pay the debt was .
The lenders, like Mozillo ,can lie and say they had a mandate to make loans to further the American dream ,but that is pure BS and a excuse for a serious breach of duty from the loan industry/real estate industry to underwrite loans and prevent fraud and not aid borrowers in committing fraud.
The above situation is the very reason why trying to bail out these investor type borrowers, or fraudulent cash back borrowers, or straw buyers has not been working very well . For God sakes , you got project that 70% of the borrowers are defaulting ,what does that tell you ?
And if they weren’t/aren’t regulated, then what is the point of this:
“Fed plans new rules to protect future homebuyers” (Google it - from today’s news)
“The Federal Reserve will issue new rules next week aimed at protecting future homebuyers from dubious lending practices…”
“Under the proposal unveiled last December, the rules would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower’s income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower’s ability to repay a home loan from sources other than the home’s value.”
ummm…so is this an “opt in” or “opt out” program? (scratching head)
Continuing: “The Bush administration has proposed revamping the nation’s financial regulatory structure. That plan would make the Fed an ubercop in charge of financial market stability. But the Fed would lose daily supervision of big banks. Bernanke said the Fed must maintain this power if it is to be an effective overseer of financial stability. ”
Yop. Just when you think it can’t get any worse…
Abbey, Britain’s third largest lender, has said it has increased the amount it requires borrowers to put down as a deposit on an interest-only loan without a proven repayment vehicle is 50 per cent, while it requires a 25 per cent deposit where a proven repayment vehicle is in place.
Is “proven repayment vehicle” a convoluted way of saying “job”?
Ok,
I always thought 25% down would become the norm.
But I’m thinking 50% down as a requirement is quite the Joshua Tree.
I thought this quote was telling (it wouldn’t be allowed in the US):
In addition, Nationwide is changing the maximum age limit by which time the mortgage must be paid off to 75. Prior to this there was no upper age limit as long as borrowers could afford the mortgage payments from their pension income.
What! Your making those old people die debt free… Meenie!
Great, I no longer qualify for a 40 year mortgage from Nationwide.
Also:
“One of the advantages of opting for a longer term is to reduce the monthly payments but A&L will no longer take this into account when deciding whether an applicant can afford to repay the loan.
Everyone is evaluated on their ability to pay it off in 25 years. Sounds fair to me!
Then they can pick 25,30, or 40 year payoff terms, but only if they could pay off the loan in 25. 
Got Popcorn?
Neil
Cliff Divers of Owe-Calpulco
“Charles Smailes, auctioneer at Feather Smailes & Scales in Harrogate, said: ‘Demand has dropped to nothing. It’s like the property market has fallen off a cliff.’”
IndyMac was co-founded by Le Tan Orange in 1985, and is the 1st bank of any size to fail.
hmmmmmm…
Yet another Poole affected with bubble denial virus…
________________________________________________________________
“William Poole served as president of the Federal Reserve Bank in St. Louis from 1998 until March 31, when he reached the mandatory retirement age. He also served on the Fed’s open market committee, which sets interest rates.”
“A: The Fed is independent up to a point. The financial community, the Fed, academics, didn’t see the problem brewing.”
“William Poole served as president of the Federal Reserve Bank in St. Louis from 1998 until March 31, when he reached the mandatory retirement age. He also served on the Fed’s open market committee, which sets interest rates.”
“A: The Fed is independent up to a point. The financial community, the Fed, academics, didn’t see the problem brewing”
When a file clerk doesn’t know the alphabet, they get fired. And we’re to believe this Poole and the rest of the fed governors, and the lovely Sheila Bair at FDIC and Paulson of Goldman sacks the treasury, knew nothing at all. Were unable to connect the dots. It was all just too complicated for them.
I’ve officially joined the conspiracy theorists. Paulson is using the Gonzales model…”I didn’t know, I wasn’t there, nobody told me”…
They knew what they were doing, every one of them. And they continue.
Round ‘em up and hang ‘em from the lampposts, before the sun sets.