Weekend Topic Suggestions!
The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
Location:Northern Arizona, United States
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how the bailout bill will effect rentable properties
low end SFH’s
Greenspan says prices nowhere near bottom: http://www.bloomberg.com/apps/news?pid=20601087&sid=a4jioRRKzw5s&refer=worldwide
I recall hearing realtors expound on the coming retirement of boomers and the sure boom that meant to real estate, as they poured their wealth into houses. It doesn’t look like it will work out that way. And is congress beating a dead horse trying to make this model stay alive?
‘These are tough economic times for people of all ages, but few are affected more than senior citizens living on pensions and Social Security, and juggling medical bills, credit card payments and mortgages along with soaring food and gas costs.’
‘Americans age 55 or older experienced the sharpest rise in bankruptcy filings during the 16-year period between 1991 and 2007, according to a report released by AARP, “Generations of Struggle.” The rate of personal bankruptcy filings among those ages 65 or older grew by 125 percent, while the bankruptcy rate of seniors ages 75 to 84 jumped a stunning 433.3 percent.’
‘It’s frightening. It’s a horror story in the making. It will not get better. It will continue to get worse,” said Thomas Mackell., chairman of the board of directors of the Federal Reserve Bank of Richmond and author of “When the Good Pensions Go Away.” “We are facing a generation of boomers where 55 percent of them are ill-prepared economically to retire.’
‘Zimbabwe, wracked by hyperinflation, introduced a 100-billion Zimbabwean dollar bank note a week ago. As one of the most worthless bits of paper on the planet, the bill can’t buy much - just one or two loaves of bread. But there’s always a chance, if you stacked a few of them together, that you could pay for a grungy bungalow in Stockton, Calif., where one in every 25 households got a foreclosure notice between April and June, or in Flint, Mich., where homes once worth six figures receive no bids at all.’
‘As with currency in Zimbabwe, everything about the U.S. housing crisis is marked by large numbers. That’s especially true when the topic is Fannie Mae and Freddie Mac, those monuments to American capitalism, or is it socialism? Hard to tell these days.’
‘Oh, how the Fannie Mae folks had gorged themselves during the glory days. In 2003, Mr. Raines, in addition to his $5.2-million in salary and bonus, got the company to foot the bill for $200,000 in personal travel, $37,000 for personal tax and financial advice, $11.6-million in “incentive plan” payouts, life insurance, pension, stock options - you could run out of breath listing it all. Daniel Mudd, his chief operating officer, got a slightly less lucrative package, still totalling some $7-million, including $80,000 to buy him club memberships.’
‘But hey, weren’t these guys worth it? Hadn’t they engineered a remarkable growth story? No longer just guaranteeing or packaging mortgages - how boring - Messrs. Raines and Mudd had plunged headlong into investing in them, and without the capital constraints of a normal commercial bank, Fannie nearly doubled its profits between 2000 and 2003.’
‘That turned out to be a sham, and by the end of 2004, Mr. Raines was forced into early retirement in a $10-billion accounting scandal. An investigation was hatched and a U.S. government agency found that Mr. Raines had earned more than $90-million in total compensation from ‘98 through 2003, and the majority of it, $52-million, was paid for achieving profit targets - with phony profits.’
‘But here’s the punchline: When regulators tried to recover the money, Mr. Raines dug in. He and the two other former executives settled the case a few months ago, paying $3-million in fines (which was covered by a company insurance policy). Mr. Raines also donated $1.8-million from the sale of Fannie stock to programs aimed at boosting home ownership and averting foreclosures, and forfeited some stock options that were far out-of-the-money anyway.’
‘And Daniel Mudd? He’s now Fannie Mae’s CEO.’
Carl Icann has a great article on phony CEOs like those of Fannie and Freddie
http://www.icahnreport.com/report/2008/06/corporate-democ.html
Where are the U.S. Attorneys and FBI when you need them?
In Cleveland getting ready to round up the grafting county locusts; over 100 FBI digging up the dirt on the county auditor and at least one commish. Stay tuned.
What’s the average 401K balance, like 60 grand? That’ll last a year or two at best. It’s too bad, because people really could have made a ton of money the last 20 years if they were in the market. The ones who didn’t invest wisely are going to be hurting, and I have a bad feeling there are a lot of boomers out there that will be hurting. A lot of people say that it just means people will keep working, but where?
And no, it will not be their houses that save them.
They were in the market, and they got sheared; first by the tech bubble and then by eight years of no gains. Buy and hold is a sucker bet.
“Buy and hold is a sucker bet.”
Unless it’s bought at the right price.
Thanks for pointing out the obvious.
Uh, remember what the dow was in 1987?
We may not see gains like that again in our lives, but for the boomers, well, they really had a chance to make lives grand for themselves at retirement
Problem is, the Boomers expected it to go on and on forever (and they’ve done their damnest to try and keep it all propped up)… and haven’t planned for any future…
This is exactly it.
You got to know when to hold them, know when to fold them, know when to walk away, and know when to run. Most people once them make money think it will go on for ever. My landlord made a couple hundred K on his prior rental property so he sold it at the peak and bought a bigger one. Now he looses 1800 a month when the place is fully rented. He says he is a year or two from bankruptcy. We’re moving to a new place this weekend. He hasn’t rented our unit yet.
Ouch
Those stats on seniors filing for BK are nothing short of alarming.
How the REIC thought it would become typical for seniors to play with houses is another sign of the retirement fetish. For all the hype about seniors in AZ and FL, there are many, many more like my parents, and their neighbors, who are only leaving their homes (for many their first and only one) feet first.
Was talking to a couple of neighbors the other eve. All of us fall into that much-ballyhooed boomer age group.
One neighbor noted that she has around $250k in her retirement account. The house is also paid off.
And guess what she and her partner aren’t about to buy? If you guessed “another house,” you’re right. They have no intentions of living for their house payment during their senior years.
Since there’s pretty much a skipped generation between me and my parents I’ve been surrounded by seniors my entire life. What you observe squares exactly with what I have heard over the years - the home was absolutely not considered a store a wealth - other than perhaps as something to pass on.
” … the home was absolutely not considered a store of wealth …”
I consider a paid-for house a source of imputed tax-free cash flow. The amount of rent one would otherwise pay to someone else is instead paid to himself - tax free.
Also, his imputed tenant will care for the house as if he owns it.
To extend this thinking a bit …
If one were to purchase a tax free bond and use its interest to pay his rent, how much would the bond cost?
Whatever the cost, this cost could be considered the value of his house as measured by the imputed rent the house generates after all expenses.
Combo, you’re often saying “cash is king” and I agree, but what you’re saying here brings up a question I often struggle with: pay off the house or keep the cash? So far I’ve been going with “keep the cash”, my thinking being that when cash is king, if I’ve paid off my house, I won’t be able to get easy access to the cash when there are great land/business/stock opportunities. On the other hand, I hate having the mortgage payment. What do you think?
“recall hearing realtors expound on the coming retirement of boomers and the sure boom that meant to real estate, as they poured their wealth into houses. It doesn’t look like it will work out that way. And is congress beating a dead horse trying to make this model stay alive?”
And it was an extremely popular notion(lie) and still is in some cases. I contend that most of this $$ holding demographic ALREADY retired. I can only speak for VT and NY but depending on department, you can draw on your pension as early as 50 years old. And this warped notion gave birth to all the moronic expressions we love to castigate like “the boomers are coming”, “rich retirees want to live here” blah blah blah.
The boomers retiring should do nothing but produce churn in the market.
Sell your 3000 sq/ft home in NJ, buy a 1500 sq/ft home in FL. Still the same number of homes out there, and still one for sale. Most boomers aren’t buying a 2nd home at 60 years old, they either already own it, or will sell their primary residence to buy their retirement home.
And, frankly, most of the boomers aren’t going anywhere. However, if the “sell then buy” does become real, it could put extreme pressure on house prices in the areas the boomers are leaving (NY comes to mind).
My parents were between the Boomers and “Greatest Generation”.
They owned thier own primary residences, and were RE investors over their lifetimes. As they grew older, they SOLD their “investment” properties so they could have less work (rentals are a LOT of work) and more cash on hand.
Much easier to invest in fixed-income bonds/CDs than to manage rentals, especially when you are older.
This notion that Boomers are going to save **any** market is a sham — stocks, housing, bonds, etc. will all be sold off as they age. This was meant to be what they lived off in retirement. They will not be investing NEW money after they retire, IMHO.
Shrub…Nationalize the Oil companies!
If the Gov’t is responsible for Dams & Electricity…why not Oil?
Starbucks, coffee and the housing bubble:
‘There’s just no use crying over spilt non-fat half-caff triple-grande quarter-sweet sugar-free vanilla non-fat Lactaid extra-hot extra-foamy caramel macciato. The Starbucks on North Main Street, which opened just last year, is one of four New Mexico coffee joints getting the ultimate decaffeination — a 616-store closure nationwide aimed at under-performing stores.’
‘The “coffee bubble” has long been a national joke — from satirical newspaper The Onion’s 1998 article “New Starbucks Opens In Rest Room of Existing Starbucks” to 2000’s mockumentary “Best in Show,” with its revoltingly delicious yuppie love-at-first-sight story: “We met at Starbucks,” coos Meg Swan. “Not the same Starbucks. We saw each other at different Starbucks across the street from each other.’
‘Or, as one visitor said Friday, “usually, you can’t swing a dead cat without hitting one.” Kim Schneider, who was visiting Friday morning from Albuquerque, said the Main Street Starbucks, just off the highway, was the easiest to find. ‘I’ll have to find another one,” said Schneider, camped out with a pastry, her laptop and a soy latte. “If I can’t do that, I’ll just get a Diet Coke.’
Yeah, it is a joke. I know of one place where there were 2 Starbucks within less than a block of each other. How can they possibly make money like that? Of course, I never go into a Starbucks so who knows?
Stephen Colbert was pretty funny last night with the bit about the Starbucks he had under the left and right sides of his desk.
once the simpsons or southpark dis you, it’s over
That caffeine fueled a lot of hyper-optimism, too. I bought my last car (in 1998) after the salesman cleverly got me high on a Granita at his wife’s coffee joint. Not that there’s anything wrong with that.
Starbucks just over-expanded. They all do.
But the broader theme is, personal consumption is going to have to be throttled back. The question is where.
I wonder how many consumer chains can even survive a prolonged period of stagnation? The boyz want boundless growth so holding one’s own isn’t nearly good enough. Wall Street obviously was no longer happy with an era of Ma & Pop stores that had endured for generations.
I forget who said it, but “Growth for the sake of growth is the ideology of a cancer.”
There was a really good “Opus” a few months back with a creepy, round “businessman” showing up out of Opus’ Anxiety Closet. The creep was “life’s agent for growth” and, in the end, was a cancer cell in desguise.
Considering the limited size and resources of this planet, you’d think somebody would have realized that we can’t keep consuming at ever-increasing rates, but that’s why I am not a manager!
“growth for the sake of growth is the ideology of the cancer cell.”
-Edward Abbey
In the depression, candy makers fared much better than some other businesses. People who are stretched tight still feel obliged to indulge/reward themselves sometimes. So I think Starbucks overall will be fine, but mid-range chains like Macy’s and JC Penny will take a beating as shoppers both cut back in spending and what they do spend is more likely to be at Target, Kmart, etc.
How many data series are rigged to hover on the brink of a recession signal without ever flashing red alert?
latest news
U.S. June residential construction spending falls 1.8%
U.S. July ISM slips to 50%
By Rex Nutting
Last update: 10:06 a.m. EDT Aug. 1, 2008
WASHINGTON (MarketWatch) — U.S. manufacturing activity was flat in July, the Institute for Supply Management reported Friday. The ISM manufacturing index was 50% in July, indicating an equal number of firms said business was growing or slowing. The June index was 50.2%. It’s been near 50% for 10 straight months.
Do you mean you question the GDP number of 1.9%? Just because the inflation factor was 1.06%? It means inflation is down 1,5% from the 2nd quarter of 2007! It is true. It is the result of hedonic inflation; people do not have to eat. People are substituting cardboard for meat.
P.G.S. Bear,
The numbers are all we get to work with. If I read a paper from Italian Economics on the US economy(an oxymoron of the 12th degree), I know the US figures that they will be using. Results become reproducible.
There was a paper written a few years ago that showed that if unemployment were calculated in the US as it is in Sweden, US unemployment was over 13.5% instead of 4.5% as the government reported. Nevertheless everybody uses the government figures, they are consistent. Changes are also consistent. A big deal was made about the 4th quarter going negative 2% GDP- half the loss was adjustment for inflation, but not one news reporter commented on the 2nd quarter 2007 revision from 3.8% growth to 4.8% growth. (That changed a lot of figures in every analysts calculations, a far more significant event.)
The numbers coming out of the gubmint look increasingly smooth and contrived.
I look for people to begin to empty out their mutual funds as money tightens and stock prices continue to fall. This’ll put added pressure on the stock market, accelerating its decline.
I’m not trying to empty out the mutual funds at the moment. But I am trying to do a full rollover from one retirement plan administrator (chosen by a former employer that has since switched to another administrator) to another (which I chose).
Peeps, let me tell you something: Doing a full rollover is not for the faint of heart. I’m into month #3 of this effort, and I think it may take another month before it’s done.
Methinks that plan admin #1 is trying to hold on to my money for as long as possible. I hear that there’s been an exodus, one that’s much bigger than my former employer.
Reason is ; He probably has to return his under the table spiff for funneling all the Co’s 401k’s into that certain fund.
The old Wisconsin adage is BACK with a Vengeance . Buy a house in Wisconsin…and RENT it from the State
SE Wisconsin homedebtors and the MSM were damned near dancing and cheering the streets as house and property assessment values soared during the boom.
Now that sales, prices and the economy begins to sour and stagnate, they weep and scream in some areas as their near 5-9% Property Tax Increases from the bloated local and state gov’t bills come due.
Milwaukee Journal Sentinel
“Property tax levies in region rise 6.1 percent in 2008
Increase is southeast Wisconsin’s biggest in five years”
“The analysis found that the highest gross property tax increase this year was in Walworth County, with an increase of 9.3%, followed by Milwaukee County at 6.9%. Racine County logged the lowest increase, 4.5%, while Ozaukee’s was 4.6%, Waukesha’s, 4.7%, Washington’s, 5.7%, and Kenosha’s, 6.4%.”
Actually, this is probably their Good News. Their BAD News
is that it will get one whole Hell of lot Worse
http://www.jsonline.com/story/index.aspx?id=778810
“Property tax levies in region rise…”
Once again here’s more proof that reduced assessor’s valuations, and all those “silver lining” stories about them, are meaningless. So what if they get adjusted downwards? What’s happening with the levy?
How about a thread on the changing views of homeownership. Read this post, then the comments that follow. They’re not exactly cheerleading the writer’s decision to become a homeowner.
I would like to see different stages of bubble-deflation and bust characterized - to get a better idea of a common trajectory that different places are in different stages of, if that makes sense. (Maybe I’m asking for HBB Cliff’s Notes?)
It seems like Austin has been behind, but is starting to go through what other places have. The zeitgeist has definitely shifted over the last few months, as bad news seeps through the continuous city hall and RE boosterism.
But there’s still so much “it’s different here” and “everybody wants to live in Austin” and “Austin is so cool” and “there’s so many people with so much money and they will pay anything to live here” and “everybody wants to live downtown or near-in now.”
http://austin.bizjournals.com/austin/stories/2008/08/04/story1.html?b=1217822400^1677422
“Condos, top half of skyscraper cut - Credit crunch and condo boom blamed for changes to Van Zandt project”
includes an odd quote:
“As for the fundamental of supply and demand, nothing has changed,” Perryman says. “If 1 percent of the people in Austin decide to live downtown, it will fill up everything there.”
http://austin.bizjournals.com/austin/stories/2008/07/28/daily33.html?jst=b_ln_hl
“Developer: Austonian proceeding as planned”
“Seeking to dispel rumors that the luxury condo project is in trouble, developers of The Austonian on Thursday held a news conference on the building’s recently completed 10th floor, unveiling new renderings and offering assurances that the 56-story tower will be completed as planned.”
Austintowers has entries on each story. Yesterday’s entry on the Austonian (tallest residential building west of Mississippi) is worth seeing - for the rendering that emphasizes how obscenely out of scale this project is with iconic elements of the Austin skyline.
http://www.austintowers.net/Austin_Downtown/index.html
Like Felixxiano over at the Forum, I feel like shouting HELP!
I had my property re-surveyed yesterday and chatted with the surveyor. He is perplexed at the kind of properties being built and sold. He said that he understands why it is to the developer’s advantage to build 2-unit “condos.” They paid a lot for the land, they wouldn’t be able to sell a $1.6 million house, but they can sell two $800,000 units, easy to build on one site. While they have to adhere to city rules for permeable / impermeable cover, “condos” don’t fall under the McMansion ordinance and are free of some restrictions of SFHs.
But (like me) he doesn’t understand why anyone would want to buy a property with shared wall(s), shared yard, land owned by a two member HOA (with the builder retaining the mineral rights). He and I are the same ‘vintage,’ and think of these things as duplexes, except that an owner only owns one side and doesn’t own a yard and there isn’t enough space for an enjoyable yard anyway. When I said that they weren’t selling, based on my observation of a few in the neighborhood, he said no, they are, and gave an example of two cookie-cutter units $800,000 each, just sold in the last two weeks. He said that these things are actually selling more than new SFHs at the moment, even when there are nearby SFHs for the same price.
He left to survey a large property out in the ‘burbs. The house stands on the level high part of the land, and is on the edge of a canyon that goes down 85 feet. The owners are going to build a swimming pool suspended over a cliff edge - the bottom of the pool will be 35 feet above the ground underneath it. He said that they could have built the pool parallel to their house and had an infinity pool with a view of the same landscape - but they want it suspended.
In our neighborhood, a builder put up these weird “SFHs” (in name only) with just a tiny patio between them. They are literally 8-10 feet apart, if that. Of course, the structures are large (approx. 3K-4K+ sf), and have the requisite granite, SS appliances, etc.
We didn’t think anyone would buy them because the surrounding area is full of older, but much nicer homes (smaller homes with larger lots) that were selling for less.
Surprised us, but they actually sold all those ugly beasts for around their asking price (this was in 2005/2006). So far, at least two have been foreclosed, and others are attempting to rent them out — waiting for the market to pick up again, you know.
A topic that I have not seen covered is the effect of the unwillingness of lenders to write HELOCS upon the average homeowner’s ability to maintain a home. The death of HELOCS has been universally cheered because it means that buyers have to have skin in the game, and it stops abuses such as HELOCing SUVs and vacations. But a lot of that money really was used for home maintenance and improvement. Let’s face it, most people have no savings and items like roofs and HVAC units are expensive to replace. Exterior painting and replacement of rotted wood is also very costly. Many of the companies that do this type of work are not large enough to provide financing. So in many instances work that needs to be done on a home will not be done professionally, it will instead be a cobbled together do-it-yourself mess. When the market does finally bottom out, will we be able to find a house to buy that isn’t falling down? Will we be able to afford a down payment PLUS the cost of performing the necessary deferred maintenance on that house?
I agree Kid. I have seen a lot of nice improvements to properties here. But I also believe that once those who were so inclined to improve were done with what they “needed” to do they went on to the things they “wanted” to do. As paper values rose higher and higher owners felt richer and richer and the marketing arms of home improvement outlets were very good at selling into that wealth perception. But alas, one can only install so much granite counter top, so much stainless appliance, landscaping, gazebos, pools, etc. And yet prices went even higher and instead of ignoring that many owners just kept spending like drunken sailors. As I see it the breakdown was with the lenders who really should have known better than to lend into a bubble like they did and now they have been bitten by their own greed. For kid yourself naught it was greed that drove lenders to continue the lending well past what anyone with any history in the market would have advised. Being burned lenders will indeed cut off HELOCs and we will need to muddle through a period of tight lending and it is those who do not have cash reserves who will struggle with the big ticket expenses on their houses. No way around it as I see things. The positive side is that maybe, just maybe, the pain incurred will be a lesson once again about spending vs saving, budgeting vs keeping up with the Jone’s.
Last evening I ran across a pal who bought a two-bedroom apartment unit (condo) three years ago for 145k. He had previously rented the same apt in the southern suburbs of Twin Cities for $750 a Month. I was surprised when he bought the apt because with his debt load (that I knew of) , a Walmart supervisor job and sub-prime loan, I knew then that he was setting himself up for failure. Yesterday, he cheerfully told me that he had bought a 3-bedroom family house for 145k and that he would dump the condo that he has owned for three years before ARM expires. I asked him whether he had done any research or spoken to a counselor to find the cost/benefit analysis of this maneuver. He seemed not to configure that there could be other financial ramifications that he will have to deal with long after he has settled in his new house later this month. On surface the move may be good. I did a mental calculation and found that, at a minimum, he has already lost about $21, 000 being the aggregate difference between what he has so far paid for the mortgage and what he would have paid for rent in the past 3 years in the same apt. What are other possible additional costs that await him on this move, if any? Both of us were born outside US but took different paths when we came here.
That’s the “buy and bail” method of buying a new (cheaper!!) home and foreclosing on the old one. Smart for a borrower to do that, IMO.
As long as the lenders are willing to give these fools money — it should have been obvious he had another mortgage — then the lenders will continue to lose money.
Anyone want to wager if this chap keeps making his new payment if he finds something “better” to do with his money.
The housing/CREDIT bubble is not over yet. Not nearly.
Last evening I ran across a pal who bought a two-bedroom apartment unit (condo) three years ago for 145k. He had previously rented the same apt in the southern suburbs of Twin Cities for $750 a Month. I was surprised when he bought the apt because with his debt load (that I knew of) , a Walmart supervisor job and sub-prime loan, I knew then that he was setting himself up for failure. Yesterday, he cheerfully told me that he had bought a 3-bedroom family house for 145k and that he would dump the condo that he has owned for three years. I asked him whether he had done any research or spoken to a counselor to find the cost/benefit analysis of this maneuver. He seemed not to configure that there could be other financial ramifications that he will have to deal with long after he has settled in his new house later this month. On surface the move may be good. I did a mental calculation and found that, at a minimum, he has already lost about $21, 000 being the aggregate difference between what he has so far paid for the mortgage and what he would have paid for the rent in the past 3 years in the same apt. What are other possible additional costs that await him on this move?. Both of us were born outside US but took different paths when we came here.
TOPIC FOR DISCUSSION:
WHAT TO NAME THIS RECESSION
Bush ressesion 2
the big one 2
Shrub fest
new paradyne recession
I’M not as rich as I was recession
The Goldilocks Prosecution (for breaking and entering, theft and malicious damage.)
The Born Yesterday Identity
sometimes I have to dig deep.
hat tip hoz.
Comment by Hoz
2007-08-01 21:34:39
Feeling safe posting this late at night, to never be read or thought of again. As a child, I read all the Asimov, Campbell, Heinlein et al that I could get my hands on. The incredible thoughts of nuclear energy, the way to the future - probably, but if this gets blocked like so many others have been blocked. I suspect it will be the fitting death knoll for our economy; tied to oil, died for lack of energy.
I wonder if the members of the Sierra Club et alia bicycle to protests? Do they use air conditioning? Or heating in the winter? Microwave ovens?
If there is concern about the use of nuclear energy, let the citizens involved vote on the subject. I know more people have been killed by oil than have ever died from nuclear energy - in any form.
TVA OKs second Watts Bar nuclear reactor
“…There are a lot of people that will be in this fight,” said Ann Harris, a former TVA whistleblower at Watts Bar and now an activist with the Sierra Club. “The anti-nuclears. The safety advocates. The people who work on conservation.”
Opposition to Watts Bar Unit 1 was fierce. Whistleblower complaints forced large amounts of cabling and piping to be replaced, delaying the reactor and driving the cost to $7 billion. Protesters blocked plant entrances and demonstrators were removed from TVA board meetings.
“This time people will have a lot more knowledge,” Harris said. “There are lots of opportunities to ask for public hearings, (to seek) injunctions and media that didn’t exist before.”
Watts Bar Unit 2 has a construction permit from the Nuclear Regulatory Commission that will have to be renewed in 2010. Then TVA will have to secure an operating license.”
now I frame in today:
hoz is golden….
“2008-08-01 11:11:10
OV,
The US has lived in a bubble economy for the last 28 yrs. It does not have to be a housing bubble, it just has to be a bigger bubble than the housing bust. Current bubble suspects are alternative energy (potential is $30T) or infrastructure (potential is $40T) or a combination of both.
Commodities are to small to ever be a bubble solution.”
Think what it means….Ive positioned myself accordingly. I call it the “alternative energy urban transportation infrastructure solution”…find out what it means.
Voz
You should have gone back a few yrs in time to predict the future of this banana republic. (or why I am starting to hate weekend pronouncements from the federal reserve)
“…While Congress prepared to act this weekend, Argentines huddled in pouring rain outside banks wondering if they would ever recover their deposits. Drug stores ran out of medicines like insulin, and shops raised prices to hedge against a devaluation that will be an effective income cut for millions….
Economists are skeptical the measures will succeed because Argentines have lost all confidence in banks and the new system is seen as open to corruption and growth of a black market.
Some Argentines voted with their feet, lining up by the Italian consulate to ask for visas to leave the country. ”
Argentina to Devalue as President Slams Free Market
http://www.commondreams.org/headlines02/0104-03.htm
Friday, January 4, 2002 originally printed in Reuters
a few of the 241 headlines from the LA Times during the Argentine crisis oldest first:
Argentine Move Hits Spanish Stocks
Argentine Banks in Tailspin
Argentina Responds to Banking Outcry
Argentina Lowers Forecast for GDP
Argentina Will Drop Dollar Peg, Float Peso
Lack of Credibility May Put Off International Bailout Package
Argentine Trade Offers Little Hope for Economy
Argentina Pleads for Renewed Aid
Bank Freeze Brings Standstill
and that is just ’til April, 2002
Forward looking…
Why do the SWF’s, FCB’s, and Private Equity continue to go into the US banking system in the form of equity shareholders, as well as, continued buying of US treasuries?
If the US banking systems faulters, what happens to “less liquid” panic driven emerging markets? This is now why, IMHO, the entities above are engaging in purchasing the US banks.
Additionally, the rumor mill is about to get fired up real hard as the consolidations get underway among the “chosen” entities who come through this mess. I am not saying 100+ banks dont go under. However, I am saying that consolidation among the “TBTF” is in the early stages. I say this based on two observations:
1. Federal Regulators are gonna just give green lights.
2. Early stages in the minimization of the Credit Default Swap tsunami.
So we are down to a fork in the road, and which outcome is more likely? Systemic collapse or Big-Hoopla fanfare Mergers everyone does a victory dance?
–though most of my focus has to do with whats gonna come out the other side as the big winner…the US bank solution set has to do with DOW theory buy signals, coupled with the masses believing that alternative energy solutions are good for society as a whole.
These credit default swaps, as I understand it are basically insurance policies that pay out if the given bond ect falls in value. Is it similar to an insurance policy where you make a monthly payment? or do you pay for a period of coverage all at once up front. I would expect at some point these terminate. The question is can the banks / gov mitigate the problem by keeping things inflated long enough that these things never pay out? I suspect that relatively few of these are being issued now due to peoples distrust of the ability of insurers to make good on them.
Let’s look at Wachovia Bank.
The stock has rallied from $8 to a shade over $19 in the last few weeks.
The credit default swaps are trading at 700 over. If Wachovia needs to go to the credit markets for cash, the bonds would price at around 13%! Since Wachovia is stuck with option arms, even though the mortgage market is faltering, Wachovia is showing an expanding mortgage loan portfolio. Wachovia needs cash.
On my list of at risk banks Wachovia is slightly behind Corus in the number 5 slot.
They are currently the number 4 bank for offering the highest rate of interest on CD deposits (ahead of WAMU). If there is a buyer for Wachovia, I would be shocked. Wachovia’s VAR, with a further 10% drop in Cal RE, is almost $100B. (thanks Golden West)
What effect the new housing rescue bill will have on Second Homes:
Vacation-Home Hit
We’ve been taking for granted that lovely $250,000 ($500,000 for couples filing jointly) personal residence capital-gains-tax exclusion for about a decade. Savvy taxpayers have played hopscotch, moving from home to vacation home to the next home, etc. and avoiding income taxes on the sale of each one. That free ride is at an end.
The personal resident exclusion is still good on your personal home. However, you’ll be paying taxes on the sale of your vacation home, or rental property converted to a home. The tax will be based on the amount of days the house was not a qualified personal residence divided by the total number of days you owned it. This ratio is multiplied by the amount of gain realized on the sale of the property.
http://tinyurl.com/5py8yz
For how much longer can home prices decline at a 15+ pct rate on a national basis?
US home prices plunge by 15.8%
By James Politi in Washington
Published: July 29 2008 14:47 | Last updated: July 29 2008 23:31
US house prices suffered a record annual decline of 15.8 per cent in May, according to data released on Tuesday, offering scant hope that the ailing US housing industry could be on the path to recovery.
The Standard & Poor’s Case-Shiller index showed home prices declining over the year in all of the 20 large US cities surveyed, with the worst drop – 28.4 per cent – in Las Vegas and the most modest decline – 0.2 per cent – coming in Charlotte, North Carolina.
Although the overall figure was slightly better than expected by most economists, it marked the steepest fall since the index was created eight years ago – eclipsing the 15.3 per cent drop reported in April.
For how much longer can home prices decline at a 15+ pct rate on a national basis? “Antelope Freeway, 1/2 mile.. Antelope Freeway, 1/4 mile… Antelope Freeway, 1/8 mile… Antelope Freeway, 1/16 mile”, ad infinitum, or until the price gets to a penny & can’t be reduced, percentagewise, any further.
PAGE ONE
After the Bubble, Ghost Towns Across America
Half-Built Subdivisions Are Lonesome Places;
‘There’s Just No Noise’
By ALEX ROTH
August 2, 2008; Page A1
BENTONVILLE, Ark. — Dennis Pflueger and his wife won a rent-free year in a nice new house in an expensive subdivision not far from the headquarters of Wal-Mart Stores Inc. As part of the prize, they then have the option to buy the four-bedroom home for $452,000.
Mr. Pflueger, a telephone-cable installer who describes himself as an “old redneck,” is in the middle of his free year. But the Pfluegers are a bit lonely. Just one other family lives in any of the 28 new or unfinished houses on Foxboro Court. Up the street, a sign announcing “Elegant Homes” sits on a lot choked with weeds. The block is as quiet as an old ghost town.
BwaHaHaHa…BwaHa…BwaHaHaHaHAAA!!!! Oh do my ribs hurt!!!
But for the Pfluegers, who won, the outcome appeared to be nothing short of divine intervention. Mr. Pflueger had been out of work for eight weeks. Unable to afford the rent for their $475-a-month apartment, the couple was planning to move into a trailer in their daughter’s back yard.
Suddenly they were moving into a new 3,400-square-foot house with an entertainment center, an outdoor hot tub, stainless-steel appliances and more than enough room to store the 61-year-old Mr. Pflueger’s collection of guns and antique fishing reels.
The last seven months have been an odd existence. Chickens wander by from a nearby farm, poking around in the brush. Not long ago, someone broke into one of the unoccupied houses around the corner. Now the Pfluegers say they pay close attention to passing traffic, but hardly anybody passes by.
“There’s just no noise,” Mrs. Pflueger said.
When their 12 months end, the Pfluegers will move on too — perhaps to that trailer on their daughter’s property. Mr. Pflueger recently found a job but still can’t afford to buy the house. “That’s way out of my league,” Mr. Pflueger says. Unless someone else moves in, only one family will be left in the 28 houses on Foxboro Court.
So funny and yet, so sad.
This is a total joke, as full-blown stimulus is already underway, and potential sources of further stimulation are in severe doubt.
Pressure grows for action on US economy
By James Politi in Washington
Published: August 1 2008 14:09 | Last updated: August 2 2008 01:11
Pressure for action to revive the economy grew on Friday as a new report showed the unemployment rate rose in July to 5.7 per cent – its highest for four years – and the number of jobs fell for a seventh straight month.
The Labor Department data provided further evidence of deterioration in the economy as companies in a broad range of sectors including manufacturing, construction and retailing trimmed workforces.
But it also offered some encouragement since the pace of job losses – at 51,000 last month – was not as rapid as predicted by economists and remained below the levels in previous recessions. Officials said there were 26,000 fewer positions shed in May and June than previously reported.
“The labour market has not yet capsized but is taking on more water,” said Michael Feroli, a US economist at JPMorgan.
The jobs report capped a week of disappointing news. On Tuesday, it emerged that house prices had fallen at a record annual rate of 15.8 per cent in May, and later, Alan Greenspan, former Federal Reserve chairman, said they were “nowhere near the bottom”. On Thursday, the US said growth in the second quarter had been slower than economists had forecast, at an annualised rate of 1.9 per cent.
The US economy
Published: July 31 2008 14:25 | Last updated: July 31 2008 23:08
How many economists can dance on the head of a pin? By the time a US recession is declared official by the National Bureau of Economic Research, it will already be well under way.
… it was largely the weak dollar and government spending that kept the US economy afloat in the second quarter. A big rise in exports and fall in imports boosted the numbers but this looks unsustainable. Local government receipts, geared to property taxes, are softening, with grim implications for budgets.
Meanwhile several industries – notably autos, airlines and construction – already show clear signs of recession. Employment figures will probably show that half a million jobs have been lost in the past seven months. That is not as precipitous a decline as in previous busts but, then, relatively few jobs were added during the boom, while incomes remained stagnant. With many Americans needing to pay off debts and, therefore, cut consumption, it is only a matter of time before the recession becomes official.
IMHO, we need to ramp-up a WPA-type program to build up/maintain our infrastructure, and we need to focus on innovations in healthcare, energy, and energy conservation. It would be worth it to increase our deficit for these purposes, because at least it might produce something we actually need and might bring benefits well into the future.
Stimulus checks, housing bailout bills and other sundry spending packages only serve to waste time and money that can be devoted to useful things which can truly help rebuild our middle-class economy.
The key to bringing our country back to its former greatness is focusing on the middle class.
We need to end the era of our government’s raping of the American people (middle and lower classes) for the benefit of banks and mega-corporations. End the credit bubble and focus on businesses that bring stable, well-paying JOBS to the American workers.
Finance & Economics
Buttonwood
Profits of doom
Jul 31st 2008
From The Economist print edition
The rise of the bearish analyst
TEN years ago it was easy to make your name as a securities analyst. Take a technology stock, think of a number, double it and then announce that as your price target. Time it right and your call would be a self-fulfilling prophecy, as investors worldwide would regard your views as a buy signal. Mary Meeker of Morgan Stanley and Henry Blodget of Merrill Lynch ruled the markets.
Nowadays you establish your reputation by being as gloomy as possible.
Mr Bear…sounds like you’ll have “real” competition for this years: Eyeore Award!
A great analyst finds the quality stocks in bad times. It is worth remembering that IBM’s stock roared in the great depression.
It is just easier at this time to sell and make money than it is to find quality to buy. There is so much junk the mopes are buying.
Personally, I would rather buy than short. Most investors just don’t know when to sell and will ride winners to a losing position. When these investors liquidate, then it may be time to go long.
In the meantime, we are in for another 12 -18 months of easy pickings.
Economic and Financial Indicators
America’s empty properties
Jul 31st 2008
From The Economist print edition
The proportion of America’s housing stock that lies empty awaiting either tenants or buyers has risen over the past decade, according to the Department of Commerce’s Census Bureau.
Britain
Housing market
When the tap turns off
Jul 31st 2008
From The Economist print edition
Lending has slowed to a trickle. What can be done to change that?
WOOLWICH is a down-at-heel working-class port in East London that teeters between gentrification and decay. To the right of the railway station are the money-wiring agencies, mobile-phone shops and African restaurants that identify this as an immigrant neighbourhood. To the left the high street leads to the river, and rows of smart new apartment blocks designed for bankers working in nearby Canary Wharf. The house-price bubble inflated here as fast as just about anywhere in the country. Get-rich-quick investors helped by crafting dubious schemes to get mortgages without paying a deposit and banks seemed happy to oblige them.
Instead of making a quick pound, though, many buyers are now losing their shirts. Flats that they bought three years ago for £330,000 ($580,000 at the time) are back on the market for less than £200,000. One was sold at auction recently for just £115,000. In March (the most recent month for which data are available) the average outstanding mortgage in this neighbourhood was 91% of the value of the property it was secured on—the highest loan-to-value ratio in London and the third-highest in the country, reckons Experian, a credit-scoring outfit. With banks virtually on strike and loans approved only for those able to put up huge deposits, Woolwich is enduring a particularly hard landing. New flats in Thamesmead, downriver from Woolwich, are standing half-empty, the overgrown gardens filled with litter.
Thank the sweet baby jeebus that Thamesmead is finally dying a death - what a hell hole that place is!
Built in the 80’s to house ‘problem’ families that were turfed out of the council estates north of the river, when Canary Wharf was built, its been an eyesore and a poster child for urban blight for decades.
Funnily enough, when they built it, they ‘forgot’ to put in things like a train station, or regular busses in and out of it - so people without cars ( a large majority of the people housed in Thamesmead), had difficulty in getting to and from places like Plumstead and Woolwich to do thier shopping and get to work (if they had a job, that is). Which suited the people in Plumstead and Woolwich just fine…
I spent 4 years at the University of Greenwich (ex-Thames Polytechnic), and lived in Deptford during that time - both places were on the EU Council’s ‘most deprived urban areas’ top 10 while I was there.
Woolwich is flat, estuarine, and uniformly grey - both the sky and the hideous 70’s ‘architecture’.
Most of the buildings around Woolwich are generic Council high-rises - I can’t really get my head around anybody paying over 500 GBP for a slice of that.
“To the right of the railway station are the money-wiring agencies, mobile-phone shops and African restaurants that identify this as an immigrant neighbourhood.”
This is actually an exact description of my neighborhood…globalization is difficult to comprehend sometimes, but it is proving an awesome and irresistible force.
I guess the writers at The Economist are too dense to recognize the U.S. housing rescue is a bailout of lenders, not borrowers?
United States
The housing bill
When feds rush in
Jul 31st 2008 | WASHINGTON, DC
From The Economist print edition
How much should government meddle in the market?
The Economist writers have picked up my “hair of the dog” meme (first coined here maybe a year ago)…
Leaders
Housing bill
A hair of the dog
Jul 31st 2008
From The Economist print edition
Congress has been too lenient on Fannie Mae and Freddie Mac
From the link:
“Nor could the government close Fannie and Freddie to new business and wind down their old operations. Without them, the mortgage market in America would shut.”
———————
This nonsense gets tiring. The mortgage market would NOT shut down if F&F failed. There is so much money on the sidelines looking for a fair return (not seen in years, now), that most of these investors would LOVE to make loans to homebuyers.
The issue is not availability of money, but the price of money. The REAL price of mortgage money in recessionary times, with falling housing prices, is much higher than 5-6.5%. Personally, I’d be glad to lend a qualified buyer (20% down, reliable appraisal of current value, 28% DTI ratio or less on verified income) almost any amount at around 9-11%.
There is nothing wrong with high interest rates. They are the mechanism that will bring asset prices to their fundamental levels, and will get us there more quickly, so that we can begin the healing process sooner.
In their misguided attempts to reinflate the housing market, they are prolonging the recession, which will lead to a steeper and longer period of unemployment, and will push people’s ability to survive to the very edge.
Letter
A Housing Bill for Others
Published: August 2, 2008
To the Editor:
Re: “A Housing Bill That Has Something for Nearly Everyone” (Your Money column, Business Day, July 25):
Sure, the housing bill is good, except for those of us who don’t own a home. We get to have our tax dollars given to those who do, as well as to those who got us into this mess by convincing others who couldn’t afford to buy a home that they really could.
I guess the moron who wrote this article missed the recent news that California used home sales prices are dropping at a 38 pct YOY rate. That is some stable market! With prices falling at an unprecedented rate, it seems more than a little premature to call a bottom.
California hints at bottom to housing slump
Fri Aug 1, 2008 7:30pm EDT
By Jim Christie
SAN FRANCISCO (Reuters) - California’s battered homes market may be hitting bottom, suggesting a national housing recovery may follow, veteran banking analyst Charles Peabody said on Friday, citing a rebound in home sales as renters become owners.
In many parts of California, buying a house, especially at auction, makes more financial sense than paying rent so home sales have been on the rise recently.
“The key is to try to get some stability in the price of homes, which appears to be happening in California,” Peabody, of the independent research firm Portales Partners, told Reuters by phone on Friday.
U.S. house prices overvalued by up to 20 percent: IMF paper
Fri Jul 25, 2008 5:52pm EDT
WASHINGTON (Reuters) - The downward spiral of U.S. housing prices still has a way to go and homes were overvalued by between 8 percent to 20 percent in the first quarter of this year, according to research by an International Monetary Fund economist published on Friday.
In his report “What goes up must come down? House price dynamics in the United States,” IMF economist Vladimir Klyuev used several economic techniques to determine by how much U.S. home prices are overvalued.
Klyuev drew from a government study of single-family home prices to conclude that values were “around 14 percent above equilibrium in the first quarter of 2008, with a plausible range of 8 to 20 percent.”
His research showed that home prices became considerably overvalued from 2001 and while the housing market has started to correct itself, there is still a long way to go.
U.S. policy-makers are now trying to guide the housing market into a soft-landing after a five-year run-up in home values that ended in 2006.
The report also said that it is likely home prices will swing well below their equilibrium level before they start to recover.
“The report also said that it is likely home prices will swing well below their equilibrium level before they start to recover.”
An overshoot is in the bag. Taxes?..higher. Fuel?..higher. Insurance?..higher. # of houses?..higher. wages?……meh.
Citi destroyed tapes, says NY investigator
Citigroup was on Friday accused of destroying records subpoeaned by Andrew Cuomo, the New York attorney-general, who intends to sue the investment bank for its role in the collapsed auction rate securities market.
Citi “repeatedly and persistently committed fraud” by misrepresenting auction rate securities as safe and cash-equivalent investments, said David Markowitz, chief of the office’s Investor Protection Bureau, in a letter sent to the bank on Friday.
After receiving a subpoena in mid-April for records under New York’s powerful Martin Act, Citi had “destroyed” recordings of related telephone conversations and failed to notify authorities – even though it learnt in mid-June that tapes had been destroyed, the letter claimed….
The allegations came as Citi disclosed in a regulatory filing that the US Securities and Exchange Commission had opened a formal probe into whether federal securities laws had been violated in connection with the sale of the securities.
Nearly all the major investment banks are subjects of probes.”
FT
http://www.ft.com/cms/s/0/f01a0f50-6006-11dd-805e-000077b07658.html?nclick_check=1
Ooops first Massachusetts goes after Merrill, now the rest are piling on.
Fortunately for Citigroup, the SEC will give them a ceremonial slap on the wrist. The civil suits will be a drag for years.
No worries — I am pretty sure Citi’s role on the PPT gives it implicit immunity against prosecution for (potential) acts like destroying criminal evidence.
This weeks Barrons
Barron’s: Unfortunately for the rest of us, you have a pretty good track record. How much more misery lies ahead?
Roubini: We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up….
Barron’s: Now the regulators are attempting to make up for lost time. What do you think of their efforts?
The paradox is they’re going to the opposite pole. They are overregulating, bailing out troubled participants and intervening in every market. The Securities and Exchange Commission has accused others of trying to manipulate stocks, but the government itself is now the manipulator. The regulators should investigate themselves for bailing out Fannie Mae (FNM) and Freddie Mac (FRE), the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds for toxic securities. It is privatizing the gains and profits, and socializing the losses, as usual. This is socialism for Wall Street and the rich….
Barron’s: At what point does the government run out of money to lend to troubled banks?
Many public institutions are themselves going bankrupt. The FDIC (Federal Deposit Insurance Corporation) has only $53 billion of funds, and has already committed almost 15% of it to bail out depositors of IndyMac. The FDIC’s deposit-insurance premiums weren’t high enough, and now it is asking Congress to raise them. Plus, the agency claims only nine institutions are on its watch list. IndyMac wasn’t on the watch list until June, the month before it collapsed. Studies done by experts in banking suggest that at least 8% of U.S. banks are in big trouble. Eight percent of the roughly 8,500 that the FDIC essentially is insuring equals about 700 banks. Another 8% to 16% also are shaky, so some 700 potentially are going bust and another 700 eventually could join them. Yet the FDIC is watching only nine institutions. It’s a joke….
Barron’s: How long will it take for the collapse in the banking sector to play out?
It is happening in real time. Many smaller banks are going bust already. More than 200 subprime-mortgage lenders have gone bust in the past year alone. And many community banks will go bankrupt. Community banks usually finance everything: the homes, the stores, the downtown, the commercial real estate, the shopping center. If you are in a town or a municipality where there is a housing bust, the bank is gone. Of three dozen or so medium-sized regional banks, a good third are in distress. That includes the Wachovias and Washington Mutuals of the world. Half of this group might go bankrupt. Even some of the majors could end up technically insolvent, though they might be deemed too big to fail.
Take Citigroup. In 1991 there was a small real-estate bust, though the quarterly fall in home prices was only 4%, based on the S&P/Case-Shiller indices. Citi was effectively bankrupt and signed a memorandum of understanding with the Fed that allowed the government to give the bank regulatory forbearance. Citi was allowed to ride it out and try to recapitalize in a few years, and thereby avoid bankruptcy protection. This time around the S&P/Case-Shiller indices indicate home prices already have fallen 18%. The decline could be as much as 30%, because the excess supply is huge….”
And I thought we were starting the 4th inning.
hell hoz, if Roubini gets more bearish, might wanna deep-in-the-money call the end of civilization.
time to short civilization, you heard it here first. You can close 300 banks tomorrow, and J6P aint gonna blink.