Yellen ‘Alert To The Possibility Of Going Too Far’
Some housing bubble news from Wall Street. “D.R. Horton Inc, the largest U.S. home builder, said on Tuesday its fiscal second quarter earnings rose 20 percent on higher home sales, but its shares fell on a tepid outlook that was reinforced by government data. ‘The overall tone wasn’t great. They didn’t give a tremendously robust outlook,’ analyst Gregg Schoenleber said. ‘They thought the market would probably be in a better position today.’”
“For the second quarter ended March 31, Horton reported earnings of $1.11 per share, one cent short of what analysts on average had expected. Since the start of the year, Horton shares have lost 9 percent of their value, while the Dow Jones U.S. Home Construction Index has fallen 8 percent.”
“Wells Fargo said its mortgage business slumped but first-quarter profit rose 9 percent from the year-ago period. Wells Fargo, one of the nation’s largest mortgage lenders, felt the impact of the slowdown in the housing market in the quarter. The bank said home mortgage revenue declined 43 percent.”
“Downey Financial Corp. reported that net income for the first quarter of 2006 (was) down 13.5% from the year-ago first quarter. Daniel D. Rosenthal, President and CEO, commented, ‘Our portfolio of option ARMs, which represents 92% of our single family portfolio, had a weighted average loan-to- value ratio of only 72% at the time they were originated and borrowers were qualified based on fully-indexed interest rates. These loans do present greater credit risk in sustained periods of rising interest rates, as borrowers may see their loan payments increase significantly when their payments recast to fully-amortizing payments.’”
“‘In addition, credit risk increases if home values decline. In light of continued increases in market interest rates and changes we are beginning to see in the residential market, such as an increased level of unsold homes and relatively flat home prices on a sequential month basis, we recently instituted pricing changes for the option ARMs we originate for portfolio by increasing the initial start rate and thereby lowering their potential for negative amortization.’”
“‘Since our new start rate is now higher than those of many of our competitors, our production of option ARMs for portfolio may not offset loan payoffs. We are offering other types of adjustable rate product for portfolio that do not permit negative amortization, but those products are currently not as popular with borrowers.’”
The press release continues, “During the current quarter, certain segments of the California residential real estate market began to show signs of slower sales and flattening home values on a sequential month basis. In addition, increased usage of negative amortization associated with option ARM loans may result in certain borrowers reaching their limit of negative amortization permitted under the terms of their loan, thereby resulting in an increase in their minimum monthly loan payments and the potential for higher delinquencies.’”
And a Fed official spoke, “San Francisco Fed chief Janet Yellen said cooling housing prices and the impact of the Fed’s gradual tightening were behind her expectation for economic activity to simmer down after a strong first quarter. ‘While I expect the housing sector to slow somewhat, I will be highly alert to the possibility of the policy tightening going too far,’ she said.”
The Fed went ‘too far’ in 2003 and 2004, by keeping rates to low for too long. By allowing individuals to become in hock to inflated home prices, they set up this situation. I can’t see how they can talk this market down off the ladder.
Here are some inventory numbers for Horton:
3.15.05 $7,926,700,000
9.30.05 $8,486,800,000
12.31.05 $10,074,100,000
The firm had almost $2 billion in accounts payable at the end of 2005 and $225 million in cash.
Janet Yellen is a limp-wristed left coaster.
This may be her comments,
but I am “SURE”, CERTAIN, Without doubt”,
her cheif economist is reporting to her a real concern about the upper boundaries of GDP growth without runaway inflation and reported CORE inflation, and that he knows that NONE of the 15 rate increases has broken meaningfully or pushed those two critical indicators toward their MEDIAN let alone the lower acceptable boundary targets.
And 2) he reports what she wants him to report!
So she may say things like, ” I am mindful of, or watching this closely”…..she knows that more serious problems will ERUPT if they stop tightening now! Better known as “CYA” speak..That is why the VOTE was unanimous to raise rates.
of note:
Gold is up $70 dollars/oz.(12%) since M3 reporting was stopped 3/23/06.,and this hasn’t escaped these people either!
The funny thing, the SF. Fed uses the US government provided statistics as gospel (”if not these what would we use”, while I wouldn’t give your 2 licks for their reliability…
Can someone please help with this quote:
“…increased usage of negative amortization associated with option ARM loans may result in certain borrowers reaching their limit of negative amortization permitted under the terms of their loan”
How is this limit determined? What happens then? And finally, how common is this “out there”? My guesses to these questions lead me to think this could greatly shorten the fuse?
Thanks in advance.
This is Real Estate’s version of a Margin Call. Essentially, it will go to interest only or even fully-amortizing with little warning if prices plummet or negative amortization goes too far. This would definitely trigger substantial defaults even more than just the normal case would. We very well may find that the OCC prohibits the use of negative-amortization altogether. Some financial products are just too risky to allow consumers to have.
The limit to neg am is usually 110% or 125% of the original loan value. Note this is not the same as loan to value. A loan that has an 80% LTV and then goes up to the max neg am ends up with 88% LTV. Ironically, some lenders, like goldenwest, believe that 125% is the less risky limit because it allows borrowers more leeway before the mortgage forcibly resets. This of course works better if interest rates come down during the “adjustment” period so the borrower can afford to pay the full mortgage amount again.
After today, interest rate decreases on the short end are looking more and more likely.
I would imagine most folks were not told or dont understand this about their ARMs. The blame for taking on these loans cannot be just blamed on stupid borrowers - the bankers/loan officers who sold these monsters are guilty too.
Every loan officer knows these are garbage loans for ma and pa consumer. I’ll speak for myself only every single one of these I have done has been the consumer asking for it. If you have a 9 to 5 job with no realistic income appreciation coming in 3 to 5 yrs it’s the stupidest thing you can do. But the only thing the consumer saw was .75, 1.25 or 2% and those low payments and lost their minds. They deserve the ass-whackin that’s coming
Personally, I would hate for these types of loans to be banned. I love foreclosures.
They won’t be banned just put back on the shelf where they have been for the past 20 yr’s for people who actually understand and know how to use them. That product has been around for quite sometime the only reason it was dusted off and given to the masses is because pricing got so out of whack.
Thanks. Is this typical in the small print of these loans or is this characteristic unusual? (what % of loans have this potential?… I know this is a % of a %)
The loan will also recast if the property falls in value even if the borrower is making the IO payment option. This is typical of this type of loan. And the only bank that is really familiar with the downside is Golden West aka World Savings - they lived thru it once.
What do you mean “it will recast”? They will have to pay more?
Yes, the neg-am portion of the mortgage disappears. Not sure if you still have the interest only option. But at that point it doesn’t matter if you weren’t prepared because you pretty much screwed
So they just write people a letter “sorry we feel your property has fallen in value (how would they know unless they did an appraisal), so you have to start paying minimum payments.”??
That sounds like a time bomb. Just when the housing market starts falling you make it worse by forcing people who can’t pay to start paying.
LOL well the theory was real estate always goes up. Were in the new market and this is the sign of the digital age. So if it always went up no problem.
The banks order an appraisal. I have already seen it in one case. Thankfully the property held its value from purchase last October.
Suppose it’s just general knowledge that homes have fallen 20% since 2005. Do they tell everyone on a negative amort. loan since 2005 that the jig is up and their payments are now doubled or whatever? Won’t they be sued for forcing people into bankrupcy/foreclosure?
Or is it in the fine print somewhere?
Not to beat this to death but suppose someone has a 800K neg. amort loan (original) on a 1M house. The rest is a 20% piggyback.
The neg. amort loan is now 900K. The bank no knows the property is worth only 800K. The bank also holds the piggyback loan of 20%. What do they do? Tell them to start paying or demand 100K up front (actually 300K with the piggyback)?
Recast the loan based on 30 year amort less the amount of time already in place. This is an ARM for this example I will ust the MTA (the US Average of the one year treasury bill = monthly treasury average =MTA, this is a moving average) the Margin is ~3.00 over the MTA currently ~3.5% moving higher. In a recast the loan with 29years left would be amortized for the next payment at 6.5% on a 30 year fixed, the next month could and in current conditions would be ~6.57% based on 28yrs11mos. The bank keeps this loan in a portfolio, (unless there is cause from a banking regulator) the portfolio products can go up to 125% LTV
Question: When Downey Savings says their loans have an average 72% loan-to-value ratio, that’s probably just referring to first mortgages, right? And since nobody pays a traditional 20% down payment (or anything close), isn’t it fair to guess that the borrowers’ total LTV (counting both the first trust deed and the piggyback) a lot closer to 100% or higher?
And does Downey originate piggyback loans? If a bank made a first mortgage loan for 80% of the purchase price, and another for 20% of the purchase price, it has one loan with an 80% LTV and another loan with a 20% LTV. Could the bank then just say “the average LTV of our loans is 50%”?
Brian B. (or whoever): so does that mean, per your example of the folks who now owe the bank 300K on the Million dollar home, that theoretically at least, the bank would take 300K for the home to whoever could give it to them?
As a worst case example, could somebody buy that home for 300K?
Not sure what MTA is exactly. The one year is about 5%. You mean the average one year over the past year or so?
Either way, it’s an absolute joke. I would think banks would not want to trip this even if they have the right to. There’s no way this doesn’t cause the problem to snowball.
seattle:
No, my example was the total indebtedness would be 1.1M (900K on the option ARM and 200K on the piggyback) and the house is worth 800K (down from original 1M). So the bank is in trouble: they have an 800K house with 1.1M in loans on it.
If they (the bank) sold it for 300K, then they’d lose 1.1M - 300K, so that would not be their choice.
Brian,
You did an outstanding job at explaining why I have been saying for year now that when these I/O’s and neg am loans reset it will be like a bomb exploding.
Don’t forget about those lovely 1099’s that the banks will send out to those poor slobs that cannot pay the new higher mortgage and simply walk away from their houses, thinking that they are off the hook. What they don’t realize is that they will be responsible for the difference in value between what they owe and what the bank recovers for the house at auction. Talk about a double whammy!
Thanks to everyone for responding. I considered myself somewhat educated on what was going on our there with these loan products. This “gotcha” is scary enough on top of what I already knew (if the rules don’t change w.r.t. ARMs, neg ams, etc) but if the rules can change mid-game, some people are going to be in real trouble. Truly frightening is I’m sure this is not the only hidden iceberg.
Bearnanke: I checked into a WAMU option arm once. {washington Mutual) If memory serves me?
The limit on the negative amortization is 120% of the original loan value. However “IF” the borrower does not have this much equity, then the limit is to the ‘bank appraised’ value at the time of the loan”.
Hot Cold Hot Cold. First it was the “eight inning”. Then it was fear of commodity prices and inflation. Now it’s fear of going too far with rate hikes. It’s amazing how much the market moves on these tidbits. The Fed’s gonna do what the Fed’s gonna do.
So who provides the negative amort. loans? Aren’t they all worried about it holding them?
And when does the negative amort. period run out when you have to refi or start paying at least interest? Or can you go negative amort for 30 years?
No typically mark for you to refinance or start paying principal and interest is 5 to 7 years. These loans are at best short term and are no good for the average buyer. They are really going to suck in a declining market
by 5 or 7 years wouldn’t you be above the original collateral amount if you paid minimum payments?
Of course. But from what I have seen of different presentations about this especially the Wells Fargo one it’s a real piece of work. But what happens lets say you qualify for $5,000.00 per mo payment at whatever the prevailing rates and terms are at the time. You sign up for an Option Arm and for sake of argument your neg-am portion of the loan comes out too lets say $2,500.00. What they tell you to do is invest that $2,500 that your saving monthly from having the lower payment into a mutual fund, ira, or something of that nature. What’s supposed to happen after that 5-7 yr period is that you so far ahead of the game on your invested money that the overages on your loan balance doesn’t matter. Ex. Lets say during that 5 yr period you save 60k and with interest it ended up at 100k and you gained 25K on top of your mortage the 100-25 gives you a 75 net. Thats the theory anyway
That may work in principle but you’re forgetting the IRS. They will tax the increase - with state taxes (California @ 9% or more), your net could be as low as 55-60%.
That would be OK if people really saved the money but they don’t . Also I think the margins are high . A 3% or more margin is I guess standard today but if the interest goes up you can really pay high interest rates . Back 20 years ago the margins were 1.75% to 2.25% ,which was not greedy on the part of the lenders .I think people were just betting that interest rates would stay low and they liked the teaser rates ,but you can’t tell me they did not know the potential of the loan going up .
Tell people that did that 5 years ago and are about flat on their investments before taxes. The S&P has just about got back to where it was in 2000. The NASDAQ is still about 50% off its high. We can thank Greenspan for that sage advice of switching from fixed rate loans to arms and investing the difference. Another reason why he is the worst Fed Chairman ever.
Pismobear-
Yea right I was just trying to give a quick and dirty for brevity lest I get called a windbag again LOL. Anyway that’s just one of the ways they sell that loan. If I had away to post it I would actually put up the examples. The other one that I thought was humourous is actually quite detailed. But the end result is you pay off your loan in an accelerated time frame with gobs of cash left over.
Housing Wizard is correct also if people were to actually save like they were supposed to and/or dropped some extra cash on the principle every few payments consistently they would actually be ok with this type of loan. But what happens is because the underwriting is so lax they take their minimum payment up to what they actually can afford and qualify for and after 2 yrs of bumbs in payments never mind the neg-am feature of the loan they are FB walking.
The markets went crazy today. The fed is playing with fire if they stop at 5%. But remember, all Fed governors are appointed by Bush by now.
Thats pretty crazy all right…
http://www.marketwatch.com/tools/quotes/quotes.asp?symb=dj_hom&vc=&siteid=mktw&dist=dropmenu
bernanke know if he stops, dollar is toast.
And what about the HELOCs? Don’t the lenders also have a maximum LTV ratio in the language of those loans? If yes, there probably is a very rude surprise awaiting many people who were counting on a soon-to-be “poof!” withdrawal level. Once a couple of comps in the neighborhood fall blow that LTV limit, I’d think a letter from the bag-holder will arrive that is like a giant version of the “Sorry, you maxed out” letter one would get by using their credit card to the limit.
Let’s see: oil broke $70; gold soared past $620; dollar is sinking. By keeping the rates at 5%, hedge funds will be more reckless in looting our money.
So…bottom line is the Fed continues to punish savers!
I think the HB will collapse under its own weight by 2007 in spite of the Fed Funds rate.
I already went to the woodshed and it didn’t require the Fed. Stopped for gas. $2.89 for reg.
Most of commodities are pretty much exploding: gold, silver, copper, aluminum, nickel,zinc, plat, palladium, sugar, oj. All are pushing higher. Anybody remember the bad old days of inflation (or stagflation)?
Fed tries to fend off recession by flooding the economy with money, which will only result in a depression at a later time. You cannot restore the economy by printing money.
So what’s your point, John? The only thing that matters in Washington, DC, is the first Tuesday in November. If a depression kicks in Wednesday morning, who cares?
I used to think Fed is independent. How naive I’d been the whole time? Well, even the politicians are not the ones pulling the strings. They are the puppets too. The entire system is so corrupt.
“So what’s your point, John? The only thing that matters in Washington, DC, is the first Tuesday in November. If a depression kicks in Wednesday morning, who cares?”
There is THE LEGACY which at this point is probably as salvagable as the dollar.
DC_Too you’re exactly right.
If anyone thinks that those comments are not on purpose to goose the markets, I got some swampland off I-95 to sell you. Time to lead some more lemmings off the cliff.
Get this from Janet Yellin;
Yellen noted “a significant moderation” in house price gains recently. A slowdown in home construction and sales would depress job growth and could cut into consumer spending by reducing the ability to withdraw accumulated home equity.
“With this asset appreciating more slowly, consumers are likely to pull back on spending,” she said.
They want to keep the bubble inflated! In the words of the Mogambo Guru “GAAAAAH!”
It’s sickening.
I like the idea of homebuilders keeping on cranking out homes though. The prices are STILL high enough for them to make lots of money. So balloon the inventory ever higher, it’ll make the ultimate crash even worse.
Even if the Fed stops soon it’ll probably be a 5.25% fed funds rate. High enough to ruin alot of ARM holders and flippers.
If someone has an 80/20 option arm with a piggy back loan and they blow the option up to 125% of original loan (100% of collateral), then who holds the 20% loan? Doesn’t the borrower have far greater than the original collateral amount outstanding?
Yea, I thought the lenders making the piggybacks were on crack. That was a huge risk on their part. They have two options hold the bag on a sinking ship or shutter their doors either way they loose big.
“We are offering other types of adjustable rate product for portfolio that do not permit negative amortization, but those products are currently not as popular with borrowers.’”
IMHO this is what will probably bail out the banks - switching the F’d borrowers to another portfolio product without needing an appraisal.
That’s the only way. What they are not saying is that the current products because of their rates can’t save anybody. Compound that with declining prices. You got a whole lot of folks saying uh-oh
“We are offering other types of adjustable rate product for portfolio that do not permit negative amortization, but those products are currently not as popular with borrowers.’”
This to me is terrifying. They’re essentially saying that the only “popular” (i.e. affordable to the howmuchamonths) loan product out there is and Option ARM. The FBs can’t even make ends meet with a traditional risky IO loan. They now NEED the neg am part of the ARM to buy their homes.
Clouseau.
So if the price of their property fails to rise (let alone fall), and the loan resets off the teaser rate to amortization AND full interest . . .
If the fed stops they will just be reinflating all the bubbles with renewed vigor- RE, Oil, Commodities.
Maybe they have secretly decided that inflation is the only way to get out of this debt mess.
I heard on the news that the Fed concluded that rise in oil didn’t lead to inflation. So there you have it - they can reinflate the bubble and deny that there is any inflation!
remember the minutes come from meeting which was mar 27-28, when gold was 565 and oil was mid low 60’s …
if meeting was held today, they would be singing different tune. they’re trying to inflate their way out of this predicament and at same time not have the market crash i guess. have cake and eat it…
Inflation isn’t a painless way out of the Credit bubble. Once inflation takes off long rates will follow causing housing to crash. Inflation will also depress the dollar and lower living standards across the country. Stopping the rate hikes too soon could cause a dollar crisis. The only way to remove the excess liquidity of the credit bubble is through controlled prolonged deflation with the Fed adding reserves to banks to keep them afloat as their bad loans are written off.
That’s why Bush didn’t appoint you to chair the Fed.
But don’t republicans cater to big business? That’s what I hear all the time. By inflating they’ll be hurting big business and helping the FB’s. Are we now saying that the republicans cater to individual investors now?
republiKKKans cater to whomever has the most money. Just like they always done. Nothing new there.
Demoncrats are just as bad.They also wont protect us from the beaner invasion. I will grow my own veges.
Sorry pissmo. Republikkkans hold the majority in all the branches. The blame it on democrat handwringing no longer washes.
Neither does vehemently and ignorantly insisting that the Demokkkrats are somehow different, better, or less involved in any of this. Moron.
Amazingly enough, stupid little angry men still insist democrats are responsible for the catastrophic public policies over the last 5 years. Sad.
Yes, but inflation hurts in the future, it doesn’t hurt NOW.
” Maybe they have secretly decided that inflation is the only way to get out of this debt mess.”
Can’t be any doubt in my mind…Stopped publishing M3 in March. Foreigners are rotating out of dollars bit by bit. No choice to keep going. As you say Dollar is toast if they stop. Conundrum ? You as an American consumer is immaterial. Hu , the leader of China meets with our richest business leader first ,and stays at his house. What’s 300 Mil
tapped out Americans compared to a Billion hungry Chinese.
” Nothing personal, business is business” The Godfather
I don’t know if they are trying to push inflation. Big business does not like inflation, and they’re sitting on a pile of cash. I think the fed is trying to push up rates without pushing up inflation, in other words remove the conundrum where the long term rates were too low for the risk premium.
so what gives?
30% in commodities+gold
30% in emerging market stocks
40% in euro cash…
DUMP DOLLAR
is that where fed wants us to be?
Smart money has alreayd been loaded with Euro future options and oil options. They make money right and left and Fed is only their tools.
” is that where fed wants us to be? ” Us ? ?? Do you mean us as Americans? The top 10% have over 70% of the wealth. It’s a world market they will continue to make more ,and more. Unfortunately you ,and I as Americans are immaterial. High wages, pensions are purposly being set up for collapse to level the playing field so business can operate globally without that burden. Enjoy the last vestiges of middle class,and driving your own car “The world market is arriving ” and greasing the wheels of China, and India is a priority over “US” driving our SUVs’.
It appears the helicopters are in full force. Someone give me another plausible explanation as to why we are hyperinflating in secrecy( no M3).
Not to be another voice in the choir but I have to agree. The 1/4 pt. hikes were such a joke! No one had any real fear that these modest hikes were going to anything to stop the bubble. In the end they wound up making 2004 and 2005 like putting bricks in your trunk before driving off a cliff. You know, just to make sure it’s a total disaster.
“In the end they wound up making 2004 and 2005 like putting bricks in your trunk before driving off a cliff. You know, just to make sure it’s a total disaster.”
LOL! That is hilarious. Though the results may not be pretty.
I think a lot of people in the SF Bay Area put bricks in their trunks in 2004 and 2005.
Attn: Ben
Food for new thread….
Real estate insiders go bearish in blogs….
In mostly anonymous postings, agents are reporting big problems in the markets….
I disagree. You are crediting the people at the Fed with an omniscience that no one has. The historical record shows that Greenspan misjudged the internet stock bubble. There is no reason to believe that, five years older, he could anticipate the detailed ramifications of the housing bubble we now face. His successors are no more superhuman. The tone of uncertainty in the Fed Minutes of its last meeting tells us that they dont feel in control of the economy. Remember that Bernanke’s first job is to placate the bondholders, and that means future bondholders as well as current ones. As long as inflation is a threat, the Fed wont go soft.
I like this thinking.
“Remember that Bernanke’s first job is to placate the bondholders, and that means future bondholders as well as current ones. As long as inflation is a threat, the Fed wont go soft.”
Good thinking. I hope you’re right. Somehow I find it hard to be an optimist with these C-minus students and GED-hopefuls at the helm — God help us.
Ms. Yellin is apparently attempting to be ’sensitive’ to some of her contituents here in California. I’m sure she’s getting a lot of heat from folks living in San Fran.
But the truth of it is, even Ms. Yellin knows where rates are going.
I’ve predicted on this blog that Mr. Bernanke will continue raising the Fed rate through the summer, and probably one last time in the fall.
After that, Mr. Bernanke is going to sit back and watch what happens for a term. It will be a momentary pause in the rate raise.
If, after the last rate raise and the pause Mr. Bernanke sees that inflation is being headed off and the housing mania is suffeciently over, he’ll stop raising the rate and watch some more.
But if, after a pause in the late fall, he sees houses still outrageously priced and speculation still rampant…he keep raising the rate until it stops.
Overpriced housing isn’t good for ANYONE, EVER.
Luckily, Mr. Bernanke has been listening to his predeccesor, and understands this.
Thus, regardless of what the local Fed folks say, the show- or rate raise- must go on.
I haven’t been wrong yet, and I ain’t wrong about this.
…and I sure wish I had a spell checker.
‘constituents’, dammit.
Bernanke’s jackass predecessor caused the damn housing bubble!!! Why listen to the rantings of that dried up and duplicitous Mr. Magoo lookalike?
OT, but is it just a pet peeve of mine, when somebody calles the good ol’ loans and mortgages “loan products“? I can’t explain my frustration rationally, I always invoke dirty sweaty farmers and cowboys delivering to us “products”, or maybe brainy scientists and engineers doing that, but not the GED-enabled loan brokers and the companies they work for.
I know I know - risk management, trading, etc etc, but still, I cringe.
Anyone know what % loans are negative amortization loans and what % of people are paying less than interest, ie accruing principal? In CA?
Can the lender really shut off the amortization feature if they conclude that the house is probably worth less?
From postings in the past on this blog, something over 70% are NegAms in the last 2 years in California. over 50 % in the Chicago Metro last year, ~100% of all 2nd homes in Florida. If you have any friends at a title company they can give you the break down in your target area.
Who cares? California and Illinois are ‘BLUE’ states. The kool aid drinkers who speculated in Florida are for the most part from ‘BLUE’ states, ie NY and NJ as well as California.
AHin’07, I sure hope you’re right about those rate hikes through to the Fall. Many of the guests on CNBC this morning kept crowing about how one more rate hike seems just right for their little economic model.
How can so many alleged experts really believe getting back to business-as-usual is a good thing?
Most of those alleged experts probably own homes.
Where I work, I see this a lot.
Can’t tell you where I work, because I can’t spend time talking to friends about housing…but I can tell you this. I talk to AT LEAST three hundred people a day. Not on the phone, in person, and in private.
In the work environment I’m in, they’re relaxed and don’t mind saying what’s on their minds.
One thing that appears to be a constant among these folks is their outlooks on housing.
It’s predictable.
If they own a home, housing will never go down- but it might ‘adjust’.
If they rent, they’re either nervous- because they haven’t done their homework, and therefore might get suckered onto the Titanic- or they’re pretty darned happy because they have done their homework, and they know where this thing is going- and fast.
How does this relate to the Fed raising rates through the fall?
People haven’t gotten the message yet.
Bernanke, just like Greenspan, is aware of whether or not the message has been heard.
See, for the Fed to stop raising the rate, a ‘consensus’ must be reached. People out in the ‘real world’- not just the media- need to KNOW that flipping is over. They need to KNOW that they shouldn’t be spending money they don’t have (CREDIT) on stuff that’s waaay overpriced.
The message hasn’t gotten through yet.
The fall is also significant for the Fed because most of these homes that are currently sitting on the market at nosebleed prices WILL STILL BE THERE in September. September is the month of reckoning for housing. It’s the month where even the most bullish bulls will have to concede “It’s Over”.
I guess you might call it a ‘Rate Raise Lag’.
In October, we’ll start getting Primetime Live hourlong shows about all the bankruptcies and fallen flippers. The Fed will watch these shows, and see if the ’sheeple’ has FINALLY gotten the message.
If it has- actually an Oprah show would do wonders, too- then the Fed will sit back, keep rates where they are, and watch.
Mr. Bernanke can create an action- raising the rate- and the action can be seen by a select few to have an effect. Yes, the market reacts quickly. Yes, we on this blog react quickly.
But we aren’t the NORM in America.
The NORM in America is a single 28 year old girl who has overspent herself on credit cards, but who thinks she should buy a house because her friend told her it’s a good investment.
Once THAT GIRL gets the message about housing, Mr. Bernanke will stop raising the rate.
That explanation was friggin outstanding
Give yourself a pat on the back, too, sir.
You guy on this blog, and Ben, have been teaching me, too.
I just take all the little interesting incoherent pieces of info and spit them back out.
Playing dumb, while out in public, is also a useful tactic.
I love the line at the grocery store most. Or Home Depot.
People are at their most honest in those two places, as well as this blog. As a result of reading what you folks say everyday, I think my brain has grown about 20% since October.
I wonder if Mr. Bernanke comes here?
Hmm…
Why wouldn’t he?
‘guys’…dammit.
Impassioned writing meets silly grammatical errors. Argh.
Hope my mom ain’t reading this, ’cause she’d surely smack me upside the head.
I totally agree that the Fed will keep raising rates. But the news will go back and forth about it.
After all, they don’t want to PANIC the markets and individuals. The way they’re approaching the situation, it gives some people the chance to adjust to what’s coming. That’s better than dropping the bomb on everybody at once.
A little less chaos in the end. Which is about the best they can hope for now, just a little less chaos.
How bout 70 year olds that had to upgrade the condo w/ a $50,000 kitchen? Is it really about the 20-ish singles? Everyone wants to live the American dream….and feels entitled to it. I saw it on the Cape when 40ish types would go into Bed Bath &Beyond and drop $1000+ on decorating for a single room in an hour. Too often if the company cancelled they’d bring it all back. Its all about the show, baby!
How long have all the “Analysts” been saying: “one, maybe two more 1/4 % hikes and then they’ll stop.”? Seems to me that they’ve been saying that for AT LEAST 6 months. ISTM that the question is how much they fear wage/price inflation.
I felt sick reading the Fed comments. I dn’t know why, but I expected them to continue raising. Especially when one looks at commodities. I know the minutes are a few weeks old, but still… I guess I expect too much from them.
I hope they will defend the US dollar, but I doubt that’s high on their list. One thing to keep today in context; several Fed people have said recently that what they do will be data dependent. Nothing Yellen or the minutes contradicts that. What are the data showing? Gold over $620, oil over $70 and the US$ at a 52 week low versus the euro. And the homebuilders are still building hundreds of thousands more homes than they are selling. They have a serious inflation problem on their hands and may be forced to keep raising rates well beyond 5 or 5.5%.
USD not quite at a 52 wk low
—-
EURUSD
04/17/05 - 04/17/06
Average (367 days): 1.21497
High: 1.31230
Low: 1.16380
The Euro/USD rate quoted backwards (like the pound) it’s how many dollars a Euro buys. A low price is a strong dollar while a high price is a weak dollar.
I agree, it would be foolish to not tighten more. and bad for USD and economy in the longterm. CPI is lagging, modified with all hedonics and rent proxy and generated by govt. 10year is effectively set by foreign central banks and carry trades. whereas commodity prices are set by market. what do you believe?
if you believe CNBC you are in trouble.
Those same CNBC fools were the ones telling us that the stock market was “buy and hold” during the 2000-2003 bust! I lost quite a bit following this advise.
Yikes..Advice not advise.
but it probably felt like you were in a “vise”
After much frustration, I have started a Baltimore metro area housing blog, at the address listed here. Sorry for the shameless plug, I hope that’s OK. If not, sorry in advance. Please come and contribute as I get it up and running. Thanks!
OK, guess the URL thingy doesn’t show up. It’s baltimorehousing.blogspot.com. Hope to see you there.
Excellent Nikki!
Send me an email when you get it up and running.
Do not fight the Fed, folks. Inflation will soon become a problem if Ms. Yellen is correct and that will only mean additional tightening than would otherwise have been necessary.
I have been telling everybody to buy equities (particularly global equities) for quite some time and I maintain that view - particularly Europe and some LatAm.
So long as bond prices do not want to price in inflation, stock prices will…to the benefit of shareholders.
I don’t believe CNBC or just about anything in the main stream media news anymore.
I personally want Ben Bernanke to be like the exterminator John Goodman played in the movie Arachnophobia. Kill the housing market with some strong bug juice. If he has to keep tightening through Fall and into Winter that’s just fine with me.
Yea, that’s the ticket..Bernanke the “Exterminator.”
hey hedgefund
I have a mutual fund- Putnam International Growth, has done well, steady growth. Put a wee more into tonight after closing. Moderately low risk- I frankly think the FED is wrong about inflation. I visited a local flooring company here in Connecticut- they told me wood and just about everything is having weekly (some days) price increases on most items. A wood floor I had put in 3.5 years ago would now be 50% more to install.
Peter, until Bondholders fear inflation, the best way to get long inflation is to buy the stocks of companies such as your local flooring company (stylized example).
You know Hedge, I really don’t mean to pick on you but that fund is a dog. It is a one star Morningstar rated fund that is ranked in the bottome 1/3 of its class. It trails the peer index in its 1,3, and 5 year performance. It has almost 40 % in financials such as HSBC, ABN AMRO, Credit Suisse, etc. Don’t you think they have some exposure to the real estate markets?
Putnam is one of the worst run shops. They paid huge fines and as a family have some of the highest fees, more turnover and worst returns. Larry Lesser cleaned house and their go-go funds like Voyager and New Opportunity have had negative outflows for years due to poor performance.
Your comment below about the corporate bond market makes no sense. You do not get a recession in inflationary times, you get them in deflationary times when the yield curve is inverted. This is normally seen as two consecutive quarters of NEGATIVE GDP growth.
You never answered my question as to what hedge fund you work for or what certification you hold. The more I read your posts, the more I doubt you are employed in the industry.
my bad Hedge, Peter owns that dog of a fund.
Dude, I have no idea what you are talking about and I don’t need to justify my credentials (which are top-rated) to anybody. I post and if people want to listen, then that’s great, if not, then that’s great too.
If people want to talk to me further, they can reach me at hedgefundanalyst@gmail.com
I think the fed will start cutting rates as the up coming recession kicks in. But America has nothing productive left to reflate. Productivity is paramount in any recovery not paper ask the Japanese.
You will only get a recession when the bond market sells off due to real inflation fears. Until then, you are in a goldilox scenario for corporates. Maybe in 2007.
Hedge.
What about deflation fears? Did the yield curve inversion not imply a liquidity splurge to avert a deflationary recession or worse?
Who are you kidding? We’re already in a recession, it’s just that the government and Wall Street refuse to acknowledge it.
Allow me to labour this point. The Fed will (based on it’s previous record) seek to avert the forthcoming recession by injecting liquidity into the market. The critical issues are;
1. Will this injection of liquidity be sufficient to avert a house price crash and resultant recession?
2. Will cutting interest rates cause a run on the dollar, requiring the Fed into a reactionary rate rising policy (i.e. will they seek to put off the day of inevitable reckoning for ‘political’ purposes?)
3. Given the history of the bubble burst in Japan, does the cost of borrowing matter when the affordability and rent to price ratios are so far removed from fundamentals? (The immeasurable ‘sentiment’ factor)
1. The Fed increasing the money supply is to avert DEFLATION. They cannot stop a reversion to the mean for housing, which was caused by a credit bubble and the corresponding loose lending practices.
2. There will be a run on the dollar if the Fed stops, let alone cuts rates. They are raising rates to maintain confidence in the dollar and US debt, as well as to control inflation.
3. The cost of borrowing ALWAYS matters. We would not have a housing bubble if the cost of borrowing hadn’t been near zero.
I pay no fees for that Putnam fund- had money in there for years- so I transfre from fund to fund-costs me nothing-
at e trade the fund is rated four stars by Standard and Poors.
From previous quote ” The NORM in America is a single 28 year old girl who has overspent herself on credit cards, but who thinks she should buy a house because her friend told her it’s a good investment.”
It is Karyn, the cyber-begger at savekaryn.com here is her letter. And she has made a bundle of money from being stupid. June 23, 2002
Hello Everyone,
Thank you all for visiting my website! My name is Karyn, I’m really nice, and I’m asking for your help! Bottom line is that I have this huge credit card debt and I need $20,000 to pay it off. All I need is $1 from 20,000 people, or $2 from 10,000 people, or $5 from 4,000 people - you get the picture. So if you have an extra buck or two, please send it my way! Together, we can banish credit card debt from my life!
HERE’S THE DEAL…
I’m a girl in my late twenties who lives in Brooklyn, New York. Over the last few years I’ve run up quite a credit card bill… let me tell YOU! $20,221.40 to be exact. OUCH! Maybe it was too many morning lattes that pushed me over the edge, maybe it was the Prada pumps that I bought on eBay (They were only $100 - a STEAL!) Who knows! My debt just got larger and larger, and here I am today with a huge monthly payment.
TOGETHER WE CAN MAKE A DIFFERENCE!
You see, I’m done with my frivolous ways. I’ve stopped buying designer clothes. I’ve stopped using department store products. I decided that I really DO like Oil of Olay. It really DOES work just as well… And Old Navy is actually kind of cool… I’ve done my part, now I need you to do yours. I believe that this world is a good place, and if someone needs help, then they should ask for it.
SO I’M ASKING…
Please help me pay my debt. I am nice. I am cheery. I am the girl at the office that MAKES YOU SMILE. I didn’t hurt anyone by spending too much money. I was actually HELPING OUT THE ECONOMY. Give me $1, give me $5 - Hell, give me $20 if you feel like it! I promise that everything you give me will go towards paying off my debt.
WHAT’S IN IT FOR YOU, YOU ASK?
It’s normal that one should ask this question. I’ll be honest… nothing is really in it for you. But I do believe in Karma. If you help me, then someday someone might help you when you need it. SO HELP ME, and maybe someday, I’ll be able to help you.
AND TO THE IRS…
Yes I’ll report everything I make as income. I’m honest - sometimes too honest, but I believe in honesty!
XOXO,
Karyn