Hedge Funds Bet Against The Housing Bubble
Some housing bubble reports from Wall Street. “Home-building and mortgage-banking company NVR Inc. on Wednesday said first-quarter profit rose 12%, but cautioned it could see margins squeezed as the firm faces pricing pressure in slowing housing markets. Orders in Washington, D.C. fell 12% from the year-ago period on higher cancellation rates, which increased to 17% from 13%.”
“‘Our market checks continue to point to weak market demand and heavy incentives in [Washington], D.C., NVR’s largest market,’ said analyst Dan Oppenheim in a recent research note. He expects lower order growth and greater-than-expected margin deterioration.”
“In January, NVR said it expected 2006 gross margins would be squeezed by pricing pressure in many of its markets, a forecast it repeated Wednesday.”
Checking the press release, the firms new orders declined in Washington DC, as did the average new order price; from $401,400 to $387,600.
A reader found this item. “Comerica Inc. on Wednesday said quarterly profit fell a lower-than-expected 3 percent, but a surprise decline in lending margins caused the regional bank’s shares to suffer their biggest loss since 2002.”
“CEO Ralph Babb attributed the deposit decline to customers ‘investing in their businesses, and because of slower real estate activity in our western market.’”
“‘They make loans or pay certain expenses to title and escrow companies in exchange for deposits,’ analyst Anthony Davis said. ‘The sudden, unanticipated decline in those deposit balances raises questions about the outlook for net interest margin, especially given that the (financial services) business is concentrated in California, which has been the hottest housing market.’”
Another posted this Salon article. “Raghuram G. Rajan believes, in sum, that new developments in technology and finance have made the world better off, but ‘they may also create a greater (albeit still small) probability of a catastrophic meltdown.’ But he’s not too worried.”
“One example Rajan used was the housing sector. The great thing about credit derivatives is that they allow the banks to buy protection for the possibility that borrowers will default on loans. Since last September the market for a particular kind of credit derivative, technically described as ‘credit default swaps on subprime ARM pools,’ has taken off.”
“According to Mark Whitehouse of the Wall Street Journal, such derivatives doubled in price between mid-September and December of 2005. So who is doing the buying? According to Whitehouse, the main players are hedge funds that specialize in debt trading.”
“‘The new credit-default swap ‘allows us to express a bearish opinion’ on the housing market, says Steve Persky, managing partner at a Los Angeles hedge fund. ‘A lot of people debate whether the housing market is overpriced, but, for sure, the credit quality of home borrowers has deteriorated.’”
“The hedge funds are basically betting on the likelihood that there will be a housing sector collapse. They are short-selling the real estate business. But what happens if the defaults do start rolling in, and the sellers of those derivatives have to make good on their obligations with cold, hard cash? Will there be enough liquidity in the system to handle the shock?”
“As Whitehouse reports, the market for credit-default swaps that could be applied to pools of home mortgage loans is new, it’s only been around since last June. Any prospective homeowner thinking right now about jumping into the market with a no-money-down, adjustable-rate mortgage might want to think twice. Wall Street is betting against you.”
Thanks to the readers who sent in these links. If there is any news out of the MDC numbers, I’ll add it to this post.
Title should read “Hedge funds betting on housing bubble”?
From the same article “The smartest players on Wall Street see the housing market about to implode”. Alright the next bubble market credit default swaps! I’ll catch this one. Yubba dubba do. To paraphrase SF_jack “Swaps for everyone”
It is rather ironic that the hedgefunds were major players in the carry trade that fed the bubble due to the rate cuts in 2001 and now, they have moved to the other side of the market to profit on the volatility.
Enron was famous for claiming they didn’t care which direction prices moved so long as they moved.
This issue needs some Spitzer attention but I fear that it is too big and too unregulated to even begin to rein in.
I get very scared when I read about .”The smartest players on Wall Street .” These are the same assclowns that gave us 1973, 1987, 1994, 2000, and other painful miscues. I would not be surprised for the PPT to engineer a major squeeze knowing that these guys have their butts in the wind now.
Don’t forget the 1998 “Genius” crowd.
The smartest players made money at each of those dates
Yes. The smart money was against LTCM. Killed them, in fact.
I get very scared when I read about .”The smartest players on Wall Street .” These are the same assclowns that gave us 1973, 1987, 1994, 2000, and other painful miscues.
Not so. The smart players let their media and “analyst” shills run up stock prices to insane valuations, bailed at or near the top, then shorted the garbage right into the ground. Bubble.com touts like Henry Blogett were recommending stocks to the goom-bahs at the same time they were describing them as garbage in notes for private, well-heeled clients. Trust me, the smart money knows what’s happening and is positioning themselves accordingly.
Note the not-so-smart money (commercial speculators) have a HUGE short position to cover in gold and silver. Kitco is showing that gold hit $640 today, which means a lot of the gold and silver shorts are either covering (at a steep loss) or are as nervous as a six-year-old boy at the Neverland Ranch as they stare financial ruin in the face. Check out Friday’s Commitment of Traders (COT) statement. Commericials are rarely wrong, but if they’ve bet the wrong way this time, they are well and truly buggered.
http://news.goldseek.com/COT/1145044020.php
That bit about Neverland was rotflmao.
Just like the kids at Neverland they are going to get screwed!
“Enron — The Smartest Guys in the Room”
“The best and the brightest” don’t have a great track record either.
I think the PPT will help keep volatility at a very, very low level for as long as necessary to protect the counterparties, knowing full well that a major breakdown of the financial system is the alternative…
The goal isn’t to be much smarter than everyone else. The goal is to be exactly as smart as everyone else, the day before they are.
These guys take big risks with big piles of hedge-fund money. Considering how many different predictions I read on this blog about what the Fed will do once the bubble pops, it is maybe a little bit scary that a large fraction of the fund managers have placed the same bet. I dont think anyone’s pet predictions will be borne out if the financial system goes nonlinear.
As the Fed has warned, the counter-party risk may mean these protective securites end up being expensive pieces of paper.
Ben- that is my bet.
I keep wondering “if Goldman, Lehmen, BearStearns, Citigp, & now Merrill are all making Billions, who is on the other side losing?” Becasue they never seem to report. Heck a company called Swift reported gains on their interest rate hedges today!
In the Middle are the banks!!! Why becasue they sold both sides…it is impossible that these $USD - 13 trillion nominal face value bets won’t have major counter party defaults.
As ,my kids always said, “Are we there yet?”
Inspired as having previously worked at Enron.
There are no losers in deriviatives their pricing models and risk models show that they are laying off the risk to the counter-party.
They have different forward looking views. Until Mr. Market wakes up and bitch slaps somebody each side books the derivative as a profit.
Hence the attraction to physical gold and silver - the counter-party risk is zero. In uncertain times, people gravitate to assets that are not simultaneously someone else’s liabilities.
Yea — wouldn’t it be funny if all the smart blogger who took the great advice here and bought puts on Toll and friends ended up hitting the jackpot, only to learn there was no change in the slot machine?
There are plenty of quants who are eagerly awaiting non-linearity.
I have full confindence the Credit Bubble Pop can collapse both housing and hedgefunds in one fell swoop! Suzanne researched this!
LOL!
http://russellarch.com/videofiles/CENTURY21.mov
Bad link, here’s one that works (Suzanne sent it):
http://russellarch.com/2006/04/century21-video-debate.html
That is the creepiest ad of all time.
As Teddy Roosevelt once said, “I could carve a better man out of a banana.”
I can hardly wait for the day when the hedge funds all discover how badly fooled by randomness they were…
Read about Freddie Mac to Pay to Settle Allegations.
“Freddie Mac was accused of illegally using corporate resources between 2000 and 2003 for 85 fundraisers that collected about $1.7 million for federal candidates. Much of the fundraising benefited members of the House Financial Services Committee, a panel whose decisions can affect Freddie Mac.
The FEC opened an investigation of Freddie Mac’s fundraising after the private group Public Citizen filed a complaint in 2003 accusing Delk, his wife Amanda, the Washington restaurant Galileo and the political consulting firm Epiphany Productions of making illegal political contributions.”
“The FEC decided against taking action against the Delks, Camper, Galileo or Epiphany.”
The complaint was filed in 2003 and it took this long?
American Morning on CNN today:
http://transcripts.cnn.com/TRANSCRIPTS/0604/19/ltm.02.html
It looks like Miles O’Brien is in denile.
SERWER: When is the housing bubble going to end? Well, maybe, maybe it finally is showing signs of slowing.
O’BRIEN: Oh, stop that.
NGUYEN: Are you sure about this, Andy?
(CROSSTALK)
SERWER: Housing starts in March dropped 8 percent, which is big.
O’BRIEN: You’re almost gleeful about this.
SERWER: No, I’m not. I don’t like it. No one likes this. The second slowest month in the year. Why? There was a lot of building in January when the weather was warm.
But here’s the real rub here. Interest rates are really finally starting to get higher. The 30-year rate now at 6.49 percent. That’s the highest since the summer of 2002.
And when money gets more expensive, it makes houses more expensive. And people buy less homes, period. That’s unassailable.
NGUYEN: It all makes sense, yes.
O’BRIEN: It’s still historically low numbers.
SERWER: Uh-oh, coming back at me.
O’BRIEN: It’s still a great investment. And now is the time to buy.
NGUYEN: We’ve got a…
SERWER: I think we have a vested interest here. Yes, we’ll have a point, counterpoint.
NGUYEN: A little roundtable.
SERWER: Yes.
O’BRIEN: That’s right.
SERWER: You can moderate.
NGUYEN: I’ll try my best. It’s difficult between you two, though.
SERWER: All right.
O’BRIEN: All right. Thank you, Andy.
NGUYEN: Thank you, Andy.
SERWER: You’re welcome.
O’BRIEN: As we approach the top of the hour, let’s check on the forecast.
Chad Myers in the weather center.
Hello, Chad.
MYERS: I’m on Andy’s side of this one, though.
O’BRIEN: Oh, you are? Oh, you’re a bubble burster, huh?
MYERS: No, I’m not a bubble burster, but if the interest rates go higher, then your payment is going to be higher. NGUYEN: More. Yes, exactly.
MYERS: And so you’ve got to buy a cheaper house.
NGUYEN: I’m with you, Chad. I’m right there with you.
O’BRIEN: Think of it as a buying opportunity. As interest rates go up, people will rush out to purchase.
NGUYEN: Oh, I don’t know about that.
MYERS: With money they don’t have.
O’BRIEN: Well, that’s the American way, Andy — I mean Chad, or whoever the heck you are.
What a JackA#$
Yeah, the “American way”…to financial ruin. Criminy, I wonder when this crazy psychology will change…..from the crazy notion that it’s acceptable to buy stuff you can’t afford, go into debt, go bankrupt, then blame everyone else for your decisions, and assume the government will bail you out, then apply for grants to buy your next house. Criminy.
Miles O’Brien should get together with David Lereah to do a little RE investing…they both think it’s a great time to buy and there’s plenty to choose from.
“With money they don’t have.”
“With money they don’t have.”
“With money they don’t have.”
Result?
I say: “Housing bubbles for everyone!”
Of COURSE you do!!! LOL….
SF Jack for everyone!
I say: “Everyone for everyone!”
ah, thanks for posting that drivel from Miles O’Brien. I’ve had my deep suspicions about his integrity since some other drivel he spewed a couple months ago, on another one of my favorite topics….
cheers!
O’BRIEN: “Think of it as a buying opportunity. As interest rates go up, people will rush out to purchase.”
I can’t tell you anachronistic and “old school” that sounds already. At least to me.
Homebuyers, in any great numbers - are done. I don’t know this guy - has he been paying attention?
I mean this was the line that realtors were using in SF in the spring of ‘04 when Easy Al and his merry band of merrymakers at the FOMC were “telegraphing” their forthcoming intention for the June ‘04 rate raising (recall: first in a VERY long time).
The Spring of ‘04 was when house price gains seemed to go vertical in SF. By a year ago, the market started to look kinda exhausted in my neighborhood (fewer buyin’, fewer sellin’)… and when that Economist cover came out in mid-June, the writing has clearly been on the wall.
Under what rock has O’Brien been? This guy is on CNN - no wonder I don’t watch it any longer.
Once in awhile one has to blink, pinch oneself, and reread articles to see if the words are for real. At first I thought this one was a joke, but instead it’s just another classic. Americans are concerned about a Bust in other’s communities and neigborhorhood’s, just not their own.
71% Of Americans See Housing Bubble Collapse In Next Year
By Janet Morrissey
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)–More than 70% of U.S. consumers believe a national housing bubble will burst and home prices will collapse within the next year, although 56% believe it’s unlikely to happen in the area where they live, according a new survey.
The Experian-Gallup Personal Credit Index study, released Wednesday, found that 71% of the 1,004 adults surveyed believe a bubble exists in the country and could burst within the next 12 months. Only 24% believe it’s unlikely to happen, and 5% said they didn’t know.
However, most consumers don’t think it will happen where they live - at least not in the next three years. The survey found 56% believe it’s unlikely to occur in their residential area while 42% believe it could happen and 2% didn’t know. The survey found even fewer - 32% - believe a bubble exists and will burst in their neighborhood in the next 12 months.
Dennis Jacobe, Gallup Organization’s chief economist, said the results reflect public perception about a national housing bubble and news of sharp price increases in particular markets.
“I think they hear hype and the stories of prices that have increased in the hot markets,” such as Manhattan, Washington, D.C., Miami, Las Vegas, San Francisco and Los Angeles, said Jacobe. “They just don’t think it’s able to continue.”
However, people in the Midwest and in smaller towns and cities have not seen the same price surges, and therefore don’t think the bubble will affect them locally, he said.
“In Lincoln, Nebraska or Omaha, Nebraska or those kinds of places, you don’t see the same kind of escalation in prices and therefore don’t see the same potential for bust,” Jacobe said.
However, he said the number of people who believe the bubble could burst in their own markets is on the increase.
The survey also found that more than half of all Americans - 53% - recognize the term “housing bubble” without an explanation, up from 35% a year ago.
When it comes to loans, only 15% believe it’s a good time to borrow money, down from 20% a month ago, and 24% a year ago.
Heard it through the grapevine — Fannie Mae economist said the bubble has popped…
Fannie Mae gonna have some ’splainin to do.
I heard the same thing.
That’s why I been surfin’…and not postin’.
Ladies and gentlemen, welcome to M-O-M-E-N-T-U-M.
The more I read that everyone thinks there is a bubble, the more I’m inclined to think there is no bubble. Show me some *significant* price declines (and in fairly rapid fashion, not gradually, over the next 10 years), and then I’ll believe in the bubble theory.
I’m getting impatient; I’ve been waiting for 3 years for the momentum of this market to change, while my friends have bought more property and gotten richer and richer. Just call me bitter, regretful Skipintro.
‘APR. 19 5:28 P.M. ET Federal Reserve Chairman Ben Bernanke is warning anew of the potential risks to the economy posed by persistent and large trade and budget deficits. Bernanke’s comments came in a written response to questions on these matters by Rep. Brad Sherman, D-Calif.’
‘The United States racked up a $723.6 billion trade deficit last year, the fourth in a row where the annual shortfall set a record.’
Well that is good. It means that he knows the situation. He won’t lower rates to prop up the economy. The economy has to take its lesson and have lower consumption and more savings. That means higher rates.
Those are just talking points for the Chinese Presidents press core, in town for tomorrows big Meet!!
that is why Ben is extremely busy lately printing this $ 724 billion trade deficit into oblivion. They already made some 30% or so of it magically disappear in the last year, quite a job!
(that is when measured in real money of course, and not in funny money from the FED).
I have been doing my own research on the Condo situation in downtown San Diego. The Legend seen here:
http://www.thelegendsandiego.com/main.asp
is BOSA’s flagship Condo highrise here in San Diego. BOSA is supposedly the best builder in San Diego right now. BOSA’s previous projects such as the Electra and the Grande North and South sold out in a matter of days. The Legend is only 50% sold and is now breaking ground right next to PETCO Park where the San Diego Padres play. I check the sales figures for the Legend on a regular basis. They basically have not sold a Condo this entire year, despite opening a downtown sales office in January or February. There were 88 units available as of 3/7/2006 and there were 88 units available last week and today there were also 88 units available. There were actually 4 more units in “reserve” status on 3/7/2006. Basically they have lost sales in the last 45 days. Typically banks only allow builders to break ground when 60-70% of the building is sold. This isn’t the case at the Legend.
Be sure to check out http://www.777lofts.com for MAJOR pricing reducions in downtown San Diego.
“I think we have a problem Houston!”
I think I heard this somewhere. Condos for everyone! LOL
Markmax -
How about some personal “ground level view” of the empty buildings down around there? Ghost town?
If I recall, you live or work in the area? Must have been very quiet over the winter, with all the Pads playing golf until recently.
I would hate to be one of the fools that bought here at the top in 2005, then you find out the guy next door paid 30-40% less than you did when he bought in 2007. Ouch…that hurts.
The largest is 1000 sf? That sucks… ugly and small and too pricey.
The highrises don’t have a soul in them. When 80% of the building has the lights out @ dinner time, you know there is a problem. The people in sales offices all rent too. It is really funny.
So screw me if this is off topic. But I picked up an old, lovely aerial views of Texas photography book at used book store. I was flipping through the pages and near the back is a page showing condos being built on the coast, the caption was something like “Condos have become all the rage on coast around the country” — I said, damn, when was this book published — a turn to the front — 1987!!
We’re starting to see the beginning of an enormous rotation of capital out of real estate and into stocks and commodities, particularly metals and oil (U.S. oil reserves are unusually high and yet oil prices are at record levels - go figure). This new bubble will cause further damage to the economy by driving up inflation (the effects are already showing up in the core numbers). Until the central banks get serious about mopping up all of this excess liquidity, we’re going to continue to have a “rotating bubble” problem.
John, ” Until the central banks get serious about mopping up all of this excess liquidity, we’re going to continue to have a “rotating bubble” problem ”
I’m convinced it’s out of the CB, Feds’, hands. When the leader of China stays at our richest “business” mans’ home ,and meet for 3 days with business leaders before finally getting around to meeting our President, you know who’s running the country….It won’t quit til’ the last few dollars are squeezed from the tube. Fed policy?, currency crisis?, Housing bubble? who gives a rip…The powers that be are making it hand over fist.
We can’t afford to lower rates and we can’t afford to raise rates. Sound like to me, we are looking at scary times ahead.
Simmsays.
http://www.AmericanInventorSpot.com
Stagflation ahead, IMHO.