November 27, 2014

A Quick Scan Of Data Can Be An Eye-Opener

For a Thanksgiving respite, I’ll point out this blog is nearing its tenth year anniversary. A trio of posts that month in 2004.

“Saturday, December 11, 2004″

“Subprime Lending Surges”

“Pricing bubbles often end in a parabolic rise, which we probably saw last year. It is no surprise that what is holding up the market now is lending to so-called subprime borrowers. I view this as bad news for this market as these folks will be in financial trouble even faster. Consider that the risk to mortgage lenders increases, suggesting some desperation for borrowers. ‘Overall, new originations of subprime mortgages totaled an estimated $375 billion through the end of September, a figure that marked a 63 percent year-to-date rise. Putting that number into perspective, one out of every six new residential mortgages made this year has gone to a credit-impaired’..borrower.”

“Wednesday, December 22, 2004″

“Most Influential List Revealing’”

“The website Builder Online recently published an editors list of people of whom ‘when these individuals speak, do other people listen? More important, do they act? Each of the professionals who made the cut left no doubts.’”

“I think it is telling that number one is Fed Chair Allan Greenspan who ‘can continue the current housing boom or grind it to a halt’. And number two is Franklin Raines, who as CEO of Fannie Mae, signed off on financials that must be restated negatively to the tune of nine billion dollars. And who was forced out of that position today.”

“It would seem the editors saw the most influence from a central banker and a disgraced bureaucrat, not very comforting picks for the industry.”

“Sunday, December 05, 2004″

“Fannie Mae Weakens Financially”

“A quick scan of Fannie Mae quarterly financial data can be an eye-opener. Of course, the most recent quarter isn’t available due to the accounting problem, but lets use what is available; the four quarters from June 30, 2004 and back. Compared to the quarter ending September 30th, 2003, Net Income has declined 58%. And if the Securities and Exchange Commission rules against the mortgage giant on accounting for derivatives, the firm will have to post a 9 billion dollar charge. Investors have also upped the shares “short”; that is betting the stock price will fall, some 2.28 million shares in the past month.”

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Comment by Whac-A-Bubble™
2014-11-27 03:42:26

Great post on the eve of a renewed push by Fannie Mae and Freddie Mac to ease lending standards and put more mortgages into the hands of marginally qualified borrowers.

Happy Thanksgiving!

Comment by Jingle Male
2014-11-27 05:26:36

The default rates on current loans are too low. Common knowledge! (sarc off).

Comment by Housing Analyst
2014-11-27 11:45:45
Comment by Whac-A-Bubble™
2014-11-27 03:48:46

Monday, December 13, 2004
The Unsustainable California Housing Market
The California Association of Realtors has put out a report on the gap between incomes and home prices in that state. “California households, with a median household income of $52,940, are $55,370 short of the $108,310 qualifying income needed to purchase a median-priced home at $462,510 in California, according to the…Homebuyer Income Gap Index”.

Some things never seem to change.

Comment by Jingle Male
2014-11-27 07:06:38

I heard this time is going to be different! (sarc off)

Comment by Shillow
2014-11-27 07:13:39

And this being Thanksgiving, it reminds me of Charlie Brown still trying to kick that football that Lucy is holding on the Charlie Brown Thanksgiving episode. FBs keep running at that housing football and the crooked shysters keep promising they won’t pull it away. And the FBs end up flat on their back again and again.

Comment by Ben Jones
2014-11-27 09:16:46

One thing that’s changed is California is now the poorest state in the union.

I’ve never paid too much attention to the time for one point to another. What year did Greenspan first talk about irrational exuberance? Then there he was, just as the stock bubble was near highs, going on about the “new economy” as the tech stocks went way higher and the old economy stocks diverged down. Did he fool himself? Read Greenspan’s Bubble’s and you’ll see the Federal Reserve actively pushes these mania’s.

In the 90’s, I was following something casually. We saw a crisis here and a panic there, always resulting in a fit of money creation and easing of loans, even bailouts, like LTCM. Yet gold didn’t move accordingly. Nor did interest rates. And the Fed started working really hard to prevent recessions, rather than just help the economy get through them faster. In 1998, I moved to Austin, an in spite of paying the highest rent I’d even paid, I got my landlords mortgage bill (he had lied and said it was owner occupied), and discovered his bill was twice mine. I thought about it for a while and eventually concluded it could only be the result of speculation. And was probably a bubble. A little later I also realized the dotcom business I was working in was also a bubble and got the heck out of town. (The landlord later went bankrupt and lost all his houses).

Still, this lack of inflation, more crisis, more money creation.

November 21, 2002 “The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself…a deflationary recession may differ in one respect from “normal” recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the “zero bound.”

‘Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy…In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.’

‘Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.’

In this, they have failed:

‘a determined government can always generate higher spending and hence positive inflation’

This should give us great pause, because now Bernanke has come and gone. What is the greatest concern at the worlds central banks? Deflation. How can that be?

‘For many years, my colleague Tony O’Sullivan and I ran courses for planners on practical housing market analysis. We regularly ran a workshop deconstructing newspaper house price stories as a way to make people more critical of data and more aware of the interests lying behind such stories. We were regularly told that this was also an effective way of breaking out of the mindset that rising house prices are “good” in some sense and that volatility and other housing ills were inevitable (a quick tour of international housing markets can also quickly put paid to that notion).’

‘Here is the crux. If we apply these tests to the numbers we have seen recently, then it is clear that rising real house prices mean that housing relative to everything else is still getting more expensive and less affordable.’

‘The figures above, though by no means identical, suggest the house prices are still rising at several times the rate of general prices and this is now occurring widely across the UK. Calling this a correction misses the point – it is not the “plausible narrative” we seek. Just ask Generation Rent.’

House prices shouldn’t rise faster than other things, but they have, by a lot. One more thing from this article:

‘There is a nice weather map cartoon by Matt featuring the UK characterised by the varied intensity of dinner table house price conversation. And it is not just that we are obsessed with property values. The dysfunctional national fixation both reflects and is reflected by media and professional hyperbolic language concerning what is going on in local and national housing markets.’

None of this should even be on our radar. How many countries are in some phase of “obsessive fixation” about house prices? Look at the reality TV flipping shows. This is what a mania looks like. Given the deflationary funk were sliding into, it looks like a dangerous time. Because if we get a deflationary recession, (and yes Bernanke, you ARE out of ammunition) there’s a whole lot of people who are gonna get socked.

Comment by Housing Analyst
2014-11-27 09:20:05

“One thing that’s changed is California is now the poorest state in the union.”

Indeed it is. Looking ahead, consider the scope of the economic disaster the state will become when the Apple lay offs begin.

Comment by Ben Jones
2014-11-27 09:39:37

It’s not just Apple. At least they make money. Yesterday someone announced Uber is “worth” 40 billion. If I understand it correctly, it’s a web based black market taxi service. And Twitter, etc. Yesterday the biggest off-shore oil driller cancelled their dividend, and are about to receive 65 drill ships that they don’t think they can keep working. I smell a bunch of printed up money about to go poof. How many of these yield chasing arrangements are there? And that’s outside of these silly internet companies that have no earnings.

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Comment by Ben Jones
2014-11-27 09:58:14

Here’s something else that’s changed:

Is This the End of China’s Economic Miracle?

‘The era that brought the Ma family—and so many millions of others—from poverty to relative economic security is now over. With every new economic indicator released, it’s become clearer that the period of China’s hyper-growth has passed. The decades-long push into manufacturing, export-led growth, and real estate and infrastructure investment—which propelled growth for more than 30 years—has run out of steam. Furthermore, since the global financial crisis of 2008-2009, China has relied on massive infusions of credit to prop up its economy, and data show that the growth bang for the credit buck has diminished considerably. In 2008, banks had assets of roughly $9 trillion on their balance sheets. By the end of this year, according to Charlene Chu of Autonomous Research Asia, that will reach $28 trillion. Yet growth is decelerating sharply.’

“In order to get on the right track, you have to first get off the wrong track,” says Patrick Chovanec, chief strategist at Silvercrest Asset Management, a New York-based investment firm. “For new sources of growth to develop, you can’t be channeling resources in the wrong direction, which they continue to do. They are several years behind where they ought to be.”

‘For business executives trying to figure out what the next China will look like, the questions now are: What assumptions do you make about future growth and thus investment? What assumptions do you make about demand from China, which was so crucial in driving a commodity price boom over the past decade, only to see everything from oil to iron ore to copper prices now in free fall as the economy downshifts?’

‘The China CEO for a major U.S. multinational says, “After restructuring the state-owned companies in the late 1990s and then joining WTO, it wasn’t rocket science to figure out that this was going to be a high-growth economy. It’s very different now. Now we’re having knockdown drag-out arguments over how much to invest, how much to count on China going forward. And the truth is, we don’t know yet.”

‘The uncertainty that now hangs over China’s economic future is informed by preceding “economic miracles”—and subsequent busts—in East Asia. Exhibit No. 1 of course, is Japan. It, like China subsequently, became the world’s second largest economy after decades of fast growth, prompting (as China does now) fears in the West about Japanese economic domination. Then, in the early 1990s, Japan stumbled and fell down. And two decades later, it still hasn’t gotten up.’

‘Japan also let a real estate bubble get out of hand, just as many economists believe China has. Indeed, the present slowdown has been led by a sharp reversal in housing construction, one that UBS economist Wang believes “will bring dis-inflationary or deflationary pressures through various demand channels.” That, again, is uncomfortably evocative of the Japan syndrome.’

‘As its macro slowdown hit in the early 1990s, Japan had a hard time getting its banks to stop making loans to companies—whether they were real estate developers or manufacturers—that were already deeply in debt. Japan became known as the Weekend at Bernie’s economy: You put the corpse in a corner, stuck a cigar in its mouth and pretended everything was fine. Thus was the phenomenon of “zombie companies” born.’

‘It’s the reality of new debt going to bail out bad debt across the economy that prompts the most bearish views on China. A year ago, a Reuters analysis of proprietary data about so-called trust loans—made by non-bank financiers that do not have to abide by the interest rate restrictions placed on the state-owned commercial banks—showed that more than 41 percent of all such debt issued in 2012 went to companies most likely to be using it to roll over old debt.’

‘In the city of Wuxi, in the prosperous Jiangsu province near Shanghai, the head of a medium-sized metals manufacturer—a man named “Zhang’’ who did not want his real name used—walked Newsweek through his company’s recent experience. It had relied throughout the 10 years since 2000 on the state-owned Bank of China for its credit needs. “We built a factory plus two new warehouses, plus they gave us money for working capital,” he says. But starting in late 2011, “our sales started to slow down, and the bank told us they had to cut back on lending—government orders. We were stuck. So I went to a trust company to borrow some money, which we basically used to pay back previous loans from Bank of China. We’ve been doing it ever since as the economy has gotten worse. The interest rate on the [trust] loan is high—14 percent, but I don’t have any choice. The bank is urging us to do it because they want their money back.”

‘Among other things, the subsidized system has led to overcapacity across the manufacturing spectrum in China’s economy. That in turn increases deflationary pressure, as too few companies have the pricing power to increase profits. Banks tend to lend money almost unthinkingly to favored local employers—often state-owned themselves, usually big employers in any case, with close ties to local party officials. Since local party officials were usually evaluated by the growth in jobs created in their own districts, all the incentives were aligned in one direction: more. More investment, more factories, more jobs—and more debt.’

Comment by goedeck
2014-11-27 10:18:09

I’m trying to add to my humble cash pile, in anticipation of being able to buy high-markup, quality goods at deep discounts. I remember years ago an episode of MTV Cribs where Moby, the electronic music star, is showing this huge boardroom table in his house that he was originally $40,000 and, after the dot com bubble he said he bought it for $4000.

Myself, I’d like to own a nice espresso machine :)

Comment by Housing Analyst
2014-11-27 10:51:37

There is a monstrous financial tsunami building. Like a tidal tsunami, you don’t see it but develops more and more energy…

So it is with a financial tsunami.

Comment by oxide
2014-11-27 20:09:20

I saw the $40 billion Uber too. Are people really this dumb? The old dot com isn’t even 15 years old yet and already everyone is back at it. Maybe Uber HQ can move into one of those fancy glass office buildings that were commissioned by the original dot coms just before they went tits up.

I’m going to watch consumer staples. If they crash in sympathy with Uber and the rest, it sounds like a good buy. People always gonna need Kleenex and contact lens fluid and Saran Wrap.

Comment by AmazingRuss
2014-11-27 14:32:34

I just jumped from one big tech company in SF that has been losing money at a staggering pace ever since the staggeringly large IPO, despite taking in staggering amounts, no doubt due to staggering sums being spent on promotion. Billions have simply vanished.

I witnessed various C-Level dog and pony presentations that drove home very clearly that these overpaid charlatans knew NOTHING about what really drives their industry.

It came to me that these people were basically using my skills as a cover to loot the pension funds of people that are denied info to make informed decisions.

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Comment by Jingle Male
2014-11-27 17:24:03

Under what metric is CA the poorest state in the nation? You must be referring to housing affordability or something. Below is the list of the top 10 and bottom 10 for income:

The Poorest States in America
10. Oklahoma
Median household income: $45,690
9. Tennessee
Median household income: $44,297
8. Louisiana
Median household income: $44,164
7. South Carolina
Median household income: $44,163
6. New Mexico
Median household income: $43,872
5. Kentucky
Median household income: $43,399
4. Alabama
Median household income: $42,849
3. West Virginia
Median household income: $41,253
2. Arkansas
Median household income: $40,511
1. Mississippi
Median household income: $37,963

The Richest States in America
10. California
Median household income: $60,190
9. Minnesota
Median household income: $60,702
8. Virginia
Median household income: $62,666
7. New Hampshire
Median household income: $64,230
6. Massachusetts
Median household income: $66,768
5. Connecticut
Median household income: $67,098
4. Hawaii
Median household income: $68,020
3. New Jersey
Median household income: $70,165
2. Alaska
Median household income: $72,237
1. Maryland
Median household income: $72,483

Comment by Housing Analyst
2014-11-27 18:43:42

Under every metric measured Jingle_Fraud. When will you ever substantiate your wild claims?

“California Most Impoverish State In The US”

Stick with the data Jingle_Fraud.

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Comment by Blue Skye
2014-11-27 19:19:49

You can answer this question a hundred times, and yet it will be asked again.

Comment by Housing Analyst
2014-11-27 19:28:06

And we’ll be right here to answer it…… a hundred times.

Comment by Jingle Male
2014-11-28 01:59:54

You don’t make any sense HA. Your own post only shows one metric and it shows lots of states have more poverty than CA.

Comment by Housing Analyst
2014-11-28 06:31:36

By using your own definition of poverty, CA is the most impoverished Jingle_Fraud.

*READ* the data.

Comment by Professor Bear
2014-11-27 17:54:58

I’ve noticed a tendency by Fed leadership to openly discuss phenomena in which they play an active role as though it is due to “market forces” or perhaps the invisible hand of God.

Comment by Whac-A-Bubble™
2014-11-27 22:46:37

We regularly ran a workshop deconstructing newspaper house price stories as a way to make people more critical of data and more aware of the interests lying behind such stories.

Fixed it.

Comment by Whac-A-Bubble™
2014-11-27 04:27:30

Is it safe to say that a full decade after the Housing Bubble gained wide notoriety, the U.S. housing market once again finds itself sliding down the slope of hope?

Comment by Jingle Male
2014-11-27 05:24:24

Or perhaps just as importantly…many markets around the world which dodged the abyss 10 years ago…..our now being sucked into a vortex?

Comment by Housing Analyst
2014-11-27 05:11:49

New data out yesterday to October 2014.

Median Rental Rate Falls 7% YoY Nationally

Comment by Jingle Male
2014-11-27 05:21:21

The fact you came along 10-years ago is not lost on me. You didn’t pull my bacon from the fire….you kept me from putting there in the first place! Happy Thanksgiving!

Comment by Housing Analyst
2014-11-27 05:23:11

And you still committed financial suicide Jingle_Fraud.

Comment by Jingle Male
2014-11-27 07:07:53

So funny, ’cause you don’t know Jingle…..or Jack for that matter! HA!

Comment by Housing Analyst
2014-11-27 08:36:55

And those $90k water meters Jingle_Fraud? Tell us about these.

You’re a contractor after all.

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Comment by Jingle Male
2014-11-28 07:27:25

See, you don’t know Jack.

Comment by Housing Analyst
2014-11-28 07:47:58

Then tell us Jingle_Fraud. What’s the problem?

Comment by Housing Analyst
2014-11-27 05:21:37

Bend, OR Housing Demand Craters 21% YoY; Excess Empty Inventory Balloons

Comment by goon squad
2014-11-27 05:41:16

“this blog is nearing its tenth year anniversary”

Ten years ago I was slinging HELOCs for TARP Bank, my loving contribution to the bubble v.1.0

Comment by Whac-A-Bubble™
2014-11-27 07:11:50

Can’t believe that we are still watching the bubble saga unfold ten years after it was common knowledge. Many predicted the bubble would be long over by now. A number of prolific former posters were outlived by the bubble (RIP).

Comment by Jingle Male
2014-11-27 17:41:25

Business Week, December 25th, 2006 issue, page 114.

Business week predicts several markets will not achieve the 2005 prices for another “15 years or more”.

2021. Another 7 years…….

Comment by Neuromance
2014-11-27 18:32:45

House of cards
In many countries the stockmarket bubble has been replaced by a property-price bubble. Sooner or later it will burst, says Pam Woodall, our economics editor
May 29th 2003

“BUYING property is by far the safest investment you can make. House prices will never fall like share prices.” This is the advice offered by countless estate agents around the globe. In the absence of attractive investment opportunities elsewhere, home buyers have needed little encouragement: from London to Madrid and from Washington to Sydney, rising house prices have been the hot topic of conversation at dinner parties. Over the past seven years, house prices in many countries have risen at their fastest rate ever in real terms. And now institutional investors are also eagerly shifting money from equities into commercial property. Many property analysts scoff at the suggestion that another bubble is in the making. House prices may have fallen after previous booms, but “this time is different”, they insist. That is precisely what equity analysts said when share prices soared in the late 1990s. They were proved wrong. Will the property experts suffer the same fate?

Comment by Jingle Male
2014-11-27 20:46:06

“….shifting money from equities into commercial property…”

Commercial property dropped like a rock starting in 2009 to 2012. 30-40% reductions or more. It is still digging out, especially office.

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Comment by Prime_Is_Contained
2014-11-28 12:09:25

Can’t believe that we are still watching the bubble saga unfold ten years after it was common knowledge.

I would argue that it was not common knowledge in 2004; it was more like 2007 that the notion of the existence of a bubble slowly entered common consciousness. And the meltdown of 2008 solidified it.

We’re probably four years away from “ten years after it was common knowledge”.

Comment by Blue Skye
2014-11-27 06:15:11

Thanks for a seat in the bleachers for this time Ben.

Comment by scdave
2014-11-27 07:10:55

Yes…Thanks Ben…Amazing how time marches on so fast…Happy Thanksgiving everyone….

Comment by Shillow
2014-11-27 07:16:59

I am thankful for Ben Jones and his blog. Being close to the tenth anniversary, I am going to try to go back and see if I can find when my first post was. At least by 06 I think. Now, what was my name back then ….

I invite others to post the date of their first post also.

Comment by Whac-A-Bubble™
2014-11-27 07:36:05

2005 (either Get Stucco or Professor Bear)

Comment by scdave
2014-11-27 07:49:15

I believe early 2005 for me also…scdave…

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Comment by Ibbots
2014-11-27 07:57:21

Ibbots, always Ibbots, 2005 ish.

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Comment by Shillow
2014-11-27 08:18:53

Earliest I can find for me is Feb 2009, I need to think of some older names.

Comment by iftheshoefits
2014-11-27 10:17:26

I started following in Sept 2006… 1st posting wasn’t ’til some time in spring 2007 I’m pretty sure. Only name I’ve ever used.

Comment by Ol'Bubba
2014-11-27 13:08:53

I first posted sometime in 2005. I’ve kept the same handle, Ol’Bubba, continuously during the past 10 years.

Comment by Jingle Male
2014-11-27 20:31:34

May 2006, Jingle Male

2008, some posts as Paladin

What ever happened to aladinsane and txchick? Anyone know?

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Comment by Housing Analyst
2014-11-27 20:40:14

uh huh riiiiiight Jingle_Fraud.

Comment by Jingle Male
2014-11-28 07:40:54

HA, Ha, ha, hahahaha….you are a riot. What do you want me to say?

Go ask Ben. He knows the two names I have posted under. Jingle Male and Paladin.

Comment by Housing Analyst
2014-11-28 07:46:44

He’s got nothing to do with it Jingle_Fraud.

Comment by Bluto
2014-11-28 01:29:41

I was curious so I used Google search, my earliest post that I could find was in 2008 as Boethius…but have been following the HBB longer, it prompted me to sell my house in early 2007 and had been reading the blog for a year or two at that time IIRC, can’t recall if I posted back then.
At any rate, thanks very much for the blog, have learned a LOT…

Comment by Muggy
2014-11-27 12:15:54

Thanks, Ben.

Comment by Housing Analyst
2014-11-27 08:35:16

California Housing Demand Craters 14% YoY; Inventory Balloons As Prices Fall

Comment by Housing Analyst
Comment by Housing Analyst
2014-11-27 08:52:59
Comment by Dave Kranzler
2014-11-27 14:03:00
Comment by Neuromance
2014-11-27 18:35:02

Thanks Ben. And thanks to those posters who have submitted thought-provoking information.

Comment by Whac-A-Bubble™
2014-11-27 23:39:17

Speaking of deflation, oil prices just collapsed BIG TIME.

Look forward to discussing the implications with you all tomorrow.

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