‘Spring Selling Season Ended Without Ever Starting’
Some quotes from the Reuters housing summit. “A potential housing bubble and rising inflation are the two biggest threats to the U.S. economy, the head of General Electric Co.’s vast real estate operations said on Tuesday. Excessive interest rate hikes by the Federal Reserve also pose a danger to an economy that’s currently growing well, Michael Pralle, CEO of GE Real Estate, said.”
“‘If you have a significant value decline in major markets like New York, Boston and San Francisco, that could significantly impair confidence in the economy,’ Pralle said, adding that he did not think there was a national housing bubble.”
“U.S. home builders are adding incentives to lure buyers but are keeping prices steady, real estate executives said this week. ‘In the latter part of 2005 and 2006, we’re learning how to creatively lower prices in those communities that are having a tougher time,’ said Robert Toll, CEO of Toll Brothers Inc. ‘Incentives are all over the place,’ he said.”
“After years of quick and easy sales, a slowdown in the U.S. housing market has home building executives reconsidering their advertising plans. ‘When times are very good, you tend not to put as much effort into advertising and you just trust that it’s working,’ Ian McCarthy, CEO of Beazer Homes. ‘When times are getting a little tougher, as they are today, you put more effort into it,’ he added.”
“Cancellation rates among U.S. home buyers are running above last quarter’s levels as the housing market slows, the chief executive of Toll Brothers Inc. said on Tuesday. ‘I think our cancellations are running higher than on the last call,’ Robert Toll said at the Reuters Real Estate Summit in New York. Toll cited a perception among buyers, fueled partly by media coverage of the housing market, that homes are a depreciating asset.”
And MarketWatch reports on a sector downgrade. “Banc of America Securities analyst Daniel Oppenheim on Wednesday lowered his profit estimates on several home builders with a June survey of real estate agents pointing to further weakness in the housing market. The spring selling season ‘ended without ever starting,’ he said.”
a “silent spring” in sonoma county,this year.i saw in the sf chronicle that there were 165 major real estate projects in oakland ca this year,many of them condo’s,does anyone know who the builders and lenders are? talk about risky business…..maybe the city can buy it for a dime on the dollar as low cost housing or turn it all into section 8 housing.
Affordable Oakland, CA housing for everyone!
“Excessive interest rate hikes by the Federal Reserve also pose a danger to an economy”
WTF? Where were these guys when the Fed dropped rates to 1%?
Where was the fretting and indignation then? How come no one complained when all the “free” money was consumed as TVs, Cars & Vacations?
Now that the Fed is raising, suddenly it is excessive?
I agree CentralBanker, why didn’t they complain when the fed dropped rates?
Excessive? We’re not even back to historical! Sheesh. Way to divert the blame.
Neil
It’s simple - they weren’t concerned then because decreasing rates made them money. They don’t give a sh-t about the economy - they care only about their wallets.
There are a lot of seniors in this Country who welcome the interest hikes. Now they have some extra money to draw on from their saving CD’s. Maybe they can go and buy meat twice a week now.
“Realtors don’t care about old people.”
That is probably the most powerful meme the housing depreciating camp has.
Keep up the postings!
Yes. Add to that list most wage earners, who have not seen their salaries go up as fast as all the “off-the-radar” (but very real) inflation. Plus anyone along both coasts who has been priced out of the housing market. In CA, that’s a mere 90% or so of the population.
Hell, I’m not a senior but I’m still relying on the proceeds of a Rental property sale to supplement my income via interest income. Growing wages in America is a cruel joke.
WTF? Where were these guys when the Fed dropped rates to 1%?
_______________________________
AMEN!!
I know where they were - cashing in on the backs of the sheeple!
Most people can be expected to play by the rules even when there are no referees to be seen. Thats because most of us have empathy and understand that rules, in the main, are made for protection of the “commonwealth”. Sociopaths may heed the presence of the referees but do not feel compelled to follow the rules. Draw your own conclusions….
Personally, I was sad to see the last recession end, and am looking forward to the next one.
Recessions are actully healthy and necessary for the overall good of the whole economic system (at least the way this one is set up).
All natural systems have built-in feedbacks that prevent the sort of gross imbalances that have recently become all too common in our economic system.
Michael Pralle, CEO of GE Real Estate, said:
1. “A potential housing bubble and rising inflation are the two biggest threats to the U.S. economy.”
2. “Excessive interest rate hikes by the Federal Reserve also pose a danger to an economy that’s currently growing well.”
3. “If you have a significant value decline in major markets like New York, Boston and San Francisco, that could significantly impair confidence in the economy.”
Are any of these statements at all consistent? How does someone like this get to be chairman of GE? Boy, talk about somebody who wants it all. Well, I guess over the past few years energy, finance, and real estate HAVE had it all, so maybe he was the perfect man for the job. Wonder if he is going to cry himself to sleep if he doesn’t get his way?
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Toll cited a perception among buyers, fueled partly by media coverage of the housing market, that homes are a depreciating asset.”
More like a depreciating liability!
“Toll cited a perception among buyers, fueled partly by media coverage of the housing market, that homes are a depreciating asset.”
Comments like these are simply ridiculous. By and large, the media is still in the housing bull’s corner. Most of what comes through the presses or over the air-waves is still pushing positive spin. The media is justr starting to cover a little bit of what’s going on, which is FACTUAL and shouls have been covered a long time ago, and now it’s all there fault. Instead of calling this thing what it is, the biggest bubble in history, we’re going to get this blame thing for a while,I’m guessing. It’s the media, it’s the Fed, it’s those pesky bloggers, ect.
These titans of industry are amazing. When things are going well for them, they start crying. Hank Greenberg was tough on everyone but when Spitzer got tough on him, Hank said it is not fair. Well, tough sh*t. If you are going to give a beating, you should take a beating.
These titans of industry are amazing. When things are going well for them, they start crying. Hank Greenberg of AIG Insurance was tough on everyone but when Spitzer got tough on him, Hank said it is not fair. Well, tough sh*t. If you are going to give a beating, you should take a beating. Those RE guys are the same.
When they are making millions, everything is fine. Once things go against them, they start crying.
Whoops, meant “When things are not going well for them”
Yes, everyone else is to blame not the greed of Toll and other HB’s doubling the price of their homes over the last couple years! I doubt the cost to build these homes have doubled/tripled! Maybe if they had kept their greed at bay, they wouldn’t be in this mess. They helped fuel the bubble! Not to mention selling to people they knew had no intention of ever living in the home! I saw the writing on the wall, how could they who make a living at it not see it!
I’d say the opposite is true, if they had raised their prices faster and higher, the specuvestors wouldn’t have see a sure-thing flip. However, I have seen them bragging about how they were slow to roll out inventory so the bubble could keep going — that’s why new builders has to rise to fill out demand. If only all cartels could be broken so easily.
Yes, indeed! In fact, I think Congress needs to take a very close look at the role Ben Jones may have played in eroding the equity value that potentially millions of Americans were counting on as a fall back for their retirement.
What’s that? They’ve already spent their retirement? Oh… well never mind then.
I heard this Ben Jones is actually funded by other housing depreciation conspirators intent on destroying the fast growing gains (and thus the retirement benefits) offered by this extremely safe investment that “never goes down.”
Should there actually be, for the first time in history I might add, a NATIONWIDE decrease in real estate prices the evidence that this cartel is to blame will be clear. We must get the word out about this deliberate and misleading campaign that could be so hazardous to our future paychecks.
And should the worst happen we must inform the American public that this cartel, indeed these traitors to the American way of life, are the ones who should be punished and that we innocent Realtors® tried our best to protect our clients from these vultures and their naysaying negativity.
Sincerely,
Blanche Evans
I just have to add that I heard a reporter on the 6:30am news use the phrase “contradicting the naysayer’s negativity” as a teaser for some housing story that showed some type of “housing sales increase.” I don’t know what they were reporting on as I had to shower but I assume it’s some NAR or other trumped up or false comparison number that will probably be “revised.”
That damn liberal media run by billion dollar corporations.
Beautiful comment SF Mechanist
Toll cited a perception among buyers, fueled partly by media coverage of the housing market, that homes are a depreciating asset. … we’re learning how to creatively lower prices in those communities that are having a tougher time,’ said Robert Toll, CEO of Toll Brothers Inc. ‘Incentives are all over the place,’ he said.
If homes are appreciating assets maybe they should hold on to all the houses that they are building instead of trying to sell them with “incentives”! I don’t know what he’s talking about… he sounds really confused about what he’s building…
Not to mention that homes ARE a depreciating asset. It’s the land beneath them that generally appreciates (albeit can fluctuate wildly).
As a real estate professional, Toll should know this–a home is simply something to build in order to sell land–which ultimately is the underpinning for the value.
Pralle said, adding that he did not think there was a national housing bubble
Then in this case he should have no concern about a bursting buuble when the interest rate returns to historical standard.
No national bubble. Simply local bubbles in nearly every market.
I’m waiting for them to call it a “finance bubble” once the housing bubble can no longer be denied.
Call it “national the housing bubble foam”.
CNBC is really pushing the “Florida is completely overbuilt” meme today. Too bad they got Diana Olick doing it instead of someone prettier. Meanwhile, they stuck Melissa Lee in a gold mine with overalls and a hard hat.
CNBC has been doing something on the housing bubble every day for at least the past week. Makes me wonder if we’re done with easy short money until the next Q when the “surprising rise in foreclosures” starts becoming the topic of the day.
‘I think our cancellations are running higher than on the last call,’ said Tool.
I think! Like he doesn’t have the number burned in his brain.
What was Tool’s cancellation rate for Q1? Over 30% wasn’t it?
CNBC just ran a really negative article on the Florida housing market. They even said that banks are sueing the appraisers. Some expert on their said he expects a 20 to 30% decline in the florida market! The said that alot of the price drop will be due to overbuilding. I think there is alot of overbuilding here in California and we should come way down as well. Oh yeah, the reporter for CNBC also said “like we have been telling you all along, the higher your market rose, the harder it’s going to fall”
“banks are sueing the appraisers”
What? No honor among thieves? Its about to turn into every man for himself situation pretty soon (bankers, brokers, agents, buyers, builders, appraisers, etc. pointing the finger at each other) and when that happens we are going to have a very messy affair.
Lawyers for Everyone!!!!
Oh wow, about 500,000 lawyers just went, “Talk dirty to me some more!”
I’m sure Rainman could do a better job than this, but to the tune of “Sleigh Ride”:
Just hear that money jingling,
ring ting tingling too…
Come on, it’s lovely weather
for a price ride together with you…
Outside the prices falling
and sheriff’s calling, “yoo hoo”,
Come on, it’s lovely weather
for a price ride together with you.
Lawyer up, Lawyer up, Lawyer up,
let’s go, Let’s look at the show,
We’re riding in a wonderland of blow.
Lawyer up, Lawyer up, Lawyer up,
it’s sad, it’s gonna be bad,
We’re sliding along with a song
of a bank-rup-t-cy stand.
Our noses nice and rosy
and badly hosey are we
Bank rates are up together
with a busted HELOC or three..
Pack up the Hummer for one
last summer at ease,
We’ll sue the broker, builder,
and that dream killer, you’ll see…
Lawyer up, Lawyer up, Lawyer up,
let’s go, let’s look at the show,
We’re riding in a wonderland of blow.
Lawyer up, Lawyer up, Lawyer up,
it’s sad, it’s gonna be bad,
We’re sliding along with a song
of a bank-rup-t-cy stand.
remember these gems from mr. toll?
“New York and Washington and Phoenix and San Fran and L.A. and Las Vegas and Naples and Boca” - were about to slow down painfully. “Investors will get creamed, and they’ll get out of the deals,” he said, noting that a subsequent recovery would take anywhere from 3 to 10 months. But beyond that - a catastrophic crash? “Why can’t real estate just have a boom like every other industry?” Toll asked in complaint. “Why do we have to have a bubble and then a pop?”
…
The company expects to grow by 20 percent for the next two years and then will strive for 15 percent annually after that. Those estimates suggest that the company’s expected production of around 8,600 houses this year will expand to at least 15,000 houses by 2010. Individual Toll developments now range in size from a few dozen to 3,000 houses.
…
In the past couple of years, Toll and his deputies have begun analyzing European housing data to see if they hold any lessons for a maturing American housing market. Toll has been talking up the research to stock analysts and the financial press for the past year. His conclusions carry a whiff of new-paradigm thinking, but he nevertheless seems convinced that Europe’s present-day reality is America’s destiny. I asked Toll what our children - my kids are both under 8, I told him - would be paying when they’re ready to buy. “They’re going to live with us until they’re 40,” Toll said matter-of-factly. “And when they have their second kid, then we’ll finally kick them out and make them pay for the house that we paid for. And that house will cost them 45 to 50 percent of their income.”
I grew alarmed. Was he kidding? He assured me he was not. “It’s all just logic,” Toll said. “In Britain you pay seven times your annual income for a home; in the U.S. you pay three and a half.” The British get 330 square feet, per person, in their homes; in the U.S., we get 750 square feet. Not only does Toll say he believes the next generation of buyers will be paying twice as much of their annual incomes; in terms of space, he also seems to think they’re going to get only half as much. “And that average, million-dollar insane home in the burbs? It’s going to be $4 million.”
Well Britain crams about 70 million people, about a quarter the population of the US, into a space smaller than Oregon. With lots of farms and open space, even so. People pay up more for housing because it is scarce, there is little new development. In the US, housing is being built at a rate that far exceeds the rate of growth in households, on cheap and plentiful land. He is, shall we say, talking his position.
That is an extremely pertinent point. How Mr. Toll manages to ignore this crucial logistical fact is simply amazing.
Plus Britan immigrants are not getting jobs cleaing toilets. They have money.
Toll is a monopolist, an old-timer robber barron. His idea of business is to control supply and ransom the public.
Yes, as they say “We make money the old fashion way.”
When I bought in the UK in 1995, I paid just under 3.5x income for a nice 1 bed apartment in a very good location - and that was with my starting salary just out of university which was around the national average. If I’d been prepared to move a bit further out, I could have got a family home for not much more.
Forwardwind to 2003 - I’ve gone through the largest salary raises in % terms I’m likely to see in my life, and if I bought that apartment I’d be just under 3x salary since its identical neighbour then sold for 4x what I paid 8 years earlier.
The graph on this page shows you house prices in the UK
http://www.housepricecrash.co.uk/
That peak you see around 1990 led to a nasty UK recession and a lot of people trapped in negative equity until the late 90s.
Britain has gone through the same easy credit fueled house price boom as you’ve seen in the US - imagine the UK to be like California, where equity locusts from a few high priced locations like London have spread across the country and ruined it for everyone, along with people who’ve never strung a budget together getting loans that they’d be laughed at by the bank only 5 years ago.
3.5x has been the typical cost of a UK home, and will be back there in a few short years.
“But beyond that - a catastrophic crash? “Why can’t real estate just have a boom like every other industry?” Toll asked in complaint. “Why do we have to have a bubble and then a pop?””
Don’t worry Mr. Toll. Real Estate bubbles never pop. They deflate veeeeerrrrrrrrryyyyyyyy slowly over many, many years. No pops here. Just a long solid hissssssssssssssssssssssssssss.
What does Mr. TOll care about anyone else? He has already made his millions and lives in one of his own mansions. His attitude, “let them eat cake, too.” This is the mentality that is going to destroy the US. You will either be super wealthy or flat broke destitute and the super wealthy will not give a rat’s rear about you the pauper.
More on ARMS and housing (Minyanville)
How will we know when we have reached the tipping point? I think THE tell will be with the banks. Going all the way back to last May, banks have been warned about the low quality of the real estate loans they were making. I actually have the document that warned them to knock it off.
Well, if it really becomes a problem - mind you, it could be a problem WITHOUT ARM’s (that just exacerbates the problem) - how will we know? I say we will know if the BKX busts support. Who will write off all these bad loans? You got it, banks, finance companies, GSE’s etc. It would also be accompanied by a dramatic spread widening in corporate bonds that we are already seeing. Succo and I wrote the other day about volatility just beginning to increase and spreads just beginning to widen. They haven’t gotten to the high grade bonds, but that always comes last (my note: just like high grade residential RE). But we are seeing the “shot across the bow” in my book. And yes, it could turn into a rout.
I have used the D word at my dinner table but never in print. It is something I make my family aware of despite the low probability. Definitely not advice there, but it is why we continue to own ZERO corporates, which has been the key to outperformance.
(This is Minyanville’s bond guru, Bennett Sedacca - comment in parens is mine)
I recently re-structured all my investments. Worst case is I lose 6 months of gains from the stock market. I think I can live with that. I would think within that time the trend will emerge.
hey, what do you guys think of the Reichenstein and Rich model?
Baylor pair’s model says returns likely to be ‘well below average’
The market will only underperform if you’re long
I’m looking for significant outperformance.
txchick57,
what vehicles and what time frame are you using on the short side? Thanks.
I think the biggest fact / mistake our “stock buyers” have been making is this:
Followingr the 3 year decline from 2000 to 2002 lows, that left the NASDAQ wiped out 75-80% of its total makret cap.
The DJI fell over 50%.
Everyone feels that with the last 3 years of rally every thing is all still good! Unless you a Canadian, Austrailian, or hold Euro’s…the DJI looks like the NASDAQ - where is the bouince?
BUT > If the Fed had not orchestrated a 35% USD (dollar) devaluation to PUMP the stocks back up. They gave us the Real estate bubble, a commodity boom, but stocks couldn’t recover!
Now faced with another devaluation or selling the living s — out of the global stock markets…the big guys have made their choice…
Let’s try to keep the “Fiat currency” thing going a bit longer..
another gem, mark it down.
“A housing-driven recession is “mathematically impossible,” said Wachovia Bank senior economist Mark Vitner, because housing is derived from the rest of the economy and construction is actually a smaller portion of the U.S. economy than during the housing boom of the late 1970s. Even if home values soften in expensive markets, many homeowners are still sitting on substantial home equity cushions.”
Chances rise for housing-driven recession
Someone should send this to Lansner. He keeps all the stats on jobs, and they seem to be in direct contradiction to Wachovia talking its book.
“A housing-driven recession is a “mathematically circumstantiated given,” said Wachovia Bank senior economist Mark Vitner, because housing drives the rest of the economy “”
Fixed that for you Mark. So many bad economists, so little time.
LOL
“He believes the U.S. will barely avoid a recession next year because the housing slowdown is unlikely to be accompanied by a precipitous fall in manufacturing employment as in past recessions, partly because so many manufacturing jobs have been sent overseas.”
Yep. Don’t have to worry about those pesky manufacturing jobs letting us down this time around.
No they are all real estate agents now!! No worry!
This shill has an incredible, almost criminal mental disconnect about housing’s economic impact. Really make one wonder about the job selection process that goes into hiring canards like this?
For those requiring the facts, here’s the bullet points from David Rosenbergs (Merill Lynch) review, “Housing is Dominating Economic Activity”.
http://www.siliconinvestor.com/readmsg.aspx?msgid=21534880
“‘I think our cancellations are running higher than on the last call,’ Robert Toll said”
I kind of think we made a profit last year, but I’ll have to ask my secretary to be sure. This is all so confusing.
Chuckle.
“We’re making houses right? Ok, yeah, I thought so. I was pretty sure on that.”
“The living in kind, right?”
LOL Feeps…
NorCalRay,
You are so right. Most of what passes for business these days, esp. among the titans is a joke. Most of these guys have no ethics or morals, are greedy beyond Midas, and then cry when things get bad. God forbid this country ever go into depression or deep recession. You will see alot of crybabies on the street suing one another and looking to the fed for a bailout. It’s funny how they want help when the bubble bursts, but want no interference from them when the money is rolling in. Hypocrites. However, the sheeple are no better since they want super high over valued stock returns.
Yes, a lot of titans promote performance based compensation for the rank and file. But they then get a load of stock options with no downside and at almost no cost. Buffett has blasted such CEO (Cash Every Outcome) greed in the past. These type of CEO’s have no little or no morals and are the greediest SOB’s around.
“Toll cited a perception among buyers, fueled partly by media coverage of the housing market, that homes are a depreciating asset.”
Everyone seems to love this quote.
My response — homes ARE a depreciating asset. In the long run, average housing prices barely keep up with inflation, even as newer and better housing is continually added into the average. If one does not reinvest in one’s home continually, it loses value. The land does not depreciate (the value of just being there seems to fluctuate wildly) and the building shell depreciates slowly, but everything else wears out and has to be replaced.
There is proof a few doors down, where a 1915-built row-house is being gutted practically down to the bricks and joists. They new owners paid an ungodly amount for a location and a shell, along with a few nice touches (wood moldings, etc.). Everything else had depreciated to zero value, in some cases not for the first time.
LOL, I made the same comment before reading yours.
There is a reason that buildings can be written off over time using depreciation under US Tax Code and land cannot.
Excessive interest rate hikes by the Federal Reserve also pose a danger to an economy that’s currently growing well, Michael Pralle, CEO of GE Real Estate, said.
I hope “gentle” Ben Bernanke rides Mr. Pralle like a Harley on a bad stretch of road.
I don’t remember any time in the past tightening rounds so much bitching and complaining from industry shills and even the pipsqueaks with their adjusting HELOCs. In the past we seemed to recognise we needed a round of higher rates to control inflation and put a lid on the excesses, now we are screaming bloody murder about what are still low rates. Am I wrong ?
They know the popping of the housing bubble means game over and I mean game over for the whole US economic system. If rates go over 6% and stay there then everything goes down and they know it.
Leverage is at inordinate levels as compared to previous tightening cycles. The power of large numbers rears it’s ugly head when the percentages turn against your position. 1% of a trillion is a big bad number even these days.
I agree ! You’d think interest rates were at 10% going to 15% the way people complain ! Anyone remember the 1980s ? This would have been heaven compared to then !
Yes, but going from 10%-12% is not nearly the kind of pain that going from 4% to 6% is. One is a 20% increase in payment, one is a 50% increase, yet the interest rate move is the same.
The Fed’s moves when coming off the low have a much more dramatic effect than when moving rates at higher levels.
I agree. The 4% rate is priced into the comps, and given the prevalence of I/O ARM financing on the extensive margin of affordability in bubble zones, a move from 4% to 6% translates in to a price decline of 33%.
But in the 1980’s not as many people were stretched to the max on the day they closed like they are today.
“But in the 1980’s not as many people were stretched to the max on the day they closed like they are today.”
Tell my in-laws that one. They love to tell the story of their first home purchase in 1956. After arriving at the closing, they realized the closing costs were going to be higher than they had planned for. They went to their new home with $50.00 left in their bank account. Believe me, they’ve done alright for themselves since.
Did they put 0% down and have an ARM?
And $50 is what, $750 now? Not that I’m saying it’s enviable, but they were a lot better off than the vast majority of CA buyers nowadays.
The problem is that their stories and experiences have translated into common knowledge. My in-laws also have the “it always starts out hard…” story. With which I agree… but that then translated into “…so finance your ass off and you’ll be fine.”
This has destroyed the value of the original idea.
People are being taught not to save and gather up assets. Then when deflation hits they will be whipsawed into into selling their assets at low prices and saving… just in time for the powers that be to reflate making their savings worthless.
It is the way of things.
The volume of outstanding debt and the use of leverage at every level of society is much geater today than in 1982.
I remember a lot of whining when Volker tightened the screws way back when. Rates peaked around 17% (that’s one-seven) as I recall.
Now we’re about to go to 5.25% and the sheep are bleating like it’s the end of the world. Maybe they would prefer to wait an hour in line to buy gasoline.
Take a look at what the CPI has been over the last few years if calculated with the pre-Clinton methodology:
http://www.gillespieresearch.com/cgi-bin/bgn
We’ve got plenty of inflation (over 7% currently), but no one believes it because it’s not in the news.
Volcker worked his mojo when linear charts made sense. In 2006 only a log chart gives proper perspective between % and prices. In 2006 6% is the new 17% in terms of debt servicability. That is unless you want utter, total collapse.
Central banking sucks.
Nuevo dollares for everyone!
Slightly off topic, but from Mish’s Blog:
http://globaleconomicanalysis.blogspot.com/
“Yesterday in Foreclosures Rise I was trying to figure out exactly what dollar amount of mortgages would have their rates reset and when. I had two numbers: $1 trillion and $2.5 trillion. Both are correct it turns out. Jack McCabe was kind enough to respond to my question with this breakdown.
2006 - $500 billion adjusts first time
2007 - $1 trillion adjusts first time
2008 - $1 trillion adjusts first time
Total: $2.5 trillion - first time adjustments
Data was from MBA earlier this year.”
There you have it. Didn’t see the $1 Trillion for 2008 before–wow.
* 29% of mortgages assumed in 2005 are now underwater.
* 16% of those with mortgages pay over half of their income on housing, up from 2% five years ago.
* 22% of the $9.3 trillion residential mortgage market is now subprime.
* $2.7 trillion of adjustable-rate mortgages are expected to reset in the next 18 months with payments increasing on average 45%.
from Kevin Duffy’s “Are Mortgage Borrowers Rational?”
Michael Pralle, shows the self righteous arrogance of the new age of Robber Barrons that have suddenly become shining stars of a free enterprise system out of control- I hope in the very near future these predators are swept away.
“now we are screaming bloody murder about what are still low rates. Am I wrong ? ”
I remember the interest cycle of the late 90’s. It didn’t seem to affect housing much at all. Some blame the tightening with bursting the stock market bubble, but how many people take money from the bank so they can buy stocks?
Some overleveraged idiots, but most people use their savings.
MBAA mortgage activity and capital flows:
http://www.xanga.com/russwinter
The Loop of Idiocy
In the old, industrial economy, interest rates were a massive lever with which to accelerate or decelerate the economy. The largest borrowers were companies and industries. They borrowed to build factories and expand businesses. In the past 20 years, we have gone from an industrial economy to a financial economy. One of the biggest, glaring pieces of evidence is that the most profitable sector in the world is now the financials. Today, the most profitable way to make money is through the financial markets. In this financial economy, interest rate manipulation works very differently.
Mortgagees now represent some of the largest borrowers in the world. These are largely financially unsophisticated people. After the dotcom crash and the horrors of global terrorism, Central Banks around the world panicked and flooded the world with liquidity.
They had probably hoped that it would have been absorbed by industry. It was not. The liquidity was absorbed by unsophisticated investors who used it to push up home prices. Paradoxically, even though the loans were getting larger, ever rising prices reduced risk, and therefore lending rates.
To this brew, add two final igredients: crazy Fannie & Freddie and foreign central banks. Who knows what has happened in the bowels of Fannie and Freddie. Their books are so murky people should be concerned. Foreign central banks added their own unique brand of idiocy to the markets by buying up treasuries and depressing yields worldwide.
So here is loop of idiocy:
1. Greenspan and the Fed confused about industrial vs. financial economies.
2. Unsophisticated homebuyers bidding up prices.
3. Mortgage brokers/lenders giving mortgages to anyone.
4. Rising prices allowed even the shakiest buyers to be able to pay back their mortgages.
5. Global interest rates began to drop as a result.
6. Foreign Central Banks & Fannie & Freddie bought up treasuries and mortgage paper with questionable fundamentals. Further depressing yields.
7. Repeat this for a few years.
Now a question for you: how does this loop end?
Will it work in reverse? Will dropping asset prices reduce the ability of shaky borrowers to payback their loans? Will we see a continuing rise of yields as a result? Will this re-inforce the drop?
Financial economy is a nice way to say ponzi scheme. It works until it doesn’t.
In one answer–yes.
People stretched to buy until banks couldn’t create any more exotic products–now the Fed tightens, increasing short term rates (indirectly effecting ARMs as all short term rates move). Enter the new downward cycle.
1. Mortgage rates go up (ARMs and conventional) - been here already
2. Depressing prices - starting
3. Increasing defaults - starting
4. BOTH–Banks tighten mortgage lending AND people’s opinion of ARMs changes (more risky, don’t want them–especially since #2 above is now true) - hasn’t happened en masse yet
5. BOTH following from #4 - Increased lending spreads AND increasing prevalence of more conventional borrowing - not yet, but will happen as defaults rise in 2007-2008.
6. Driving average borrowing rates up (either by choice to go conventional, or necessity with higher spreads)
7. Depressing prices further
An important thing to note–given where we are, this downward cycle can happen, even without the 10-year yield moving up from where it is today.
And also important to note: The 10-year yield can move up even if the Fed pauses, due to the pricing in of a higher inflation premium if the Bernanke regime is perceived as being dovish on inflation.
Agree with that too, in which case the above happens faster/more painfully.
“Their books are so murky people should be concerned.”
Murky is putting this too politely. Fannie Mae has not even produced financials since ???
It is the escence of our “debt” monetary system.
When you boil it all down to the net basics it goes like this!
The FED Government borrows with USTreas. Banksters use this “assets” to lend to you.
You borrow $1,000 dollars and agree to pay $1,000 plus interest.
Where does the interest come from?
The federal government borrows USTreas. Banksters use this asset to lend to your employer to pay your wages.
You take your wages and pay the note plus interest. Total $1,100.
Total money supply drops $1,100.
Ultimately the interest consumes the economy! and money supply!
It is only a matter of when not IF! And has been repeated countless times in the last 300 hundred / 1000 hundred yearss!
Finally, every borrower becomes so weak and precarious {case in point illegal immagrants getting mortgages} and ultimately unable to pay causing each lender to become weak and precarious { over 70% of all loan {bank assets are real estate related}}.
“Toll cited a perception among buyers, fueled partly by media coverage of the housing market, that homes are a depreciating asset.”
Where did this crazy rumor get started? Doesn’t everyone know that homes are the best investment to make if you want to earn more than 10% in tax-free capital gains forever?
(Oh — we started it here!)
The Spring Selling Season has been a mixed bag up here in Seattle. Inventory has been rising since April but median prices keep going up.
What is happening is “The Summer of The Locust”. CA equity locusts are buying up higher end properties and keeping the median prices up. Whereas a lot of lower end properties are having to reduce to sell.
No surprises really, Seattle is lagging CA by about a year. Until the spigot is turned off in CA, locusts will continue to chow down on Seattle.