Ok, most of us on this site believe that the RE market is (WAY) overvalued. We are waiting for a housing correction and are taking prudent financial steps to prepare for that decline.
I sold my vacation home in 2003 (missed the top) and have resisted the mania of buying a larger home (that I really need)in the realization that the RE market was not just appreciating, it's been caught up in a speculation frenzy and a CREDIT bubble. Hopefully, I will be able to buy a new vacation home and a larger main residence at a much better price. I think I am being smart.
Now here is what I worry about. All the speculators and McMansion buyers have been tempting fate and been living in a fantasy land. Living beyond their means with MEWS and believing that their RE investment can never go down. There has been so much bad credit and loans produced that I worry that the RE bubble and the Credit bubble will cause a lot more damage than I originally thought.
Here is my question: The gov't and especially this administration has extolled the virtues of home ownership. Everyone should own a home. It's the American dream and right (obviously that meant that all Americans should own 5,000 sq. ft mansions). All the regulators sat back and allowed no money down loans, ARMS, no income verification, and all the other FRAUD to occur w/o ever questioning the banks. I'm not blaming the gov't entirely, but they usually only act until a crisis already exists.
So, if indeed there is a debt and RE crisis, I don't see how the gov't is going to allow thousands or many millions of families to lose their homes? My fear is that I've tried to be smart, and the gov't is going to wind up bailing out all the idiots who got in over their heads and I'm (taxpayers) going to have to pay for it! I could easily see the gov't saying that the banking industry was at fault for writing these exotic loans, but they can't let them all go bankrupt (always seem to save the auto, airlines, steel industries, etc). I could see a scenario where the gov't would write out 0% interest 30 year loans to people who got a mortgage in the last 5 years. Would/could the U.S. allow so many of it's citizens to be homeless? Many people have no equity in these homes, took out MEWS that with a sharp drop in the home's value would be WAY under water.
Of course I being fiscally responsible get the priviledge of living in my smaller home while I wind up giving my taxes to pay for the moron's mansion. Then who is the real winner?
Excellent question, i'd like to hear the answer...What about those who claim the deflation will make the dollar worthless, and a currency which will be replaced by something with value. Does that mean someone with $1 million in debt doesn't have to worry because the currency will be meaningless in 10 years?
I could see the same thing happening and it would suck since I sold my primary residence near the top of the frenzy in 2005, paid off debt, and am sitting back and waiting.
I think the term is "moral hazard" that results in bad decision making. It shouldn't a probably won't be allowed.
Although the job of "central banker" is more accurately described as "price controller" so anything can happen.
One person's opinion is that if there are mass foreclosures, the feds will relax standards for declaring bankruptcy. This will be relatively inexpensive for the federal govt. It essentially puts the holders of the paper on the hook. Painful, but what else can be done?
I can't see a mass bailout of mortgage loans. That's too much money and we have too many countries left to invade.
John McGann,
I think the Bush administration is keeping the dollar low to try to assist US exporters. I also wonder if the assumption of further devaluation is built into the import/export equation. China in particular may view it as an additional discount on our purchases.
I think the Bush administration is keeping the dollar low to try to assist US exporters.
I don't think they're doing anything to keep the dollar low, but I don't think they mind it being there.
Also, the dollar is not that low when compared to historical standards. It only looks really low if you compared it to the dollar bubble of the late 1990s.
The reason you didn't buy the bigger home is you weren't greedy. I rent and will never be able own but houses will soon be Buy 1 and get the 2nd one free.
'm in the trades and saw this coming once again 2 years ago.
jo6pac
What about those who claim the deflation will make the dollar worthless
Inflation makes the dollar worthless, not deflation. Right idea wrong word.
:::
On the bit about gov't bailing out individual homeowners - fat chance.
What the gov't might try to do is save the financial system - the banks & markets - and let the individual owners be damned.
And there is method to this madness... if they try to 'save the individual' the whole system explodes but later... bad debt on top of bad debt it eventually fails. Once that happens the individuals fail too (no more system to providing ongoing credit).
If they save 'the system' by injecting liquidity & helicopter money so healthier companies buy bad loans from failing companies... then foreclose on those holding the loans to recover what they can... lotsa individuals lose their homes but there is still money in the system to lend out so they can 'buy' a new one... qualified at a much tighter standard & for smaller amounts... something they can manage.
Think of it as financial recycling. We all love to recycle.
Those mini-Mcmansions would likely decline in price as there is less money chasing the same number of homes. So if you are one of the folks with cash - or solid equity - they will be less expensive.
If you are responsible you don't lose as much as if you were irresponsible.
Meanwhile the bankers all sigh in relief.
That is one scenario - doubt it will happen exactly - but I would be shocked if the theme isn't followed some how or ad libed...
Save system, screw some individuals, redeal the deck... it's the American way.
Rm:
not really. This particuliar RE bubble will unwind over a period of years and I am sure the gov't will provide some sort of cure for banks but J6P will see his equity decline towards historical mean, become less of a consumer and wish he had sold in june of 05!.
When deflation comes cash is the king. The cost of life will go down and whatever cash reserve you have will suddently become very valuable.
Gowt will not bail out people in oversized homes and with second properties. They will force those people to relocate and squeeze before they help them. They will subsidize rents in bad neighborhoods. This is not something you would benefit from anyway.
Expect very affordable housing 4-5 years from now. If you have cash for 10% downpayment with no piggybacks, because those tricks will be gone, you will get a dream home.
The only way to rescue homeowners who are too far in debt is with runaway inflation. That would shrink the real size of the debt to a more manageable level. But unless the fed is willing to drop dollars from helicopters...
The elites get to stay elites, the elites want to bes get whacked, the prudent don't worry, the crazy in debt get hurt real bad, but they will live through it, speculators take a bath.
Then we start over with new winners.
A complete system melt down would be real bad, Your 401K or mortgage payment would be the last thing to worry about.
We know several things: RE is going to go down hard, The current business cycle is near a top if not there, We know the international flow of cheap money is going to end.
We know the elites have a wonderful instinct for survival. All we have to do is put it together.
I've lived in Pittsburgh (Go Steelers!) all my life. I know we have foreclosure problems here, but I'd have made Coast the frontrunner for first closure honors.
This is how the federal government will save the RE market:
They will simply buy up the surplus inventory from the market. I'm not sure about the amount of houses that have been overbuilt over the past years, let it be 1 mio homes. A federal housing admin company could buy 1 mio homes for current market value. If it was debt financed at 4.5% plus 2% upkeep yearly it would be a piece of cake for the federal budget: 1 mio units times 500,000$ market value a piece times 6.5% should be around 32.5 billion $ yearly. Not a big deal. In the following years these homes could be sold back slowly into a market of still raising population/household units. 1mio units suddenly coming onto the RE market would kill and significantly deflate the market. If the surplus will come in small doses over years and years, it would keep up the values in nominal amounts. At the same time loans would not go sour in such great numbers as spending and emplyment could keep up much better, too.
There will be no significant price deflation in the RE market, nor will there be a significant recession. In the future, economic growth will be somewhat reduced as the demand for new homes will be diminished by the recycled federal homes.
You shall not press down upon the brow of labor this cross of thorns. You shall not crucify mankind upon a cross of gold.
--William Jennings Bryan (1896)
The sweet irony is that cyanide gold extraction would later lead to gold extraction induced inflation. haha.
I would expect to see a visible "inflationist" constituency soon led by their fearless leader Barney Frank and Mr. Populist himself, Lou Dobbs.
I also expect something similar to the scenario dryfly described. The rich just got richer and the poor are soon to become much poorer. But hey, Average Joe will be making more per hour and isn't that how this whole game works anyways?
People might want to read Money Mischief by Friedman for some examples on how they might be able to fill the inflation gap.
I vote for clean, renewable energy. Maybe the government can print up money and pay babyboomers lots of dough to pedal electricity generating exercise bikes? It would be nice to get something out of them other than a legacy of debt.
Vote Dr Strangemoney 2008!
Free Lunch Party
Cheating Risk Since 1913
Would/could the U.S. allow so many of it's citizens to be homeless?
Why would people become homeless? Those houses are still going to be standing. What will happen is that all those foreclosed houses will be sold to somebody, who will end up renting them out to the same people who used to "own" them. All at market prices that reflect reality, not fantasy.
AZ Joe, you really think that the USG is going to buy SFH en masse to prop up the market? Not even FDR tried to do anything so grandiose. Not gonna happen.
I agree with a previous poster, what is most likely is a relaxation in the bankruptcy laws (proved Bush goes along) which would let FB's start with a clean slate. It would require no funding, and let the debt holders - mostly the Chinese and hedge funds - take it in the shorts, which would be politically popular. And very just - they are the ones who enabled this idiocy in the first place.
They will simply buy up the surplus inventory from the market.
Get real. If the government bought a million homes, the HBs would just construct another million more.
IMO dryfly has it right.
p.s.: Even a significantly relaxed BK is out of the question. Their first worry is the banks, not the borrowers. Also, way too much MBS held by banks & pension funds.
Interesting how the tone has changed from recession/no recession to how to deal with a major financial collapse. I think many on this blog have a suspicion that there is no easy way out of our debt predicament.
Don't be silly boys. The US Govt. won't be buying distressed houses. They didn't back in the last BIG housing crunch after the Great Depression, why would they start now? It's too complicated in any case, the regulatory overhead for such a move (forget the political implications) make that a ridiculous scenario.
Hm, so what did they do back then, I wonder? Simple, the Fed bought up the yield curve. Easy enough, and they already have the power. They pegged the long bond at 2.5% or so. Well all sorts of mortgage rates are based off of those long rates (the 10 yr which fell into line), so that would provide a nice low yield to refi to.
If that seems too crazy, consider that the Fed threatened to do so back in 2002 during the dump. Turned out they didn't have to, the market did a lot of it for them. They found out that all they had to do was to threaten, and guess what all those savvy money folk dog piled on those bonds, largely doing the job for them.
Almost effortless bailout, and the first move they'll make. If things continue into a doomsday scenario (which I don't believe), such as massive layoffs, then it'll be far too late for such draconian measures. It would take a Great Society program Mark II.
So I would say "run away, run away" from a subdivision bought up and managed at the federal level.
It will never happen.
Uncle Sam might authorize an equivalent of the RTC to facilitate 'repurchase & resale' of foreclosed properties... just to get the liquidity reflowing... what's left of it anyway.
In effect speed up the liquidation & market clearing to get the properties back in people's hands - but at a valuation levels & terms that is sustainable.
But Uncle Sam is NOT going to directly buy suburban homes en masse. That might live in the minds of hard core wingnuts who fear a 'liberal commie take over of housing... right after medicine and energy'...
But it isn't going to happen. Gov't may contract to clean up the mess but that is as far as it would go.
"Allegheny Valley has agreed to assume approximately $12.0 million of insured deposits of the failed bank. At the time of closure, Metropolitan Savings had approximately $1.2 million in deposits in 70 accounts that potentially exceed the federal deposit insurance limit."
The above from the press release you cited. We tend to be forgetful of the limits on the insurance. I wonder how well those 70 accounts are now sleeping.
"
So after accounting for consumer price inflation, the average production worker takes home about $10 more per week than he or she did in the year 2000. It's no wonder that lots of people feel that economic growth is passing them by...
It is the voting power of millions of over indebted voters. Thus it is possible to lower rates to 1% (we saw in 2003) or even to 0.5% for mortgages.
Don't worry, just buy gold when interest rates go under 3%!
I could actually imagine the US gov to buy some equity through gov agencies. They won't allow the Asians to buy boing, exxon.. which they easily could.
...so that would provide a nice low yield to refi to.
BZZZZ, WRONG ANSWER -- TRY AGAIN!
Most of the FBs didn't put any money down and have been making either I/O or NegAm payments. Can't refi when you don't have equity or cash to bring to the table.
"mostly the Chinese and hedge funds - take it in the shorts, which would be politically popular. And very just - they are the ones who enabled this idiocy in the first place.
yogurt"
you forget one thing, the government wont save the people, cause it needs foreign money for its own spending. because if the world realize that you cant make safe bussiness in us, the capital will move on to somewhere else
FredW, The only thing interesting is the delusional state of of some of the perma bears. Let's see a recession - which is a totally plausible event - appear before we even entertain discussion about a financial collapse, which is a highly, highly unlikely event .
If the long bond is pegged at 2.5%, won't that scare away all the foreign central banks and investors currently buying our debt? I guess we'd print more money but then we'd kick off an inflationary spiral?
Also: from a fun site on the front lines: "I bet you didn't know there was a mortgage company called Sub500 Mortgage. The rates aren't pretty...lowest rate possible is in the high 10's...but they will do some ugly stuff as long as the LTV is in the 60 - 75 range."
Cripes, the Government didn't even bail out all those Enron employees whose pensions were 100% company stock! It's even letting companies offload their pension obilgation to the who gives retirees 35 cents on the dollar.
The American system has never believed in baling out the individual because in the US of A individuals are responsible for their own actions.
The government will do what it thinks will keep the financial system healthy and that will be decided by the elite. And history has shown us that this group is very capable of making huge errors. Es[ecially when the whole world has faith that the Fed will fix everything.
Todays WSJ: "WHY DEMOCRATS REMAIN IN A DEPRESSION"
"The current expansion was derided right through 2004 as a "jobless recovery." We now know the economy has created 7.4 million new jobs since mid-2003, as revisions by the Bureau of Labor Statistics have added hundreds of thousands to its original monthly estimates. Thus the hand-wringers have had no choice but to move on, turning their laments to allegedly "stagnant wages." Well, that's now vanishing too.
Let's look at the record of this expansion compared with that of the sainted 1990s. Economist Michael Darda has been looking at the numbers, and yesterday he put out a side-by-side employment comparison of the first five years of the 1991-2000 expansion with the current one that began in the fourth quarter of 2001.
Between 1991 and 1996, the unemployment rate averaged 6.4%, compared with 5.4% from 2001 to 2006. Today's jobless rate is now down to 4.6%. As for real (inflation-adjusted) wage growth, it averaged 0.6% annually for non-farm workers in the first half of the 1990s compared with 1.5% a year so far in this decade. "This cycle as a whole has witnessed twice the average real wage growth than the first 64 months of the previous expansion," Mr. Darda writes. For the last 12 months, real wages have risen even faster, at a 1.7% clip.
Anything else to worry about? Well, there's always the "trade deficit," though exports are now booming (up 10% last year), especially to the countries with which the U.S. has signed free-trade agreements. So moving right along, this week's bad news is said to be the U.S. "savings rate," which according to the official measure was "negative" for a whole calendar year for the first time "since the Great Depression," as Martin Crutsinger of the Associated Press helpfully put it. Hooverville, here we come!
As a statistic, however, the official "savings rate" is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, "income" doesn't measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts."
I also LOVED definition of Roubinis new favorite term:
"What exactly is a "growth recession"? The term appears to describe an economy that is growing, but too slowly to create more jobs than are being destroyed. But since a "recession" is explicitly defined as two quarters of declining economic growth, flinging around the term "growth recession" is also kind of a weaselly way to continue saying "recession" while meaning something slightly different."
As to abandonded subdivisions, they are wonderful for Hollywood to destroy in movies.
# The housing development under construction was an abandoned construction project in Lancaster, CA that succumbed to the housing market bust of the early 1990s. The city allowed the film company to film when they agreed to demolish it when finished.
I was thinking the same thing Friday as I was distributing some penny stocks in the casino to some other, Umm.... Investors and the song, Happy Days Are Here Again kept running threw my mind.
Party like its 1999 baby.
Of course we all know what happened when that party ended, it was a BODACIOUS short and it wiped out the poor financial schlump and his clueless bride so they went and borrowed a bunch of money and bought a McMansion which is now in foreclosure.
I'm with you, Kevin. That whole tech crash thingy just scared the bejesus out of me, to the point where I would just rather batten down the hatches with cd's so that I can sleep at night. All those people in the market now are headed for ruin, I'm sure of it. All the models come up nuclear winter.
charts: Some of us are just looking for signs of a low probability credit event. The party in between then and now is not particularly unexpected, especially with finance creating so much money in the form of financial instruments. I can buy structured products with protected principal and incredible returns through my private bankers. Obviously that kind of free lunch isn't sustainable, but I'll bet we have a blast getting to the outcome. In the meantime, it is nice having such a wide selection of cheeses at the local Whole Foods. It is all a matter of perspectives at various timescales. Let's hope tightening credit or war escalation doesn't end the party. The credit shock hypothesis hasn't even been tested yet, although it looks like the test may be starting now. I'm surprised to see people thinking the wheels are already on the ground. We definitely aren't at the gate yet, and that is what matters. Remember Italy? It would suck to be trapped in illiquid instruments with the financial warehouse on fire. I'm just interested from a historical monetary theory perspective and hedged for a soft landing or crash landing. I prefer producing value through the real economy rather than extracting value through speculation. I guess that just makes me an old fashioned capitalist keeping an eye on the monetary masters in order to read the wind.
Besides, the topic is bank failures. It is natural to ponder what the possible worst case scenarios might be. That is called prudence and it comes in handy during times of heightened risk. Should Bernanke not have studied The Great Depression because corporate profits are up and employment is starting to improve? If the bulls are so confident, maybe they should transfer their capital to Coast Bank to help them stay capitalized?
I'll be bullish after I have seen how much money the banks have lost. Until then, all the shilling in the world from the finance industry is meaningless to me.
Another minor point, in game theory, it is not just the probability of an event but also the payoff that matters . So mathematically speaking, considering low probability events can be worthwhile.
Eventually optimism will turn to pessimism when too many ideas were tried out that didn't work out as well as planned, or at least, ideas were tried out that were not well-suited for the new credit environment. The price of risk has many manifestations and it is just now starting to rise. I'm taking the route of patience in lieu of yield.
Actually I think the US equity markets are going a lot higher this year, but I also believe we are going to have a 10% or greater correction in the next 6 months are so possibly in April or May. A good shake out would be healthy, just like the oil market got recently.
Im not an investor, Im a speculator, keeping the stops tight.
"I will be damned if I take a $110,000 loan for a $30,000 lot," Hatch said Wednesday. "I'll walk away, let the bank foreclose and take the hit to my credit."
Another example of a loan that will not be repaid.
"I will be damned if I take a $110,000 loan for a $30,000 lot," Hatch said Wednesday. "I'll walk away, let the bank foreclose and take the hit to my credit."
Another example of a loan that will not be repaid.
DUST BOWL SOUP KITCHEN GRAPES OF WRATH EATING DINERS
I was thinking the same thing today when I got my income taxes filled out and found out how big the check was that I was going to have to write out to our lying, thieving, big business lobby infested, dollar purchasing power destroying government.
It was enough to make a PERMABEAR out of anyone, although it was because of capital gains and not because of debt forgiveness because my home had been foreclosed on.
One bankrupt bank and people are excited!!! Very funny!! In the historical context, this is less than nothing.
In the 1980s we had hundreds of failed S&Ls each year. By this point (post peak) in that cycle there were so many failed S&Ls that the Federal Savings and Loan Insurance Corporation itself became insolvent and considered to be beyond saving.
Of course it exists. For example Australia already went through housing slump and all kind of financial problems and crashes.
But it surrounded by growing economies and has a lot of goods for export, so it somehow avoided what we usually call "recession". But calling Australian economy to be not in recession is also incorrect. They have something different. Why not call it "growth recession"?
It is interesting to see the vigor with which potential Federal government intervention is denied. It is clear that many here have forgotten the past including the recent past.
In 1989 the federal government created the Resolution Trust Corporation to dispose of the real estate assets in the bankrupt savings and loans. The ultimate losses on sale were in the hundreds of billions of dollars. The scope and size of the real estate assets under foreclosure to be disposed of by the RTC dwarfed that of the 1930s.
But I agree that there will be no significant intervention by the government for the simple reason that the need will not be sufficient to justify it.
The S&Ls went bust because they lent recklessly and paid too much for their deposits. Those lenders went bankrupt during (not after) the bubble mania lending of the 1980s. Housing prices were still rising when the system collapsed. Thousands of S&Ls went down before the market peaked. The financial system was far more stressed than it is today.
The damage to come from the recent bubble is nothing compared to the 1980s and its aftermath. Yes, we will have a multi-year decline but conditions today are far healthier today than in 1990, and the fallout to come will be pale in comparison to the 1990s.
The massive decline of the 1990s scale might be repeated if the baby boom generation dies off faster than the new population reaches adulthood. The timing of this would be as we approach the year 2030. However, the population is expected to increase by them and the number of households will also increase.
Zephry you must not have been around for the S&L bust... else you would have remembered that the S&Ls went bust because the loans they lent went belly up... the RTC came in and salvaged the system by facilitating reselling the assets (troubled & otherwise) of the failed S&Ls to more sound & stable firms... But those individuals who were the root cause (who couldn't pay their loan payments & got the S&Ls in such tough trouble)... still lost their property... it was the NEW owners of the troubled debt who got to foreclose & resell to recover the loss.
Talk to farmers from the Midwest or wildcat oilmen from the patch and all the small merchants that sold to both, they will tell you flat out RTC didn't do squat to save them.
RTC was all about saving the 'system'. Look for a rinse-repeat near you.
The S&L mess started with one thrift too, somewhere. I think that's why people are alarmed at a measly single bank failure.
One thing that IS different this time, is that rates have not risen so fast as to make yield spreads as negative as they were in the 1980s.
I suppose in a couple of years, if rates never do rise, and the housing declines and defaults are "manageable" (just a few dozen thrifts going kablooey) the bears can find something new to worry about, or wade back in.
Mozo Maz, Interest rates peaked in 1980, and declined during the 1980s. There were no years with single bank failures in the 1980s. The entire bubble took place during an environment of failing S&Ls. None of the years during the 1980s boom were as healthy for the lenders as all of the last 5 years have been.
S&Ls made bad loans as they lent recklessly, and they overpaid their depositors as they were desperate for funds to support their lending spree.
Dryfly, Not only was I around for the S&L bust, but I was a real estate investor during that time. Fotunately, because I expected a bad crash, I sold at the top in 1989.
Further, I was employed in the S&L industry until 1978 (the early phase of the boom before the 1980s bubble). Besides conducting serious study of the real estate cycles, I have first hand experience and memory of four full market cycles.
I agree that the RTC did not save the borrowers/owners. The RTC existed to facilitate an orderly disposition of the real estate owned (by foreclosure) on the balance sheets of failed S&Ls. This orderly disposition prevented a massive flood of property onto the market by delaying/prolonging the sales. This prevented a much worse meltdown that would have occurred otherwise. This combined with Federal Reserve easing mitigated the destructive potential. Look at Japan to see what might have happened otherwise.
History does not support the sky is falling tone that many are spouting.
Market conditions and financial system health are far stronger than during the last four cyclical declines in real estate. We will have a cyclical decline. It will last a few years. But it will not be as bad as the 1990s. Not even close.
Zephyr - I wonder... I was looking at a series of charts at Contrary Investor - Market Observations
It appears that household finances are sailing into new and unmapped seas. Are there counter-arguments to these charts showing households setting new records in categories such as mortgage obligations as % of disposable income. Was financial stress on households ever as bad as it is now?
The average house is bigger and nicer, the cars are better and safer, the food is more plentiful, the unemployment is lower, the average person travels far further and more luxuriously, the net worths are higher
I guess you're in the top 1% because that's not what I see when I go to the States! Those gated communities are obvioulsy keeping someone out or are they simply paranoid?
mp, you're forgetting the rules of the discourse. You're either a bodacious bubblicious permabull or a cave-dwelling sky-is-falling permabear. This is sophisticated economic risk analysis because, unlike its actual playground equivalent, nobody gets a real tongue stuck to the flagpole.
Zephyr, my memory of the RTC is a little different from yours. For one thing, I seem to remember that, even at the time, a few people noticed the contradiction between the goals of disposing of thrift assets (which were not all REO) as quickly as possible, which saves the taxpayers money, and dribbling them out, which saves the local RE markets in question (TX, CA, LA mostly) from tanking. The story of the cost projections for RTC--from $50B to $500B--tells you something about what it cost to keep from "clearing" those RE markets too fast. I seem to remember some folks who were not in the failed thrift/tanked RE markets being mildly upset about that huge transfer of tax receipts to keep the RE investors in Houston happy. Sourpusses.
And I confess to chuckling over the idea of those thrifts "overpaying" their depositors. Those foolish depositors, wanting market rates for their deposits! Greedy bastards, why weren't they happy with 3% on a passbook--hell, we even gave them a free toaster. You wonder why they were so stupid as to deposit money in a thrift, anyway. Could it have something to do with deregulation that removed certain limits on what thrifts could pay for deposits?
In any case, we've solved that problem. We had a nice boom going in which we didn't pay squat to depositors (savers? who are they?) and offered marvelously cheap mortgage loans, which we moved off the books via sales and securitizations to people who, unlike bank depositors, have more important things to do with their money. Now that the possibility (note: not the same word as probability) of another RTC looms over the horizon, we start the pre-emptive worry about RE dumping, which for some reason frequently seems to come from the folks who spent the boom overbuiding, overselling, overlending, and creating Abstract Expressionist Appraisals. Meanwhile, the few remaining depositors and actual owner-occupants of "homes" wait to get screwed either way.
Dr. Strangemoney, thanks for the link to the CCI thing. Brian also provided a link downthread to TierOne's sorry-assed press release regarding its exposure to a similar scam. I read it, and as usual found myself utterly unable to understand it since I no longer drink.
Since this is ostensibly a thread about financial institution risk, I think we ought to focus on this part:
"Hundreds of investors from California to New Jersey jumped at the opportunity to sign contracts with CCI, a company that has stopped construction on nearly 500 homes. . . . Their credit was used to get construction loans with little or no upfront cash, while CCI promised to pay the interest until the houses were completed."
I have no idea why it didn't dawn on these "investors" that even if the scheme worked, the interest paid by the builder was going to show up in the sales price and the loan principal somewhere. So there's a sucker born every minute. There isn't that often a depository institution that will allow a builder to pay the construction interest and call it a loan to an individual. Nor is there a depository on every block that will disburse anything except the lot price and a couple of fees in the first disbursement prior to getting that building permit, since among other problems it could be construed as lending ooperating capital to a builder, which could, you know, make this a builder spec loan. The reason this is so rare is that once upon a time there were thrifts and they did really stupid things and regulations were written and stuff. That the CCI construction loans violated even the most superficial reading of safety and soundness regulations was obvious to the lender participants from the get-go; it had to be. This is not uncharted territory. This is moral hazard in action. One does not need to believe that it will necessarily engulf the financial system in flames to be very, very worried about it.
The average house is bigger and nicer, the cars are better and safer, the food is more plentiful, the unemployment is lower, the average person travels far further and more luxuriously, the net worths are higher
And the debt obligations never higher.
If we have inflation and the debts shrink as a percentage of inflated income & asset values - no problems.
So far there has been precious little 'official' inflation. Lotsa talk about 'hidden inflation'... but there is lotsa talk all over about lotsa stuff. Show me numbers.
I agree that if the incomes & asset values outstrip debt growth (also reversing the neg savings trend)... then there will be no sky falling soon.
This scenario is completely predicated on continued high levels of liquidity - with offshore sources the spearhead, the most aggressive leading market players - since we don't save. Hell we don't even invest, we 'appreciate' with leverage - big difference.
It could continue - certainly will for a while longer - but can't continue forever as our debt out paces our productive capacity. And dark matter won't feed 300 million Americans. Not well anyway.
If this isn't the 'end' - WONDERFUL - but that still doesn't erase the need for a 'Plan B'. I see nothing in the cards suggesting one is on the table.
I'm waiting to be proven wrong. I thought $3 gas would tip the economy, and we got through that. (Although there was some disturbind news accounts at the time of peopel charging more gas on cars - I have to wonder if we really could have sustained another year of it).
I did not however, think hurricane Katrina would tank the economy, and I got to cross swords with the "chicken littles" on that one.
I still think the "% residential inventment of GDP" chart here, and Crisy&Cole's" $ per square foot" charts, plus all the inventorries growing faster than population growth, plus the extreme limits of affordability meams, says to me that something's gotta give.
It just reminds me too much of the days in 1999 reading about P/E's of 200 or more, and how all that didn't matter because it was a new economy. There's too much "explaining away" of the data going on... it makes me suspicious, to be told to disregard something, and that all will be fine.
Zepher, My vague recollection of the thrift problem was that most thrifts were "participating" - acting as the developer or as a partner with the associated risk, sharing with other thrifts - and that pyramid collapsed.
One bankrupt bank and people are excited!!! Very funny!! In the historical context, this is less than nothing.
What's even funnier is that people like you (who are so smart to know that it is nothing and should be ignored) have spent hours upon hours trying to convince other people who don't agree that it is nothing.
If it really is ignorable to all the super-rich financial gurus such as you claim to be, then you should have read the press release and ignored it. Shouldn't the rich man's time be far more precious and valuable?
Something tells me that you really know that it is something, and something BIG.
One bankrupt bank and people are excited!!! Very funny!! In the historical context, this is less than nothing.
What's even funnier is that people like you (who are so smart to know that it is nothing and should be ignored) have spent hours upon hours trying to convince other people who don't agree that it is nothing.
If it really is ignorable to all the super-rich financial gurus such as you claim to be, then you should have read the press release and ignored it. Shouldn't the rich man's time be far more precious and valuable?
Something tells me that you really know that it is something, and something BIG.
Dotcommunist, You make it sound like I am part of a conspiracy. I would have ignored the news of one bank failing. It is less than nothing. But as I read the unrealistic exaggerations of its significance in the comments section here, I felt compelled to rebut. No conspiracy, just expressing my view.
I dont really care if you believe the end is coming. In fact it is better for me as an investor if all the sheep panic and run for the exits - leaving people like me to buy cheaply at the bottom.
I am not a financial guru just a very fortunate investor who has had the miraculous luck of guessing the RE market timing and magnitude correctly and repeatedly for decades.
I expect prices for detached homes to hit bottom in 2008 or 2009 for most cyclical markets.
Home prices are in decline in many cyclical areas and should continue to decline in 2007 and 2008. By 2009 I expect prices for single-family detached homes to be at a level that is about 25% above the prices of early 2003. For the hot cyclical markets that would be about equal to the prices of early 2004.
Maybe these high prices are just a forward indicator of general deflation? Wages are up strongly now, commodities have been strong for a while, P/E's on stocks are up from historical norms.
That's what I worry about as I am personally short housing (I rent). It could just be a tremendous mistake to look at historical earnings and to say there is a bubble when we are really just seeing the new liquidity getting absorbed.
The general opinions of this blog on average are a great contrary indicator for the equity market. I remember after Hurricane Katrina how absolutely negative the economic opinions on this blog were. I predicted then it would have little effect on the American economy as a whole. Has anyone noticed that the Morgan Stanley Capital International World Index of developed equity markets was up 20.1% in 2006. World growth is sychronized for the first time in many years, international trade is booming, developing countries are growing dramtically including Brazil, China, India, etc., coorportions profitablity has been remarkably high, retained earnings are extremely high, balance sheets are very strong, corporate stock buy-back and private equity purchases of company's stock are extremely high, mergers are on the rise and dividend payouts are rising too.
What are you guys missing?? Interest rates are very low including mortgage rate, companys and private equity purchasers can borrow at these low rates and buy companies whose earnings yield is greater than the interest rates of the borrowed money for the purchase. At the moment, the earning yield of the S&P 500 (reverse of the P/E ratio) is 2% higher than the 10 year bond yield. Naturally sophisticated investors understand this.
Inspite of all the negativety, the USA economy remains strong and indications are it is accelerating and inflations is slowing. 2007 will be another good year of equity investors regardless of what the housing market does. So stay fully invested and enjoy!
In my mind, housing is an especially important component of the American psyche. Yeah, we don't like inflation or unemployment -- but people view those as temporary problems. Unemployment you can typically do something about... move to a better performing part of the country, or retrain.
A negative housing market throws a millstone sround owner's necks. They feel like they can't cut their ties with an old locale. Can't move forward fully, with their next track.
With a house to sell, you end up making all kinds of small adjustments in your life... staying accessible to the Realtors, wading through an escrow and final repairs, dealing with a moving, changing all those addresses, getting kids set up in a new school. It's mood affecting, and that has to have some effect on a macro level.
In short, declining residential investment is a major indicator that average Joes do not feel confident of the future. When people feel good about things, it's the opposite. They seek out commitments.
Also, I would say that Zephyr's opinion shows a "cool" bull approach to things and I won't dismiss that we could see such results.
I see a lot of posts over on Ben's blog from peopel who think we "have to" return to 1999 pricing. While some deals may be possible to find like that in the future, the median price may very well not dive that sharply.
A cut back to 2004 pricing in 2009, is roughly equivalent to a ten year gain from 1999 dollars compounded annually at 6.4%. That doesn't sound too outlandish, all in all. But the numbers might look large, and there will be people saying the bubble hasn't finished deflating.
Wouldn't a big ole crash be fun to live through so we can tell our grandkids that living within your means is how you do your finances just like our grandparents told us before we got too smart, what with creative financing and all.
Hey Zeph - keep telling everybody that everything is OK. Please.
Foist!
And so it begins....
I've been thinking about this scenario:
Ok, most of us on this site believe that the RE market is (WAY) overvalued. We are waiting for a housing correction and are taking prudent financial steps to prepare for that decline.
I sold my vacation home in 2003 (missed the top) and have resisted the mania of buying a larger home (that I really need)in the realization that the RE market was not just appreciating, it's been caught up in a speculation frenzy and a CREDIT bubble. Hopefully, I will be able to buy a new vacation home and a larger main residence at a much better price. I think I am being smart.
Now here is what I worry about. All the speculators and McMansion buyers have been tempting fate and been living in a fantasy land. Living beyond their means with MEWS and believing that their RE investment can never go down. There has been so much bad credit and loans produced that I worry that the RE bubble and the Credit bubble will cause a lot more damage than I originally thought.
Here is my question: The gov't and especially this administration has extolled the virtues of home ownership. Everyone should own a home. It's the American dream and right (obviously that meant that all Americans should own 5,000 sq. ft mansions). All the regulators sat back and allowed no money down loans, ARMS, no income verification, and all the other FRAUD to occur w/o ever questioning the banks. I'm not blaming the gov't entirely, but they usually only act until a crisis already exists.
So, if indeed there is a debt and RE crisis, I don't see how the gov't is going to allow thousands or many millions of families to lose their homes? My fear is that I've tried to be smart, and the gov't is going to wind up bailing out all the idiots who got in over their heads and I'm (taxpayers) going to have to pay for it! I could easily see the gov't saying that the banking industry was at fault for writing these exotic loans, but they can't let them all go bankrupt (always seem to save the auto, airlines, steel industries, etc). I could see a scenario where the gov't would write out 0% interest 30 year loans to people who got a mortgage in the last 5 years. Would/could the U.S. allow so many of it's citizens to be homeless? Many people have no equity in these homes, took out MEWS that with a sharp drop in the home's value would be WAY under water.
Of course I being fiscally responsible get the priviledge of living in my smaller home while I wind up giving my taxes to pay for the moron's mansion. Then who is the real winner?
Anyone see this as the end game?
Excellent question, i'd like to hear the answer...What about those who claim the deflation will make the dollar worthless, and a currency which will be replaced by something with value. Does that mean someone with $1 million in debt doesn't have to worry because the currency will be meaningless in 10 years?
I could see the same thing happening and it would suck since I sold my primary residence near the top of the frenzy in 2005, paid off debt, and am sitting back and waiting.
I think the term is "moral hazard" that results in bad decision making. It shouldn't a probably won't be allowed.
Although the job of "central banker" is more accurately described as "price controller" so anything can happen.
One person's opinion is that if there are mass foreclosures, the feds will relax standards for declaring bankruptcy. This will be relatively inexpensive for the federal govt. It essentially puts the holders of the paper on the hook. Painful, but what else can be done?
I can't see a mass bailout of mortgage loans. That's too much money and we have too many countries left to invade.
John McGann,
I think the Bush administration is keeping the dollar low to try to assist US exporters. I also wonder if the assumption of further devaluation is built into the import/export equation. China in particular may view it as an additional discount on our purchases.
I think the Bush administration is keeping the dollar low to try to assist US exporters.
I don't think they're doing anything to keep the dollar low, but I don't think they mind it being there.
Also, the dollar is not that low when compared to historical standards. It only looks really low if you compared it to the dollar bubble of the late 1990s.
The reason you didn't buy the bigger home is you weren't greedy. I rent and will never be able own but houses will soon be Buy 1 and get the 2nd one free.
'm in the trades and saw this coming once again 2 years ago.
jo6pac
A simple correction...
What about those who claim the deflation will make the dollar worthless
Inflation makes the dollar worthless, not deflation. Right idea wrong word.
:::
On the bit about gov't bailing out individual homeowners - fat chance.
What the gov't might try to do is save the financial system - the banks & markets - and let the individual owners be damned.
And there is method to this madness... if they try to 'save the individual' the whole system explodes but later... bad debt on top of bad debt it eventually fails. Once that happens the individuals fail too (no more system to providing ongoing credit).
If they save 'the system' by injecting liquidity & helicopter money so healthier companies buy bad loans from failing companies... then foreclose on those holding the loans to recover what they can... lotsa individuals lose their homes but there is still money in the system to lend out so they can 'buy' a new one... qualified at a much tighter standard & for smaller amounts... something they can manage.
Think of it as financial recycling. We all love to recycle.
Those mini-Mcmansions would likely decline in price as there is less money chasing the same number of homes. So if you are one of the folks with cash - or solid equity - they will be less expensive.
If you are responsible you don't lose as much as if you were irresponsible.
Meanwhile the bankers all sigh in relief.
That is one scenario - doubt it will happen exactly - but I would be shocked if the theme isn't followed some how or ad libed...
Save system, screw some individuals, redeal the deck... it's the American way.
Rm:
not really. This particuliar RE bubble will unwind over a period of years and I am sure the gov't will provide some sort of cure for banks but J6P will see his equity decline towards historical mean, become less of a consumer and wish he had sold in june of 05!.
When deflation comes cash is the king. The cost of life will go down and whatever cash reserve you have will suddently become very valuable.
Gowt will not bail out people in oversized homes and with second properties. They will force those people to relocate and squeeze before they help them. They will subsidize rents in bad neighborhoods. This is not something you would benefit from anyway.
Expect very affordable housing 4-5 years from now. If you have cash for 10% downpayment with no piggybacks, because those tricks will be gone, you will get a dream home.
The only way to rescue homeowners who are too far in debt is with runaway inflation. That would shrink the real size of the debt to a more manageable level. But unless the fed is willing to drop dollars from helicopters...
dry's recycling is the most likely.
The elites get to stay elites, the elites want to bes get whacked, the prudent don't worry, the crazy in debt get hurt real bad, but they will live through it, speculators take a bath.
Then we start over with new winners.
A complete system melt down would be real bad, Your 401K or mortgage payment would be the last thing to worry about.
We know several things: RE is going to go down hard, The current business cycle is near a top if not there, We know the international flow of cheap money is going to end.
We know the elites have a wonderful instinct for survival. All we have to do is put it together.
I've lived in Pittsburgh (Go Steelers!) all my life. I know we have foreclosure problems here, but I'd have made Coast the frontrunner for first closure honors.
Poke around at Ben's blog and HP. Several people have posted links to banks confessing nasty writedowns.
Lenders just can't stuff all the ugly losses under the rug anymore. I agree with crispy... "It" has started.
This is how the federal government will save the RE market:
They will simply buy up the surplus inventory from the market. I'm not sure about the amount of houses that have been overbuilt over the past years, let it be 1 mio homes. A federal housing admin company could buy 1 mio homes for current market value. If it was debt financed at 4.5% plus 2% upkeep yearly it would be a piece of cake for the federal budget: 1 mio units times 500,000$ market value a piece times 6.5% should be around 32.5 billion $ yearly. Not a big deal. In the following years these homes could be sold back slowly into a market of still raising population/household units. 1mio units suddenly coming onto the RE market would kill and significantly deflate the market. If the surplus will come in small doses over years and years, it would keep up the values in nominal amounts. At the same time loans would not go sour in such great numbers as spending and emplyment could keep up much better, too.
There will be no significant price deflation in the RE market, nor will there be a significant recession. In the future, economic growth will be somewhat reduced as the demand for new homes will be diminished by the recycled federal homes.
Any problems? - I don't see any.
You shall not press down upon the brow of labor this cross of thorns. You shall not crucify mankind upon a cross of gold.
--William Jennings Bryan (1896)
The sweet irony is that cyanide gold extraction would later lead to gold extraction induced inflation. haha.
I would expect to see a visible "inflationist" constituency soon led by their fearless leader Barney Frank and Mr. Populist himself, Lou Dobbs.
I also expect something similar to the scenario dryfly described. The rich just got richer and the poor are soon to become much poorer. But hey, Average Joe will be making more per hour and isn't that how this whole game works anyways?
People might want to read Money Mischief by Friedman for some examples on how they might be able to fill the inflation gap.
I vote for clean, renewable energy. Maybe the government can print up money and pay babyboomers lots of dough to pedal electricity generating exercise bikes? It would be nice to get something out of them other than a legacy of debt.
Vote Dr Strangemoney 2008!
Free Lunch Party
Cheating Risk Since 1913
AZ Joe, how do I get a piece of that Fannie Mae/Freddy Mac REIT?
Would/could the U.S. allow so many of it's citizens to be homeless?
Why would people become homeless? Those houses are still going to be standing. What will happen is that all those foreclosed houses will be sold to somebody, who will end up renting them out to the same people who used to "own" them. All at market prices that reflect reality, not fantasy.
AZ Joe, you really think that the USG is going to buy SFH en masse to prop up the market? Not even FDR tried to do anything so grandiose. Not gonna happen.
I agree with a previous poster, what is most likely is a relaxation in the bankruptcy laws (proved Bush goes along) which would let FB's start with a clean slate. It would require no funding, and let the debt holders - mostly the Chinese and hedge funds - take it in the shorts, which would be politically popular. And very just - they are the ones who enabled this idiocy in the first place.
They will simply buy up the surplus inventory from the market.
Get real. If the government bought a million homes, the HBs would just construct another million more.
IMO dryfly has it right.
p.s.: Even a significantly relaxed BK is out of the question. Their first worry is the banks, not the borrowers. Also, way too much MBS held by banks & pension funds.
Interesting how the tone has changed from recession/no recession to how to deal with a major financial collapse. I think many on this blog have a suspicion that there is no easy way out of our debt predicament.
Don't be silly boys. The US Govt. won't be buying distressed houses. They didn't back in the last BIG housing crunch after the Great Depression, why would they start now? It's too complicated in any case, the regulatory overhead for such a move (forget the political implications) make that a ridiculous scenario.
Hm, so what did they do back then, I wonder? Simple, the Fed bought up the yield curve. Easy enough, and they already have the power. They pegged the long bond at 2.5% or so. Well all sorts of mortgage rates are based off of those long rates (the 10 yr which fell into line), so that would provide a nice low yield to refi to.
If that seems too crazy, consider that the Fed threatened to do so back in 2002 during the dump. Turned out they didn't have to, the market did a lot of it for them. They found out that all they had to do was to threaten, and guess what all those savvy money folk dog piled on those bonds, largely doing the job for them.
Almost effortless bailout, and the first move they'll make. If things continue into a doomsday scenario (which I don't believe), such as massive layoffs, then it'll be far too late for such draconian measures. It would take a Great Society program Mark II.
Local governments do sometimes step in and buy up housing and failed apartment complexes. These turn into poorly maintained, Section 8 barrios.
So I would say "run away, run away" from a subdivision bought up and managed at the federal level.
So I would say "run away, run away" from a subdivision bought up and managed at the federal level.
It will never happen.
Uncle Sam might authorize an equivalent of the RTC to facilitate 'repurchase & resale' of foreclosed properties... just to get the liquidity reflowing... what's left of it anyway.
In effect speed up the liquidation & market clearing to get the properties back in people's hands - but at a valuation levels & terms that is sustainable.
But Uncle Sam is NOT going to directly buy suburban homes en masse. That might live in the minds of hard core wingnuts who fear a 'liberal commie take over of housing... right after medicine and energy'...
But it isn't going to happen. Gov't may contract to clean up the mess but that is as far as it would go.
"Allegheny Valley has agreed to assume approximately $12.0 million of insured deposits of the failed bank. At the time of closure, Metropolitan Savings had approximately $1.2 million in deposits in 70 accounts that potentially exceed the federal deposit insurance limit."
The above from the press release you cited. We tend to be forgetful of the limits on the insurance. I wonder how well those 70 accounts are now sleeping.
a Bit from Kash's site which highlights the dollar and sense problem J6P is having:
The Street Light
"
So after accounting for consumer price inflation, the average production worker takes home about $10 more per week than he or she did in the year 2000. It's no wonder that lots of people feel that economic growth is passing them by...
The US gov has to take steps anyways.
It is the voting power of millions of over indebted voters. Thus it is possible to lower rates to 1% (we saw in 2003) or even to 0.5% for mortgages.
Don't worry, just buy gold when interest rates go under 3%!
I could actually imagine the US gov to buy some equity through gov agencies. They won't allow the Asians to buy boing, exxon.. which they easily could.
Would/could the U.S. allow so many of it's citizens to be homeless?
Judging by all the vacant houses, homelessness won't be an issue.
If you haven't yet, have a look at Aaron Krowne's latest post over on iTulip:
Mortgage Lenders: The three bears come home
Credit crunch is underway
...so that would provide a nice low yield to refi to.
BZZZZ, WRONG ANSWER -- TRY AGAIN!
Most of the FBs didn't put any money down and have been making either I/O or NegAm payments. Can't refi when you don't have equity or cash to bring to the table.
I went onlline today, and BankRate has a very favorable rating for the bank, 2 (1 is best.) Do we know what actually happened with this bank?
" I could see a scenario where the gov't would write out 0% interest 30 year loans to people who got a mortgage in the last 5 years."
Could that really be the answer?
Wealth goes from weak hands to stronger ones. Always has, always will. FBs are outtta luck.
"mostly the Chinese and hedge funds - take it in the shorts, which would be politically popular. And very just - they are the ones who enabled this idiocy in the first place.
yogurt"
you forget one thing, the government wont save the people, cause it needs foreign money for its own spending. because if the world realize that you cant make safe bussiness in us, the capital will move on to somewhere else
Roubini and his predictions gets mentioned in a Salon article.
Excuse me, have you seen my recession?
FredW, The only thing interesting is the delusional state of of some of the perma bears. Let's see a recession - which is a totally plausible event - appear before we even entertain discussion about a financial collapse, which is a highly, highly unlikely event .
If the long bond is pegged at 2.5%, won't that scare away all the foreign central banks and investors currently buying our debt? I guess we'd print more money but then we'd kick off an inflationary spiral?
Also: from a fun site on the front lines: "I bet you didn't know there was a mortgage company called Sub500 Mortgage. The rates aren't pretty...lowest rate possible is in the high 10's...but they will do some ugly stuff as long as the LTV is in the 60 - 75 range."
-Another F@CKED Borrower- casualty of the housing bubble: FB's with sub-500 fico scores
Cripes, the Government didn't even bail out all those Enron employees whose pensions were 100% company stock! It's even letting companies offload their pension obilgation to the who gives retirees 35 cents on the dollar.
The American system has never believed in baling out the individual because in the US of A individuals are responsible for their own actions.
The government will do what it thinks will keep the financial system healthy and that will be decided by the elite. And history has shown us that this group is very capable of making huge errors. Es[ecially when the whole world has faith that the Fed will fix everything.
Todays WSJ: "WHY DEMOCRATS REMAIN IN A DEPRESSION"
"The current expansion was derided right through 2004 as a "jobless recovery." We now know the economy has created 7.4 million new jobs since mid-2003, as revisions by the Bureau of Labor Statistics have added hundreds of thousands to its original monthly estimates. Thus the hand-wringers have had no choice but to move on, turning their laments to allegedly "stagnant wages." Well, that's now vanishing too.
Let's look at the record of this expansion compared with that of the sainted 1990s. Economist Michael Darda has been looking at the numbers, and yesterday he put out a side-by-side employment comparison of the first five years of the 1991-2000 expansion with the current one that began in the fourth quarter of 2001.
Between 1991 and 1996, the unemployment rate averaged 6.4%, compared with 5.4% from 2001 to 2006. Today's jobless rate is now down to 4.6%. As for real (inflation-adjusted) wage growth, it averaged 0.6% annually for non-farm workers in the first half of the 1990s compared with 1.5% a year so far in this decade. "This cycle as a whole has witnessed twice the average real wage growth than the first 64 months of the previous expansion," Mr. Darda writes. For the last 12 months, real wages have risen even faster, at a 1.7% clip.
Anything else to worry about? Well, there's always the "trade deficit," though exports are now booming (up 10% last year), especially to the countries with which the U.S. has signed free-trade agreements. So moving right along, this week's bad news is said to be the U.S. "savings rate," which according to the official measure was "negative" for a whole calendar year for the first time "since the Great Depression," as Martin Crutsinger of the Associated Press helpfully put it. Hooverville, here we come!
As a statistic, however, the official "savings rate" is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, "income" doesn't measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts."
Steve, FUNNY ARTICLE in that link!
Roubini is the Econoblogger of Doom
LOL!
The same could be said for this blog.
I also LOVED definition of Roubinis new favorite term:
"What exactly is a "growth recession"? The term appears to describe an economy that is growing, but too slowly to create more jobs than are being destroyed. But since a "recession" is explicitly defined as two quarters of declining economic growth, flinging around the term "growth recession" is also kind of a weaselly way to continue saying "recession" while meaning something slightly different."
Funny stuff!
war is peace
growth is recession
debt is wealth
weekends without news is bad for blogs.
As to abandonded subdivisions, they are wonderful for Hollywood to destroy in movies.
# The housing development under construction was an abandoned construction project in Lancaster, CA that succumbed to the housing market bust of the early 1990s. The city allowed the film company to film when they agreed to demolish it when finished.
Lethal Weapon 3 - Wikipedia, the free encyclopedia
"As a statistic, however, the official "savings rate" is nearly as useless a guide to prosperity as the trade deficit."
Excuse me, but the savings rate is not intended to be used as a guide to prosperity, whatever that means.
The same could be said for this blog.
Garrison,
I wouldn't say that. I think CR is pretty fair.
BODACIOUS profitfest debauchery
I was thinking the same thing Friday as I was distributing some penny stocks in the casino to some other, Umm.... Investors and the song, Happy Days Are Here Again kept running threw my mind.
Party like its 1999 baby.
Of course we all know what happened when that party ended, it was a BODACIOUS short and it wiped out the poor financial schlump and his clueless bride so they went and borrowed a bunch of money and bought a McMansion which is now in foreclosure.
Some things never change.
I'm with you, Kevin. That whole tech crash thingy just scared the bejesus out of me, to the point where I would just rather batten down the hatches with cd's so that I can sleep at night. All those people in the market now are headed for ruin, I'm sure of it. All the models come up nuclear winter.
charts: Some of us are just looking for signs of a low probability credit event. The party in between then and now is not particularly unexpected, especially with finance creating so much money in the form of financial instruments. I can buy structured products with protected principal and incredible returns through my private bankers. Obviously that kind of free lunch isn't sustainable, but I'll bet we have a blast getting to the outcome. In the meantime, it is nice having such a wide selection of cheeses at the local Whole Foods. It is all a matter of perspectives at various timescales. Let's hope tightening credit or war escalation doesn't end the party. The credit shock hypothesis hasn't even been tested yet, although it looks like the test may be starting now. I'm surprised to see people thinking the wheels are already on the ground. We definitely aren't at the gate yet, and that is what matters. Remember Italy? It would suck to be trapped in illiquid instruments with the financial warehouse on fire. I'm just interested from a historical monetary theory perspective and hedged for a soft landing or crash landing. I prefer producing value through the real economy rather than extracting value through speculation. I guess that just makes me an old fashioned capitalist keeping an eye on the monetary masters in order to read the wind.
Besides, the topic is bank failures. It is natural to ponder what the possible worst case scenarios might be. That is called prudence and it comes in handy during times of heightened risk. Should Bernanke not have studied The Great Depression because corporate profits are up and employment is starting to improve? If the bulls are so confident, maybe they should transfer their capital to Coast Bank to help them stay capitalized?
Looks like National City Bank has their finger in the CCI pie as well.
Housing Bubble: Ponzi Schemes Unwinding | Economy |Axisoflogic.com
I'll be bullish after I have seen how much money the banks have lost. Until then, all the shilling in the world from the finance industry is meaningless to me.
Another minor point, in game theory, it is not just the probability of an event but also the payoff that matters . So mathematically speaking, considering low probability events can be worthwhile.
Eventually optimism will turn to pessimism when too many ideas were tried out that didn't work out as well as planned, or at least, ideas were tried out that were not well-suited for the new credit environment. The price of risk has many manifestations and it is just now starting to rise. I'm taking the route of patience in lieu of yield.
Donny
Actually I think the US equity markets are going a lot higher this year, but I also believe we are going to have a 10% or greater correction in the next 6 months are so possibly in April or May. A good shake out would be healthy, just like the oil market got recently.
Im not an investor, Im a speculator, keeping the stops tight.
"I will be damned if I take a $110,000 loan for a $30,000 lot," Hatch said Wednesday. "I'll walk away, let the bank foreclose and take the hit to my credit."
Another example of a loan that will not be repaid.
"I will be damned if I take a $110,000 loan for a $30,000 lot," Hatch said Wednesday. "I'll walk away, let the bank foreclose and take the hit to my credit."
Another example of a loan that will not be repaid.
DUST BOWL SOUP KITCHEN GRAPES OF WRATH EATING DINERS
I was thinking the same thing today when I got my income taxes filled out and found out how big the check was that I was going to have to write out to our lying, thieving, big business lobby infested, dollar purchasing power destroying government.
It was enough to make a PERMABEAR out of anyone, although it was because of capital gains and not because of debt forgiveness because my home had been foreclosed on.
Looks like the sockpuppet got into Larry's coke.
One bankrupt bank and people are excited!!! Very funny!! In the historical context, this is less than nothing.
In the 1980s we had hundreds of failed S&Ls each year. By this point (post peak) in that cycle there were so many failed S&Ls that the Federal Savings and Loan Insurance Corporation itself became insolvent and considered to be beyond saving.
My own house already lost over $50k in price, and some of my friends lost even more.
The person who denies falling prices probably can't afford his own home and is getting all the info from NAR statistics. Good luck!
"growth recession"
Of course it exists. For example Australia already went through housing slump and all kind of financial problems and crashes.
But it surrounded by growing economies and has a lot of goods for export, so it somehow avoided what we usually call "recession". But calling Australian economy to be not in recession is also incorrect. They have something different. Why not call it "growth recession"?
It is interesting to see the vigor with which potential Federal government intervention is denied. It is clear that many here have forgotten the past including the recent past.
In 1989 the federal government created the Resolution Trust Corporation to dispose of the real estate assets in the bankrupt savings and loans. The ultimate losses on sale were in the hundreds of billions of dollars. The scope and size of the real estate assets under foreclosure to be disposed of by the RTC dwarfed that of the 1930s.
But I agree that there will be no significant intervention by the government for the simple reason that the need will not be sufficient to justify it.
The S&Ls went bust because they lent recklessly and paid too much for their deposits. Those lenders went bankrupt during (not after) the bubble mania lending of the 1980s. Housing prices were still rising when the system collapsed. Thousands of S&Ls went down before the market peaked. The financial system was far more stressed than it is today.
The damage to come from the recent bubble is nothing compared to the 1980s and its aftermath. Yes, we will have a multi-year decline but conditions today are far healthier today than in 1990, and the fallout to come will be pale in comparison to the 1990s.
The massive decline of the 1990s scale might be repeated if the baby boom generation dies off faster than the new population reaches adulthood. The timing of this would be as we approach the year 2030. However, the population is expected to increase by them and the number of households will also increase.
Correction: Many hundereds of S&Ls failed. Thousands of S&Ls were significantly impaired.
Zephry you must not have been around for the S&L bust... else you would have remembered that the S&Ls went bust because the loans they lent went belly up... the RTC came in and salvaged the system by facilitating reselling the assets (troubled & otherwise) of the failed S&Ls to more sound & stable firms... But those individuals who were the root cause (who couldn't pay their loan payments & got the S&Ls in such tough trouble)... still lost their property... it was the NEW owners of the troubled debt who got to foreclose & resell to recover the loss.
Talk to farmers from the Midwest or wildcat oilmen from the patch and all the small merchants that sold to both, they will tell you flat out RTC didn't do squat to save them.
RTC was all about saving the 'system'. Look for a rinse-repeat near you.
Call it controlled creative destruction.
The S&L mess started with one thrift too, somewhere. I think that's why people are alarmed at a measly single bank failure.
One thing that IS different this time, is that rates have not risen so fast as to make yield spreads as negative as they were in the 1980s.
I suppose in a couple of years, if rates never do rise, and the housing declines and defaults are "manageable" (just a few dozen thrifts going kablooey) the bears can find something new to worry about, or wade back in.
Mozo Maz, Interest rates peaked in 1980, and declined during the 1980s. There were no years with single bank failures in the 1980s. The entire bubble took place during an environment of failing S&Ls. None of the years during the 1980s boom were as healthy for the lenders as all of the last 5 years have been.
S&Ls made bad loans as they lent recklessly, and they overpaid their depositors as they were desperate for funds to support their lending spree.
Dryfly, Not only was I around for the S&L bust, but I was a real estate investor during that time. Fotunately, because I expected a bad crash, I sold at the top in 1989.
Further, I was employed in the S&L industry until 1978 (the early phase of the boom before the 1980s bubble). Besides conducting serious study of the real estate cycles, I have first hand experience and memory of four full market cycles.
I agree that the RTC did not save the borrowers/owners. The RTC existed to facilitate an orderly disposition of the real estate owned (by foreclosure) on the balance sheets of failed S&Ls. This orderly disposition prevented a massive flood of property onto the market by delaying/prolonging the sales. This prevented a much worse meltdown that would have occurred otherwise. This combined with Federal Reserve easing mitigated the destructive potential. Look at Japan to see what might have happened otherwise.
"hedged for a soft landing or crash landing"
Exactly how do you hedge for a crash landing. Buy gold in western Australia? Puts on the S&P?
History does not support the sky is falling tone that many are spouting.
Market conditions and financial system health are far stronger than during the last four cyclical declines in real estate. We will have a cyclical decline. It will last a few years. But it will not be as bad as the 1990s. Not even close.
Zephyr - I wonder... I was looking at a series of charts at Contrary Investor - Market Observations
It appears that household finances are sailing into new and unmapped seas. Are there counter-arguments to these charts showing households setting new records in categories such as mortgage obligations as % of disposable income. Was financial stress on households ever as bad as it is now?
Fred, you ask if the stress was ever as bad as now? Yes. And I have been hearing the end of prosperity argument for decades.
Every time the chicken littles have claimed that it is different this time. However, the sky is still up there.
The average house is bigger and nicer, the cars are better and safer, the food is more plentiful, the unemployment is lower, the average person travels far further and more luxuriously, the net worths are higher
Life in America has never been better.
But there are always some who cannot see it.
Who said the sky is falling?
"Life in America has never been better."
I guess you're in the top 1% because that's not what I see when I go to the States! Those gated communities are obvioulsy keeping someone out or are they simply paranoid?
mp, you're forgetting the rules of the discourse. You're either a bodacious bubblicious permabull or a cave-dwelling sky-is-falling permabear. This is sophisticated economic risk analysis because, unlike its actual playground equivalent, nobody gets a real tongue stuck to the flagpole.
Zephyr, my memory of the RTC is a little different from yours. For one thing, I seem to remember that, even at the time, a few people noticed the contradiction between the goals of disposing of thrift assets (which were not all REO) as quickly as possible, which saves the taxpayers money, and dribbling them out, which saves the local RE markets in question (TX, CA, LA mostly) from tanking. The story of the cost projections for RTC--from $50B to $500B--tells you something about what it cost to keep from "clearing" those RE markets too fast. I seem to remember some folks who were not in the failed thrift/tanked RE markets being mildly upset about that huge transfer of tax receipts to keep the RE investors in Houston happy. Sourpusses.
And I confess to chuckling over the idea of those thrifts "overpaying" their depositors. Those foolish depositors, wanting market rates for their deposits! Greedy bastards, why weren't they happy with 3% on a passbook--hell, we even gave them a free toaster. You wonder why they were so stupid as to deposit money in a thrift, anyway. Could it have something to do with deregulation that removed certain limits on what thrifts could pay for deposits?
In any case, we've solved that problem. We had a nice boom going in which we didn't pay squat to depositors (savers? who are they?) and offered marvelously cheap mortgage loans, which we moved off the books via sales and securitizations to people who, unlike bank depositors, have more important things to do with their money. Now that the possibility (note: not the same word as probability) of another RTC looms over the horizon, we start the pre-emptive worry about RE dumping, which for some reason frequently seems to come from the folks who spent the boom overbuiding, overselling, overlending, and creating Abstract Expressionist Appraisals. Meanwhile, the few remaining depositors and actual owner-occupants of "homes" wait to get screwed either way.
Dr. Strangemoney, thanks for the link to the CCI thing. Brian also provided a link downthread to TierOne's sorry-assed press release regarding its exposure to a similar scam. I read it, and as usual found myself utterly unable to understand it since I no longer drink.
Since this is ostensibly a thread about financial institution risk, I think we ought to focus on this part:
"Hundreds of investors from California to New Jersey jumped at the opportunity to sign contracts with CCI, a company that has stopped construction on nearly 500 homes. . . . Their credit was used to get construction loans with little or no upfront cash, while CCI promised to pay the interest until the houses were completed."
I have no idea why it didn't dawn on these "investors" that even if the scheme worked, the interest paid by the builder was going to show up in the sales price and the loan principal somewhere. So there's a sucker born every minute. There isn't that often a depository institution that will allow a builder to pay the construction interest and call it a loan to an individual. Nor is there a depository on every block that will disburse anything except the lot price and a couple of fees in the first disbursement prior to getting that building permit, since among other problems it could be construed as lending ooperating capital to a builder, which could, you know, make this a builder spec loan. The reason this is so rare is that once upon a time there were thrifts and they did really stupid things and regulations were written and stuff. That the CCI construction loans violated even the most superficial reading of safety and soundness regulations was obvious to the lender participants from the get-go; it had to be. This is not uncharted territory. This is moral hazard in action. One does not need to believe that it will necessarily engulf the financial system in flames to be very, very worried about it.
The average house is bigger and nicer, the cars are better and safer, the food is more plentiful, the unemployment is lower, the average person travels far further and more luxuriously, the net worths are higher
And the debt obligations never higher.
If we have inflation and the debts shrink as a percentage of inflated income & asset values - no problems.
So far there has been precious little 'official' inflation. Lotsa talk about 'hidden inflation'... but there is lotsa talk all over about lotsa stuff. Show me numbers.
I agree that if the incomes & asset values outstrip debt growth (also reversing the neg savings trend)... then there will be no sky falling soon.
This scenario is completely predicated on continued high levels of liquidity - with offshore sources the spearhead, the most aggressive leading market players - since we don't save. Hell we don't even invest, we 'appreciate' with leverage - big difference.
It could continue - certainly will for a while longer - but can't continue forever as our debt out paces our productive capacity. And dark matter won't feed 300 million Americans. Not well anyway.
If this isn't the 'end' - WONDERFUL - but that still doesn't erase the need for a 'Plan B'. I see nothing in the cards suggesting one is on the table.
Without it our 'Wonderful Life' will be repoed.
I'm waiting to be proven wrong. I thought $3 gas would tip the economy, and we got through that. (Although there was some disturbind news accounts at the time of peopel charging more gas on cars - I have to wonder if we really could have sustained another year of it).
I did not however, think hurricane Katrina would tank the economy, and I got to cross swords with the "chicken littles" on that one.
I still think the "% residential inventment of GDP" chart here, and Crisy&Cole's" $ per square foot" charts, plus all the inventorries growing faster than population growth, plus the extreme limits of affordability meams, says to me that something's gotta give.
It just reminds me too much of the days in 1999 reading about P/E's of 200 or more, and how all that didn't matter because it was a new economy. There's too much "explaining away" of the data going on... it makes me suspicious, to be told to disregard something, and that all will be fine.
Zepher, My vague recollection of the thrift problem was that most thrifts were "participating" - acting as the developer or as a partner with the associated risk, sharing with other thrifts - and that pyramid collapsed.
Hey zephyr,
One bankrupt bank and people are excited!!! Very funny!! In the historical context, this is less than nothing.
What's even funnier is that people like you (who are so smart to know that it is nothing and should be ignored) have spent hours upon hours trying to convince other people who don't agree that it is nothing.
If it really is ignorable to all the super-rich financial gurus such as you claim to be, then you should have read the press release and ignored it. Shouldn't the rich man's time be far more precious and valuable?
Something tells me that you really know that it is something, and something BIG.
Something big, indeed!
Hey zephyr,
One bankrupt bank and people are excited!!! Very funny!! In the historical context, this is less than nothing.
What's even funnier is that people like you (who are so smart to know that it is nothing and should be ignored) have spent hours upon hours trying to convince other people who don't agree that it is nothing.
If it really is ignorable to all the super-rich financial gurus such as you claim to be, then you should have read the press release and ignored it. Shouldn't the rich man's time be far more precious and valuable?
Something tells me that you really know that it is something, and something BIG.
Something big, indeed!
Dotcommunist, You make it sound like I am part of a conspiracy. I would have ignored the news of one bank failing. It is less than nothing. But as I read the unrealistic exaggerations of its significance in the comments section here, I felt compelled to rebut. No conspiracy, just expressing my view.
I dont really care if you believe the end is coming. In fact it is better for me as an investor if all the sheep panic and run for the exits - leaving people like me to buy cheaply at the bottom.
I am not a financial guru just a very fortunate investor who has had the miraculous luck of guessing the RE market timing and magnitude correctly and repeatedly for decades.
Zephyr,
When do you expect the bottom of this present RE cycle? - I know it can probably only be an educated guess.
Thanks.
I expect prices for detached homes to hit bottom in 2008 or 2009 for most cyclical markets.
Home prices are in decline in many cyclical areas and should continue to decline in 2007 and 2008. By 2009 I expect prices for single-family detached homes to be at a level that is about 25% above the prices of early 2003. For the hot cyclical markets that would be about equal to the prices of early 2004.
The sky is not falling but it will rain for a while.
Thank you - zephyr.
2009/10 is shopping time again for us.
AZ Joe
Maybe these high prices are just a forward indicator of general deflation? Wages are up strongly now, commodities have been strong for a while, P/E's on stocks are up from historical norms.
That's what I worry about as I am personally short housing (I rent). It could just be a tremendous mistake to look at historical earnings and to say there is a bubble when we are really just seeing the new liquidity getting absorbed.
The general opinions of this blog on average are a great contrary indicator for the equity market. I remember after Hurricane Katrina how absolutely negative the economic opinions on this blog were. I predicted then it would have little effect on the American economy as a whole. Has anyone noticed that the Morgan Stanley Capital International World Index of developed equity markets was up 20.1% in 2006. World growth is sychronized for the first time in many years, international trade is booming, developing countries are growing dramtically including Brazil, China, India, etc., coorportions profitablity has been remarkably high, retained earnings are extremely high, balance sheets are very strong, corporate stock buy-back and private equity purchases of company's stock are extremely high, mergers are on the rise and dividend payouts are rising too.
What are you guys missing?? Interest rates are very low including mortgage rate, companys and private equity purchasers can borrow at these low rates and buy companies whose earnings yield is greater than the interest rates of the borrowed money for the purchase. At the moment, the earning yield of the S&P 500 (reverse of the P/E ratio) is 2% higher than the 10 year bond yield. Naturally sophisticated investors understand this.
Inspite of all the negativety, the USA economy remains strong and indications are it is accelerating and inflations is slowing. 2007 will be another good year of equity investors regardless of what the housing market does. So stay fully invested and enjoy!
In my mind, housing is an especially important component of the American psyche. Yeah, we don't like inflation or unemployment -- but people view those as temporary problems. Unemployment you can typically do something about... move to a better performing part of the country, or retrain.
A negative housing market throws a millstone sround owner's necks. They feel like they can't cut their ties with an old locale. Can't move forward fully, with their next track.
With a house to sell, you end up making all kinds of small adjustments in your life... staying accessible to the Realtors, wading through an escrow and final repairs, dealing with a moving, changing all those addresses, getting kids set up in a new school. It's mood affecting, and that has to have some effect on a macro level.
In short, declining residential investment is a major indicator that average Joes do not feel confident of the future. When people feel good about things, it's the opposite. They seek out commitments.
Also, I would say that Zephyr's opinion shows a "cool" bull approach to things and I won't dismiss that we could see such results.
I see a lot of posts over on Ben's blog from peopel who think we "have to" return to 1999 pricing. While some deals may be possible to find like that in the future, the median price may very well not dive that sharply.
A cut back to 2004 pricing in 2009, is roughly equivalent to a ten year gain from 1999 dollars compounded annually at 6.4%. That doesn't sound too outlandish, all in all. But the numbers might look large, and there will be people saying the bubble hasn't finished deflating.
Wouldn't a big ole crash be fun to live through so we can tell our grandkids that living within your means is how you do your finances just like our grandparents told us before we got too smart, what with creative financing and all.
Hey Zeph - keep telling everybody that everything is OK. Please.