Housing is and always will be cyclical. I was a single-family home builder in 1981, so by my frame of reference what we're seeing now barely qualifies as a slowdown, much less a bust. The numbers this week are holding at about 1.5mm new starts this year and existing supply, while high, is not increasing. What I see is a natural pullback somewhat exaggerated by several years of basically free money to play with.
A lesson old-timers like me can't forget... when you've lived through a 21% prime rate, the term "tight money" has a frame of reference that's hard to top. So please forgive me if I seem cynical. In my opinion the current hype about the sub-prime "meltdown" is going to prove to be much ado about not much. The defaulted loans make up about 2% of the total debt market and the risk dispersal is so widely based that no one player can bring the system down. In fact, the delinquency rate on sub-prime (and prime mortgages) was higher in 2002 than it is now.
As I see it, the only systemic threat that exists in the capital markets is if one of the GSEs (i.e. Fannie Mae, Freddie Mac. etc.) were to fail. It's disappeared from the media, but there are still huge issues regarding their accounting problems. My hope is that Congress gets something right and reins them in to serve the lower end of the markettheir original chargeand leaves the rest to the true private sector capital markets. (But that's wishful thinking at it's worst... when was the last time Congress was right?)
The one thing that worries me is that those who are citing facts.... aren't.
Firstly, the inventory level are at or near all time highs and growing. Look at Pheonix and Vegas for instance. They are above the highs set in Sept/Oct of '06. Additionally, as time passes, intuitively I believe that a higher proportion of that higher inventory is of a "must sell" classification (arm resets, forclosures etc).
Now, everyone cites the rapid reduction in interest rates my Greenspan as an effective tool to speed up the economy. And many say that as much as 30% of the job growth in the last few years is due to housing. Does a rapid slowdown in the housing market therefore not indicate that much of this growth will fall to previous levels? How can easy money help so much on the way up, but tight money have little effect on the way down?
Additionally, although many will keep their houses....won't also many now not be able to access and spend MEW? What about those who are able to afford ARM resets and will just pay a higher percentage of their income for housing. How can gas price rises affect the economy so much (which means people spend an extra $100 or $200 a month) but a 25-50% increase in a house payment have little or no affect on the economy?
Next: given that 21% interest is no doubt stifling....what does that say about the default levels fixed long-term rates are at 6%? Doesn't this imply the the current problems are more subject to getting worse than better since money is about as cheap now as it's gonna get and the only likely way that assets will get less expensive is a reduction in their price and not a reduction in the cost of money to buy it?
And Finally, even though subprime may be a relatively small percentage of the total housing market: Given the "ladder" move-up analogy of the housing market (the upper levels are highly dependant on the lowest rung first time buyers) Suppose you have a 100 rung ladder. The first two rungs may only be 2%, but if you can't reach the third rung, the ladder is 100% useless.
All these have been pointed out before many times....I have yet however to have a pragmatic explaination by anyone (bull or not) as to why this will all be just a small blip, an overblown hype, and not turn into the pain that seems at least very plausible if not highly likely.
No bull has addressed ALL these issues comprehensively with a reasonable explaination as to how each of this issues, cumulatively, will have little effect on the economy.
They simply point to ONE of the many aspects, downplay it's significance, and ask us all to move on.
Although CA is a non-recourse state, my understanding is that any departure from the initial mortgage, including any refi or HELOC, is considered in a different category, and therefore subject to recourse. How many of those FB's have managed to keep from pulling out any of the "equity" on their way down?
Mozo Maz, It is my understanding that in "purchase money" states like California, the non-recourse only applies to purchase money firsts. So if the homeowner has refi'd, they are on the hook. Or if they took out a 2nd to purchase the home, they are on the hook for the 2nd. That is my understanding.
Shepard, a credit crunch really has nothing to do with interest rates - there was a credit crunch in the '50s with rates lower than today! In fact, a common definition for a credit crunch is less credit due to non-price causes - like tighter regulations - exactly what we are seeing today.
So the sector specific credit crunch in subprime and Alt-A (and probably soon in the prime ARMs) is classic. It will clearly have a significant impact on housing. How big the impact will be is uncertain - and the impact on the general economy is also uncertain.
Shepard, Agree that for house builders the current decline is not exceptional and may not become exceptional.
However, IMO nominal house prices will decline this year(didn't 1981), ARMs will reset, vacant houses are a record (worse than 1981), a recession is a good probability and the impact of credit tightending is ahead of us. Therefore, IMO the loan default problems and related derivatives issues are just starting.
Hopefully, the problems won't be as bad as the early 1980's but if they are the financial and economic impacts will be large.
IMO building will be at reasonable levels since costs will decline and builders will be able to and forced to reduce their prices. This would reinforce the pressure on existing home prices and debt secured by those houses.
I swear one of the first discussions I was in on here was about the nuances of recourse/non-recourse. I think Tanta explained that it was more convoluted than it first appeared. But I can't find this in a search of the site.
I could just be imagining it, but it seems so real!
First-time homeowner Carmen Rodriguez likes everything about the three-bedroom house in San Pablo she bought in September and shares with her brother. Except for the loan. Rodriguez, speaking through a Spanish interpreter, said the payments on her loan have already increased by a third, rising $500 to $2,000 a month.
She does not like the loan.
You see no one care about price.
If you get 100% LTV - you only end up hating the loannnnnn....
i live in the Bay Area. i have an atty friend who does some work for the poor and elderly who are filing for bankruptcy bec of predatory lending. he says the courts are full of cases where, for primary mortgages or home equity loans, the borrowers closing statements had 75-125k for consulting fees paid to an affiliate of the mortgage broker. the broker then took the funds out of state and is no longer traceable. these loans became part of RMBS, etc. they were typically neg amort loans.he thinks there are thousands of these cases in this area alone. have you heard of this?
I just wanted to add my 2 cents about your statement that the 2005 changed to the bankruptcy laws "made it more difficult for homeowners to declare Chapter 7"). I think most consumer bankruptcy attorneys (who regularly study and practice bankruptcy law) will tell you that that is simply not the case.
Bankruptcy has become more complicated for attorneys - and unfortunately, many have had to increase fees. The costs of bankruptcy (everything from filing fees to credit counseling fees) add to the burden. But bankruptcy protection is still available. Yeah - there are some new forms and new requirements, and I have to make my clients gather far more documents than I ever had to before BAPCPA became law, but a struggling homeowner can still file Chapter 7 if this the option they are considering.
At the risk of appearing self serving, I am finding that there is a belief in the public that bankruptcy is not an available option any longer. I have met many people who have regretted financial decisions they made under a mistaken assumption that they could no longer file bankruptcy (it's not uncommon for me to hear that banks and debt collectors have told debtors this).
Whether a homeowner should consider a "short sale" vs. a bankruptcy filing is something that can only be decided on a case by case basis. There is no "one size fits all" solution out there and distressed homeowners owe it to themselves to get as much information they can about all of their options... including the ones they might not like thinking about.
a lot of people are surprised that IRS taxes debt forgiveness, but no one seems to think about what the world would be like if IRS didn't. I, for one, would ask my employer to loan me my salary instead of paying it to me, and at the end of every quarter forgive the debt. Of course, I may not get that. But what about the CEO's with boards that backdate their options. Think they wouldn't get that little perk?
More inventory in Phoenix :43,841
294 more homes hit the market since Friday. Did I mention the over 6,441 active rental propertie in MLS?
Nice to know that an area of over 3 million people with an average influx of 100k has enough inventory to house an entire year of immigration. It might help if there were more new jobs, but sadly permits are falling like rocks in a pond.
don't just take it from me- one of Phoenix's leading economic prognosticators Elliot Pollack says
"The bad news relates to single family housing. We asked last year Can this last? We
now have an answer. As I pointed out last year, some things do not end well and housing
certainly fits in that category. Fifteen years of a strong housing market has caused people
to forget that housing is cyclical. In 2004 and 2005, there was an explosion in the
number of single family housing permits in the Greater Phoenix area, roughly 123,000
over that two-year period. Builders attempted to meet what appeared to be substantial
demand created not only by those moving to Greater Phoenix, but by investors, second
home buyers and people moving from apartments to single family. Yet, the demographic
demand for single family housing in Greater Phoenix was about 42,000 to 45,000 units
per year over that period, or about 84,000 to 90,000 total units over those two years.
Now that the frenzy is over and the dust has settled, it appears that over-building has
occurred, both nationally and in Greater Phoenix. While you can fool around with the
numbers until the cows come home (and believe me, we have tried); it appears that the
number of excess housing units constructed during the frenzy is between 15,000 and
25,000.
In figuring that number, you have to realize that we really only know population once a
decade and that is when there is a census. We do not know the extent people are moving
from apartments to single family homes. We do not know the exact number of second or
vacation homes that were bought or purchased in the 2004 to 2005 period and we do not
know how many investors there were for sure. But this excess, comprised of some
investor homes, homes under construction by builders that do not yet have buyers, and
vacant resale homes, appears to be real.
Like all inventory corrections (which is essentially what this is) you need to go through a
period of under-production to get rid of that excess inventory. Thus for the year 2006 as
a whole, we will build the number needed for the demographic demand 43,000
44,000 units. It is only recently, since August, that we have even begun to address the
problem by permitting a lower of units than the demographic demand would suggest is
necessary. Whether the problem takes one year to resolve or longer depends on how bad
a year 2007 turns out to be. The worse 2007 is in terms of housing permits, the quicker
we resolve the problem."
Ugh. Now I happen to believe that the inventory uptake will be even slower tha
con't..
Elliot believes, and the raw numbers on the MLS are starting to concern local realtors, especially how the numbers are translating into sales...
We have yet to see the jingle mail and large resets failure hit this market.
So how much of a drop in price does it take to make the market start clearing and function as a price setting mechanism? Phoenix is about to find out, and you are all invited to watch.
I personally remember the worst of the housing bust of the early 90's in Arizona, and believe this could be as bad.
The issue of recourse/non-recourse is indeed much more convoluted than it appears. I haven't checked California, but I have checked the statutes in Arizona and they appear to offer very broad protection for borrowers.
This is not my specialty, but just looking at the statutes for a few minutes I started to see some potential loopholes. Unfortunately, virtually all the published court cases interpreting such statutes in Arizona are from the depression era. At that time the laws were changing constantly and the courts were reinterpreting the laws (or finding them unconstitutional) on a fairly regular basis.
In theory the laws that were in place when the borrower signed the note should govern what recourse is available to the lender. However, I worked on a commercial property case recently where the judge decided that the parties' rights did not "vest" until the default occurred, so new laws applied that the borrower and the lender never anticipated when they signed the contract.
Bottom line - advice from experts is helpful, but this will be more complicated than most of the experts anticipate. Nothing is guaranteed.
Bill McLeod, thanks for that update. I guess you can include me in the confused category (the story I linked at CNN Money argued it was more difficult for some homeowners to file Chapter 7). Thanks again for the information!
Section 108 provides some big holes to escape tax on forgiveness of debt. The biggest are the first 2, insolvency or bankruptcy:
a) Exclusion from gross income
(1) In general
Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if -
(A) the discharge occurs in a title 11 case,
(B) the discharge occurs when the taxpayer is insolvent,
& the definitions (because tax code without definitions is like ice cream without milk)
2) Title 11 case
For purposes of this section, the term "title 11 case" means a case under title 11 of the United States Code (relating to bankruptcy), but only if the taxpayer is under the jurisdiction of the court in such case and the discharge of indebtedness is granted by the court or is pursuant to a plan approved by the court.
(3) Insolvent
For purposes of this section, the term "insolvent" means the excess of liabilities over the fair market value of assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the amount by which the taxpayer is insolvent, shall be determined on the basis of the taxpayer's assets and liabilities immediately before the discharge
On Shepherd's post regarding 1981 and 20% interest rates...
I graduated that year and took a job as a Chem Engineer. Rates were high though I only recall a short period of time when rates were THAT high and I never once met anyone who actually took out a loan that high.
But rates were high for money markets too... when loans were running 15% or so I was getting 18% in my money market fund.
And inflation was pretty high too - I got a review after my first six months at the chem plant & they gave me a 20% raise (some of it on 'merit', some due to COLA).
How common is it today to get 40% raises on an 'annualized' basis?
I bought a house a couple years later and was ecstatic to qualify for a 12% loan... And it didn't worry me much because all my raises over those two years had been in the 12-15% range. At that rate my payments would be as expensive as parking tickets in a decade... if inflation kept at that pace.
I moved & sold the home. And of course we know inflation didn't stay at that rate.
But it really was different in 1981. Hard to draw analogies from those times.
As a modest suggestion, wouldn't this be one area where Congressional action for relief for mortgage debtors might be appropriate? Eliminating the tax on the "income" from short sale or debt forgiveness of a primary residence (on a temporary or permanent basis) would remove one obstacle to a rapid and (comparatively) orderly decline in residential real estate prices. I know a number of the readers of this blog want to see as much pain as possible, but let's keep our eyes on the main prize - a rationally priced housing market.
Average Joe, you should read "Home Equity: The Party May Be Over For Consumers" in the April 2 issue of BusinessWeek. The optimists arguments are "solid job growth outside of construction and manufacturing, healthy income growth, and the lagged effect of past wealth gains are expected to make up for the decline in equity extraction. Also, higher-income households make up a majority of spending and are less likely to be affected by the housing downturn. We should soon know which side has it right."
dryfly, kind of like this magazine cover from 1981?
Exactly.
I had a buddy back then tell me if he could save a $100K he could retire (he wasn't even 25 at the time). Figure 18% of $100K equals $18K per year... way below his expenses back then... reefer, beer, tickets to blues bands coming in from Chicago, rent a small place... maybe even some food once in a while... and not work anymore.
I laughed... I told him his 18% won't get you too far too long at 16%-20% inflation. Even then those rates evaporated pretty fast.
::::
IMF to urge further depreciation in dollar
That's interesting. Its gotta happen... question is will BoJ & PBoC let it happen?
I know a number of the readers of this blog want to see as much pain as possible, but let's keep our eyes on the main prize - a rationally priced housing market.
That won't bring rationally priced housing. It would reward people who stuck out their neck & got it cut off.
I'm not a fan of 'maximum pain' but I agree with mort above - too many ways for the very well heeled to game this once the thin wedge gets inserted.
I'd rather see a revisit to BK reform... possibly forgive the tax but only if part of a much larger restructuring & start over.
"But we received IRS Form 1099 from the lender showing we had taxable "debt-relief" income of $26,215. How can we be taxed on money we didn't receive?"
This comment struck me as so very odd. Of course, they received the money. They spent it on a house! Just because the value of the house went down, how does that equate to "not receiving the money"?
"I bought a house a couple years later and was ecstatic to qualify for a 12% loan... And it didn't worry me much because all my raises over those two years had been in the 12-15% range. At that rate my payments would be as expensive as parking tickets in a decade... if inflation kept at that pace.
I moved & sold the home. And of course we know inflation didn't stay at that rate."
Sounds like the same pie in the sky optimism of the last 5 years you have criticized people for...
On the debt forgiveness, thing. Remember that gain on the sale of the house is not taxable. Were the gain taxable, the loss would offset the phantom income to some extent.
I know that people are endlessly inventive in gaming the system. The protection in the case of short sales or similar partial debt forgiveness for residences currently owned is that while the creditor has a strong interest in reducing third-party costs to a resolution, he is ultimately interested most in a bottom-line return - which means wringing as much money out of the bad loan as possible. What produces a taxable event for the borrower represents a loss for the creditor, who has to accept the loss on a voluntary basis. If there is no loss for the creditor, then there has been no gain for the borrower. It;s not that there can't be gaming - using Mort's example - an employer could buy a mortgage at face value and then forgive the debt as a form of compensation but I doubt thta kind of fraud would be all the common, and should be relatively easy to monitor and punish. Requiring bankruptcy or similar restructuring (as you suggest and as it looks the current law does) makes all nonrecourse loans into recourse, which seems both unwise and politically impossible.
As far as lowering prices - actively encouraging short sales begins the repricing of real estate assets or as does removing one reason why a owner might fight foreclosure, extending the problem and piliing up further losses. It's possible that people "profited" by their actions - HELOCing and investing or just having a grand year with equity withdrawal. It's not likely that the overwhelming majority of people are going to be smirking as they lose their houses. And everyone - left, right, and center - who believes in the bubble also believes that the Federal Government bears a considerable share of the responsibility, through omission or comission. Should the USG get rewarded?
You can get a view at just how cyclical national and local housing is at thebubblebuster.com. Today there is also a focus on the San Luis Obispo market...
"Fox said IggysHouse is paying the nominal cost for the MLS listings to drive more business to Iggys House - Real Estate , his company's original real estate presence on the Internet. That site rebates 75% of the traditional commission received by an agent representing a buyer if the buyer finds his or her own home and works with the company's salaried agents. The remaining 25% of that commission goes into the coffers of the company."
Sounds like the same pie in the sky optimism of the last 5 years you have criticized people for...
What do you think I paid for the home back then? $45K.
What was I making then? About $30K/yr.
Did I put anything down? About $5K - cash (>10% but not the 'magical' 20% & 'yes' it cost me some points).
Still my mortgage (just out of college) was less than 1.5 times my salary. My payments were pretty high at 12% interest but manageable. I had about $2K student loans and $3K in a car loan and we had no other debt. We were cash rich let me tell you.
Oh and we were on the 15 year plan... not 30 years. Plus we often paid in more principal than the payment called for - we were allowed to do that without penalty.
Ironically we also had the option to pay in less as long as we were 'ahead' at the time... Almost neg-am like. But it wasn't 'cause you could only do it if you already had paid in more principal than the original contract schedule had called for at that time.
So producer... You see those kind of income to loan ratios or terms much today?
Many folks you know on plan to pay off the mortgage in less than 15 years?
I can see a mortgage 3-4 times income in high cost areas like Cali & NYC if the person has some down payment or prior equity to cushion & a very good job.
But not the 10+ times income zero down you see on the coasts today... that's what we're criticizing.
Optimism is fine you have a plan that allows you to succeed.
I don't buy the argument TStockman - I guess we disagree.
I don't see how short sales readjust prices better than say REO auctions... its a wash to me.
I do believe folks will game the system if loan forgiveness is tax free... as vader says they will get it tax free if they show a gain... tax free if they show a loss. I would guess an environment like that would entice folks to bid prices up even more if they could get their losses subsidized by the tax man.
I think this is one of those ideas that makes us too smart by half.
Most folks do not pay off the homes, or at least as I know it, making home payments no more than rent with a tax advantage.
Not much anymore. Even in my cheap housing part of the world they move up into bigger & more expensive homes as fast as they have 'equity'... or buy a boat, cabin up north, trip to Hawaii... etc.
That might change as folks see & experience carnage.
Why the debt bubble hasn't burst -- yet
We're in the midst of an already huge bubble in the debt markets that's going to get bigger before it finally deflates. That bubble is characterized by huge bets on risk in the markets for government notes, corporate bonds, home mortgages and the various synthetic derivatives based on those instruments. And it's likely to take years to deflate -- either gently or in one big pop.
Ultimately this trend can't be sustained. The more money there is in search of higher yields, the higher those buyers will drive prices for high-yielding debt securities, and the lower those yields will fall. The only way to make up for falling yields, of course, is to take on more risk. But taking on the next level of risk isn't enough, as more and more institutional investors will soon drive up the price of those debt instruments, reducing their yield, too. Then the only solution is to move up yet another level in risk.
Where is Ronald Reagan when we need him? When it came to the heavy lifting of demonization, nobody could do it like Ronald McDonald.
The country is being sabotaged by people who can't speak English. I guess those who adhere to this view give the President a deferral due to his years in the National Guard.
Until I see amateur videos of Spanish-speaking borrowers with moustaches and large families handcuffing lenders to chairs and pistol-whipping them until they sign the neg-am, 110% LTV, ARM paper, I will look elsewhere for perps.
Someone in the comments above, and I do not recall who, advanced the idea that until things got hot for the GSE's, nothing would happen.
I completely support that notion. I think the economy is going to sink between now and January 2009, but I think it will still swim...barely.
But Inauguration will bring a nasty surprise to the Democratic victor. Fannie and Freddie will be discovered to have problems that need really big bucks to solve.
People have no fear of risk. They are not getting paid for bearing it as Greenspan said.
A junk bond witha loss rate of 2% will yield 7.25% (with no risk premium for holding it) Who can you blame?
The same thing happens with stocks,
Warren Buffet predicting 6% stock returns when Investment grade bonds yield 5.25% (.75% stock risk premium)?
and housing... Extremely low fear of risk and losses. Can you blame greenspan for this? You can only blame them for allowing high inflation really.. Every investor has a choice of how much risk to bear..
Its basically a shift in psychology, and a gambling mentality in the US with these assets. Who knows what to do about it. Central banks trying to pop the bubble can do more damage than good.
I think Shillers "Irrational Exuberance" book is already a classic, it reads better every year.
Steven,
I humbly submit that you can't have an environment in which there is no risk premium without extremely cheap and plentiful money.
That would be the yen carry trade.
You take the yen carry trade out of this picture, and you don't have what you're seeing now.
The low value of the yen is aggressively (putting it mildly) supported by the Japanese Finance Ministry. It is a gun pointed at our economy by a foreign power.
It is also supported by those people in the United States who profit from it, acting in collusion with a foreign power.
Currency manipulation to attack the manufacturing base and economic health of another country is an act of economic warfare. We are at war with Japan and China economically.
They are winning using currency manipulation and, in the case of China, slave labor.
I have read a lot recently about being taxed on debt charge offs and with the way the real estate market is going this is going to be happening a lot.
Though I don't feel bad for all these people that are going to end up in foreclosure (the flippers (casey serin)) there are some truly sad stories. And these people ending up with a huge tax burden will only make their lives worse.
There is something though that I never see posted anywhere.
Someone in this situation can get out of the tax burden.
If a person is insolvent they can get out of paying the taxes on the charge off. To do this, their liabilities must exceeded their assets. If you are upside down on a house and have a ton of credit card debt this is easy to do.
I was told that this was originally created to save farmers. (I don't know if that is true.)
It would really help a lot of people if we could get this info out to the public. The IRS isn't going to tell them that they don't have to pay tax on the debt.
IRS form 982 allows a person to exclude the 1099-c's from their taxes. Turbo Tax doesnt have the forms and it seems almost no one has heard of this.
there is an insolvency exception for the recognition of COD income. If these are typical high-credit card debt low savings Americans they may not have to recognize the income.
My sense is that anything that would encourage low-ball offers with no penalty to the borrower would simply motivate the lender to foreclose rather than accept short sale or DIL. Monitoring a short sale to make sure that it was, actually, the best offer available can begin to get as expensive for the lender as FC.
I'm all in favor of borrowers accepting the consequences of their actions. I'm also all in favor of lenders accepting the consequences of their actions. One of the things I have always appreciated about "purchase money" laws is that they're supposed to make lenders more wary up front: if you know that you will not be able to pursue a deficiency judgment in the event of foreclosure, the theory goes, you will be wiser about the LTV at which you lend in the first place, as well as the quality of the appraisal, the evidence for stated occupancy, etc.
So, of course, since we've seen over the course of the last five years so much more prudent lending in "purchase money" states like CA . . . oh, wait.
What I mean is, since the taxability of debt forgiveness, the cost and difficulty of BK, and the future costs of credit after FC or deed-in-lieu have all functioned to make borrowers much more prudent . . . oh, wait.
The penalties are too distant from the actions penalized. Furthermore, the "penalties" always have to "enrich" someone--he who collects the penalty--and so it always gets bogged down into things like why the gummint should be enriched by a short sale, or why RE vultures should be, or BK attorneys, or . . . whatever. You got yourself a classic recipe for a pseudo-populist shift of penalties back onto Mr. Moneybag Lender. Mr. ML knows this and continues to charge dog-ate-my-homework fees to cover it. Borrowers who do their homework continue to get pissed off over those fees. And so it goes.
Frankly, I see the "nontraditional guidance" and other regulatory items that function to prevent high-risk lending from getting started in the first place having more impact on prudent lending and borrowing than these after-the-fact "misery" penalties.
Arbogast- I agree with you, but I don't agree with what investors are doing with these cheap imports and low inflation.
If I can get 5.25% return on treasuries and expected 6% return on stocks- who is forcing me to jump for that extra .75% yield on stocks?
Yen carry trade or excessive chinese investment aside, I can grab all the protection of bonds for a .75% price tag.. Cheap considering all the risks to fragile corp. profits in the world historically. People will point fingers but in the end they chose the risks.
I think our Govt needs to take better care of American workers without a doubt, it is extremely cheap to do so considering the benefits from the imports (the currency manipulation is a subsidy for americans unless they suddenly pull the plug) which would hurt themselves much more than us.
Meanwhile, out back, in the shed packed with dynamite...
Risk of derivatives 'not fully evaluated' ...
The firm's risk management survey involved 130 mostly global institutions, primarily commercial and retail banks and diversified groups, with total assets of $21,000bn.
...
Fewer than half of respondents regularly used "stress-testing", a technique recommended in reports on systemic risk. Page not found- msnbc.com
I guess they spend so much time counting the $21 trillion dollars that there is no time left over for things like stress testing.
dryfly: A foreclosure may take a while to result in a sale, with all the attendant waste. A short sale is, by definition, a sale. That's part of why I think it's a quicker and more orderly market adjustment.
TStockmann, of course a short sale is a quicker and more orderly market adjustment. Lenders aren't that insane. But can't you see the potential for short-sale scams if there is no penalty to the borrower, and no diligence on the part of the lender to verify that the short bid is the best available bid?
"So producer... You see those kind of income to loan ratios or terms much today?"
Dryfly, I am not questioning your financial management skills, indeed it seems like you had a plan back then, however, your optimism that double digit salary increases(inflation) would continue is not unlike the bullish view of most folk today as it relates to home appreciation. Nothing, good or bad, lasts forever.
And yes, contrary to the news reports, there are many people who have put money down on purchases in the last 5 years. More than have not.
Producer where were you in 1983? If you were alive you'd know that almost EVERYONE got double digit increases back then if they had a job at all.
That was the problem. That was why a GOOD interest rate back then was 12% Because inflation (pre-Volker crack down) was running at least that high.
It was exactly the OPPOSITE of what we see now. The problem wasn't future payment resets, it was making the INITIAL payments at 12% before a couple years of inflation diluted its value.
After a few years of high inflation just about everyone's previous payments became manageable... if they kept their jobs (not always the case).
But if you had a down payment - you had some cushion & time to sell even back then... though it could take years. My neighbor took three years selling his home & he took a loss.
It wasn't like we were smarter back then, we weren't (look at the reruns of the shows we watched - man). But most of us peons didn't willfully commit economic suicide... we let the S&L big boys do that. Today way too many folks believes its their right to drink the Jonestown Juice.
"Producer where were you in 1983? If you were alive you'd know that almost EVERYONE got double digit increases back then if they had a job at all"
yes, yes, but the point is it didn't continue forever--Carter went out and Reagan came to save the day--did you think it would? Sounds like you made decisions based on that possibility.
And while no down lending is a risky proposition, it certainly has worked out for those who timed the market correctly. Values in my hood have grown 4-fold in the last 3 years, and for those got in too late, so what...you have not lost any of your savings due to devaluation and you liked the place when you bought it, right?
Tanta - Of course I can see the possibility of fraud, but the tax liability wouldn't police that - in fact, it would tend to discourage true short sales more than fraudulent ones, since there's aprofit in the fraud that might make the penalty worthwhile. I would think it's up to the lender rather than the IRS whether to accept a sale in lieu of coreclosure, using the type of due diligence you've indicated was sorely lacking at the early stages of the process.
On purchases, the non-recourse states like CA won't persue foreclosure deficiencies. But I think they can still 1099 the borrowers for forgiven debt.
Housing is and always will be cyclical. I was a single-family home builder in 1981, so by my frame of reference what we're seeing now barely qualifies as a slowdown, much less a bust. The numbers this week are holding at about 1.5mm new starts this year and existing supply, while high, is not increasing. What I see is a natural pullback somewhat exaggerated by several years of basically free money to play with.
A lesson old-timers like me can't forget... when you've lived through a 21% prime rate, the term "tight money" has a frame of reference that's hard to top. So please forgive me if I seem cynical. In my opinion the current hype about the sub-prime "meltdown" is going to prove to be much ado about not much. The defaulted loans make up about 2% of the total debt market and the risk dispersal is so widely based that no one player can bring the system down. In fact, the delinquency rate on sub-prime (and prime mortgages) was higher in 2002 than it is now.
As I see it, the only systemic threat that exists in the capital markets is if one of the GSEs (i.e. Fannie Mae, Freddie Mac. etc.) were to fail. It's disappeared from the media, but there are still huge issues regarding their accounting problems. My hope is that Congress gets something right and reins them in to serve the lower end of the markettheir original chargeand leaves the rest to the true private sector capital markets. (But that's wishful thinking at it's worst... when was the last time Congress was right?)
Good comments Shepard.
Appreciate the historical perspective.
The one thing that worries me is that those who are citing facts.... aren't.
Firstly, the inventory level are at or near all time highs and growing. Look at Pheonix and Vegas for instance. They are above the highs set in Sept/Oct of '06. Additionally, as time passes, intuitively I believe that a higher proportion of that higher inventory is of a "must sell" classification (arm resets, forclosures etc).
Now, everyone cites the rapid reduction in interest rates my Greenspan as an effective tool to speed up the economy. And many say that as much as 30% of the job growth in the last few years is due to housing. Does a rapid slowdown in the housing market therefore not indicate that much of this growth will fall to previous levels? How can easy money help so much on the way up, but tight money have little effect on the way down?
Additionally, although many will keep their houses....won't also many now not be able to access and spend MEW? What about those who are able to afford ARM resets and will just pay a higher percentage of their income for housing. How can gas price rises affect the economy so much (which means people spend an extra $100 or $200 a month) but a 25-50% increase in a house payment have little or no affect on the economy?
Next: given that 21% interest is no doubt stifling....what does that say about the default levels fixed long-term rates are at 6%? Doesn't this imply the the current problems are more subject to getting worse than better since money is about as cheap now as it's gonna get and the only likely way that assets will get less expensive is a reduction in their price and not a reduction in the cost of money to buy it?
And Finally, even though subprime may be a relatively small percentage of the total housing market: Given the "ladder" move-up analogy of the housing market (the upper levels are highly dependant on the lowest rung first time buyers) Suppose you have a 100 rung ladder. The first two rungs may only be 2%, but if you can't reach the third rung, the ladder is 100% useless.
All these have been pointed out before many times....I have yet however to have a pragmatic explaination by anyone (bull or not) as to why this will all be just a small blip, an overblown hype, and not turn into the pain that seems at least very plausible if not highly likely.
Let me clarify,
No bull has addressed ALL these issues comprehensively with a reasonable explaination as to how each of this issues, cumulatively, will have little effect on the economy.
They simply point to ONE of the many aspects, downplay it's significance, and ask us all to move on.
Although CA is a non-recourse state, my understanding is that any departure from the initial mortgage, including any refi or HELOC, is considered in a different category, and therefore subject to recourse. How many of those FB's have managed to keep from pulling out any of the "equity" on their way down?
Mozo Maz, It is my understanding that in "purchase money" states like California, the non-recourse only applies to purchase money firsts. So if the homeowner has refi'd, they are on the hook. Or if they took out a 2nd to purchase the home, they are on the hook for the 2nd. That is my understanding.
Shepard, a credit crunch really has nothing to do with interest rates - there was a credit crunch in the '50s with rates lower than today! In fact, a common definition for a credit crunch is less credit due to non-price causes - like tighter regulations - exactly what we are seeing today.
So the sector specific credit crunch in subprime and Alt-A (and probably soon in the prime ARMs) is classic. It will clearly have a significant impact on housing. How big the impact will be is uncertain - and the impact on the general economy is also uncertain.
Best Wishes.
Shepard, Agree that for house builders the current decline is not exceptional and may not become exceptional.
However, IMO nominal house prices will decline this year(didn't 1981), ARMs will reset, vacant houses are a record (worse than 1981), a recession is a good probability and the impact of credit tightending is ahead of us. Therefore, IMO the loan default problems and related derivatives issues are just starting.
Hopefully, the problems won't be as bad as the early 1980's but if they are the financial and economic impacts will be large.
IMO building will be at reasonable levels since costs will decline and builders will be able to and forced to reduce their prices. This would reinforce the pressure on existing home prices and debt secured by those houses.
I swear one of the first discussions I was in on here was about the nuances of recourse/non-recourse. I think Tanta explained that it was more convoluted than it first appeared. But I can't find this in a search of the site.
I could just be imagining it, but it seems so real!
First-time homeowner Carmen Rodriguez likes everything about the three-bedroom house in San Pablo she bought in September and shares with her brother. Except for the loan. Rodriguez, speaking through a Spanish interpreter, said the payments on her loan have already increased by a third, rising $500 to $2,000 a month.
She does not like the loan.
You see no one care about price.
If you get 100% LTV - you only end up hating the loannnnnn....
Purchase money in CA is non-recourse meaning no judgements or 1099's after jingle mail.
Refinance mortgages are different. Lenders can come after the borrower.
cr,
i live in the Bay Area. i have an atty friend who does some work for the poor and elderly who are filing for bankruptcy bec of predatory lending. he says the courts are full of cases where, for primary mortgages or home equity loans, the borrowers closing statements had 75-125k for consulting fees paid to an affiliate of the mortgage broker. the broker then took the funds out of state and is no longer traceable. these loans became part of RMBS, etc. they were typically neg amort loans.he thinks there are thousands of these cases in this area alone. have you heard of this?
I just wanted to add my 2 cents about your statement that the 2005 changed to the bankruptcy laws "made it more difficult for homeowners to declare Chapter 7"). I think most consumer bankruptcy attorneys (who regularly study and practice bankruptcy law) will tell you that that is simply not the case.
Bankruptcy has become more complicated for attorneys - and unfortunately, many have had to increase fees. The costs of bankruptcy (everything from filing fees to credit counseling fees) add to the burden. But bankruptcy protection is still available. Yeah - there are some new forms and new requirements, and I have to make my clients gather far more documents than I ever had to before BAPCPA became law, but a struggling homeowner can still file Chapter 7 if this the option they are considering.
At the risk of appearing self serving, I am finding that there is a belief in the public that bankruptcy is not an available option any longer. I have met many people who have regretted financial decisions they made under a mistaken assumption that they could no longer file bankruptcy (it's not uncommon for me to hear that banks and debt collectors have told debtors this).
Whether a homeowner should consider a "short sale" vs. a bankruptcy filing is something that can only be decided on a case by case basis. There is no "one size fits all" solution out there and distressed homeowners owe it to themselves to get as much information they can about all of their options... including the ones they might not like thinking about.
The forgiveness of debt is considered phantom income.
a lot of people are surprised that IRS taxes debt forgiveness, but no one seems to think about what the world would be like if IRS didn't. I, for one, would ask my employer to loan me my salary instead of paying it to me, and at the end of every quarter forgive the debt. Of course, I may not get that. But what about the CEO's with boards that backdate their options. Think they wouldn't get that little perk?
More inventory in Phoenix :43,841
294 more homes hit the market since Friday. Did I mention the over 6,441 active rental propertie in MLS?
Nice to know that an area of over 3 million people with an average influx of 100k has enough inventory to house an entire year of immigration. It might help if there were more new jobs, but sadly permits are falling like rocks in a pond.
don't just take it from me- one of Phoenix's leading economic prognosticators Elliot Pollack says
"The bad news relates to single family housing. We asked last year Can this last? We
now have an answer. As I pointed out last year, some things do not end well and housing
certainly fits in that category. Fifteen years of a strong housing market has caused people
to forget that housing is cyclical. In 2004 and 2005, there was an explosion in the
number of single family housing permits in the Greater Phoenix area, roughly 123,000
over that two-year period. Builders attempted to meet what appeared to be substantial
demand created not only by those moving to Greater Phoenix, but by investors, second
home buyers and people moving from apartments to single family. Yet, the demographic
demand for single family housing in Greater Phoenix was about 42,000 to 45,000 units
per year over that period, or about 84,000 to 90,000 total units over those two years.
Now that the frenzy is over and the dust has settled, it appears that over-building has
occurred, both nationally and in Greater Phoenix. While you can fool around with the
numbers until the cows come home (and believe me, we have tried); it appears that the
number of excess housing units constructed during the frenzy is between 15,000 and
25,000.
In figuring that number, you have to realize that we really only know population once a
decade and that is when there is a census. We do not know the extent people are moving
from apartments to single family homes. We do not know the exact number of second or
vacation homes that were bought or purchased in the 2004 to 2005 period and we do not
know how many investors there were for sure. But this excess, comprised of some
investor homes, homes under construction by builders that do not yet have buyers, and
vacant resale homes, appears to be real.
Like all inventory corrections (which is essentially what this is) you need to go through a
period of under-production to get rid of that excess inventory. Thus for the year 2006 as
a whole, we will build the number needed for the demographic demand 43,000
44,000 units. It is only recently, since August, that we have even begun to address the
problem by permitting a lower of units than the demographic demand would suggest is
necessary. Whether the problem takes one year to resolve or longer depends on how bad
a year 2007 turns out to be. The worse 2007 is in terms of housing permits, the quicker
we resolve the problem."
Ugh. Now I happen to believe that the inventory uptake will be even slower tha
con't..
Elliot believes, and the raw numbers on the MLS are starting to concern local realtors, especially how the numbers are translating into sales...
We have yet to see the jingle mail and large resets failure hit this market.
So how much of a drop in price does it take to make the market start clearing and function as a price setting mechanism? Phoenix is about to find out, and you are all invited to watch.
I personally remember the worst of the housing bust of the early 90's in Arizona, and believe this could be as bad.
The issue of recourse/non-recourse is indeed much more convoluted than it appears. I haven't checked California, but I have checked the statutes in Arizona and they appear to offer very broad protection for borrowers.
This is not my specialty, but just looking at the statutes for a few minutes I started to see some potential loopholes. Unfortunately, virtually all the published court cases interpreting such statutes in Arizona are from the depression era. At that time the laws were changing constantly and the courts were reinterpreting the laws (or finding them unconstitutional) on a fairly regular basis.
In theory the laws that were in place when the borrower signed the note should govern what recourse is available to the lender. However, I worked on a commercial property case recently where the judge decided that the parties' rights did not "vest" until the default occurred, so new laws applied that the borrower and the lender never anticipated when they signed the contract.
Bottom line - advice from experts is helpful, but this will be more complicated than most of the experts anticipate. Nothing is guaranteed.
jim r, I haven't heard of anything liek that.
Bill McLeod, thanks for that update. I guess you can include me in the confused category (the story I linked at CNN Money argued it was more difficult for some homeowners to file Chapter 7). Thanks again for the information!
Best to all.
Section 108 provides some big holes to escape tax on forgiveness of debt. The biggest are the first 2, insolvency or bankruptcy:
a) Exclusion from gross income
(1) In general
Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if -
(A) the discharge occurs in a title 11 case,
(B) the discharge occurs when the taxpayer is insolvent,
& the definitions (because tax code without definitions is like ice cream without milk)
2) Title 11 case
For purposes of this section, the term "title 11 case" means a case under title 11 of the United States Code (relating to bankruptcy), but only if the taxpayer is under the jurisdiction of the court in such case and the discharge of indebtedness is granted by the court or is pursuant to a plan approved by the court.
(3) Insolvent
For purposes of this section, the term "insolvent" means the excess of liabilities over the fair market value of assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the amount by which the taxpayer is insolvent, shall be determined on the basis of the taxpayer's assets and liabilities immediately before the discharge
On Shepherd's post regarding 1981 and 20% interest rates...
I graduated that year and took a job as a Chem Engineer. Rates were high though I only recall a short period of time when rates were THAT high and I never once met anyone who actually took out a loan that high.
But rates were high for money markets too... when loans were running 15% or so I was getting 18% in my money market fund.
And inflation was pretty high too - I got a review after my first six months at the chem plant & they gave me a 20% raise (some of it on 'merit', some due to COLA).
How common is it today to get 40% raises on an 'annualized' basis?
I bought a house a couple years later and was ecstatic to qualify for a 12% loan... And it didn't worry me much because all my raises over those two years had been in the 12-15% range. At that rate my payments would be as expensive as parking tickets in a decade... if inflation kept at that pace.
I moved & sold the home. And of course we know inflation didn't stay at that rate.
But it really was different in 1981. Hard to draw analogies from those times.
dryfly, kind of like this magazine cover from 1981?
TIME Magazine Cover: Savings Plans - June 8, 1981 - Banking - Business
As a modest suggestion, wouldn't this be one area where Congressional action for relief for mortgage debtors might be appropriate? Eliminating the tax on the "income" from short sale or debt forgiveness of a primary residence (on a temporary or permanent basis) would remove one obstacle to a rapid and (comparatively) orderly decline in residential real estate prices. I know a number of the readers of this blog want to see as much pain as possible, but let's keep our eyes on the main prize - a rationally priced housing market.
Average Joe, you should read "Home Equity: The Party May Be Over For Consumers" in the April 2 issue of BusinessWeek. The optimists arguments are "solid job growth outside of construction and manufacturing, healthy income growth, and the lagged effect of past wealth gains are expected to make up for the decline in equity extraction. Also, higher-income households make up a majority of spending and are less likely to be affected by the housing downturn. We should soon know which side has it right."
OT: IMF to urge further depreciation in dollar: paper
IMF to urge further depreciation in dollar: paper
| Reuters
dryfly, kind of like this magazine cover from 1981?
Exactly.
I had a buddy back then tell me if he could save a $100K he could retire (he wasn't even 25 at the time). Figure 18% of $100K equals $18K per year... way below his expenses back then... reefer, beer, tickets to blues bands coming in from Chicago, rent a small place... maybe even some food once in a while... and not work anymore.
I laughed... I told him his 18% won't get you too far too long at 16%-20% inflation. Even then those rates evaporated pretty fast.
::::
IMF to urge further depreciation in dollar
That's interesting. Its gotta happen... question is will BoJ & PBoC let it happen?
I know a number of the readers of this blog want to see as much pain as possible, but let's keep our eyes on the main prize - a rationally priced housing market.
That won't bring rationally priced housing. It would reward people who stuck out their neck & got it cut off.
I'm not a fan of 'maximum pain' but I agree with mort above - too many ways for the very well heeled to game this once the thin wedge gets inserted.
I'd rather see a revisit to BK reform... possibly forgive the tax but only if part of a much larger restructuring & start over.
"But we received IRS Form 1099 from the lender showing we had taxable "debt-relief" income of $26,215. How can we be taxed on money we didn't receive?"
This comment struck me as so very odd. Of course, they received the money. They spent it on a house! Just because the value of the house went down, how does that equate to "not receiving the money"?
"I bought a house a couple years later and was ecstatic to qualify for a 12% loan... And it didn't worry me much because all my raises over those two years had been in the 12-15% range. At that rate my payments would be as expensive as parking tickets in a decade... if inflation kept at that pace.
I moved & sold the home. And of course we know inflation didn't stay at that rate."
Sounds like the same pie in the sky optimism of the last 5 years you have criticized people for...
On the debt forgiveness, thing. Remember that gain on the sale of the house is not taxable. Were the gain taxable, the loss would offset the phantom income to some extent.
dryfly -
I know that people are endlessly inventive in gaming the system. The protection in the case of short sales or similar partial debt forgiveness for residences currently owned is that while the creditor has a strong interest in reducing third-party costs to a resolution, he is ultimately interested most in a bottom-line return - which means wringing as much money out of the bad loan as possible. What produces a taxable event for the borrower represents a loss for the creditor, who has to accept the loss on a voluntary basis. If there is no loss for the creditor, then there has been no gain for the borrower. It;s not that there can't be gaming - using Mort's example - an employer could buy a mortgage at face value and then forgive the debt as a form of compensation but I doubt thta kind of fraud would be all the common, and should be relatively easy to monitor and punish. Requiring bankruptcy or similar restructuring (as you suggest and as it looks the current law does) makes all nonrecourse loans into recourse, which seems both unwise and politically impossible.
As far as lowering prices - actively encouraging short sales begins the repricing of real estate assets or as does removing one reason why a owner might fight foreclosure, extending the problem and piliing up further losses. It's possible that people "profited" by their actions - HELOCing and investing or just having a grand year with equity withdrawal. It's not likely that the overwhelming majority of people are going to be smirking as they lose their houses. And everyone - left, right, and center - who believes in the bubble also believes that the Federal Government bears a considerable share of the responsibility, through omission or comission. Should the USG get rewarded?
You can get a view at just how cyclical national and local housing is at thebubblebuster.com. Today there is also a focus on the San Luis Obispo market...
OT: Company offering Free MLS listings for FSBOs
An Internet boost for do-it-yourself home sellers - Los Angeles Times
"Fox said IggysHouse is paying the nominal cost for the MLS listings to drive more business to Iggys House - Real Estate , his company's original real estate presence on the Internet. That site rebates 75% of the traditional commission received by an agent representing a buyer if the buyer finds his or her own home and works with the company's salaried agents. The remaining 25% of that commission goes into the coffers of the company."
Sounds like the same pie in the sky optimism of the last 5 years you have criticized people for...
What do you think I paid for the home back then? $45K.
What was I making then? About $30K/yr.
Did I put anything down? About $5K - cash (>10% but not the 'magical' 20% & 'yes' it cost me some points).
Still my mortgage (just out of college) was less than 1.5 times my salary. My payments were pretty high at 12% interest but manageable. I had about $2K student loans and $3K in a car loan and we had no other debt. We were cash rich let me tell you.
Oh and we were on the 15 year plan... not 30 years. Plus we often paid in more principal than the payment called for - we were allowed to do that without penalty.
Ironically we also had the option to pay in less as long as we were 'ahead' at the time... Almost neg-am like. But it wasn't 'cause you could only do it if you already had paid in more principal than the original contract schedule had called for at that time.
So producer... You see those kind of income to loan ratios or terms much today?
Many folks you know on plan to pay off the mortgage in less than 15 years?
I can see a mortgage 3-4 times income in high cost areas like Cali & NYC if the person has some down payment or prior equity to cushion & a very good job.
But not the 10+ times income zero down you see on the coasts today... that's what we're criticizing.
Optimism is fine you have a plan that allows you to succeed.
Most folks do not pay off the homes, or at least as I know it, making home payments no more than rent with a tax advantage.
Jim
I don't buy the argument TStockman - I guess we disagree.
I don't see how short sales readjust prices better than say REO auctions... its a wash to me.
I do believe folks will game the system if loan forgiveness is tax free... as vader says they will get it tax free if they show a gain... tax free if they show a loss. I would guess an environment like that would entice folks to bid prices up even more if they could get their losses subsidized by the tax man.
I think this is one of those ideas that makes us too smart by half.
Most folks do not pay off the homes, or at least as I know it, making home payments no more than rent with a tax advantage.
Not much anymore. Even in my cheap housing part of the world they move up into bigger & more expensive homes as fast as they have 'equity'... or buy a boat, cabin up north, trip to Hawaii... etc.
That might change as folks see & experience carnage.
Gonna get much worst before it pops.
Why the debt bubble hasn't burst -- yet
We're in the midst of an already huge bubble in the debt markets that's going to get bigger before it finally deflates. That bubble is characterized by huge bets on risk in the markets for government notes, corporate bonds, home mortgages and the various synthetic derivatives based on those instruments. And it's likely to take years to deflate -- either gently or in one big pop.
Ultimately this trend can't be sustained. The more money there is in search of higher yields, the higher those buyers will drive prices for high-yielding debt securities, and the lower those yields will fall. The only way to make up for falling yields, of course, is to take on more risk. But taking on the next level of risk isn't enough, as more and more institutional investors will soon drive up the price of those debt instruments, reducing their yield, too. Then the only solution is to move up yet another level in risk.
vader the link didn't go through - I'm interested in reading it all. Please try again.
Carmen Rodriguez
Where is Ronald Reagan when we need him? When it came to the heavy lifting of demonization, nobody could do it like Ronald McDonald.
The country is being sabotaged by people who can't speak English. I guess those who adhere to this view give the President a deferral due to his years in the National Guard.
Until I see amateur videos of Spanish-speaking borrowers with moustaches and large families handcuffing lenders to chairs and pistol-whipping them until they sign the neg-am, 110% LTV, ARM paper, I will look elsewhere for perps.
Trend:
http://bp3.blogger.com/_wFWqWIH-WFU/RgZ9WKFDQEI/AAAAAAAAAfs/-GTDCyfXduE/s1600-h/National%2520Existing%2520Home%2520Sales-%2520Feb07.png
Someone in the comments above, and I do not recall who, advanced the idea that until things got hot for the GSE's, nothing would happen.
I completely support that notion. I think the economy is going to sink between now and January 2009, but I think it will still swim...barely.
But Inauguration will bring a nasty surprise to the Democratic victor. Fannie and Freddie will be discovered to have problems that need really big bucks to solve.
Iraq. Insolvency. The I-words.
People have no fear of risk. They are not getting paid for bearing it as Greenspan said.
A junk bond witha loss rate of 2% will yield 7.25% (with no risk premium for holding it) Who can you blame?
The same thing happens with stocks,
Warren Buffet predicting 6% stock returns when Investment grade bonds yield 5.25% (.75% stock risk premium)?
and housing... Extremely low fear of risk and losses. Can you blame greenspan for this? You can only blame them for allowing high inflation really.. Every investor has a choice of how much risk to bear..
Its basically a shift in psychology, and a gambling mentality in the US with these assets. Who knows what to do about it. Central banks trying to pop the bubble can do more damage than good.
I think Shillers "Irrational Exuberance" book is already a classic, it reads better every year.
Intersting toward the end:
Mortgage Grapevine: SUBPRIME CRYSTAL BALL, a peak at top 25's capitalization
And a plan that allows you to cut your losses (to avoid disaster) if your plan doesn't succeed.
Steven,
I humbly submit that you can't have an environment in which there is no risk premium without extremely cheap and plentiful money.
That would be the yen carry trade.
You take the yen carry trade out of this picture, and you don't have what you're seeing now.
The low value of the yen is aggressively (putting it mildly) supported by the Japanese Finance Ministry. It is a gun pointed at our economy by a foreign power.
It is also supported by those people in the United States who profit from it, acting in collusion with a foreign power.
Currency manipulation to attack the manufacturing base and economic health of another country is an act of economic warfare. We are at war with Japan and China economically.
They are winning using currency manipulation and, in the case of China, slave labor.
If Chuck Prince didn't exist, I would have to invent him.
He failed to mention whether his job was being outsourced to India, but, just guessing, I think not.
Now, you can call this good, sound, capitalist business, or you can call it screwing the United States.
But I can always trust Chuck Prince.
- NY Times
And, by the way, we now know why Citi hasn't been sounding the tocsin about subprime mortgages.
They are going to make up the loss on the backs of the employees.
Eating their young ain't in it, as Captain Aubrey would say.
Hi,
I have read a lot recently about being taxed on debt charge offs and with the way the real estate market is going this is going to be happening a lot.
Though I don't feel bad for all these people that are going to end up in foreclosure (the flippers (casey serin)) there are some truly sad stories. And these people ending up with a huge tax burden will only make their lives worse.
There is something though that I never see posted anywhere.
Someone in this situation can get out of the tax burden.
If a person is insolvent they can get out of paying the taxes on the charge off. To do this, their liabilities must exceeded their assets. If you are upside down on a house and have a ton of credit card debt this is easy to do.
I was told that this was originally created to save farmers. (I don't know if that is true.)
It would really help a lot of people if we could get this info out to the public. The IRS isn't going to tell them that they don't have to pay tax on the debt.
IRS form 982 allows a person to exclude the 1099-c's from their taxes. Turbo Tax doesnt have the forms and it seems almost no one has heard of this.
So, maybe this will help some one.
http://www.irs.gov/pub/irs-pdf/f982.pdf
there is an insolvency exception for the recognition of COD income. If these are typical high-credit card debt low savings Americans they may not have to recognize the income.
Average Joe:How can easy money help so much on the way up, but tight money have little effect on the way down?
Willy Wonka over at the CDO Factory has innovated an Everlasting Bondstopper!
My sense is that anything that would encourage low-ball offers with no penalty to the borrower would simply motivate the lender to foreclose rather than accept short sale or DIL. Monitoring a short sale to make sure that it was, actually, the best offer available can begin to get as expensive for the lender as FC.
I'm all in favor of borrowers accepting the consequences of their actions. I'm also all in favor of lenders accepting the consequences of their actions. One of the things I have always appreciated about "purchase money" laws is that they're supposed to make lenders more wary up front: if you know that you will not be able to pursue a deficiency judgment in the event of foreclosure, the theory goes, you will be wiser about the LTV at which you lend in the first place, as well as the quality of the appraisal, the evidence for stated occupancy, etc.
So, of course, since we've seen over the course of the last five years so much more prudent lending in "purchase money" states like CA . . . oh, wait.
What I mean is, since the taxability of debt forgiveness, the cost and difficulty of BK, and the future costs of credit after FC or deed-in-lieu have all functioned to make borrowers much more prudent . . . oh, wait.
The penalties are too distant from the actions penalized. Furthermore, the "penalties" always have to "enrich" someone--he who collects the penalty--and so it always gets bogged down into things like why the gummint should be enriched by a short sale, or why RE vultures should be, or BK attorneys, or . . . whatever. You got yourself a classic recipe for a pseudo-populist shift of penalties back onto Mr. Moneybag Lender. Mr. ML knows this and continues to charge dog-ate-my-homework fees to cover it. Borrowers who do their homework continue to get pissed off over those fees. And so it goes.
Frankly, I see the "nontraditional guidance" and other regulatory items that function to prevent high-risk lending from getting started in the first place having more impact on prudent lending and borrowing than these after-the-fact "misery" penalties.
Arbogast- I agree with you, but I don't agree with what investors are doing with these cheap imports and low inflation.
If I can get 5.25% return on treasuries and expected 6% return on stocks- who is forcing me to jump for that extra .75% yield on stocks?
Yen carry trade or excessive chinese investment aside, I can grab all the protection of bonds for a .75% price tag.. Cheap considering all the risks to fragile corp. profits in the world historically. People will point fingers but in the end they chose the risks.
I think our Govt needs to take better care of American workers without a doubt, it is extremely cheap to do so considering the benefits from the imports (the currency manipulation is a subsidy for americans unless they suddenly pull the plug) which would hurt themselves much more than us.
This is a great question:
How can easy money help so much on the way up, but tight money have little effect on the way down?
so far this is indeed the case.
CR: If FED cuts in june and $$$ rising kill the Yen carry trade problems would be greater than if carry trade continues ?
Or maybe the answer is a for a quick jump in YEN value and after that carry trade can resume ?
Meanwhile, out back, in the shed packed with dynamite...
Risk of derivatives 'not fully evaluated'
...
The firm's risk management survey involved 130 mostly global institutions, primarily commercial and retail banks and diversified groups, with total assets of $21,000bn.
...
Fewer than half of respondents regularly used "stress-testing", a technique recommended in reports on systemic risk.
Page not found- msnbc.com
I guess they spend so much time counting the $21 trillion dollars that there is no time left over for things like stress testing.
dryfly: A foreclosure may take a while to result in a sale, with all the attendant waste. A short sale is, by definition, a sale. That's part of why I think it's a quicker and more orderly market adjustment.
TStockmann, of course a short sale is a quicker and more orderly market adjustment. Lenders aren't that insane. But can't you see the potential for short-sale scams if there is no penalty to the borrower, and no diligence on the part of the lender to verify that the short bid is the best available bid?
"So producer... You see those kind of income to loan ratios or terms much today?"
Dryfly, I am not questioning your financial management skills, indeed it seems like you had a plan back then, however, your optimism that double digit salary increases(inflation) would continue is not unlike the bullish view of most folk today as it relates to home appreciation. Nothing, good or bad, lasts forever.
And yes, contrary to the news reports, there are many people who have put money down on purchases in the last 5 years. More than have not.
So it's not all bad news out there.
Producer where were you in 1983? If you were alive you'd know that almost EVERYONE got double digit increases back then if they had a job at all.
That was the problem. That was why a GOOD interest rate back then was 12% Because inflation (pre-Volker crack down) was running at least that high.
It was exactly the OPPOSITE of what we see now. The problem wasn't future payment resets, it was making the INITIAL payments at 12% before a couple years of inflation diluted its value.
After a few years of high inflation just about everyone's previous payments became manageable... if they kept their jobs (not always the case).
But if you had a down payment - you had some cushion & time to sell even back then... though it could take years. My neighbor took three years selling his home & he took a loss.
It wasn't like we were smarter back then, we weren't (look at the reruns of the shows we watched - man). But most of us peons didn't willfully commit economic suicide... we let the S&L big boys do that. Today way too many folks believes its their right to drink the Jonestown Juice.
"Producer where were you in 1983? If you were alive you'd know that almost EVERYONE got double digit increases back then if they had a job at all"
yes, yes, but the point is it didn't continue forever--Carter went out and Reagan came to save the day--did you think it would? Sounds like you made decisions based on that possibility.
And while no down lending is a risky proposition, it certainly has worked out for those who timed the market correctly. Values in my hood have grown 4-fold in the last 3 years, and for those got in too late, so what...you have not lost any of your savings due to devaluation and you liked the place when you bought it, right?
Tanta - Of course I can see the possibility of fraud, but the tax liability wouldn't police that - in fact, it would tend to discourage true short sales more than fraudulent ones, since there's aprofit in the fraud that might make the penalty worthwhile. I would think it's up to the lender rather than the IRS whether to accept a sale in lieu of coreclosure, using the type of due diligence you've indicated was sorely lacking at the early stages of the process.
Florida short sales does not tax the Florida short sales with nonrecourse debt for Florida short sales.