Something that makes me want to grind my teeth, is the comment like this: " With labor markets and income growth still appearing strong, it looks like consumers can shoulder the extra debt burden, for now. "If wage income grows enough to offset increased debt, then consumers will be fine," says McKelvey."
Sounds like what was being said about increasing mortgage debt.
In recent years, rising net worth has trumped the traditional arguments that heavy debts and a low savings rate will spell trouble for consumers. That's because households are discovering new vehicles for saving, and they are better able to handle a higher volume of debt. For example, since the recession ended three years ago, household liabilities have soared by $2.7 trillion. That compares with a rise in aftertax income of only $1.4 trillion. BW one year ago.
Understanding household debt obligations by Chairman Alan Greenspan In evaluating household debt burdens, one must remember that debt-to-income ratios have been rising for at least a half century. With household assets rising as well, the ratio of net worth to income is currently somewhat higher than its long-run average. So long as financial intermediation continues to expand, both household debt and assets are likely to rise faster than income. Without an examination of what is happening to both assets and liabilities, it is difficult to ascertain the true burden of debt service. Overall, the household sector seems to be in good shape, and much of the apparent increase in the household sector's debt ratios over the past decade reflects factors that do not suggest increasing household financial stress. And, in fact, during the past two years, debt service ratios have been stable. link
April 3 (Bloomberg) -- Moody's Investors Service plans to cut the credit ratings on 40 to 50 banks in Europe and North America after Merrill Lynch & Co. and JPMorgan Chase & Co. said the new rankings are flawed.
Over at HBB we've been saying the same for quite some time, too. The capex slowdown isn't a surprise either -- businesses just don't spend in the face of a consumer slowdown.
The drop off in MEW due to the tightening lending standards and falling property values has been well documented here. Has there been a corresponding tightening in the other consumer lending arenas such credit cards and auto loans? It not unreasonable to assume that a FB would look for other sources of funding when the easy money HELOC well runs dry.
Once someone reaches a certain debt to income ratio they become unable to keep up the even interest payments, much less reduce the principle. If the mortgage puts them over that limit why would anyone lend them more, particularly if it's in a subordinate position?
Anthony Fleming's Bloomberg link is interesting. Moody evidently tried to create a FICO system for banks, and ML was shocked, shocked to find out that there were qualitative errors in the results. Wow. Hooda thunk? And it worked so well with the general public.
In Samuel's NY Times Article about the affluent...
"But they quickly learned that they could no longer get 100 percent financing, even though Dr. Au makes more than $700,000 a year as a surgeon in Hawaii. So the couple settled on a $625,000 studio and used $62,500 in savings for the down payment."
$700,000/yr? And he wants 100% financing? That'a serious WTF, IMO.
I realize this is a very naive view of the relevant economics, but is it possible that the deflation of the real estate bubble will actually boost the general economy? The basis for this is that all the capital chasing yield in MBS will now be forced to find alternative investments. This will make the cost of initiating new (sound) business activity lower. In turn, business activity will increase.
Maybe the old rust belt will be reborn with export's based on a cheap dollar. Or we become a completely robot driven manufacturing society and use our technology to dump cheap goods on Asia and Europe.
"The Aus recently found that their credit scores had slipped into these lower categories. Dr. Au, who has four surgical offices in Hawaii, saw his score dip to a subprime level after he and a relative invested in a project, which Ms. Au would not discuss. She said the relative had missed some payments."
I realize this is a very naive view of the relevant economics, but is it possible that the deflation of the real estate bubble will actually boost the general economy? The basis for this is that all the capital chasing yield in MBS will now be forced to find alternative investments.
Yes but it will take time & be painful. Realignments always take time and result in some new losers not just new winners.
Can you post the dryfly's comment? I think it is interesting compare what he said one year ago and wht we are seeing.
JC - this all took place over a couple months of heated debate a year ago or so involving MEW & consumer spending. Lotsa opinions, mine was just one.
All I said was that people wouldn't stop spending just because they couldn't easily refi... not until they maxed out their credit cards & other borrowing options. When the cards get pulled or cut up, then spending ends & not until.
And I believed those 'other credit options' would remain available as long as 'liquidity' ran strong - and up until recently it HAS run strong... not just in the mortgage market.
However - it appears that might be ending. I've started reading articles suggesting that maybe the secondary markets are getting nervous about all types of ABS... CC based, auto loans, etc., not just mortgages.
Samuel:But in recent weeks, a growing number of New Yorkers, often with six-figure salaries and reasonably good credit, have begun to find that mortgages are harder to get as lenders try to stem losses from loans to the weakest, or subprime, borrowers.
...
Buyers like Lee and Kimberly Au had to adjust their expectations. The Aus wanted to buy a one- or two-bedroom condominium costing $800,000 to $1.25 million at the Atelier on West 42nd Street, now that their 8-year-old son has a modeling contract in New York. But they quickly learned that they could no longer get 100 percent financing, even though Dr. Au makes more than $700,000 a year as a surgeon in Hawaii. So the couple settled on a $625,000 studio and used $62,500 in savings for the down payment.
Wow, Tanta wasn't kidding. Those bankers turn on a dime once they get a whiff of blood in the air. Tightening standards is like shotgun blasts into the dark. Looks to me like this could get ugly.
Moral to the Au's story: don't get financially involved with relatives-you're highly likely to take it in the shorts eventually.
Although, if you're making that kind of money you ought to put some money down in any case. It's funny that they magically were able to come up with $62,500 in "savings" when the lender balked. I suppose they looked at it as a kind of arbitrage opportunity where they could get some appreciation without having to put in any capital. Gotta love that $450k price range in that building...
dry and I have been watching for this to happen for a long time. Nice to know we may be finally correct.
Something that makes me want to grind my teeth, is the comment like this: " With labor markets and income growth still appearing strong, it looks like consumers can shoulder the extra debt burden, for now. "If wage income grows enough to offset increased debt, then consumers will be fine," says McKelvey."
Sounds like what was being said about increasing mortgage debt.
In recent years, rising net worth has trumped the traditional arguments that heavy debts and a low savings rate will spell trouble for consumers. That's because households are discovering new vehicles for saving, and they are better able to handle a higher volume of debt. For example, since the recession ended three years ago, household liabilities have soared by $2.7 trillion. That compares with a rise in aftertax income of only $1.4 trillion. BW one year ago.
BW042005
Understanding household debt obligations by Chairman Alan Greenspan In evaluating household debt burdens, one must remember that debt-to-income ratios have been rising for at least a half century. With household assets rising as well, the ratio of net worth to income is currently somewhat higher than its long-run average. So long as financial intermediation continues to expand, both household debt and assets are likely to rise faster than income. Without an examination of what is happening to both assets and liabilities, it is difficult to ascertain the true burden of debt service. Overall, the household sector seems to be in good shape, and much of the apparent increase in the household sector's debt ratios over the past decade reflects factors that do not suggest increasing household financial stress. And, in fact, during the past two years, debt service ratios have been stable.
link
Moody's Plans Credit Rating Cuts to 40-50 Banks After Protests
Moody's May Cut Ratings on 40-50 Banks After Protests (Update2) - Bloomberg.com
April 3 (Bloomberg) -- Moody's Investors Service plans to cut the credit ratings on 40 to 50 banks in Europe and North America after Merrill Lynch & Co. and JPMorgan Chase & Co. said the new rankings are flawed.
vader, was there ever really any doubt?
Over at HBB we've been saying the same for quite some time, too. The capex slowdown isn't a surprise either -- businesses just don't spend in the face of a consumer slowdown.
Interesting reas.
Where is the CapEx?
The drop off in MEW due to the tightening lending standards and falling property values has been well documented here. Has there been a corresponding tightening in the other consumer lending arenas such credit cards and auto loans? It not unreasonable to assume that a FB would look for other sources of funding when the easy money HELOC well runs dry.
Once someone reaches a certain debt to income ratio they become unable to keep up the even interest payments, much less reduce the principle. If the mortgage puts them over that limit why would anyone lend them more, particularly if it's in a subordinate position?
Excellent article on the increased difficulty that even the affluent are having in getting mortgages in New York
The Battle for a Mortgage - NY Times
Anthony Fleming's Bloomberg link is interesting. Moody evidently tried to create a FICO system for banks, and ML was shocked, shocked to find out that there were qualitative errors in the results. Wow. Hooda thunk? And it worked so well with the general public.
Finally! We unlock the secret of robust consumer spending!
God this is going to be awful when the spigots turn off...
Boyz with BB Guns
Winter (Economic and Market) Watch » Boyz with BB Guns
In Samuel's NY Times Article about the affluent...
"But they quickly learned that they could no longer get 100 percent financing, even though Dr. Au makes more than $700,000 a year as a surgeon in Hawaii. So the couple settled on a $625,000 studio and used $62,500 in savings for the down payment."
$700,000/yr? And he wants 100% financing? That'a serious WTF, IMO.
Business Week is surprised? What, do they hire high school kids to do analysis?
Don't answer that question.
Can you post the dryfly's comment? I think it is interesting compare what he said one year ago and wht we are seeing.
João Carlos
Interesting information Russ Winter...
Business week is one of the worst business publications out there IMO.
I realize this is a very naive view of the relevant economics, but is it possible that the deflation of the real estate bubble will actually boost the general economy? The basis for this is that all the capital chasing yield in MBS will now be forced to find alternative investments. This will make the cost of initiating new (sound) business activity lower. In turn, business activity will increase.
Name:
Maybe the old rust belt will be reborn with export's based on a cheap dollar. Or we become a completely robot driven manufacturing society and use our technology to dump cheap goods on Asia and Europe.
Waz,
From later in the article:
"The Aus recently found that their credit scores had slipped into these lower categories. Dr. Au, who has four surgical offices in Hawaii, saw his score dip to a subprime level after he and a relative invested in a project, which Ms. Au would not discuss. She said the relative had missed some payments."
That's wtf.
I realize this is a very naive view of the relevant economics, but is it possible that the deflation of the real estate bubble will actually boost the general economy? The basis for this is that all the capital chasing yield in MBS will now be forced to find alternative investments.
Yes but it will take time & be painful. Realignments always take time and result in some new losers not just new winners.
Can you post the dryfly's comment? I think it is interesting compare what he said one year ago and wht we are seeing.
JC - this all took place over a couple months of heated debate a year ago or so involving MEW & consumer spending. Lotsa opinions, mine was just one.
All I said was that people wouldn't stop spending just because they couldn't easily refi... not until they maxed out their credit cards & other borrowing options. When the cards get pulled or cut up, then spending ends & not until.
And I believed those 'other credit options' would remain available as long as 'liquidity' ran strong - and up until recently it HAS run strong... not just in the mortgage market.
However - it appears that might be ending. I've started reading articles suggesting that maybe the secondary markets are getting nervous about all types of ABS... CC based, auto loans, etc., not just mortgages.
We'll see.
Dryfly said:
We'll see.
Wise man.
Samuel:But in recent weeks, a growing number of New Yorkers, often with six-figure salaries and reasonably good credit, have begun to find that mortgages are harder to get as lenders try to stem losses from loans to the weakest, or subprime, borrowers.
...
Buyers like Lee and Kimberly Au had to adjust their expectations. The Aus wanted to buy a one- or two-bedroom condominium costing $800,000 to $1.25 million at the Atelier on West 42nd Street, now that their 8-year-old son has a modeling contract in New York. But they quickly learned that they could no longer get 100 percent financing, even though Dr. Au makes more than $700,000 a year as a surgeon in Hawaii. So the couple settled on a $625,000 studio and used $62,500 in savings for the down payment.
Wow, Tanta wasn't kidding. Those bankers turn on a dime once they get a whiff of blood in the air. Tightening standards is like shotgun blasts into the dark. Looks to me like this could get ugly.
Moral to the Au's story: don't get financially involved with relatives-you're highly likely to take it in the shorts eventually.
Although, if you're making that kind of money you ought to put some money down in any case. It's funny that they magically were able to come up with $62,500 in "savings" when the lender balked. I suppose they looked at it as a kind of arbitrage opportunity where they could get some appreciation without having to put in any capital. Gotta love that $450k price range in that building...