Credit default swaps for CMBX started to increase spread in February. The spread is still much better than for subprime ABX but the ABX stabilized and CMBX did not. And like for ABX, the newer vintage, the higher spread.
I'm not an expert on these issues but I have been following warnings by Richard Suttmeier (Real Money) on how many banks have commercial loans in the range of 100-300% of the levels recommended by FDIC. I assume that a part of these loans are to residential builders as well as builders for industry, retail etc. The midcap cap and regional banks seem especially vulnerable in this regard.
Underwriting has gotten so frothy that we have to take a stand, - What the hell does that mean? A made up term?
"Buildings have traded at record prices and loan terms have become increasingly generous, with many buyers putting little or no equity into the deals." - I don't believe they have proof that people are buying with little or no down. Are they saying that commercial banks are lending (non-SBA 504a) on commercial property with 90% - 100% LTV? I seriously doubt it.
There are two broad types of home sellers right now:
Irrationals: Just keep holding on as the months go by, the showings decline and no offers come rolling in. Nothing is going to change and their house is not going to sell at the price they're asking but they refuse to admit that.
Must Sells: These are people that moved into their next house without selling their previous house first, or maybe their job has moved or maybe they can't afford their payments anymore and they have just enough equity to be able to pay off their loan even if they sell at a reduced price.
Where does this lead us? Home price deflation. While the Irrationals are holding on, the Must Sells are deflating the price all around them. The longer they hold on, the worse it gets for them.
Home price deflation is so dangerous because like a fission bomb, it's a self-feeding process until it explodes. When prices are going up, buyers snap up houses as fast as they can. They'll even camp out for them! When home prices are going down, time is on the buyer's side. Why buy a house today for x when tomorrow it will be 10% lower than x? Why buy a house tomorrow for 10% lower than x when the next day it will be 11% lower than x? Rinse, repeat.
Add to this the fact that even if a buyer WANTED to buy a home - they likely CAN'T. First, a buyer often has to sell their current house before they can buy their next house. With an average of 6 months on market and as much as 18 months, good luck getting two home sales to be coordinated within a month or two of each other. The result is more people becoming Must Sells.
This is a self-sustaining process that nothing at this point is going to stop.
The NY Fed just reported that the concentration of risks in hedge funds is back to pre-crisis 1998 levels. I'm not sure exactly how they quantify that, but the ducks are really lining up here, so to speak. Hedge funds up to the gills in risk, banks up to the gills in real estate loans in a topped out market, credit spreads generally at or near record low levels, frothy global stock markets. Sell in May a go away may prove quite prophetic this year.
You cant believe everything you read. The experts are often wrong.
Time Magazine reported, The prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline. They wrote that in 1947.
Business Week said, The goal of owning a home seems to be getting beyond the reach of more and more Americans. When they wrote that in 1969, the average price of a house was $28,000.
The Miami Herald wrote, If you are looking to buy, be careful. Rising home values are not a sure thing anymore. That sage advice came in 1985.
Money Magazine said, Most economists agree . . .a home will become little more than a roof and a tax deduction, certainly not the lucrative investment it was . That was their best advice in 1986.
The glut of U.S. properties for sale is about to hit the rental market.
A record number of homeowners who can't sell condominiums and houses are competing for tenants with the country's biggest apartment owners led by Chicago-based Equity Residential, said Jack McCabe, the founder of Deerfield Beach, Florida-based McCabe Research & Consulting LLC. Metropolitan New York, where demand for housing exceeds supply, may be the only place where rents increase, albeit at a slower pace, he said.
``Competition already is forcing the big apartment owners to offer concessions like two months free rent,'' McCabe said.
ews from the Front that perhaps you all will appreciate finally:
Yes CRE lending has tightened SOME. we had a commercial development that was to be spec built. the bankers said no problem lets rock. this was after some hemming and hawing, they still decided to green light the project.
well when push came to shove and it was time to fund, the bank went back on its promise and said the 'spec' is no longer in their vocabulary.
this caused me some problems as i had to pre-lease the whole project but we eventually got that done and it resulted in the liquidity event i so drunkenly wrote about on here a few weeks ago.
now - in other news - permanent financing for properties with investment grade tenants is still ROCK BOTTOM.
120bps over the ten year
80% LTV
1.2 DSC
non-recourse save for the standard carve-outs
1% origination
now thats a deal. and this is ultimately what drives the market is the permanent financing not the portfolio / balance sheet loan made by local joker banks such as BB&T (i hate you BB&T).
most developers can stomach prime plus 1 or 2 with pre-sales and pre-leases its that permanent financing that drives lease rates and as such the market.
MA Declares Moratorium On Foreclosures
Massachusetts has become the first state in the country to declare a moratorium on foreclosures stemming from predatory lending.
Homeowners will now be able to submit a complaint to the Division of Banking.
The division will then call the lender and ask them not to forclose.
The move comes after dozens of homeowners marched on the State House last week, demanding a meeting with Gov. Deval Patrick.
The state secured 60-to-90-day freezes on foreclosure for most of the protesters.
Homeowners having trouble will also be provided with housing counselors
As for NYC escaping rent decline -- any big dips will probably be a year or 2 away -- there has been a huge rush to build here (prompted by both the boom and a deadline to build before some tax breaks for developers are ended). Some here are being "repartmented" already due to lack of condo sales -- but none I know of yet in Manhattan.
Both renting and buying are largely unaffordable here, but buying is still much more costly --for most--than renting.
Another parent on my sons team is from the DC MD Burbs, built 3 yrs ago. I tell him i came in june 04 at DC peak and still renting at 1600 a 88 acre farm on the water. I say I am waiting to see what the market wo.
Well he is a mortgage lender, says that due to the DC being the hub of govt that we should be pretty insulated. And any decline will be minimal and short lived and pocketed.
Then i say I am concerned that the so called small percentage of SP that are defaulting as a total of all housing loans is causing this chaos I am waiting for the real wave on SISA, Alt-A's to hit.
He asks those are some technical terms are you in the industry, tell him no but my family has been for years, exec. builders, bankers, RE brokers, etc and its a hobby of mine especially if i am going to throw half a mill on a house.
He grins slyly and says , "i think we are deep shi*" I know we have so much further to fall...we are just trying to keep a pretty face on it.
I died laughing, in the course of 2 minutes it went from party line to idiot buyer, to reality to knowledgable industry guy...
Don't worry, folks, your listing agents are out there working hard for you.
Linda Chabucos-Galow, a real estate agent with Shorewest, stood in the dining room while Justin and Colleen McKeen walked through a house Monday night.
Before long, she heard Colleen scream as the couple stood at the doorway.
"I thought, 'What's wrong?' Maybe it was a dead mouse or something," Chabucos-Galow said.
But then she peered into the bedroom and saw the body of Linda L. O'Leary, 55, the owner of the home. She had been dead for about two weeks, officials say. . . .
Gale Kent, the Coldwell Banker First United Realty agent who listed the house, said the property was for sale "for a while," but wouldn't say how many times it had been shown in recent weeks.
"I don't want to say anything because I haven't talked to the police yet," Kent said.
I suppose we should not be surprised at the huge increase in credit card usage and debt. If the HELOC / MEW route is getting tougher where else can the cash-short citizen turn?
"Both renting and buying (in Manhattan) are largely unaffordable here, but buying is still much more costly --for most--than renting.
This rings true from my experience. My building is going condo. I was offered my appartment at $780k. Assuming no increases in rent or asset appreciation (ok, this is strictly back of the envelope stuff here and a lazy one at that), this works out to a 4% return on investment if one ignores depreciation. Not too good in my eyes.
Larry - it's done on inflated appraisals, just like home sales. Borrower gets appraisal that shows it's worth 10-15% more than sale cost. That's the significance of the tenant valuations listed in the article - they are inflated to justify the "value" used for that LTV ratio!
DC1000, what you are describing is exactly the environment that's going to alter. Not much - but the marginal stuff will see higher rates. Just like residential, it won't happen until the debt cannot be offloaded.
The mortgage purchase index is now only 1% below last year's levels. I'm not too sure what to make of that. CR has outlined some potential problems with the index, but that was a pretty big jump this week.
There is a FSBO circa 68 brick ranch on 7 acres that an old cpl own 300' maybe of water front and boat house.
Asking 750K
Of course it does take 22 miles to get to the nearest gas station..or store for that matter unless you like the lottery and sardines from a can and fresh bait....
"Is Bear Sterns(BS) Potentially Facing The Mother of All Treasury Bond Short Squeezes?"
Bear Sterns, particularly, has voiced a bias that the Fed will infact raise the Funds rate during the 2nd half. John Rydings three weeks ago expressed the same opinion of higher rates later this year. Perhaps their forecast will be right and the Fed will elevate. This may also be their hope that Treasuries will decline in price and increase in yield.
BS is probably short treasuries and long a host of other debt as a hedge.
Remember back in 2005 when treasuries rallied to 119? This was caused in part to the unwinding of GM junk(long positions) and US Treasuries(short positions).
As institutions found their GM bond holdings had been reclassified as junk, many were forced to sell the junk from their portfolio and cover or buy back the hedged portion(Treasuries). PLUS, many of these institutions are required to maintain minimal levels of bonds in both notional and duration, and found they were having to replace to purchase requirements at a higher price/lower yield of US T.
If a Mother of ALL Bond Rallies in US treasuries does occur, I suspect it will caused in part by the UNDWINDING of SHORT TREASURIES that are hedged with other long debt structure such as MBS's, junk corporates, and CDO's.
About 100% LTV financing, a couple of the CRE guys in class were laughing how easy it is to get 100% with a second or even direct from the bank under the guise of a LLC or a shell company. It didnt sound like there was much insulation for the bank and that they were well aware of it... (these were the local banks...)
I live in a DC suburb in Maryland. My neighbors had an open house this past weekend and one of my neighbors asked the realtor if the market was difficult. Her response was their company (Long and Foster) was having a record month. I didn't hear the rest of the conversation, nor do I know what record was being referred to. Maybe it was a record number of listings.
I have 2 immediate neighbors whose homes have been for sale for a long time and have been consistently lowering their asking price and the homes aren't selling. I think the market in DC is better than most due to the historic low unemployment rate, but I also think homes are unaffordable around here and wouldn't be suprised to see prices drop another 20%. DC has a lot of baby boomer federal govt employess approaching retirement age with fat pensions awaiting them. I think there's going to be a steady supply of older homes on the amrket for the next 10 or so years.
Really now... how can consumer spending not decline?
Regarding NYC & DC, both will come down to earth some day. NYC is finance bubble central, and DC is government bubble central. Both will burst in spectacular fashion, IMO.
Is it the lighting, or does US Treasury Secretary Henry Paulson look kind of frightend as he's shaking hands with Chinese Vice Premier Wu Yi? Kind of has that deer-in-the-headlights look:
Really now... how can consumer spending not decline?
The ongoing upsurge in the stock market is creating a lot of new asset wealth. Perhaps more than enough to offset the decline in housing wealth I suspect. Even though this is distributed very differently it could still possibly restimulate consumer spending, not to mention business spending (though it would likely be poor quality investment).
Alas, even if this happened we'd still be headed down the same road of spending fantasy leveraged asset wealth without creating sufficient offsetting real wealth.
Alas, even if this happened we'd still be headed down the same road of spending fantasy leveraged asset wealth without creating sufficient offsetting real wealth.
Our only hope is that the red Chinese come in with their $400B war chest, start buying companies, take control of some boards and run the companies better than our American masters have run things (into the ground from a workers perspective anyway)...
I know folks who have worked for both Asia transplants & big three - they would MUCH rather work for the Asians even when the pay isn't always as good.
So maybe it will all work out for the best in the end when everyone on both sides of the ocean works for Japan Inc or China Inc.
One problem is that the stock wealth and the housing downturn are affecting different people. The stock market winners, especially in non-tax sheltered accounts are not the same people who have spent every penny leveaging themselves into housing. Some, but not much of the MEW went into Wall Street.
We seem to be developing two different enconomies--one going up and one going down. If true, it can't last for long.
I've ground through the numbers on Manhattan co-op ownership myself, and what you can rent for $4k a month would cost about $7k a month to own, and co-ops require a healthy down payment. Tax deductions bring that figure down to about $5.5k a month to own, but you also forgo investment income on your down payment, and that doesn't include any allowance for on-going maintenance and upgrades. On that basis, Manhattan looks to be 30%+ overvalued to me, and the amount of new construction and conversions going on in my neighborhood is truly astounding. Manhattan is real estate bubble ground zero, but as long as the equity market keeps going up every day, it will all be good...
Not by much ac - we playing in the margins with 'declines' like that.
I agree, that decline could be an aberration or it could get revised away. But I like the irony - everybody hails the invincible US consumer as the backbone of the economy (71% of the GDP) and our insurance policy against recession. Now there's suddenly no mention of it in the wake of an outright decline in consumer spending last month, and what matters is that manufacturing is picking up. As if the US still has a manufacturing economy.
It's really more revealing about our financial culture than the economy, I admit.
Financial markets are in absolute rose-coloured glasses feugo right now. Manufacturers ramping up production despite the weakening consumer is a recipe for recession. Incidently, the large jump in factory orders was caused by an 11% jump in petroleum and coal goods, which is rather suspicious, and also would have a large price driven component - ie. real factory orders probably fell in March. Bet you won't hear that from the talking heads on CNBC?
All March data is suspect IMO as having an upward bias. But I have more respect for the positive April ISM figure - if that truly represents activity in that month.
Weak dollar helps manufacturing exports, mostly aircrafts. At the same time it makes oil more expensive and that helps drilling projects, also plus for manufacturing.
All those manufacturing gains are unrelated to US consumer.
why can't the rich get richer and poor get poorer forever (or at least for the foreseeable future?)
barring some catastrophic social unrest, i'd think that the system is set up to do just that - rich richer poor poorer
We have a political system which could redistribute wealth if it gets so concentrated that the masses get upset. Think 90% tax brackets and 60% short-term capital gains taxes. It's probably not entirely coincidental that the period leading up to the Great Depression, and ultimately a more socialist US government/economy, was characterized by more and more concentration of wealth. This was at least partly undone in following decades.
"barring some catastrophic social unrest, i'd think that the system is set up to do just that - rich richer poor poorer."
If it goes on long enough, social unrest is exactly what you get. Ask the Russians. Ask the French.
One of the upsides of having an "entitled" society is that when those entitlements are taken away, people get pissed. I dunno if we'd ever have soccer moms in Voyager minivans storming the local federal building, but you get the idea. And that has sort of thing has happened in this country, particularly in the '30s.
"Spurred by the collapse of the subprime mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate."
Given that government regulators and ratings agencies are generally years late when they finally get around to paying attention to what has been going on for years....
Does this mean that we have a particularly bad vintage of bonds backed by commercial mortgages.
Are they explicitly lowering the investment ratings on these types of securities? If so, by how much?
Or are they just overreacting to all the criticism they got from sub-prime bond ratings so now are out to make an example of someone.
Or Bear Stearns could just bet on vol of vol with straddles/strangles, which might have second-order hedging effects, but nothing so drastic for treasuries specifically. Shorting treasuries for risk assets involves praying that risk premia won't increase, which seems kind of loony even by current standards. There are safer ways to get carry, if that's the goal.
For anyone who doesn't think we have bubbles all over the world:
Amid this frenzy for all markets foreign, some not surprisingly have become very expense. Based on their equity risk premium -- stocks' earnings yield relative to risk-free bond yields...
India's 5% earnings yield (which is the reciprocal of the price-earnings ratio, which would be 20 times in this case) compares with a bond yield of 8.2%. Thus, India's equity risk premium is minus 3.2%...
China's 2.8% earnings yield compares with a 3.6% bond yield, for a negative equity risk premium of minus 0.8%...
The U.S market equity risk premium was well below average at 1.6%, with an earnings yield of 6.2% against a bond yield of 4.7%. Japan's 2.2% earnings yield just beats out a 1.7% bond yield, the lowest in the world, for a 0.5% equity risk premium...
"Weak dollar helps manufacturing exports. At the same time it makes oil more expensive and that helps drilling projects, also plus for manufacturing.All those manufacturing gains are unrelated to US consumer"
I'm actually becoming "slightly" more optimistic about the economy due to slow fall of dollar. Overvalued exchange rates typically distort an economy away from manufacturing and exports toward consumption, services (esp. real estate and other non-tradables) and imports. Seems pretty obvious to me this has occured.
A fall in the dollar does hit US standard of living (think more expensive stuff at Wal-Mart and Ikea). But we've been living beyond our means for quite a while. Might be healthy.
let's hope the falling dollar unwinds some of the excesses in our economy before the debt balloon blows.
Cal: The illiquidity of derivative contracts seems to pose a serious systemic risk during times of stress. Rather than adding robustness and flexibility as the central bankers hope, derivatives are complex and delicate creations not suited for panicked environments. A crash or environmental stress is no place for a specialization. Complexity is not your friend when things are moving fast and the most specialized are least well-suited once the ecosystem shifts.
Yal: Still, many officials including Geithner have shied away from calling for explicit regulation, arguing instead that the large banks who lend to hedge funds should police themselves to make sure no one lender gets in too deep.
That's fine. Don't bail the banks out when it blows up in their face. If you are going to let them reap the reward then they must bear the risk. You're a big talker, Mr. Market!
It's really pretty amazing to see some of the things that commercial lenders are reportedly doing: Handing out many more interest-only loans than in the past ... allowing building owners to make overly optimistic forecasts of future rent growth ... and permitting landlords to scrimp on reserves for taxes, insurance, and other costs.
Am I the only one who thinks these lenders must be dumber than a bag of hammers? I mean, residential mortgage defaults are soaring, residential foreclosures are skyrocketing, and residential subprime firms are going out of business left and right. The reason: Companies made too many high-risk residential mortgages on properties whose values were wildly, artificially inflated by all the easy money and excess liquidity floating around out there.
Now, commercial lenders are doing the same thing in their arena ... and expecting things to work out just fine. What's that famous quote? That the definition of insanity is doing the same thing over and over and expecting different results?
The rich get richer and the poor get poorer--that's way it's been for the last number of years. It's more of a problem when the vast middle class starts getting poorer or at least when the middle class starts loosing members, as may happen when people are wiped out by foreclosure and/or bankrupsy.
If the rich get richer and the poor get poorer, overall consumption will go down. Some say this was a big factor in the Great Depression. From Causes of the Great Depression:
Two economists of the 1920s, Waddill Catchings and William Trufant Foster, popularized a theory that influenced many policy makers, including Herbert Hoover, Henry A. Wallace, Paul Douglas, and Marriner Eccles. It held the economy produced more than it consumed, because the consumers did not have enough income. Thus the unequal distribution of wealth throughout the 1920s caused the Great Depression [Dorfman 1959]...
According to this view, wages increased at a rate lower than productivity increases. Most of the benefit of the increased productivity went into profits, which went into the stock market bubble rather than into consumer purchases...
Mike_in_FL wrote: "Am I the only one who thinks these lenders must be dumber than a bag of hammers? I mean, residential mortgage defaults are soaring, residential foreclosures are skyrocketing, and residential subprime firms are going out of business left and right. The reason: Companies made too many high-risk residential mortgages on properties whose values were wildly, artificially inflated by all the easy money and excess liquidity floating around out there.
Now, commercial lenders are doing the same thing in their arena ... and expecting things to work out just fine."
Funny. And don't forget the habit of insulating yourself from the risk by writing a WHOLE lot of bad loans....
What happened is that the dumb lenders succeeded for long enough to force the wiser lenders to compete with looser underwriting.
Also, in regard to the NY Fed's warning on hedge funds, these guys are in a mushroom cloud, raise the damn margin requirements, and stop enabling this concentrated casino.
Pension funds have increased their exposure and I doubt very much that the pensioners understand the risk involved, the fiduciaries don't even understand it.
Does anyone know what the implications of GMAC's ratings cut may be for their servicing business? GMAC is a rather large servicer.
"S&P also revised its outlook on GMAC to negative from developing, indicating the rating is likely to be cut over the next two years. S&P rates GMAC "BB-plus," one level below investment grade."
where is the guy for fiscal conservativism, social liberalism, gun rights, abortion rights, gay rights, low taxes, internationalism, legalizing drugs, and a balanced budget?
where is the guy for fiscal conservativism, social liberalism, gun rights, abortion rights, gay rights, low taxes, internationalism, legalizing drugs, and a balanced budget?
ac said: "...everybody hails the invincible US consumer as the backbone of the economy (71% of the GDP) and our insurance policy against recession. Now there's suddenly no mention of it in the wake of an outright decline in consumer spending last month, and what matters is that manufacturing is picking up. As if the US still has a manufacturing economy..."
There were so many misconceptions on this particular thread that I almost decided to give up. Maybe just one more day.
The consumer is not our insurance policy against recession, since consumption remains very stable over time and business cycles.
Important expansion or contraction comes from the business investment part of the economy, like manufacturing.
If manufacturing is picking up, the economy is going to be stabilizing for sure, and probably expanding.
Sebastian
p.s. For anyone who doesn't think manufacturing is important to the economy, try going without electricity, gasoline, and plastics for a week or so. These are all manufactured right here in the U.S. S.
p.s. For anyone who doesn't think manufacturing is important to the economy, try going without electricity, gasoline, and plastics for a week or so. These are all manufactured right here in the U.S. S."
Many simple plastic products are made here -- storage boxes, etc, and other things that can be stamped out by machine. But if assembly is required, that labor is foreign.
I'm glad electricity is made here, but that's one thing that can't be made practically in Asia. The natural gas that is imported to create some of it is imported more and more. There may even be the beginnings of a cartel.
And increasingly the things that run on that electricity are made elsewhere. Gasoline? It makes more sense to refine it here than transport it. Same as wall-to-wall carpeting; that's made in the south and is always going to be, because it's extremely automated, the infrastructure involved is huge, and it's just not worth building it all over again in China. No money in it.
You can always pick out a few exceptions and call it a rule. Works in a barrroom discussion, but not when you pore over the issue in detail.
p.s. For anyone who doesn't think manufacturing is important to the economy, try going without electricity, gasoline, and plastics for a week or so. These are all manufactured right here in the U.S. S.
Currently most of those products are produced here but increasingly less so except for electricity.
And none of those industries hire a large number of employees per dollar volume sales. Lotsa of capital employed, lotsa technology & IP involved, lotsa raw material processed - not many jobs at the average J6P level. The jobs they do create pay extraordinarily well though, there just aren't that many of them per dollar of activity.
My first engineering job out of college was in an ag products chemical plant - about a half billion dollars in sales and a billion dollars in capital. Big enough that we had to build our own co-gen power plant. Only about a 150 full-time employees (100 more added after co-gen went in).
Compare that with manufacturing companies I work with now... 250 employee plants will typically generate about $25-$50M in sales and cost way less than $25-50M to build.
As for jobs staying in the US...
The current trend in refining is to add capacity as close as possible to the well head then ship the finished products around the world instead of shipping crude. There are some advantages to shipping crude & refining close to the market (product mix response) but not as many as the cost advantages of doing it close to the well head. The result of this is expect to see less refining done in the US & a lot more of it done in places like Persian Gulf, Venezuela, Russia, etc.
Plastics are now increasingly being produced offshore too (both monomers & fully processed polymer resins) as are primary metals of all types.
Again getting close to the feedstock source for plastics or energy source for smelting of metals is the primary consideration.
I have buddies engineering resin plants and most of their work is currently in Asia (heck that is where the demand growth is for injection molding resins so makes perfect sense).
Same with aluminum - the power from Three Gorges is likely to result in the cheapest aluminum in the world for at least a generation once all the infrastructure is in place. It will give Chinese metals manufacturers an enormous advantage - labor, energy AND capital cost advantages.
In both cases the growth in Asian aluminum & plastics capacity is targeted to export growth - NAFTA Zone & EU markets.
Electricity is & will remain regional if not local.
The thing that keeps me optimistic that mfg will remain here is that the dollar will decline so much that cost of labor & cost of capital will equilibrate between regions of the world. Raw material costs already global.
I believe we are seeing the beginning of the dollar correction happening now... the Asian FCBs are fighting it but can't fight the tape forever.
GMAC Swings to Loss
By JOSEE ROSE
May 2, 2007 4:48 p.m.
GMAC Financial Services, partly owned by General Motors Corp., posted a first-quarter loss as a significant loss at its home-mortgage business offset strong results from its global automotive finance and insurance businesses.
GMAC's results are likely to affect GM's quarterly results, expected Thursday morning. In late November, GM sold a 51% stake in GMAC to a consortium of investors led by Cerberus Capital Management. Under terms of the sale, GMAC has received a common-equity injection of about $1 billion from the auto giant to shore up its balance sheet.
For the first quarter, GMAC posted a loss of $305 million compared with a year-earlier profit of $495 million. Excluding its Residential Capital LLC unit, GMAC had first-quarter earnings of $605 million, up from $311 million a year ago.
GMAC's revenue dropped 27% to $3.38 billion from $4.62 billion.
GMAC's home-lending unit, also known as ResCap, posted a loss of $910 million compared with a year-earlier profit of $201 million, due to continued pressures of the U.S. mortgage market. The slower housing market has led to an increase in the number of defaults on high-risk, or subprime, loans -- an area where ResCap, traditionally thought of as the jewel of the GMAC portfolio, does business.
Amid the sharp downturn in the U.S. mortgage market, GMAC said many of ResCap's nonprime assets were liquidated at a loss or marked substantially lower to reflect the severe illiquidity and depressed valuations in the prevailing market environment. GMAC established substantial incremental reserves during the quarter against various nonprime loans on the balance sheet.
In Wednesday's release, the company said its ResCap unit should "be far less vulnerable to further adverse developments in the nonprime space." GMAC also said the setback ResCap incurred "is expected to be a temporary one."
The U.S. mortgage industry has felt intense pressure from a housing slump, higher funding costs and rising defaults. Higher delinquencies on subprime home loans -- in large part due to a sharp deterioration of underwriting standards last year -- have in recent months forced a slew of lenders, big and small, to set aside more capital for potential loan losses. In many cases, lenders have also been forced to write down the value of their mortgage securities.
GMAC said nonprime loan production in the U.S. was $3.3 billion in the first quarter, down from $9.1 billion in the year-ago quarter. U.S. prime loan production was $27.8 billion, up slightly from $27 billion a year ago, and international loan production rose 18% to $6.5 billion.
The company had said it plans to "sharply" reduce the volume of subprime mortgages this year. GMAC executives have said implementing changes at ResCap -- including tightening underwriting guidelines -- is their "most pressing priority" this year.
According to Coast Bank President & CEO, Brian F. Grimes, the increase in net loss is primarily attributable to extraordinary circumstances. "For the past several months, Coast Bank has been operating under difficult circumstances and the earnings report is reflective of the situation." Grimes continued, "As previously disclosed we have a large number of customers who have been negatively impacted by their builder filing for bankruptcy in the midst of their new home construction. This situation has generated large extraordinary expenses, negatively impacting the performance of Coast Bank."
Those "negative impacts" just bite, don't they?
MOM, I don't know off the top of my head how many big old jillion-tranche REMICs there are out there serviced by GMAC in whole or in part, but I'd estimate somewhere between a shitload and a big honkin' mess of them. A servicer downgrade will negatively impact the situation.
MOM, I don't know off the top of my head how many big old jillion-tranche REMICs there are out there serviced by GMAC in whole or in part, but I'd estimate somewhere between a shitload and a big honkin' mess of them. A servicer downgrade will negatively impact the situation.
Maybe GM can just recall them... that's something they seem pretty experienced at.
In the long run, Peak Oil should work in J6P's favor, too. Once transportation costs exceed the foreign labor cost advantage, everyone will be building plants in the states.
"The consumer is not our insurance policy against recession, since consumption remains very stable over time and business cycles."
"Important expansion or contraction comes from the business investment part of the economy, like manufacturing"
The components of GDP (Gross Domestic Product) will tell you what the U.S. is good at producing.
Over 70% of what the U.S. produces is for personal consumption. The remaining 30% of GDP is business investment (16%) and government (19%), of which one-third is defense.
The largest components of personal consumption include:
More than 40% of GDP are services. The two largest components are real estate (10%) and health care (12%).
Non-durable goods are 20% of GDP. The three largest components are food (10%), clothing (2.7%) and fuel (2.4%).
Durable goods, such as autos (3.6%) and furniture (3%) is the smallest, at only 8% of GDP.
GDP components and their impact on growth.
Added (subtracted)
from GDP (%)
Residential fixed investment (0.97)
International trade (0.52)
Inventories (0.30)
Consumer spending 2.66
Business spending 0.21
Government spending 0.18
" p.s. For anyone who doesn't think manufacturing is important to the economy, try going without electricity, gasoline, and plastics for a week or so. These are all manufactured right here in the U.S. S."
Surprises me that the Bulls seem to think it necessary to mention manufacturing that supplies consumers while saying consumption tends to remain constant thru the cycle and will not influence manufacturing.
The US does have some important none consumer manufacturing that could be quoted? Or am i wrong? Does for example Boeing make plane parts overseas?
Does for example Boeing make plane parts overseas?
About 30% of value added is non-NAFTA content and increasing from what I understand. Though they say their offshore buy is non-core competency, stuff like 'wing' and 'fuselage' structures...
Meanwhile other domestic suppliers produce avionics (Honeywell & Collins) and engines (GE) for them... also non-core competency I suppose.
So that begs the question, what is their core competency - lobbying congress maybe?
It's all so silly sometimes I think I'm in a dream.
ac said: "...everybody hails the invincible US consumer as the backbone of the economy (71% of the GDP) and our insurance policy against recession. Now there's suddenly no mention of it in the wake of an outright decline in consumer spending last month, and what matters is that manufacturing is picking up. As if the US still has a manufacturing economy..."
There were so many misconceptions on this particular thread that I almost decided to give up. Maybe just one more day.
"It's all so silly sometimes I think I'm in a dream"
I suppose that explains to me why Sebastian quotes manufacturing for consumers and BB praises job creation in the health care sector as examples of what is good about the economy.
Even so Dryfly you are still fairly bullish at the moment are you not?
I stumbled upon the following article recently. I think it speaks volumes. It has plenty to appease the deflationists AND the inflationists. But what's new?
The Deflationist's Dream: It has to fall, said Steve Rodley, joint managing director at M2M Management in London. Its hard to see rates sustaining where they are today beyond summer.
The Inflationist's Dream: China also became a net coal buyer for the first time this year, while rising incomes and a shortage of farmland may spur increased imports of grain to feed livestock.
It is almost like the world is awash in both dollars AND overcapacity. It's like the Roaring 20s met up with the Roaring 70s and decided to throw one heck of a deflationary inflationary party. Of course, this could all reverse and turn into a deflationary inflationary party if a butterfly flaps its wings incorrectly.
Bah! Butterflies are overrated anyway. Bernanke can barely drop any cash at all when flying one.
Even so Dryfly you are still fairly bullish at the moment are you not?
I'm neither and both bull & bear... I do not think a recession is near at hand due to liquidity from FCB currency manipulation and also from carry trade and hedgies and PE funds. All that leveraged money drives a lot of activity... hard to see how we end up with negative GDP growth with all that nonsense going on.
But from what I read it's getting more & more difficult for the FCBs to maintain those de facto pegs... intervention & manipulation isn't without its cost. They are the key as their intervention keeps credit available, rates low & imports cheap.
Someday they will throttle back the manipulation effort... or throw in the towel completely & float. Or go after the euro & give up on the USD. Who knows. But when it happens that's the day a serious recession becomes imminent... And that is the time to go major league bearish.
But not until.
I think the current situation can drag on much longer than any of us could ever imagine... I've expected the conundrum to have ended years ago. I'm not sure we are any closer today then when AG first coined the phrase.
I think it speaks volumes. It has plenty to appease the deflationists AND the inflationists. But what's new?
LOL.
I've thought for many years that we could see domestic US inflation at the same time we see global non-USD denominated deflation...
USD goes to hell so we have domestic inflation due to large growth in USD money supply...
Meanwhile there is all that capacity out there outside the dollar zone and nowhere near enough 'good currency' (i.e. euros, yen, RMB) to sop up the global capacity... classic deflation.
So we see inflation in the US while everyone else in the world experiences deflation. Now that would be the perfect storm.
So we see inflation in the US while everyone else in the world experiences deflation. Now that would be the perfect storm.
I think it is possible but far from probable.
I agree. That's a really good storm you've got there and like you say, it might not be all that probable.
My perfect storm is somewhat different but is clearly based on the same theme. Mine involves me having to compete with 9,000 hedge funds (overcapacity!) who might see your perfect storm coming someday. I don't like my odds, lol.
Although the music is clearly still playing, I've decided to sit down in my treasury inflation protected security chair and hope for the best. The deflationists will do better (in long bonds) if there's deflation. The inflationists will do better (in gold and silver) if there's inflation.
I'm hardly 100% safe though. Greenspan said it best, "The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves." I have no doubts that the government will do everything it can to get me to stand up again at some point. If history is any guide, I should have plenty of time to comply.
Camper #1: There's a bear charging down the hillside towards us!!
Camper #2 calmly puts on his shoes.
Camper #1: You fool! You idiot! You cannot outrun the bear!
Camper #2: I don't need to outrun the bear. I just need to outrun you.
I agree. That's a really good storm you've got there and like you say, it might not be all that probable.
I would add that I think domestic inflation coupled to global deflation is more probable than 'deflation' by itself...
I think you should always take a central banker, like BB, at his word when he says he's prepared to do what it takes to defeat deflation... printing money is one of the things they do best.
Taking them at their word that they will really fight inflation? Now that's asking fish to fly.
"There are two broad types of home sellers right now:
Irrationals: Just keep holding on as the months go by, the showings decline and no offers come rolling in. Nothing is going to change and their house is not going to sell at the price they're asking but they refuse to admit that.
Must Sells: These are people that moved into their next house without selling their previous house first, or maybe their job has moved or maybe they can't afford their payments anymore and they have just enough equity to be able to pay off their loan even if they sell at a reduced price."
Sounds like CR's 5Q lag theory is coming to fruition. jury is still out, but the evidence is building.
Credit default swaps for CMBX started to increase spread in February. The spread is still much better than for subprime ABX but the ABX stabilized and CMBX did not. And like for ABX, the newer vintage, the higher spread.
I'm not an expert on these issues but I have been following warnings by Richard Suttmeier (Real Money) on how many banks have commercial loans in the range of 100-300% of the levels recommended by FDIC. I assume that a part of these loans are to residential builders as well as builders for industry, retail etc. The midcap cap and regional banks seem especially vulnerable in this regard.
There are two broad types of home sellers right now:
Irrationals: Just keep holding on as the months go by, the showings decline and no offers come rolling in. Nothing is going to change and their house is not going to sell at the price they're asking but they refuse to admit that.
Must Sells: These are people that moved into their next house without selling their previous house first, or maybe their job has moved or maybe they can't afford their payments anymore and they have just enough equity to be able to pay off their loan even if they sell at a reduced price.
Where does this lead us? Home price deflation. While the Irrationals are holding on, the Must Sells are deflating the price all around them. The longer they hold on, the worse it gets for them.
Home price deflation is so dangerous because like a fission bomb, it's a self-feeding process until it explodes. When prices are going up, buyers snap up houses as fast as they can. They'll even camp out for them! When home prices are going down, time is on the buyer's side. Why buy a house today for x when tomorrow it will be 10% lower than x? Why buy a house tomorrow for 10% lower than x when the next day it will be 11% lower than x? Rinse, repeat.
Add to this the fact that even if a buyer WANTED to buy a home - they likely CAN'T. First, a buyer often has to sell their current house before they can buy their next house. With an average of 6 months on market and as much as 18 months, good luck getting two home sales to be coordinated within a month or two of each other. The result is more people becoming Must Sells.
This is a self-sustaining process that nothing at this point is going to stop.
The NY Fed just reported that the concentration of risks in hedge funds is back to pre-crisis 1998 levels. I'm not sure exactly how they quantify that, but the ducks are really lining up here, so to speak. Hedge funds up to the gills in risk, banks up to the gills in real estate loans in a topped out market, credit spreads generally at or near record low levels, frothy global stock markets. Sell in May a go away may prove quite prophetic this year.
You cant believe everything you read. The experts are often wrong.
Time Magazine reported, The prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline. They wrote that in 1947.
Business Week said, The goal of owning a home seems to be getting beyond the reach of more and more Americans. When they wrote that in 1969, the average price of a house was $28,000.
The Miami Herald wrote, If you are looking to buy, be careful. Rising home values are not a sure thing anymore. That sage advice came in 1985.
Money Magazine said, Most economists agree . . .a home will become little more than a roof and a tax deduction, certainly not the lucrative investment it was . That was their best advice in 1986.
Commercial REITs have issued about $6bn worth of convertibles in the past six months. They issued about $1bn in the comparable period last year.
Could imply managements think their stocks are overvalued.
Rents Peak in Housing Glut; New York Escapes Decline
Rents Peak in Housing Glut; New York Escapes Decline (Update3) - Bloomberg.com
The glut of U.S. properties for sale is about to hit the rental market.
A record number of homeowners who can't sell condominiums and houses are competing for tenants with the country's biggest apartment owners led by Chicago-based Equity Residential, said Jack McCabe, the founder of Deerfield Beach, Florida-based McCabe Research & Consulting LLC. Metropolitan New York, where demand for housing exceeds supply, may be the only place where rents increase, albeit at a slower pace, he said.
``Competition already is forcing the big apartment owners to offer concessions like two months free rent,'' McCabe said.
No more MEW, no problem! Hmmm....I wonder how this Credit Card thing works. Ka ching!!! Sweet!!
MasterCard Net Rises to Record as Card Use Increases (Update8) - Bloomberg.com
yal said...
This is a self-sustaining process that nothing at this point is going to stop.
I agree i am fixing to post a little story about a conversaation i had at my sons Bball game last night, its a riot.
ews from the Front that perhaps you all will appreciate finally:
Yes CRE lending has tightened SOME. we had a commercial development that was to be spec built. the bankers said no problem lets rock. this was after some hemming and hawing, they still decided to green light the project.
well when push came to shove and it was time to fund, the bank went back on its promise and said the 'spec' is no longer in their vocabulary.
this caused me some problems as i had to pre-lease the whole project but we eventually got that done and it resulted in the liquidity event i so drunkenly wrote about on here a few weeks ago.
now - in other news - permanent financing for properties with investment grade tenants is still ROCK BOTTOM.
120bps over the ten year
80% LTV
1.2 DSC
non-recourse save for the standard carve-outs
1% origination
now thats a deal. and this is ultimately what drives the market is the permanent financing not the portfolio / balance sheet loan made by local joker banks such as BB&T (i hate you BB&T).
most developers can stomach prime plus 1 or 2 with pre-sales and pre-leases its that permanent financing that drives lease rates and as such the market.
MA Declares Moratorium On Foreclosures
Massachusetts has become the first state in the country to declare a moratorium on foreclosures stemming from predatory lending.
Homeowners will now be able to submit a complaint to the Division of Banking.
The division will then call the lender and ask them not to forclose.
The move comes after dozens of homeowners marched on the State House last week, demanding a meeting with Gov. Deval Patrick.
The state secured 60-to-90-day freezes on foreclosure for most of the protesters.
Homeowners having trouble will also be provided with housing counselors
As for NYC escaping rent decline -- any big dips will probably be a year or 2 away -- there has been a huge rush to build here (prompted by both the boom and a deadline to build before some tax breaks for developers are ended). Some here are being "repartmented" already due to lack of condo sales -- but none I know of yet in Manhattan.
Both renting and buying are largely unaffordable here, but buying is still much more costly --for most--than renting.
it's like this:
Another parent on my sons team is from the DC MD Burbs, built 3 yrs ago. I tell him i came in june 04 at DC peak and still renting at 1600 a 88 acre farm on the water. I say I am waiting to see what the market wo.
Well he is a mortgage lender, says that due to the DC being the hub of govt that we should be pretty insulated. And any decline will be minimal and short lived and pocketed.
Then i say I am concerned that the so called small percentage of SP that are defaulting as a total of all housing loans is causing this chaos I am waiting for the real wave on SISA, Alt-A's to hit.
He asks those are some technical terms are you in the industry, tell him no but my family has been for years, exec. builders, bankers, RE brokers, etc and its a hobby of mine especially if i am going to throw half a mill on a house.
He grins slyly and says , "i think we are deep shi*" I know we have so much further to fall...we are just trying to keep a pretty face on it.
I died laughing, in the course of 2 minutes it went from party line to idiot buyer, to reality to knowledgable industry guy...
Don't worry, folks, your listing agents are out there working hard for you.
Linda Chabucos-Galow, a real estate agent with Shorewest, stood in the dining room while Justin and Colleen McKeen walked through a house Monday night.
Before long, she heard Colleen scream as the couple stood at the doorway.
"I thought, 'What's wrong?' Maybe it was a dead mouse or something," Chabucos-Galow said.
But then she peered into the bedroom and saw the body of Linda L. O'Leary, 55, the owner of the home. She had been dead for about two weeks, officials say. . . .
Gale Kent, the Coldwell Banker First United Realty agent who listed the house, said the property was for sale "for a while," but wouldn't say how many times it had been shown in recent weeks.
"I don't want to say anything because I haven't talked to the police yet," Kent said.
Yahoo! 404 - Page Not Found
As long as consumer spending doesn't decline everything should be OK, since that accounts for 70% of the economy.
I suppose we should not be surprised at the huge increase in credit card usage and debt. If the HELOC / MEW route is getting tougher where else can the cash-short citizen turn?
"Both renting and buying (in Manhattan) are largely unaffordable here, but buying is still much more costly --for most--than renting.
This rings true from my experience. My building is going condo. I was offered my appartment at $780k. Assuming no increases in rent or asset appreciation (ok, this is strictly back of the envelope stuff here and a lazy one at that), this works out to a 4% return on investment if one ignores depreciation. Not too good in my eyes.
Tanta,
Justin & Colleen should be pretty happy - estates usually sell for less.
JRip:
don't worry - college funds and raiding future inheritances will be next!
perhaps Roth IRA's first as there are no tax consequences for early withdrawal lol
hey lance, what water do you have 88 acres on for $1600/month in the DC burbs?
As long as consumer spending doesn't decline everything should be OK, since that accounts for 70% of the economy.
Yup. That really is the name of the game isn't it?
Larry - it's done on inflated appraisals, just like home sales. Borrower gets appraisal that shows it's worth 10-15% more than sale cost. That's the significance of the tenant valuations listed in the article - they are inflated to justify the "value" used for that LTV ratio!
DC1000, what you are describing is exactly the environment that's going to alter. Not much - but the marginal stuff will see higher rates. Just like residential, it won't happen until the debt cannot be offloaded.
DC1000,
It,s southern Charles County, 20662 nanjemoy address.
High tide we are an island
The mortgage purchase index is now only 1% below last year's levels. I'm not too sure what to make of that. CR has outlined some potential problems with the index, but that was a pretty big jump this week.
in SOMD,
There is a FSBO circa 68 brick ranch on 7 acres that an old cpl own 300' maybe of water front and boat house.
Asking 750K
Of course it does take 22 miles to get to the nearest gas station..or store for that matter unless you like the lottery and sardines from a can and fresh bait....
another warning:
Business & Financial News, Breaking US & International News | Reuters.com
As long as consumer spending doesn't decline everything should be OK, since that accounts for 70% of the economy.
Auto's make up a good % of consumer spending per Kash, I wonder exactly how much?
"Is Bear Sterns(BS) Potentially Facing The Mother of All Treasury Bond Short Squeezes?"
Bear Sterns, particularly, has voiced a bias that the Fed will infact raise the Funds rate during the 2nd half. John Rydings three weeks ago expressed the same opinion of higher rates later this year. Perhaps their forecast will be right and the Fed will elevate. This may also be their hope that Treasuries will decline in price and increase in yield.
BS is probably short treasuries and long a host of other debt as a hedge.
Remember back in 2005 when treasuries rallied to 119? This was caused in part to the unwinding of GM junk(long positions) and US Treasuries(short positions).
As institutions found their GM bond holdings had been reclassified as junk, many were forced to sell the junk from their portfolio and cover or buy back the hedged portion(Treasuries). PLUS, many of these institutions are required to maintain minimal levels of bonds in both notional and duration, and found they were having to replace to purchase requirements at a higher price/lower yield of US T.
If a Mother of ALL Bond Rallies in US treasuries does occur, I suspect it will caused in part by the UNDWINDING of SHORT TREASURIES that are hedged with other long debt structure such as MBS's, junk corporates, and CDO's.
I think New York rentals are in the $3k-$4k/month range and still growing. It's like a different planet
"As long as consumer spending doesn't decline everything should be OK, since that accounts for 70% of the economy."
Yup. That really is the name of the game isn't it?
SIGH
You guys were so supposed to look at that graph and say something like "Wait, according to that chart consumer spending did decline last month!!!"
This isnt Manhattan but a pretty ritzy neighborhood none the less...
Curbed NY: 99 Gold Throws In Towel, Goes Rental
(Condo Reversion)
About 100% LTV financing, a couple of the CRE guys in class were laughing how easy it is to get 100% with a second or even direct from the bank under the guise of a LLC or a shell company. It didnt sound like there was much insulation for the bank and that they were well aware of it... (these were the local banks...)
but hey it makes gems like this possible....
Curbed NY: Chelsea's Narrow 19-Foot Site Revealed as Greenhouse 26
19' ? Dios Mio !
I live in a DC suburb in Maryland. My neighbors had an open house this past weekend and one of my neighbors asked the realtor if the market was difficult. Her response was their company (Long and Foster) was having a record month. I didn't hear the rest of the conversation, nor do I know what record was being referred to. Maybe it was a record number of listings.
I have 2 immediate neighbors whose homes have been for sale for a long time and have been consistently lowering their asking price and the homes aren't selling. I think the market in DC is better than most due to the historic low unemployment rate, but I also think homes are unaffordable around here and wouldn't be suprised to see prices drop another 20%. DC has a lot of baby boomer federal govt employess approaching retirement age with fat pensions awaiting them. I think there's going to be a steady supply of older homes on the amrket for the next 10 or so years.
A Hard Lesson in Derivatives - WSJ.com
A Hard Lesson in Derivatives
Some Learn Timing
Of Subprime Bets
Wasn't So Prime
Really now... how can consumer spending not decline?
Regarding NYC & DC, both will come down to earth some day. NYC is finance bubble central, and DC is government bubble central. Both will burst in spectacular fashion, IMO.
Is it the lighting, or does US Treasury Secretary Henry Paulson look kind of frightend as he's shaking hands with Chinese Vice Premier Wu Yi? Kind of has that deer-in-the-headlights look:
China plans to launch the world's largest investment fund - May 14, 2007
China's $1.2 trillion cash hoard
I wonder what Ms Yi told Mr. Paulson just prior to that picture being taken?
Really now... how can consumer spending not decline?
The ongoing upsurge in the stock market is creating a lot of new asset wealth. Perhaps more than enough to offset the decline in housing wealth I suspect. Even though this is distributed very differently it could still possibly restimulate consumer spending, not to mention business spending (though it would likely be poor quality investment).
Alas, even if this happened we'd still be headed down the same road of spending fantasy leveraged asset wealth without creating sufficient offsetting real wealth.
Niagara Falls
Ouch!
You guys were so supposed to look at that graph and say something like "Wait, according to that chart consumer spending did decline last month!!!"
Not by much ac - we playing in the margins with 'declines' like that.
Think big... like $3B/day CA deficit big.
Alas, even if this happened we'd still be headed down the same road of spending fantasy leveraged asset wealth without creating sufficient offsetting real wealth.
Our only hope is that the red Chinese come in with their $400B war chest, start buying companies, take control of some boards and run the companies better than our American masters have run things (into the ground from a workers perspective anyway)...
I know folks who have worked for both Asia transplants & big three - they would MUCH rather work for the Asians even when the pay isn't always as good.
So maybe it will all work out for the best in the end when everyone on both sides of the ocean works for Japan Inc or China Inc.
See I'm not such a bear.
One problem is that the stock wealth and the housing downturn are affecting different people. The stock market winners, especially in non-tax sheltered accounts are not the same people who have spent every penny leveaging themselves into housing. Some, but not much of the MEW went into Wall Street.
We seem to be developing two different enconomies--one going up and one going down. If true, it can't last for long.
gmac reporting huge losses bec of res cap and sub prime.
GMAC Has $305 Million 1st-Quarter Loss on Home Loans (Update5) - Bloomberg.com
I've ground through the numbers on Manhattan co-op ownership myself, and what you can rent for $4k a month would cost about $7k a month to own, and co-ops require a healthy down payment. Tax deductions bring that figure down to about $5.5k a month to own, but you also forgo investment income on your down payment, and that doesn't include any allowance for on-going maintenance and upgrades. On that basis, Manhattan looks to be 30%+ overvalued to me, and the amount of new construction and conversions going on in my neighborhood is truly astounding. Manhattan is real estate bubble ground zero, but as long as the equity market keeps going up every day, it will all be good...
Not by much ac - we playing in the margins with 'declines' like that.
I agree, that decline could be an aberration or it could get revised away. But I like the irony - everybody hails the invincible US consumer as the backbone of the economy (71% of the GDP) and our insurance policy against recession. Now there's suddenly no mention of it in the wake of an outright decline in consumer spending last month, and what matters is that manufacturing is picking up. As if the US still has a manufacturing economy.
It's really more revealing about our financial culture than the economy, I admit.
Financial markets are in absolute rose-coloured glasses feugo right now. Manufacturers ramping up production despite the weakening consumer is a recipe for recession. Incidently, the large jump in factory orders was caused by an 11% jump in petroleum and coal goods, which is rather suspicious, and also would have a large price driven component - ie. real factory orders probably fell in March. Bet you won't hear that from the talking heads on CNBC?
real factory orders probably fell in March
All March data is suspect IMO as having an upward bias. But I have more respect for the positive April ISM figure - if that truly represents activity in that month.
Weak dollar helps manufacturing exports, mostly aircrafts. At the same time it makes oil more expensive and that helps drilling projects, also plus for manufacturing.
All those manufacturing gains are unrelated to US consumer.
bill:
why can't the rich get richer and poor get poorer forever (or at least for the foreseeable future?)
barring some catastrophic social unrest, i'd think that the system is set up to do just that - rich richer poor poorer
why can't the rich get richer and poor get poorer forever (or at least for the foreseeable future?)
barring some catastrophic social unrest, i'd think that the system is set up to do just that - rich richer poor poorer
We have a political system which could redistribute wealth if it gets so concentrated that the masses get upset. Think 90% tax brackets and 60% short-term capital gains taxes. It's probably not entirely coincidental that the period leading up to the Great Depression, and ultimately a more socialist US government/economy, was characterized by more and more concentration of wealth. This was at least partly undone in following decades.
"barring some catastrophic social unrest, i'd think that the system is set up to do just that - rich richer poor poorer."
If it goes on long enough, social unrest is exactly what you get. Ask the Russians. Ask the French.
One of the upsides of having an "entitled" society is that when those entitlements are taken away, people get pissed. I dunno if we'd ever have soccer moms in Voyager minivans storming the local federal building, but you get the idea. And that has sort of thing has happened in this country, particularly in the '30s.
"Spurred by the collapse of the subprime mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate."
Given that government regulators and ratings agencies are generally years late when they finally get around to paying attention to what has been going on for years....
Does this mean that we have a particularly bad vintage of bonds backed by commercial mortgages.
Are they explicitly lowering the investment ratings on these types of securities? If so, by how much?
Or are they just overreacting to all the criticism they got from sub-prime bond ratings so now are out to make an example of someone.
We seem to be developing two different economies--one going up and one going down. If true, it can't last for long.
This appears to be a major factor in the great FFR debate. Cut rates? Rich are doing too well. Raise rates? Everyone else is already getting killed.
Or Bear Stearns could just bet on vol of vol with straddles/strangles, which might have second-order hedging effects, but nothing so drastic for treasuries specifically. Shorting treasuries for risk assets involves praying that risk premia won't increase, which seems kind of loony even by current standards. There are safer ways to get carry, if that's the goal.
For anyone who doesn't think we have bubbles all over the world:
Amid this frenzy for all markets foreign, some not surprisingly have become very expense. Based on their equity risk premium -- stocks' earnings yield relative to risk-free bond yields...
India's 5% earnings yield (which is the reciprocal of the price-earnings ratio, which would be 20 times in this case) compares with a bond yield of 8.2%. Thus, India's equity risk premium is minus 3.2%...
China's 2.8% earnings yield compares with a 3.6% bond yield, for a negative equity risk premium of minus 0.8%...
The U.S market equity risk premium was well below average at 1.6%, with an earnings yield of 6.2% against a bond yield of 4.7%. Japan's 2.2% earnings yield just beats out a 1.7% bond yield, the lowest in the world, for a 0.5% equity risk premium...
What, Us Worry? Emerging Markets Roll On
OT-
"Weak dollar helps manufacturing exports. At the same time it makes oil more expensive and that helps drilling projects, also plus for manufacturing.All those manufacturing gains are unrelated to US consumer"
I'm actually becoming "slightly" more optimistic about the economy due to slow fall of dollar. Overvalued exchange rates typically distort an economy away from manufacturing and exports toward consumption, services (esp. real estate and other non-tradables) and imports. Seems pretty obvious to me this has occured.
A fall in the dollar does hit US standard of living (think more expensive stuff at Wal-Mart and Ikea). But we've been living beyond our means for quite a while. Might be healthy.
let's hope the falling dollar unwinds some of the excesses in our economy before the debt balloon blows.
Cal: The illiquidity of derivative contracts seems to pose a serious systemic risk during times of stress. Rather than adding robustness and flexibility as the central bankers hope, derivatives are complex and delicate creations not suited for panicked environments. A crash or environmental stress is no place for a specialization. Complexity is not your friend when things are moving fast and the most specialized are least well-suited once the ecosystem shifts.
Yal:
Still, many officials including Geithner have shied away from calling for explicit regulation, arguing instead that the large banks who lend to hedge funds should police themselves to make sure no one lender gets in too deep.
That's fine. Don't bail the banks out when it blows up in their face. If you are going to let them reap the reward then they must bear the risk. You're a big talker, Mr. Market!
It's really pretty amazing to see some of the things that commercial lenders are reportedly doing: Handing out many more interest-only loans than in the past ... allowing building owners to make overly optimistic forecasts of future rent growth ... and permitting landlords to scrimp on reserves for taxes, insurance, and other costs.
Am I the only one who thinks these lenders must be dumber than a bag of hammers? I mean, residential mortgage defaults are soaring, residential foreclosures are skyrocketing, and residential subprime firms are going out of business left and right. The reason: Companies made too many high-risk residential mortgages on properties whose values were wildly, artificially inflated by all the easy money and excess liquidity floating around out there.
Now, commercial lenders are doing the same thing in their arena ... and expecting things to work out just fine. What's that famous quote? That the definition of insanity is doing the same thing over and over and expecting different results?
The rich get richer and the poor get poorer--that's way it's been for the last number of years. It's more of a problem when the vast middle class starts getting poorer or at least when the middle class starts loosing members, as may happen when people are wiped out by foreclosure and/or bankrupsy.
Down here in Alabama, the Europeans are building factories.
Maybe we we get divided up and Historians will wonder when the US was conquered without a war.
If the rich get richer and the poor get poorer, overall consumption will go down. Some say this was a big factor in the Great Depression. From Causes of the Great Depression:
Two economists of the 1920s, Waddill Catchings and William Trufant Foster, popularized a theory that influenced many policy makers, including Herbert Hoover, Henry A. Wallace, Paul Douglas, and Marriner Eccles. It held the economy produced more than it consumed, because the consumers did not have enough income. Thus the unequal distribution of wealth throughout the 1920s caused the Great Depression [Dorfman 1959]...
According to this view, wages increased at a rate lower than productivity increases. Most of the benefit of the increased productivity went into profits, which went into the stock market bubble rather than into consumer purchases...
why can't the rich get richer and poor get poorer forever (or at least for the foreseeable future?)
So ummm dc, you posturing to get yourself on the '08 GOP ticket or what?
If so you'll have to come out to Iowa then and stop let one of your many minions run your money machine back inside the beltway though.
If you feel that Iowa pull - let me know, I'll drive you about. I could manage the campaign for a GOPer... if the money was right.
Yal,
don't know if you saw this, the ratings agencies ought to be ashamed.
It seems if we separate the domestic car biz, the mortgage ops, and fleet sales, things look great!
Business & Financial News, Breaking US & International News | Reuters.com
Mike_in_FL wrote: "Am I the only one who thinks these lenders must be dumber than a bag of hammers? I mean, residential mortgage defaults are soaring, residential foreclosures are skyrocketing, and residential subprime firms are going out of business left and right. The reason: Companies made too many high-risk residential mortgages on properties whose values were wildly, artificially inflated by all the easy money and excess liquidity floating around out there.
Now, commercial lenders are doing the same thing in their arena ... and expecting things to work out just fine."
Funny. And don't forget the habit of insulating yourself from the risk by writing a WHOLE lot of bad loans....
What happened is that the dumb lenders succeeded for long enough to force the wiser lenders to compete with looser underwriting.
Also, in regard to the NY Fed's warning on hedge funds, these guys are in a mushroom cloud, raise the damn margin requirements, and stop enabling this concentrated casino.
Pension funds have increased their exposure and I doubt very much that the pensioners understand the risk involved, the fiduciaries don't even understand it.
Does anyone know what the implications of GMAC's ratings cut may be for their servicing business? GMAC is a rather large servicer.
"S&P also revised its outlook on GMAC to negative from developing, indicating the rating is likely to be cut over the next two years. S&P rates GMAC "BB-plus," one level below investment grade."
This could be a real concern.
Ya know, if we remove food, energy, healthcare costs, insurance costs, housing & housing related, autos, & the furniture sectors....
Target, Walmart, Liz Claiborne, etc the majority of the tech sector,
things look great, we have more retirees employed at Mcdonald's and Walmart than any nation on earth.
Maxed,
Surprising that Cerberus hasn't said, "Take this crap back!" and claimed fraudulent conveyance.
hi dry- nice to see ya.
i'm no GOP'er. No Dem either.
i hate 'em both.
where is the guy for fiscal conservativism, social liberalism, gun rights, abortion rights, gay rights, low taxes, internationalism, legalizing drugs, and a balanced budget?
tanta, your favorite...
MarketWatch.com
dc, sounds Libertarian to me. Maybe we can lead the next revolution, eh?
where is the guy for fiscal conservativism, social liberalism, gun rights, abortion rights, gay rights, low taxes, internationalism, legalizing drugs, and a balanced budget?
Probably running a construction company in DC.
ac said: "...everybody hails the invincible US consumer as the backbone of the economy (71% of the GDP) and our insurance policy against recession. Now there's suddenly no mention of it in the wake of an outright decline in consumer spending last month, and what matters is that manufacturing is picking up. As if the US still has a manufacturing economy..."
There were so many misconceptions on this particular thread that I almost decided to give up. Maybe just one more day.
The consumer is not our insurance policy against recession, since consumption remains very stable over time and business cycles.
Important expansion or contraction comes from the business investment part of the economy, like manufacturing.
If manufacturing is picking up, the economy is going to be stabilizing for sure, and probably expanding.
Sebastian
p.s. For anyone who doesn't think manufacturing is important to the economy, try going without electricity, gasoline, and plastics for a week or so. These are all manufactured right here in the U.S. S.
Did "Bomac" go down?
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p.s. For anyone who doesn't think manufacturing is important to the economy, try going without electricity, gasoline, and plastics for a week or so. These are all manufactured right here in the U.S. S."
Many simple plastic products are made here -- storage boxes, etc, and other things that can be stamped out by machine. But if assembly is required, that labor is foreign.
I'm glad electricity is made here, but that's one thing that can't be made practically in Asia. The natural gas that is imported to create some of it is imported more and more. There may even be the beginnings of a cartel.
And increasingly the things that run on that electricity are made elsewhere. Gasoline? It makes more sense to refine it here than transport it. Same as wall-to-wall carpeting; that's made in the south and is always going to be, because it's extremely automated, the infrastructure involved is huge, and it's just not worth building it all over again in China. No money in it.
You can always pick out a few exceptions and call it a rule. Works in a barrroom discussion, but not when you pore over the issue in detail.
p.s. For anyone who doesn't think manufacturing is important to the economy, try going without electricity, gasoline, and plastics for a week or so. These are all manufactured right here in the U.S. S.
Currently most of those products are produced here but increasingly less so except for electricity.
And none of those industries hire a large number of employees per dollar volume sales. Lotsa of capital employed, lotsa technology & IP involved, lotsa raw material processed - not many jobs at the average J6P level. The jobs they do create pay extraordinarily well though, there just aren't that many of them per dollar of activity.
My first engineering job out of college was in an ag products chemical plant - about a half billion dollars in sales and a billion dollars in capital. Big enough that we had to build our own co-gen power plant. Only about a 150 full-time employees (100 more added after co-gen went in).
Compare that with manufacturing companies I work with now... 250 employee plants will typically generate about $25-$50M in sales and cost way less than $25-50M to build.
As for jobs staying in the US...
The current trend in refining is to add capacity as close as possible to the well head then ship the finished products around the world instead of shipping crude. There are some advantages to shipping crude & refining close to the market (product mix response) but not as many as the cost advantages of doing it close to the well head. The result of this is expect to see less refining done in the US & a lot more of it done in places like Persian Gulf, Venezuela, Russia, etc.
Plastics are now increasingly being produced offshore too (both monomers & fully processed polymer resins) as are primary metals of all types.
Again getting close to the feedstock source for plastics or energy source for smelting of metals is the primary consideration.
I have buddies engineering resin plants and most of their work is currently in Asia (heck that is where the demand growth is for injection molding resins so makes perfect sense).
Same with aluminum - the power from Three Gorges is likely to result in the cheapest aluminum in the world for at least a generation once all the infrastructure is in place. It will give Chinese metals manufacturers an enormous advantage - labor, energy AND capital cost advantages.
In both cases the growth in Asian aluminum & plastics capacity is targeted to export growth - NAFTA Zone & EU markets.
Electricity is & will remain regional if not local.
The thing that keeps me optimistic that mfg will remain here is that the dollar will decline so much that cost of labor & cost of capital will equilibrate between regions of the world. Raw material costs already global.
I believe we are seeing the beginning of the dollar correction happening now... the Asian FCBs are fighting it but can't fight the tape forever.
GMAC Swings to Loss
By JOSEE ROSE
May 2, 2007 4:48 p.m.
GMAC Financial Services, partly owned by General Motors Corp., posted a first-quarter loss as a significant loss at its home-mortgage business offset strong results from its global automotive finance and insurance businesses.
GMAC's results are likely to affect GM's quarterly results, expected Thursday morning. In late November, GM sold a 51% stake in GMAC to a consortium of investors led by Cerberus Capital Management. Under terms of the sale, GMAC has received a common-equity injection of about $1 billion from the auto giant to shore up its balance sheet.
For the first quarter, GMAC posted a loss of $305 million compared with a year-earlier profit of $495 million. Excluding its Residential Capital LLC unit, GMAC had first-quarter earnings of $605 million, up from $311 million a year ago.
GMAC's revenue dropped 27% to $3.38 billion from $4.62 billion.
GMAC's home-lending unit, also known as ResCap, posted a loss of $910 million compared with a year-earlier profit of $201 million, due to continued pressures of the U.S. mortgage market. The slower housing market has led to an increase in the number of defaults on high-risk, or subprime, loans -- an area where ResCap, traditionally thought of as the jewel of the GMAC portfolio, does business.
Amid the sharp downturn in the U.S. mortgage market, GMAC said many of ResCap's nonprime assets were liquidated at a loss or marked substantially lower to reflect the severe illiquidity and depressed valuations in the prevailing market environment. GMAC established substantial incremental reserves during the quarter against various nonprime loans on the balance sheet.
In Wednesday's release, the company said its ResCap unit should "be far less vulnerable to further adverse developments in the nonprime space." GMAC also said the setback ResCap incurred "is expected to be a temporary one."
The U.S. mortgage industry has felt intense pressure from a housing slump, higher funding costs and rising defaults. Higher delinquencies on subprime home loans -- in large part due to a sharp deterioration of underwriting standards last year -- have in recent months forced a slew of lenders, big and small, to set aside more capital for potential loan losses. In many cases, lenders have also been forced to write down the value of their mortgage securities.
GMAC said nonprime loan production in the U.S. was $3.3 billion in the first quarter, down from $9.1 billion in the year-ago quarter. U.S. prime loan production was $27.8 billion, up slightly from $27 billion a year ago, and international loan production rose 18% to $6.5 billion.
The company had said it plans to "sharply" reduce the volume of subprime mortgages this year. GMAC executives have said implementing changes at ResCap -- including tightening underwriting guidelines -- is their "most pressing priority" this year.
"We have taken aggressive actions to overcome the
risk capital, thanks. Loved this part:
According to Coast Bank President & CEO, Brian F. Grimes, the increase in net loss is primarily attributable to extraordinary circumstances. "For the past several months, Coast Bank has been operating under difficult circumstances and the earnings report is reflective of the situation." Grimes continued, "As previously disclosed we have a large number of customers who have been negatively impacted by their builder filing for bankruptcy in the midst of their new home construction. This situation has generated large extraordinary expenses, negatively impacting the performance of Coast Bank."
Those "negative impacts" just bite, don't they?
MOM, I don't know off the top of my head how many big old jillion-tranche REMICs there are out there serviced by GMAC in whole or in part, but I'd estimate somewhere between a shitload and a big honkin' mess of them. A servicer downgrade will negatively impact the situation.
MOM, I don't know off the top of my head how many big old jillion-tranche REMICs there are out there serviced by GMAC in whole or in part, but I'd estimate somewhere between a shitload and a big honkin' mess of them. A servicer downgrade will negatively impact the situation.
Maybe GM can just recall them... that's something they seem pretty experienced at.
tanta,
the performance metrics sucked!
I just want to know who in the hell placed more on deposit there?
I still loved the statement from one of the area cities (previous article), saying we pulled our funds due to our fiduciary obligation....
"but, wish them the best".
MOM:What happened is that the dumb lenders succeeded for long enough to force the wiser lenders to compete with looser underwriting.
What did you expect with old Easy Al's lead foot on the pedal? It's harder to fail when money is free!
dc1000,
The Dems are a lot closer to what you want than the GOP. They have become more fiscally conservative than the GOP, for example...
dryfly,
In the long run, Peak Oil should work in J6P's favor, too. Once transportation costs exceed the foreign labor cost advantage, everyone will be building plants in the states.
The bear market's slope of hope...
Rents Peak in Housing Glut; New York Escapes Decline
Hoping For Profit
I don't want to sell for less than I paid, so my only choice is to rent it...
I didn't buy an investment property with the hopes of being a landlord, but I'm not going to get a good price right now...
I'm hoping the good times for real estate will be back in next year's spring market...
If this keeps up and is not "contained" to the real estate market, I might soon need to change my name to one of the following.
Otherwise my relatively safe, conservative, sideline investments (TIPS) might get zappa'd.
"The consumer is not our insurance policy against recession, since consumption remains very stable over time and business cycles."
"Important expansion or contraction comes from the business investment part of the economy, like manufacturing"
The components of GDP (Gross Domestic Product) will tell you what the U.S. is good at producing.
Over 70% of what the U.S. produces is for personal consumption. The remaining 30% of GDP is business investment (16%) and government (19%), of which one-third is defense.
The largest components of personal consumption include:
More than 40% of GDP are services. The two largest components are real estate (10%) and health care (12%).
Non-durable goods are 20% of GDP. The three largest components are food (10%), clothing (2.7%) and fuel (2.4%).
Durable goods, such as autos (3.6%) and furniture (3%) is the smallest, at only 8% of GDP.
GDP components and their impact on growth.
Added (subtracted)
from GDP (%)
Residential fixed investment (0.97)
International trade (0.52)
Inventories (0.30)
Consumer spending 2.66
Business spending 0.21
Government spending 0.18
Source: WSJ, Commerce Department
In the long run, Peak Oil should work in J6P's favor, too.
Yup - absolutely. Someday.
Stag Mark - you see today's Big Picture?
Check out the comments, pretty funny...
Don't worry, folks, your listing agents are out there working hard for you.
Bolsters my conjecture that David Lynch has been presenting a series of vignettes about Southern California residiential real estate.
" p.s. For anyone who doesn't think manufacturing is important to the economy, try going without electricity, gasoline, and plastics for a week or so. These are all manufactured right here in the U.S. S."
Surprises me that the Bulls seem to think it necessary to mention manufacturing that supplies consumers while saying consumption tends to remain constant thru the cycle and will not influence manufacturing.
The US does have some important none consumer manufacturing that could be quoted? Or am i wrong? Does for example Boeing make plane parts overseas?
Does for example Boeing make plane parts overseas?
About 30% of value added is non-NAFTA content and increasing from what I understand. Though they say their offshore buy is non-core competency, stuff like 'wing' and 'fuselage' structures...
Meanwhile other domestic suppliers produce avionics (Honeywell & Collins) and engines (GE) for them... also non-core competency I suppose.
So that begs the question, what is their core competency - lobbying congress maybe?
It's all so silly sometimes I think I'm in a dream.
ac said: "...everybody hails the invincible US consumer as the backbone of the economy (71% of the GDP) and our insurance policy against recession. Now there's suddenly no mention of it in the wake of an outright decline in consumer spending last month, and what matters is that manufacturing is picking up. As if the US still has a manufacturing economy..."
There were so many misconceptions on this particular thread that I almost decided to give up. Maybe just one more day.
Sebastian,
It's official now.
We're not friends anymore.
"It's all so silly sometimes I think I'm in a dream"
I suppose that explains to me why Sebastian quotes manufacturing for consumers and BB praises job creation in the health care sector as examples of what is good about the economy.
Even so Dryfly you are still fairly bullish at the moment are you not?
detroit dan:
i've come to the conclusion that the opposition party is always 'fiscally conservative.
dryfly,
I stumbled upon the following article recently. I think it speaks volumes. It has plenty to appease the deflationists AND the inflationists. But what's new?
China shipbuilding frenzy to cut freight costs by 40%
The Deflationist's Dream: It has to fall, said Steve Rodley, joint managing director at M2M Management in London. Its hard to see rates sustaining where they are today beyond summer.
The Inflationist's Dream: China also became a net coal buyer for the first time this year, while rising incomes and a shortage of farmland may spur increased imports of grain to feed livestock.
It is almost like the world is awash in both dollars AND overcapacity. It's like the Roaring 20s met up with the Roaring 70s and decided to throw one heck of a deflationary inflationary party. Of course, this could all reverse and turn into a deflationary inflationary party if a butterfly flaps its wings incorrectly.
Bah! Butterflies are overrated anyway. Bernanke can barely drop any cash at all when flying one.
Got house? (Just milking some bonus humor.
)
Even so Dryfly you are still fairly bullish at the moment are you not?
I'm neither and both bull & bear... I do not think a recession is near at hand due to liquidity from FCB currency manipulation and also from carry trade and hedgies and PE funds. All that leveraged money drives a lot of activity... hard to see how we end up with negative GDP growth with all that nonsense going on.
But from what I read it's getting more & more difficult for the FCBs to maintain those de facto pegs... intervention & manipulation isn't without its cost. They are the key as their intervention keeps credit available, rates low & imports cheap.
Someday they will throttle back the manipulation effort... or throw in the towel completely & float. Or go after the euro & give up on the USD. Who knows. But when it happens that's the day a serious recession becomes imminent... And that is the time to go major league bearish.
But not until.
I think the current situation can drag on much longer than any of us could ever imagine... I've expected the conundrum to have ended years ago. I'm not sure we are any closer today then when AG first coined the phrase.
I think it speaks volumes. It has plenty to appease the deflationists AND the inflationists. But what's new?
LOL.
I've thought for many years that we could see domestic US inflation at the same time we see global non-USD denominated deflation...
USD goes to hell so we have domestic inflation due to large growth in USD money supply...
Meanwhile there is all that capacity out there outside the dollar zone and nowhere near enough 'good currency' (i.e. euros, yen, RMB) to sop up the global capacity... classic deflation.
So we see inflation in the US while everyone else in the world experiences deflation. Now that would be the perfect storm.
I think it is possible but far from probable.
So we see inflation in the US while everyone else in the world experiences deflation. Now that would be the perfect storm.
I think it is possible but far from probable.
I agree. That's a really good storm you've got there and like you say, it might not be all that probable.
My perfect storm is somewhat different but is clearly based on the same theme. Mine involves me having to compete with 9,000 hedge funds (overcapacity!) who might see your perfect storm coming someday. I don't like my odds, lol.
Although the music is clearly still playing, I've decided to sit down in my treasury inflation protected security chair and hope for the best. The deflationists will do better (in long bonds) if there's deflation. The inflationists will do better (in gold and silver) if there's inflation.
I'm hardly 100% safe though. Greenspan said it best, "The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves." I have no doubts that the government will do everything it can to get me to stand up again at some point. If history is any guide, I should have plenty of time to comply.
Camper #1: There's a bear charging down the hillside towards us!!
Camper #2 calmly puts on his shoes.
Camper #1: You fool! You idiot! You cannot outrun the bear!
Camper #2: I don't need to outrun the bear. I just need to outrun you.
I agree. That's a really good storm you've got there and like you say, it might not be all that probable.
I would add that I think domestic inflation coupled to global deflation is more probable than 'deflation' by itself...
I think you should always take a central banker, like BB, at his word when he says he's prepared to do what it takes to defeat deflation... printing money is one of the things they do best.
Taking them at their word that they will really fight inflation? Now that's asking fish to fly.
who does a dropping dollar really hurt?
its clear that the strong dollar policy has left the building.
my background is international econ. there are just a few adjustment mechanisms.
the dropping dollar is the main way we're gonna do it
"There are two broad types of home sellers right now:
Irrationals: Just keep holding on as the months go by, the showings decline and no offers come rolling in. Nothing is going to change and their house is not going to sell at the price they're asking but they refuse to admit that.
Must Sells: These are people that moved into their next house without selling their previous house first, or maybe their job has moved or maybe they can't afford their payments anymore and they have just enough equity to be able to pay off their loan even if they sell at a reduced price."
I think there are also irrational must sellers.