Housing: "immovable glut of supply" meets "decline in demand"
Submitted by
CalculatedRisk on Sun, 06/17/2007 - 9:41am (59 comments)
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Yeah, that's one big "oops". If anything, the problem seems to be getting further from resolution.
MOM, there is definitely no end in sight for the housing bust. It would be better for the builders if starts fell far enough to really start working off some of the inventory.
The consensus for the economy was close to 3% GDP growth (another Oops!) Those estimates are being revised down quickly, although Q2 will probably show some improvement. But the 2nd half of '07 is still looking weak.
I'll provide a mid-year update on my housing and economic outlooks in a couple of weeks.
Best Wishes.
Denial has become the most enduring quality of the American character. In the 60s and 80s I thought I understood the depth to which the American people could live in denial, but I have to admit I was mistaken. The problem is more entrenched and deep seated than I could ever have imagine. That is why I'm convinced that when the seriousness of this housing depression begins to sink in to the American conciousness that it will come as a complete shock and leave this economy reeling. The first crushing blow to the belief in real estate should come this fall as the mortgage resets swell, credit continues to tighten, and the CDOs go into melt down mode. Haloween 2007 won't be known for it's treats but it's cruel tricks on the American psyche.
I was reading the linkfest over at The Big Picture and ran across this item.
Henry Blodget: NAR: Don't Worry, Housing Prosperity Just Around Corner
What a crackup! In explaining that all the talking heads and economists woefully underestimated the severity of the 2000 stock market crash and that they wouldn't do that with the housing crash, Blodget says "Housing obviously won't experience as deep a correction as the dotcoms did, but I haven't heard a single persuasive argument explaining why this downturn won't look like every previous housing downturn".
So basically in an article saying he won't get fooled again, he's setting himeself up for getting fooled again. We'll be lucky as hell if this housing downturn looks like every previous housing downturn. Sheesh!
The consensus for the economy was close to 3% GDP growth (another Oops!)
Of course, others predicted a recession.
There's some bad news for the housing bears.
The 1-year CMT is actually down a bit from this time last year.
Mortgage Indexes: CMT, Treasury Bill, MTA, COSI, COFI, LIBOR, CODI, CD, Prime Rate
And short-term rates are falling.
http://finance.yahoo.com/charts#chart1:symbol=^irx;range=6m;indicator=volume;charttype=line;crosshair=on;logscale=off;source=undefined
ARMs rates should start to fall as the year goes on, which should have a stimulative effect on housing, and take at least a little bit of the sting out of resets.
Sebastia
In attempting to understand why the stock market is completely disconnected with the carnage of the housing market (and I admit that denial plays an extraordinarily large role), I keep coming back to Japanese yen interest rates.
This is the source of the "liquidity", isn't it? I mean, if it weren't for zero Japanese yen interest rates, we wouldn't have the amount of liquidity sloshing around that we have.
When you can borrow at zero percent interest and when you can earn 5% on the dollars you purchase with the 0% yen, then that opens all sorts of doors.
One could speculate that the Japanese Finance Ministry is the equivalent of our International Monetary Fund, if we are analogous to Argentina.
But the analogy breaks down, because the Japanese are going to keep the yen interest rates at zero forever.
So, as long as you get in and out quickly enough, there is absolutely no reason whatsoever not to buy/bid up US assets with borrowed dollars on which you are paying zero interest.
Can someone explain all this to me better? It is the carry trade, I know. But I also know I am missing a great deal.
And this is NOT OFF TOPIC. This is the topic, is it not?
Everybody in the housing game is living on borrowed money, everybody.
Where the borrowed money ultimately comes from is the very essence of the topic.
"Denial has become the most enduring quality of the American character."
Americans, like the British before them, will have to learn the hard way that building an empire is only half as much fun as losing one.
Can someone explain all this to me better?
Sure, you're overstating the significance of the housing market.
Steve- "Of course, others predicted a recession."
The year isn't over yet.
arbogast said: "...One could speculate that the Japanese Finance Ministry is the equivalent of our International Monetary Fund, if we are analogous to Argentina.
But the analogy breaks down, because the Japanese are going to keep the yen interest rates at zero forever.
So, as long as you get in and out quickly enough, there is absolutely no reason whatsoever not to buy/bid up US assets with borrowed dollars on which you are paying zero interest..."
The analogy broke down a little earlier.
We're not a South American country, we're the largest single market in the world with a great environment for conducting stable, long-term business.
Because of this, there's no reason to jump in and out of U.S. denominated assets and great reason to borrow all the money you can and invest it here for a long time.
Sebastia
"Because of this, there's no reason to jump in and out of U.S. denominated assets and great reason to borrow all the money you can and invest it here for a long time."
Sebastian
This is a very strong sell signal.
arbogast,
Yes it is the YEN.
Sebastian,
You know there is this point in which people think they need more leverage so that they can make more money: the point of optimum leverage"
but you need to think about it:
Is more being produced or consumed in this world because more and more people go further into debt and "invest" the money in financial assets ?
No. Not at all. we are way past the point of the world doing something usefull with all this liquidity and this is why this bubble will burst.
Even in china they can not switch to a western diet fast enough....
In response to Steve's: "Of course, others predicted a recession."
mp said: "The year isn't over yet."
Sad to say, but the book on a 2007 recession is closed, and it won't happen.
Based on the yield curve and recession probabilities, it definitely won't be here before Q2 2008, and probably not at any time in 2008.
Sebastia
Sebastian, I hope you're right, I really do. If you are, I'll make more money this year than last in the real economy, not the financial economy.
If you want to stick your neck out in the market, especially with borrowed money, be my guest.
Steve, I thought the continued slide in housing was easy to call, but that the impact on the economy was far less certain. I called a recession about a "coin-flip" - and that is far better than the consensus view (at least so far).
I understand that others - like Roubini - argued a recession was a near certainty. That wasn't me.
So far it looks like I'm correct on Ten Year interest rates and the trade deficit - and wrong on oil prices and the timing of the next Fed move (I thought the Fed would cut by August). I'll revisit all these predictions in a few weeks.
I suspect my housing view will pretty much stay the same!
Best Wishes.
Nobody can predict a recession or not in the latter half of '07 or early part of '08 because there are too many variables out there that could have massive downside effects.
Does anybody really believe the economy will stay sound if FCB's slow their treasury buying and rates soar? Does anybody really believe we'll be okay if ratings agencies start to lower ratings on subprime CDO's and everyone is forced to mark to market?
Those predicting recession are expecting the market to follow what appear to be rational downturn underpinnings, those not predicting recession appear to be working off irrational upward exhuberance.
Either could be right cause we don't know when the credit bubble ends. I can still take on debt, can you? I won't, but I still can.
Well, the only question becomes how gracefully the credit bubble ends- if it goes out with gradual stagnation and gentle persistent underlying inflation all will be well and a Japanese period of stagnation will be enjoyed. However, since we don't like to give out zombie loans in the US, I tend to err on the side of overkill, with numerous bk's leading to a new housing market based on the growth of the Gen X household- which is to say slooooow.
Now will this plant all of America into a deep depression? No- but. But if any other factor combines with this personal wealth destroyer to kick the American worker down the stairs, like a falling dollar that immensely ratchets up the cost of living- then bad times will happen. Period. No lah te dah, just life as normal, but thump.
There are enough risks in this new era for an almost assured exogenous impact causing number two within the next few years. Like a debacle in Iraq leading to a helicopter lift out...remember the image of the choppers being tossed over the side of our carrier...
Someday this war's gonna end...
Face it, we are already in recession.
You just won't "know" it until 2009, when the final re-revised numbers get released.
So, what else is new?
And, yes, housing brought us into this recession that we are already experiencing.
The revolution is here, it is just waiting for participants.
AllenM, what is the helicopter reference? Do you envision a similar economic fallout from the end of the Iraq war as we saw from Vietnam?
Retail is flat at best(ex high end), credit is tightening, MEW is headed down.
The other shoe drops when they stop handing out money to CRE, because they can't build CRE longer than RI can work off their backlog.
Bear Stearns may have been the 1st financial engineering firm to get caught with their pants down, but they won't be the last, so these liquidations will likely continue in spurts, usually when it looks like a floor is developing in bonds.
It's already a growth recession(to be fair, that what Roubini called for when he had his optimist hat on), the question is when does it go to full recession?
I think the wheels come off in October
arbo - its more than the yen carry, that's a big part, but there is also the SWFs - sovereign wealth funds like those run by the BRICs & OPEC.
There s still a lot of liquidity out there even if they've turned their noses up on the recent treasury auctions. Ask Blackstone.
The private market is running strong behind the sovereigns - using them like downfield blockers on a screen play.
It could go on a lot longer - or end tomorrow. Who knows.
Hey! DotCommunist! How you doin'? How's the revolution business?
Sure, you're overstating the significance of the housing market.
Now Steve, that's really sticking your neck out...
Based on the yield curve and recession probabilities, it definitely won't be here before Q2 2008, and probably not at any time in 2008. Since we constantly compare the current debt bubble to the 1999-2000 period, how do the indicators compare? The related question is how much of current growth is debt related compared to 99-00 and would an event that triggered a "flight to safety" have a dramatic near term effect?
Sebastian-
"Sad to say, but the book on a 2007 recession is closed, and it won't happen.
Based on the yield curve and recession probabilities, it definitely won't be here before Q2 2008, and probably not at any time in 2008."
I'm at a 75% chance by Q2 2008 with Q3 of this year being negative and possibly the start of a recession.
The yield curve was inverted for approximately the most part of 3 quarters, we have had a slight blip which will be followed by another inversion shortly.
The savings rate has been negative for approximately 24 months, the amount of leverage is the system is at all time highs, the economy by any measure is slowing, debt service is rising, in the S&P coverage universe we are at all time high on those rated below investment grade, the housing industry is in depression, related industries are all suffering, credit has tightened and is tightening further, more and more garbage IPO's are being brought to market, sam zell sold, blackstone, is going public and the founders are cashing out, fortress went public and now trades substantially below the IPO price, there has been net distribution at the institutional level over the last three weeks, managers are extremely cautious, the quality of earnings had been deteriorating for the last two quarters, delinquency rates are going up across the board, addional incentives were just announced across the sector in autos, the consumer is & has shown sinificant signs of stress, foreclosures are rising at an astronomical rate, the builders are in danger of covenant default, the accounting for MBS, CDO's, etc has been extremely aggrssive due to the use of mark-to-model leavng the asset values & performance of portfolios in question, gas prices emain over $3.00 per gallon, wage increases are anemic by any measure and have failed to keep pace with the Fed induced inflation, Amaranth, Dillion Reed, and now potentially two BS hedge funds will soon close due to the inability to properly quantify risk, various world leaders have warned about the risks of derivatives exposure and the systemic risk to the global financial system, much of the risk is counter-party credit risk (who's the counter-party, you think they know?), PE & LBO deals are beyond comprehension at the valuations today creating an enormous bubble of its own with absolutely no end ticket in sight & a slowing economy, the end tickets (if they come) will bring the reality of the utter nonsensical valuations & the forced layoffs of thousands upon thousands, across all fixed income markets rates have risen in the last two weeks making the cost to refinace a greater burden, the subprime debacle is not contained and never was contrary to the lies told in the press, housing has not bottomed and won't for years contrary to the lies told in the press, corporate default rates are at historical lows due to irresponsible lending unbelievably in a slowing economy-
what were the lenders thinking?
and what in God's
Halo cut me off-
"and what in God's name are you thinking?"
Halo cut me off-
"and what in God's name are you thinking?"
Erik- when Saigon finally fell we were pushing perfectly good helicopters off of carrier decks to make room for the next bird to land. It was a very vivid image that I can still recall thirty years later from CBS nightly news...that was a massive failure of national will that end in the Persian Gulf with a similar debacle. What I am saying is :
"someday this war's gonna end....
Sebastian-
one more thing-
as I said zell sold, hedgies are going public to cash out, Warren is sitting on a boatload of cash for the last two years with NO domestic acquisitions (small Israeli firm), obviously due to the "value" he sees domestically, and Wilbur Ross is waiting for Armegeddon in the distressed debt space....
but, YOU must be correct-
party on Darth!
Allenm
I really hate the term 'failure of national will' in relationship to wars. The purpose of war is to impose one's will on someone or someones else at a reasonable cost. The value of the imposition of will must exceed the cost or like playing a losing hand at cards or failed business plan, one must cut their loses.
Consider the first example of King Pyrrhus of Epirus, whose army suffered irreplaceable casualties when he defeated the Romans during the Pyrrhic War at Heraclea in 280 BC and Asculum in 279 BC. Pyrrhic victory - Wikipedia, the free encyclopedia
Or the no retreat policy of Hitler at Stalingrad. Battle of Stalingrad - Wikipedia, the free encyclopedia
In the end war must be a cold calculation of worth vs cost. So far, I have seen no real discussion of value, just national pride.
In fact, the whole theory of insurrancy revolves around the idea of bleeding an opponent past the point of no return.
In short, winning all the battles does not mean winning the war.
CR- "I called a recession about a "coin-flip" - and that is far better than the consensus view (at least so far)."
I agree with this view. Completely. Frankly, I lean toward "recession" in 2007, whatever that means, and have since Q2 of last year. The real economy is clearly near a tipping point and housing took it there. Since the beginning of this year oil has taken off again, long term interest rates are rising, retail is soft, the federal government is deadlocked on damned near everything and, to top it off, the public is in a "foul" mood.
I don't see that as a recipe for a stellar GDP this year. On the other hand, Wall Street may love it.
One last thought. It doesn't take much growth right now to make Wall Street happy. After all, they are leveraged out the wazoo. However, if growth turns negative, outfits like Bear Stearns, my tell on liquidity, are going to suffer dearly.
Think about it. Jesus. Merrill liquidating $400 million of their positions. What do you need, a slap in the face to tell you what that means?
Sure, tell me about firewalls, blah, blah, blah. Bear Stearns reputation has been severely damaged.
vader
"In short, winning all the battles does not mean winning the war."
We don't need to win the war, we just need to secure the oil fields and put a US friendly government in place in Iraq that will make sure the US is the main destination for that oil. This war is about one thing and that is oil despite all the BS to the country.
Merrill Lynch seizes Bear Stearns fund assets
Lol, Kein. I'm afraid you are living in fantasyland if you think we can lose the war, lose Baghdad, and hold on to the oil fields. Do you think triumphant insurgents will let us just sit in a mega base somewhere and pump the oil? Do you think we will have any legitimate right to even stay in the country once our military runs away and the Iraqi Government decides to deal with the oil in their own way.
Sorry, friend, but the moronic Bushies put everything in the pot and then rolled for winner take all. Once we slink out of Iraq we lose everything we bet and the repurcussions will be immense. And we absolutely will not lose the war while continuing to control the oil.
Hmph. "Merill Lynch is boolean on America."
I had to go to Modesto this weekend to look in on my very sick mother and her overstressed husband. In between shifts in Mom's sickroom, I walked the surrounding neighborhoods.
In lower-income and lower-priced neighborhoods -- defined by smaller, older houses, small lots, cheap or old cars in the driveways, and few or no municipal amenities like parks -- I saw an average of one "for sale" sign per block. Sometimes one, none, sometimes two or three.
In better neighborhoods of older existing homes -- larger lots and homes, nicer cars, parks and tree-lined streets, houses 20-40 years old -- I saw a for sale sign only once every two blocks or so. These people as a group are not under stress yet -- yet. Although the one flyer I picked up read "Any reasonable offer considered!"
But in a neighborhood of large, "executive" homes built less than five years ago (on tiny lots), I again saw a for sale sign on every block. Peering in the window of the local "help U sell" real estate franchise, I saw that every existing listing priced over 400K was marked "price reduced!" or "new low price!"
And the loan rates haven't even reset yet?
Oh yeah, my mother's husband showed me an abandoned housing project; they prepped the land, began to put in the infrastructure, -- and just stopped, a few weeks ago. Everybody went home. It just sits there on the north side.
In my next life i'm going to be a Corn Farmer
ZC.Z07.E CORN Dec (CBOT) 432.00 +7.75 +1.83%
cows eat it, chicken's eat it, pigs eat it, we eat it, we drink it, and now we put it in our cars....
oy vey
has seized $400 million in assets ????
asset's ?? there bogus contracts..?
how was this "seizure" carried out, ? in a court?
if bear released the grip on the "asset's" you can be sure there will be virtually 'no bid' -
how old are the reporters covering this dribble....
where is that paper clip miser when you need'em...
is he still sucking air , or is he happily six under
From May 22, this year: National Farmers Union, Canada
the United States Department of Agriculture (USDA) released
its first projections of world grain supply and demand for the coming crop year: 2007/08.
USDA predicts supplies will plunge to a 53-day equivalenttheir lowest level in the 47-year
period for which data exists.
The USDA projects global grain supplies will drop to their lowest levels on record. Further, it
is likely that, outside of wartime, global grain supplies have not been this low in a century,
perhaps longer, said NFU Director of Research Darrin Qualman.
The grain thing is worrisome. Wars have been started for far less.
Mass starvation may very well, for example, be what is bringing North Korea to its knees. I guess when 50% of your population is starving, you get a little teary and emotional.
I like the idea of profiting off of starvation, going long corn. I like it.
When I played musical chairs as a child, nobody died. I guess now the game has gotten a lot more serious.
Of course, nothing I say should be interpreted as handicapping a recession.
in that case, it's time to reverse engineer ethanol---
Can we drink it? safely, that is
LA Times today
(quote)
By a widely used measure of inventory, there has been an average 8.3-month supply of homes on the market in Los Angeles County over the last 19 years, according to the California Assn. of Realtors. That's how long it would take for the supply of homes to be exhausted at the prevailing sales pace. In April, that supply was 12.1 months in L.A. County and 22 months in Orange County.
(end quote)
22 Months!!!!
Neal, in 10 months , Cantarell will go under 1.4 million barrel's a day in production, and half of mexico will be offered the once a day chance to move to LA, thru amnesty, and be given no-doc, neg-am, cash-out , 0.001% 100 year loans...
that solves the supply problem
More LA Times, today:
(quote)
Alexis Desanti, a 57-year-old legal secretary and West Hollywood renter, began searching for a Long Beach condo in the $250,000 range in March. The first-time buyer, who was nervous about her meager down payment, looked at about 30 units before buying a 700-square-foot, one-bedroom condo within walking distance of the beach, for $258,000.
To qualify financially, Desanti got a $15,000 down-payment grant from a first-time-buyers program sponsored by the Pacific West Assn. of Realtors. Opening Doors participants must purchase a home priced at less than $564,264 in Los Angeles County, their incomes must not exceed $97,320 and they must contribute 1% of the sales price toward the down payment. As long as Desanti lives in the home for the first three years, the grant will be forgiven.
Desanti also qualified for a 40-year loan at 5.75%. She pays interest only for the first 10 years.
"I thought I never had enough money or the right job or the right location to buy," Desanti said. "I finally realized the market was right now. Or I would never get in."
(end quote)
$15,000 down payment grant from the realtors association! Interest only for 10 years on a 40 year mortgage! New inventions every day! No-one to say no!
Tom Dispatch.com
Possessing the world's largest fleet of modern aircraft, helicopters, ships, tanks, armored vehicles, and support systems -- virtually all powered by oil -- the Department of Defense (DoD) is, in fact, the world's leading consumer of petroleum. It can be difficult to obtain precise details on the DoD's daily oil hit, but an April 2007 report by a defense contractor, LMI Government Consulting, suggests that the Pentagon might consume as much as 340,000 barrels (14 million gallons) every day. This is greater than the total national consumption of Sweden or Switzerland....However, this assumes that sufficient petroleum will be available on world markets to meet the Pentagon's ever-growing needs -- by no means a foregone conclusion. Like every other large consumer, the DoD must now confront the looming -- but hard to assess -- reality of "Peak Oil"; the very real possibility that global oil production is at or near its maximum sustainable ("peak") output and will soon commence an irreversible decline....Clearly, writes LMI in its April 2007 report, "it may not be possible to execute operational concepts and capabilities to achieve our security strategy if the energy implications are not considered." And when those energy implications are considered, the strategy appears "unsustainable."
Anyone else wanna call a TOP/BOTTOM in the $/yen ??
123.55...
fade it, Hard
Time to investigate Sail Maker's --
Is the Falls of Clyde still sea worthy??
How bout the Constitution?
Anyone else wanna call a TOP/BOTTOM in the $/yen ??
Housewives Outmaneuver UBS, Deutsche Bank Trading Yen (Update4) - Bloomberg.com
If you want to take the opposite side of momma-san's trade, be my guest. ;>)
See the pretty submarine?
It's called Merrill Lynch
See the pretty boat?
It's called Bear Stearns
Watch the pretty boat.
Now you see it,
then you don't.
Bear may only have $40 million in that fund, but you can be sure that once the lawyers hit the courts their "firewalls" will be vaporized.
Google Videos Error
I dunno about that video, - you think it woke up the captain?
Called_Bluff, the hedge fund is tied to the Everquest IPO:
"If the stories are correct about the problems at the fund, it sounds like they off-loaded the riskiest positions to Everquest," said Josh Rosner, a managing director at research firm Graham Fisher & Co.
"It is not clear if this was before or after they were aware that those positions were hurting the hedge fund, but the decision seems to have happened before news leaked of the funds' supposed problems," he added.
CNNMoney.com: 404 Page Not Found
Bear Stearns is in deep doo-doo.
As for me, I'm getting out the marshmallows and graham crackers. It's going to be a real bonfire.
It has begun.
Vader,
I don't hate the term failure of national will. I think it fits the situation perfectly. We have as a nation a collective will expressed through the yoyos we elect to national positions. Our collective will was to knock off Saddam without forcing our leaders to commit enough resources to at least give us a reasonable chance at a successful occupation. Did we do that? No. That is a failure of collective will-if we had put over a half million boots on the ground and split the country up on ethnic lines at the beginning, then I would argue that the war failed due to bad luck.
But a failure due to Hitleresque delusions is a failure of national will. The delusional part is what totally offends me and makes me wish that most of the leadership in the bunker was out driving supplies in Anbar instead of drinking champagne at the K Street Grill.
I am absolutely fine with Realpolitik- it is the idiocy of entering into a huge conflict without paying attention to the potential problems AND ADDRESSING THEM IN ADVANCE!!!
America has coasted on mediocre leadership due to the fact that two oceans have kept the world at bay- now after 9/11 the world has come here- yet we argue about who should be paying for border control and a national i.d. card.
After a while I start to admire Putin, he sure is a better chess player than our rum bunch.
Someday this war's gonna end...
Not me. This is absolutely extraordinary event, together with BearS auctioning $4 billion of their positions. Those kind of events are incompatible with non-falling economy. It just takes time before the destruction hits TV news.
"in that case, it's time to reverse engineer ethanol---
Can we drink it? safely, that is"
There is only one safe way to drink.
Reinheitsgebot.
re-fresh that thought theroxy
bear liquidating vs Amaranth imploding
which is worse?
I have been thinking aobut a way to help our Navy with it's energy needs. If they erect these tall girders on their ships and hang canvas sheets off longitudinal supports...