Excellent post as usual, thank you.

I think that you will find that the bank lending officer survey is less valuable in predicting construction thsn it was in the past. The funding sources for construction are increasingly by-passing the traditional bank loan process. However, it is quite likely that the credit squeeze will impact construction to an extent, look for downturn in conjunction with this, not with the loan downturn last year.

I apologize for the off topic post, but could any of the resident mortgage experts comment on the following?
Karevoll is quoted in the HBB as saying that a big part of the larger foreclosure numbers, as compared to previous downturns, is the proliferation of second loans. Thus, nowadays the holder of the first “is forced” to foreclosure to get its money, while before the lender would try no negotiate with the borrower.
Could this really be a main reason for the current off-the-chart foreclosure numbers this early in the cycle? If this is true, the price drop will not be that sticky.

Note: anecdotal and just a rumor (but from a reliable source)

Goldman is in a virtual panic to unload $45 billion in loans as quickly (and hopefully quietly) as the market will allow.

Personally, i hope they choke on them.

RP,

Consider the source of your information... I work in the mortgage business and am seriously considering going back to Wall St. In the time that I've been here, I've found the players to be NAR-commentary-regurgitating, snake-oil salespeople.

Yes, mortgage rates are rising, but it has nothing to do with the "strength" of the economy. In fact the 10-Yr UST yield, which is the base component of the rate for mortgages has been falling lately as capital searches for a safe haven among falling knife equities.

Yet despite the fall in the 10-Yr bond yield, mortgage rates have risen b/c lenders are requiring higher returns for the risk of lending based on housing collateral. They KNOW that house prices are falling and will continue to fall. They know foreclosures are rising and will continue to rise. They know people are lying about their profiles and Wall St is no longer able to hide these sketchy loans behind opaque CDOs, so there is no secondary market to take on this risk away from the lenders' portfolios. Basically the jig is up.

Your broker is either blind, dumb or disingenuous based on his comments. And no matter which is true, it is a poor reflection upon him/her. Now is a great time to test your advisers and this particular fellow has failed miserably IMO.

Thank you for your non-profit service. Here's some advice you can take to the bank. Wait until AT LEAST Winter 2008 to buy that house. And even then, tread carefully.

Best of luck,
LF

Meanwhile, in areas like mine (median home price around $250k, half that of CA) home prices are still enjoying price appreciation.

Home appreciation and equity is really nonsense .
Until the SFH is sold and ALL costs associated with owning, buying, selling that SFD over time have been figured can one make any kind of judgement about any positive gain over inflation a SFH may have generated during ownership.

lama,

yeah the system is really crazy. The place where the actual mortgage paper is held may have no rights to that paper other than collecting the payment. The actual ownership of the mortgage maybe divided up into many pieces.

So you have to get a group together to foreclose?

Then because the local banks no longer hold those mortgages, some third party will have to be hired to do the procedure. Then who is the actual seller?

I see that default rates are up and foreclosure notices are sent but in my area, I see very few foreclose properties coming back on the market. This process is going to take a while.

What is going on with credit is that the feed into those MBS and CDOs are increasingly diminishing. With no certain date of remedy.

So now anyone thinking about buying one of those credit obfuscations is looking at the reality of what happens when borrowers default. No income and who know what the costs will be to foreclose and resell. So there are no real valid projections as to the eventual worth of the underlying assets.

Would any of you buy into such a convoluted system where there are no limits to the down side and no guarantees on the income?

This bubble was created by a confluence of factors that are slowly, but surely unraveling...

1. Secular decline in inflation and interest rates since the Volker Fed. PV laid the groundwork by committing to inflation fighting, which the market responded to by lowering the cost of Treasury borrowing from 14% in the late 70s to a little over 3% a couple years ago. Since that point, we're back to the 5% range and dependent upon continued low inflation to support housing related borrowing, meaning the Fed has its hands tied as the correction gets worse.
2. Evolution of 2ndary mortgage markets. At around the same time as Volker's revolution, another major change occurred as Wall St introduced the MBS security, which resulted in a MUCH higher level of selling of mortgages away from bank portfolios to Wall St. Since that time, CDOs, CLOs, Hedge Funds and other forms of levered players created a huge sink hole for questionable mortgages. Suddenly the banks cared less about risk b/c they would just sell the trash to Wall St.
3. Evolution of the mortgage broker and new mortgage products (stated income, interest-only/neg-am, and 100% financing). It used to be not too long ago that 25% of mortgages originated at brokerages. Now it's closer to 70%. Problem here is that many brokers are rogue salespeople, willing to defraud the system via stated income and other types of outright fraud in order to make a quick buck. Stated income was supposed to be for self-employed, sales people, and others with inconsistent or hard to verify income sources. Instead it became a method to qualify when you couldn't really qualify based on your real income. Just another form of leverage in the system, especially when combined with

BTW, let me state emphatically that I'm not a permabear. But in the short run, I'm very pessimistic.

It's time for some creative destruction. And I'll be patiently waiting at the other end to scoop up long-term assets at legitimate fundamental values, rather than the BS fundamentals (i.e. PEs w/inflated Es) that we hear so much about today on CNBC.

Today's market is a lesson in psychology.

Let's call it Psychology 14000.

The PPT got into action about halfway through the day, but they weren't able to do the trick.

Why?

Well, what the PPT has on its side is the morbid dread of market participants that they will miss the upside. 1987 looms large in their minds (probably the best buying opportunity of all time, which I am chagrined to say I missed).

In any case, today people are clearly not afraid of missing the upside.

Bidding wars!!! What a joke. Thank goodness we won't be seeing those again for a long time.

BTW, when I spoke of scooping of assets I was referring to RE AND equities. This correction will be widespread. What we have is a credit/leverage issue, not just an inflated housing issue.

And I have no problem borrowing at a higher rate. You can always refi your loan later. But you cannot refi your cost base without losing your credit and/or your down payment.

Wow... Major carnage in equities. The $RUT has gone from 855 9 days ago to 777 closing today. A nice 20% rise in ultrashort TWM in 2 weeks.

Good day to everyone.

Gary,

A fool and his $$$ are easily parted.

Cheers!
LF

Is the money honey stil runnng around on bubblevision like a headless chicken screaming "BEIJING PUT, DELHI PUT, MOSCOW PUT!!!!!"

What we need to do for this economy is raise the minimum wage to $40.00 per hour. That way, everyone will be able to afford a house.

tj's VIX calls should be looking pretty good right about now.

VIX closed over 24 (up almost 3 1/2). Definitely looking good!

BTW, let me state emphatically that I'm not a permabear. But in the short run, I'm very pessimistic.

That's me, too. I'm a very optimistic person by nature, but I can't help but see the clouds for the Perfect Storm darkening.

Liking this LawFitz.

It's easy to see that non-residential structures usually peak just 1-4 months before the recession starts. It's trailing indicator, must be ignored.

because i have a large (for me) position on i spent the entire day clicking away at my computer and watch cnbc. i was struck that in 6 1/2 hours of market trading, they could not come up with a single bear. in addition the trillion dollar survey, which i assume contains a fair survey of fund managers, also had 0%, for those that thought we were at the begining of a bear market. finally, when cramer came on at 2:30, his big pronouncement was that doug kass who has been a strong bear for as long as i can remember, was talking about how the market would rally and finish positive for the day.
given that we have a complete meltdown in the credit markets, hedgefunds dropping like flies, how is it that not a single commentator thinks there might be a problem?
i know i am very much talking my book, but monday could well be a day to remember....

Think about the sellers of those credit swaps (Goldman, Countrywide etc. that have gone ballistic in the last 30 days. Do they have to mark to market??? Who are they - hedgies, the banks, the usual suspects? This could be the next BearStearns like event.

http://money.cnn.com/2007/07/27/pf/funds/mutual_fund_outflows/index.htm?postversion=2007072716

Highest stock fund outflows in 5 years.

Party over?

Cosmodog

Reports: Boston Hedge Fund Down 10 Percent on the Year After Bond Losses

Expired

owning a home has obligation besides shelter.

a home is a place to live. Why buy a home for more than you can rent a comparable shelter? Add up the other costs like heating, cooling, maintenance and taxes besides your payments and that is what a house is really worth.

So in reality a home is worth what the income will support for shelter, enjoyment and entertainment and not a lot more. This housing market has been waaaaaaaaay over valued and will, like all over valued assets, revert below the mean before it returns to it. The time to buy would be near the bottom in about ..... say 2015... No one really knows what is going to happen but in general the universe likes balance with a little chaos thrown in and we have that for sure.

Have a good week end, I'm off to a local R&R concert.

I have heard he also said that there is 1:5 chance for major financial crisis but I can not find a link

There is a 5:1 chance that junk bond rates will not go back down anytime soon.

Energyecon,

I saw that chart last night. The deals that were opportunistic in nature, Arcelor,Catalyst, Magnum, MISC, Oreck, Bombardier, First Gulf, A-Tec, OAC,Harmony, Oxygen, DAE, Brazil, Tyco and Gazprom don't mean much. What I mean by that is no other transaction is reliant on the completion of that transaction and none of those companies financial health is in danger due to the lack of completion of those deals. They tried to catch a hot market and missed it. The effect of those missed transactions is small. Lost fees for the underwriters, higher interest rates/imperfect capital structure for the issuers. Pulled deals happen each time the market moves downward by even two or three points and they happen in bunches.

The hung deals for acquisitions, Chrysler, Allison,USFood, Alliance Boot are very important both to the mood of the market, the willingness of banks to fund LBO's and hence the equity markets. The size of these also contribute to these being a big deal. As I noted earlier, my back of the envelope calculations says an entire quarter of earnings for Citi could be wiped out. The Cadbury situation will be very telling of how this is playing out. I expect that asset to either be pulled from the auction or for pricing to be in the $12ish billion range rather than the $14-$15 people were expecting or for Cadbury to hold onto a stake.

The hedge fund things are overrated in importance by themselves. Hedge funds, and other investment funds fail on a fairly regular basis.

Now, when you put this all together, each piece multiplies the other so the overall impact is larger, but not unprecedented. In particular, the opaque nature of the hedge fund business makes that the potential biggest NEW thing that comes out because we really dson't know where most of them are at this point.

The big issue in my mind is duration. Each day this market is closed some exogenous shock is possible (Iran nukes Israel, another Katrina, another 9/11, Saudi gov't overthrown and the oil stops etc) that could create an enormous issue for all the markets.

In 1998, the closest, though still far worse historical event, we got lucky and the 90-120 days it took to reset the market, no real shocks happened. But that was sheer luck.

This is a bit of a scary moment, not for what has happened, but for what is now possible.