``More retailers are feeling that something has changed after years of pretty healthy demand.''
"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."
Arthur Schopenhauer (1788 - 1860) German philosopher
Huh. Coming off the most enormous debt-leverage up in the history of the U.S. economy might be a bit rough? I was wasting my time getting a computer science degree: these professional economist types really have access to deep insights unavailable to us mere amateurs.
Part n of the housing bust contained saga - Ikea's announcing restructuring in the UK due to a challenging home furnishing environment, which is likely to continue.
I left my inner city redoubt this past weekend and travelled to northern Michigan's vacation-land. Though the scenery changed, the desparate looking "For Sale" and "Open House" signs were similar. I passed by some urban fringes, and development seemed to have petered out. Land has been cleared and some commericial and residential buildings have been raised. But the signs are clear that these developments are going nowhere fast...
Rhodes is worth paying attention to IMO. He seems to be an important behind the scenes player who doesn't crave a great deal of attention in the press. He won his spurs as a financial statesman when he was Citi's lead negotiator over Mexico's defaulted sovereign debt in the early 1980s.
I find it funny that Citi NOW sees this as a risk, the fact is clear, there is more risk today in regard to the consumer than we have seen in decades.
The leverage that is in the system and the number of junk rated credits with little ability to withstand a consumer drought is unprecedented.
Tough period ahead, much of it caused by greed, and a general disregard for the endgame, disgusting really. Most knew better and ignored it, those that did not are just ignorant.
It seems frustratingly obvious to me. Wages have been slow to rise, and people have been spending all of their income plus some on average for years in an economy that is 70+% dependent on consumption. This is obviously great for companies selling stuff. Same wage expense (or decreasing even by eliminating health insurance), but people on average via expansion of debt load spend their income PLUS whatever amount of additional debt they take on. Of course, earnings are going to be great....for awhile. Then all those people making the loans expect to repaid! With interest even! Now people will no longer spend their salary plus debt. Even worse, they will have to service the debt, so from a retailers perspective you go from (salaries + debt expansion) to (salaries - debt servicing- principle paid down). And this doesn't even account for a recession! It is so obvious it makes me want to scream! Yes, there will be a recession in the near future. When? I don't know. 6 months? A year? Does it really matter if we are off a few months on the call when we are talking about the most severe recession in a generation? Multiple generations? Haven't we all looked at the graphs of the recent credit expansion? Is it similar to any other time in history? Yes, credit will contract as loans are made responsibly again. Yes, the carry trades will unwind. Yes, central banks will quit massively buying our debt to manipulate currencies. Yes, hedge funds will blow up.
Sorry for the rant, but we have a very serious problem bearing down on us and we need to start thinking about what to do about it.
Yah. Citi has been quietly retrenching for about a year, judging by the lousy teaser rates they bombard me with due to my three cards with them. I bet they are a little bit underwater on that 2.9% till I pay it off that has been running for the last three years. Suckers.
I always maximize the amount they can loan me at great rates, and when they stop offering great rates, I stop using their credit. Kinda leaves them with a loss, but not my problem, no is it?
Someday this war's gonna end...but Wall Street hasn't got the message yet!
I was wasting my time getting a computer science degree: these professional economist types really have access to deep insights unavailable to us mere amateurs.
Hmmm... we pay good money for these types where I am and they're very hard to find (I'm not referring to the economists BTW).
Last year about this time we looked at a house in SoCal that needed a LOT of work & had an asking price of $1.3mm. It later sold for $1.4mm. Guess what? That very house is on a foreclosure list I just received - showing a mtg. owed of $1.4mm.
The boomers birthrate are pretty small from 1946-1949 birthdates but starting in 1950 the gap up in birthrate numbers starts to show. Boomers are just now starting to turn 55 in very large numbers and from now for the next 10 years a large part of the general population will be over 55. Studies show that their spending habits start to decline around age 55 due to children leaving home, children out of college etc, so the impact of a aging poplulation could also significantly impact consumer spending numbers now and in the coming years.
We went to the Chandler mall this last weekend, because it was 109 in Phoenix. The place was so packed that it almost looked like christmas, except nobody was buying. Several of the stores were holding going out of business sales and the discounts were 30-80% off. But the real reason the mall was packed was because it was air conditioned, and it was free.
BTW when I go into a Starbucks these days, it is dead compared to last year.
There's an in-fill development down the street from me, 15 houses, finally sold out a couple of months ago after a round of price cuts. Just two months; and the first "for sale" sign has appeared on an occupied unit. And there's one the very large and very shiny new pickup in the driveway.
Somebody waded in too deep, and was probably given the final push under by an overly friendly mortgate broker.
CR, seeing as MEW has gone down and foreclosure/delinquency rates have gone up the housing bust seems well on it's way. As this seems to be the case, have you done any calculations on how much of a disinflation/deflationary hit from housing losses that we likely to have to weather? I realize this is not a trivial question to answer, but I was thinking it might be possible to do a ballpark guess and was wondering if you had done so.
Obviously certain markets will be hit harder, such as the coasts, Arizona and Colorado, and urban areas like Atlanta, Detroit, etc. However, would it be possible to take a guess at what the overall average decline in value of the national housing stock will be and predict the amount of wealth that will be destroyed? Again, not all of that will be realized loss and much will be "paper" losses. But it seems to me that it should be possible to pro-rate that by the average debt levels.
Commercial markets haven't lost their appetite for debt tho...
As far as I can tell the people who said commercial real estate would pick up where residential left off are right.
Driving to lunch I see this absolute frenzy of commercial building replacing all the residential projects. Again, I live in a city with a shrinking population that doesn't have a reputation for spending much money amongst local businessmen.
I also read an article today about some specific projects here which are "speculative commercial" buildings.
I think the lesson is simply that if easy money is available IT WILL BE SPENT. PERIOD.
AllenM said: " Yah. Citi has been quietly retrenching for about a year, judging by the lousy teaser rates they bombard me with due to my three cards with them. I bet they are a little bit underwater on that 2.9% till I pay it off that has been running for the last three years. Suckers.
I always maximize the amount they can loan me at great rates, and when they stop offering great rates, I stop using their credit. Kinda leaves them with a loss, but not my problem, no is it?"
Tell me about. I'm especially pissed off being a GenXer, I am staring down the barrel of having to pay for all of this BS while almost certainly not going to have access to all of the SS money I've paid in.
Seb, It means that my total amount owed drops each month, not increases. Which means that nobody makes much money off of me, and the arb comment is correct-lol;-)
MEW in my case is limited to actual home improvement, and has pretty much ceased as the rate on the heloc has risen with prime.
CR is most likely right with MEW going flatline. I expect an awful large amount of folks may end up surprised at the fact the lender can drop the amount available on the HELOC with small notice...fine print's a killer.
ac, for an individual it sometimes makes sense to "invest" in non-viable projects as long as he's not the one financing them.
Well, let's use the proper terminology. We're getting to the point were businessmen realize they're making speculative investments that are doomed to fail on behalf of another party.
Incognitus said: "MEW doesn't come at low enough "promotional" rates that you can arbitrage it...."
It absolutely does, if you think long-term. Over the past 20 years the median rate on 30-year fixed-rate mortgages is 7.5%, and even with the recent rise you can get them for 75 bp below that.
During the peak of MEW (2004-2005, as percentage of DPI), 30-year FRM could be gotten for under 6%, an incredible once-in-a-generation bargain on a long-term mortgage.
AllenM is better off today as a result of his shrewdness, and so are all the people who took out all that MEW at just the right time...only nobody sees it that way.
Wouldn't one would have to be able to guarantee a return over and above the teaser rate plus the PPP. Lets say teaser + PPP = 5%. There arent many money market accounts that are above this. Of course this all assumes people are behaving rationally. Who knows maybe people were withdrawing and putting in the markets at +10%. We all know Americans love risk...
"America the land where everyone can be a investment banker..."
Will Japan Destroy the yen to save the dollar?
\t\t \t
As the Japanese government continues holding short-term interest rates near zero while printing yen like it is going out of style, getting out of the yen has now replaced pachinko as the national pastime for rank and file Japanese. With housewives and cab drivers debating the best techniques to exchange their yen savings for higher yielding non-yen assets, the Japanese monetary authorities are facing the prospect of the complete destruction of their own currency, subjecting their citizens to the horrors of hyperinflation.
It absolutely does, if you think long-term. Over the past 20 years the median rate on 30-year fixed-rate mortgages is 7.5%, and even with the recent rise you can get them for 75 bp below that.
I can't believe I'm going to paraphrase Jim Cramer, but I don't care where it's been, I care about where it's going.
Here's a bizarre idea. If bankers are worried that rising interest rates will cost them money via increased defaults, why not not raise interest rates? It seems to me that earning a little less (but still positive) money on a lot of loans is far better than raising rates, pushing already stressed consumers into bankruptcy, and then taking possession of useless collateral that must then be sold at a much greater loss.
I always maximize the amount they can loan me at great rates, and when they stop offering great rates, I stop using their credit. Kinda leaves them with a loss, but not my problem, no is it?"
If only CR looked at MEW the same way.
Sebastian
The problem is that for every person like you there are 10 other idiots that are making the minimum payment or paying late fees, banks call people like you freeloaders, Im a freeloader also but that is just a cost of doing business for the banks and credit card companies. The real money is in late fees and minimum payments, I think you have a home bias to some extent as you seem to think everyone handles their finances like you do which obviously isnt the case.
Saying that speculative commercial construction will pick up the slack left by the demise of speculative residential construction reminds me of a comment about why a four-wheel drive pickup truck is better than a two-wheel drive pickup truck:
It lets you get a lot farther off the road before you get stuck.
Alec said: "I can't believe I'm going to paraphrase Jim Cramer, but I don't care where it's been, I care about where it's going.
Silly me, I forgot. It's different this time!!"
Sorry, but I don't get your point.
Mine, however, is one that has huge, long-term implications that are going to knock CR's assumptions into Kingdom-come.
All those homeowners who borrowed all that long-term money at historically-low interest rates in order to make the single-largest consumer purchase of their lives have a massive advantage: They'll have more disposable income in the future because their cost of housing is so low...and fixed at that low level for as long as they keep their mortgage.
That's the best part, but that's not all: Anyone who's getting a 30-year FRM now can still get some of that advantage.
Seb, what you say is true for those who bought early in the cycle before prices ballooned. It is not true for the later purchasers. They will pay lower rates (if they are in a mortgage they can afford - a different issue) but on inflated values that may not hold. It is better to do it the other way: pay less for the house but get a high mortgage rate. The reason is that you can someday re-fi and get a lower rate on a lower price. It does not work in reverse, however.
It is like this, folks that borrowed and spent and had fun are ahead of folks that saved and invested in fixed rate stuff with inadequate knowledge of what they were investing in.
This is a massive transfer of wealth from creditors to debtors. Like or know, when the foreclosures and BK are over, the folks that saved will have nothing and those who spent will have memories.
In short joe six pack made rational decisions if not the best rational decision in town. Now the folks that lent to him are going to have to clean up the mess. But you know, if folks are going to throw money at you today for a promise years away..... What do you do? They can't take your life, they can't take your kids or your wife. All they can get are used up toys.
Wally,
Too true. I have family that bought in 04 and 05 and will be refinancing everything in 2 or 3 years at who knows what rate.
I've found that 80% of people don't manager their money. Most of the remaining 20% manage it in a way that reminds me of the phrase "fighting the last war".
All those homeowners who borrowed all that long-term money at historically-low interest rates in order to make the single-largest consumer purchase of their lives have a massive advantage
I have to agree except, that in my case, I got 15 and 20 year loans. If we get a deflation, then I am on the wrong side of the bet. If it is inflation and higher interest rates, then I will be repaying those loans with less valuable money while the asset continues to appreciate. Obviously, I think that inflation is the more likely outcome.
Longer answer is too long for this or any one entry but the key concept to remember is that the dollar isn't the target... keeping the yen to USD ratio competitive vis a vis the RMD to USD ratio IS the target.
Only when the Chinese let up on USD-RMB manipulation will the others in Asia (Japanese included) dare let up.
The USD isn't 'the target', its 'collateral damage' (no pun intended but if it makes you chuckle then you're as hopeless a nerd as I am).
Sebastian, your comment about still being able to take advantage of a historically low fixed rate on a mortgage really bothers me.
Either you are
A. assuming a Fed-induced inflation of the money supply so that incomes and rents catch up to these ridiculously overpriced homes
B. are completely ignorant of the degree to which housing prices are out of whack with fundamentals, or
C. a biased shill who is reaching to make your point.
How is it a good idea for anybody to take on 5x, 10x or greater leverage right now in a property that is somewhere between 10-50% overvalued depending on location?
By your argument it's b/c rates will be rising. Tell me what happens to those prices if rates rise by 100 bps. How about 200 or 300? Yeah, 10-yr yields may not rise that much, but based upon the rising of spreads so far and the expectation of further rises based on Wall Street's soon to be credit woes, I don't think a 300 bp rise in the 30-yr fixed mortgage is out of the question. Especially for stated income borrowing.
Seems to me its much better pay a lower price later with a higher rate than the opposite. You can always refi your rate if the lending environment gets better, but you can't refi your cost base unless you want to walk away from your good credit.
Its the lenders who are stupid. Anyone with a half a brain realizes that the amount of debt being created is simply unsustainable. The ROW is still hopelessly reliant on the US consumer to drive their economies. Asia still can't make the necessary changes to bring about consumption, therefore they lend massive amounts of savings to Americans of increasingly questionable nature. I think a lot of the blame for housing is directly due to increasing government intervention in the capital markets. 5.5 trillion dollars in order to keep currencies cheaper than the US dollar is a lot of intervention. The ROW still wants gurantees and is afraid to let there economies become hostage to market forces. Private capital has taken a back seat to foreign official intervention in order to keep an incredibly unblanced system from collapsing. However, these efforts will most likely be in vain. The private sector is the most effecient allocator of credit and resources, but there presence has been contiously undermined by the chinese, oil exporter, and the japanese. Its kind of hard to sell the dollar or treasuries when the other side of the trade is a government with a printing press. At some point the system is going to go the way of the dodo and its not going to fun or pretty.
this is a bit from the Housingbubbleblog. I like it since it confirms what I have been saying here for sometime.
She predicts that the next round of foreclosures will affect more established homeowners, those at higher income levels who may have more resources to tap, and cause a small exodus as former homeowners leave the countys high-priced market.
But the real question, she asks, is what the banks are going to do with all those reclaimed homes, and what impact their pricing levels will have on the real estate market.
The debt on some properties is so far above what the properties are worth, she said, so the question is, how much is the bank going to want to absorb in their ability to get rid of the property?
"Consumers are showing some signs of stress. They fell behind on loan payments in the first quarter at the highest rate since 2001, the American Bankers Association reported."
The rate will go higher. There is blood in the water.
Interest rates are climbing steadily now...the death spiral has begun...I'm so glad I cashed out in late 2005. Let the RE market crash...I'll be sitting on my pile of $$$ sipping champagne!
``More retailers are feeling that something has changed after years of pretty healthy demand.''
"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."
Arthur Schopenhauer (1788 - 1860) German philosopher
Huh. Coming off the most enormous debt-leverage up in the history of the U.S. economy might be a bit rough? I was wasting my time getting a computer science degree: these professional economist types really have access to deep insights unavailable to us mere amateurs.
Cheers,
prat
Part n of the housing bust contained saga - Ikea's announcing restructuring in the UK due to a challenging home furnishing environment, which is likely to continue.
I left my inner city redoubt this past weekend and travelled to northern Michigan's vacation-land. Though the scenery changed, the desparate looking "For Sale" and "Open House" signs were similar. I passed by some urban fringes, and development seemed to have petered out. Land has been cleared and some commericial and residential buildings have been raised. But the signs are clear that these developments are going nowhere fast...
meanwhile, XOM knockin on 500 billio
Rhodes is worth paying attention to IMO. He seems to be an important behind the scenes player who doesn't crave a great deal of attention in the press. He won his spurs as a financial statesman when he was Citi's lead negotiator over Mexico's defaulted sovereign debt in the early 1980s.
I find it funny that Citi NOW sees this as a risk, the fact is clear, there is more risk today in regard to the consumer than we have seen in decades.
The leverage that is in the system and the number of junk rated credits with little ability to withstand a consumer drought is unprecedented.
Tough period ahead, much of it caused by greed, and a general disregard for the endgame, disgusting really. Most knew better and ignored it, those that did not are just ignorant.
The recession clouds continue to grow.
It seems frustratingly obvious to me. Wages have been slow to rise, and people have been spending all of their income plus some on average for years in an economy that is 70+% dependent on consumption. This is obviously great for companies selling stuff. Same wage expense (or decreasing even by eliminating health insurance), but people on average via expansion of debt load spend their income PLUS whatever amount of additional debt they take on. Of course, earnings are going to be great....for awhile. Then all those people making the loans expect to repaid! With interest even! Now people will no longer spend their salary plus debt. Even worse, they will have to service the debt, so from a retailers perspective you go from (salaries + debt expansion) to (salaries - debt servicing- principle paid down). And this doesn't even account for a recession! It is so obvious it makes me want to scream! Yes, there will be a recession in the near future. When? I don't know. 6 months? A year? Does it really matter if we are off a few months on the call when we are talking about the most severe recession in a generation? Multiple generations? Haven't we all looked at the graphs of the recent credit expansion? Is it similar to any other time in history? Yes, credit will contract as loans are made responsibly again. Yes, the carry trades will unwind. Yes, central banks will quit massively buying our debt to manipulate currencies. Yes, hedge funds will blow up.
Sorry for the rant, but we have a very serious problem bearing down on us and we need to start thinking about what to do about it.
This is going to be the worst mid-cycle slowdown ever. =.(
Yah. Citi has been quietly retrenching for about a year, judging by the lousy teaser rates they bombard me with due to my three cards with them. I bet they are a little bit underwater on that 2.9% till I pay it off that has been running for the last three years. Suckers.
I always maximize the amount they can loan me at great rates, and when they stop offering great rates, I stop using their credit. Kinda leaves them with a loss, but not my problem, no is it?
Someday this war's gonna end...but Wall Street hasn't got the message yet!
I was wasting my time getting a computer science degree: these professional economist types really have access to deep insights unavailable to us mere amateurs.
Hmmm... we pay good money for these types where I am and they're very hard to find (I'm not referring to the economists BTW).
Commercial markets haven't lost their appetite for debt tho...
Commercial Real Estate Risk: commercial mortgage security pipeline
WOW !
Last year about this time we looked at a house in SoCal that needed a LOT of work & had an asking price of $1.3mm. It later sold for $1.4mm. Guess what? That very house is on a foreclosure list I just received - showing a mtg. owed of $1.4mm.
The boomers birthrate are pretty small from 1946-1949 birthdates but starting in 1950 the gap up in birthrate numbers starts to show. Boomers are just now starting to turn 55 in very large numbers and from now for the next 10 years a large part of the general population will be over 55. Studies show that their spending habits start to decline around age 55 due to children leaving home, children out of college etc, so the impact of a aging poplulation could also significantly impact consumer spending numbers now and in the coming years.
bailey, and the guy that "bought" it probably paid $1.2mn or less, and is now living off a $0.2mn cashback...
We went to the Chandler mall this last weekend, because it was 109 in Phoenix. The place was so packed that it almost looked like christmas, except nobody was buying. Several of the stores were holding going out of business sales and the discounts were 30-80% off. But the real reason the mall was packed was because it was air conditioned, and it was free.
BTW when I go into a Starbucks these days, it is dead compared to last year.
We're probably living during the widest spread fraud ever, due to all this mortgage-related crime.
It's completely astonishing, clear crimes like those made using "Liars Loans" are now seen as "normal".
There's an in-fill development down the street from me, 15 houses, finally sold out a couple of months ago after a round of price cuts. Just two months; and the first "for sale" sign has appeared on an occupied unit. And there's one the very large and very shiny new pickup in the driveway.
Somebody waded in too deep, and was probably given the final push under by an overly friendly mortgate broker.
Some 80-90% of homes selling above asking price in the last year or so should be frauds (except for those in still-hot markets like NY, etc).
Some 50% of Stated Income loans are probably frauds.
We're talking millions of fraudsters.
CR, seeing as MEW has gone down and foreclosure/delinquency rates have gone up the housing bust seems well on it's way. As this seems to be the case, have you done any calculations on how much of a disinflation/deflationary hit from housing losses that we likely to have to weather? I realize this is not a trivial question to answer, but I was thinking it might be possible to do a ballpark guess and was wondering if you had done so.
Obviously certain markets will be hit harder, such as the coasts, Arizona and Colorado, and urban areas like Atlanta, Detroit, etc. However, would it be possible to take a guess at what the overall average decline in value of the national housing stock will be and predict the amount of wealth that will be destroyed? Again, not all of that will be realized loss and much will be "paper" losses. But it seems to me that it should be possible to pro-rate that by the average debt levels.
Commercial markets haven't lost their appetite for debt tho...
As far as I can tell the people who said commercial real estate would pick up where residential left off are right.
Driving to lunch I see this absolute frenzy of commercial building replacing all the residential projects. Again, I live in a city with a shrinking population that doesn't have a reputation for spending much money amongst local businessmen.
I also read an article today about some specific projects here which are "speculative commercial" buildings.
I think the lesson is simply that if easy money is available IT WILL BE SPENT. PERIOD.
AllenM said: " Yah. Citi has been quietly retrenching for about a year, judging by the lousy teaser rates they bombard me with due to my three cards with them. I bet they are a little bit underwater on that 2.9% till I pay it off that has been running for the last three years. Suckers.
I always maximize the amount they can loan me at great rates, and when they stop offering great rates, I stop using their credit. Kinda leaves them with a loss, but not my problem, no is it?"
If only CR looked at MEW the same way.
Sebastia
MEW doesn't come at low enough "promotional" rates that you can arbitrage it.
The teaser rates are generally packaged together with a prepayment penalty.
Not so with CCs.
Red Pill,
Tell me about. I'm especially pissed off being a GenXer, I am staring down the barrel of having to pay for all of this BS while almost certainly not going to have access to all of the SS money I've paid in.
ac, for an individual it sometimes makes sense to "invest" in non-viable projects as long as he's not the one financing them.
After all, the Individual does take out wages, and doesn't have to pay those back if the project goes under.
So, as soon as financing is available to start projects without equity, you can be sure it gets used.
I also read an article today about some specific projects here which are "speculative commercial" buildings.
Haven't you heard? It's different this time!!©
U.S. Housing Sales to Tumble to Six-Year Low on Rates (Update3) - Bloomberg.com
Johnson & Johnson to Start $10 Billion Share Buyback (Update5) - Bloomberg.com
Seb, It means that my total amount owed drops each month, not increases. Which means that nobody makes much money off of me, and the arb comment is correct-lol;-)
MEW in my case is limited to actual home improvement, and has pretty much ceased as the rate on the heloc has risen with prime.
CR is most likely right with MEW going flatline. I expect an awful large amount of folks may end up surprised at the fact the lender can drop the amount available on the HELOC with small notice...fine print's a killer.
Someday this war's gonna end...
ac, for an individual it sometimes makes sense to "invest" in non-viable projects as long as he's not the one financing them.
Well, let's use the proper terminology. We're getting to the point were businessmen realize they're making speculative investments that are doomed to fail on behalf of another party.
I'm not sure what the right word for this is.
Theft?
Paul Kasriel notes the following today (from Not Found
work on that link , dan
thx, in advance
Incognitus said: "MEW doesn't come at low enough "promotional" rates that you can arbitrage it...."
It absolutely does, if you think long-term. Over the past 20 years the median rate on 30-year fixed-rate mortgages is 7.5%, and even with the recent rise you can get them for 75 bp below that.
During the peak of MEW (2004-2005, as percentage of DPI), 30-year FRM could be gotten for under 6%, an incredible once-in-a-generation bargain on a long-term mortgage.
AllenM is better off today as a result of his shrewdness, and so are all the people who took out all that MEW at just the right time...only nobody sees it that way.
Sebastia
Here's the Kasriel link: http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/0707/document/dd070907.pdf
Seb,
Wouldn't one would have to be able to guarantee a return over and above the teaser rate plus the PPP. Lets say teaser + PPP = 5%. There arent many money market accounts that are above this. Of course this all assumes people are behaving rationally. Who knows maybe people were withdrawing and putting in the markets at +10%. We all know Americans love risk...
"America the land where everyone can be a investment banker..."
Interesting thoughts from Peter Schiff
July 9, 2007
Will Japan Destroy the yen to save the dollar?
\t\t \t
As the Japanese government continues holding short-term interest rates near zero while printing yen like it is going out of style, getting out of the yen has now replaced pachinko as the national pastime for rank and file Japanese. With housewives and cab drivers debating the best techniques to exchange their yen savings for higher yielding non-yen assets, the Japanese monetary authorities are facing the prospect of the complete destruction of their own currency, subjecting their citizens to the horrors of hyperinflation.
It absolutely does, if you think long-term. Over the past 20 years the median rate on 30-year fixed-rate mortgages is 7.5%, and even with the recent rise you can get them for 75 bp below that.
I can't believe I'm going to paraphrase Jim Cramer, but I don't care where it's been, I care about where it's going.
Silly me, I forgot. It's different this time!!
Here's a bizarre idea. If bankers are worried that rising interest rates will cost them money via increased defaults, why not not raise interest rates? It seems to me that earning a little less (but still positive) money on a lot of loans is far better than raising rates, pushing already stressed consumers into bankruptcy, and then taking possession of useless collateral that must then be sold at a much greater loss.
I always maximize the amount they can loan me at great rates, and when they stop offering great rates, I stop using their credit. Kinda leaves them with a loss, but not my problem, no is it?"
If only CR looked at MEW the same way.
Sebastian
The problem is that for every person like you there are 10 other idiots that are making the minimum payment or paying late fees, banks call people like you freeloaders, Im a freeloader also but that is just a cost of doing business for the banks and credit card companies. The real money is in late fees and minimum payments, I think you have a home bias to some extent as you seem to think everyone handles their finances like you do which obviously isnt the case.
"The biggest worry is that falling home prices and rising interest rates will undermine consumer spending"
I totally disagree.
American consumers are not capable of depriving themselves of anything. Nothing short of bankruptcy will slow their spending.
sebastian, you sound like a mortgage broker trying to sell to a bagholder. Let's see your arithmetic and your sunny assumptions.
In my view right now it is advisable to shy away from any LT obligations, especially adjustable , period.
Saying that speculative commercial construction will pick up the slack left by the demise of speculative residential construction reminds me of a comment about why a four-wheel drive pickup truck is better than a two-wheel drive pickup truck:
It lets you get a lot farther off the road before you get stuck.
Alec said: "I can't believe I'm going to paraphrase Jim Cramer, but I don't care where it's been, I care about where it's going.
Silly me, I forgot. It's different this time!!"
Sorry, but I don't get your point.
Mine, however, is one that has huge, long-term implications that are going to knock CR's assumptions into Kingdom-come.
All those homeowners who borrowed all that long-term money at historically-low interest rates in order to make the single-largest consumer purchase of their lives have a massive advantage: They'll have more disposable income in the future because their cost of housing is so low...and fixed at that low level for as long as they keep their mortgage.
That's the best part, but that's not all: Anyone who's getting a 30-year FRM now can still get some of that advantage.
Sebastia
Seb, what you say is true for those who bought early in the cycle before prices ballooned. It is not true for the later purchasers. They will pay lower rates (if they are in a mortgage they can afford - a different issue) but on inflated values that may not hold. It is better to do it the other way: pay less for the house but get a high mortgage rate. The reason is that you can someday re-fi and get a lower rate on a lower price. It does not work in reverse, however.
It is like this, folks that borrowed and spent and had fun are ahead of folks that saved and invested in fixed rate stuff with inadequate knowledge of what they were investing in.
This is a massive transfer of wealth from creditors to debtors. Like or know, when the foreclosures and BK are over, the folks that saved will have nothing and those who spent will have memories.
In short joe six pack made rational decisions if not the best rational decision in town. Now the folks that lent to him are going to have to clean up the mess. But you know, if folks are going to throw money at you today for a promise years away..... What do you do? They can't take your life, they can't take your kids or your wife. All they can get are used up toys.
Wally,
Too true. I have family that bought in 04 and 05 and will be refinancing everything in 2 or 3 years at who knows what rate.
I've found that 80% of people don't manager their money. Most of the remaining 20% manage it in a way that reminds me of the phrase "fighting the last war".
All those homeowners who borrowed all that long-term money at historically-low interest rates in order to make the single-largest consumer purchase of their lives have a massive advantage
I have to agree except, that in my case, I got 15 and 20 year loans. If we get a deflation, then I am on the wrong side of the bet. If it is inflation and higher interest rates, then I will be repaying those loans with less valuable money while the asset continues to appreciate. Obviously, I think that inflation is the more likely outcome.
Will Japan Destroy the yen to save the dollar?
Short answer - 'yes'.
Longer answer is too long for this or any one entry but the key concept to remember is that the dollar isn't the target... keeping the yen to USD ratio competitive vis a vis the RMD to USD ratio IS the target.
Only when the Chinese let up on USD-RMB manipulation will the others in Asia (Japanese included) dare let up.
The USD isn't 'the target', its 'collateral damage' (no pun intended but if it makes you chuckle then you're as hopeless a nerd as I am).
Sebastian, your comment about still being able to take advantage of a historically low fixed rate on a mortgage really bothers me.
Either you are
A. assuming a Fed-induced inflation of the money supply so that incomes and rents catch up to these ridiculously overpriced homes
B. are completely ignorant of the degree to which housing prices are out of whack with fundamentals, or
C. a biased shill who is reaching to make your point.
How is it a good idea for anybody to take on 5x, 10x or greater leverage right now in a property that is somewhere between 10-50% overvalued depending on location?
By your argument it's b/c rates will be rising. Tell me what happens to those prices if rates rise by 100 bps. How about 200 or 300? Yeah, 10-yr yields may not rise that much, but based upon the rising of spreads so far and the expectation of further rises based on Wall Street's soon to be credit woes, I don't think a 300 bp rise in the 30-yr fixed mortgage is out of the question. Especially for stated income borrowing.
Seems to me its much better pay a lower price later with a higher rate than the opposite. You can always refi your rate if the lending environment gets better, but you can't refi your cost base unless you want to walk away from your good credit.
Its the lenders who are stupid. Anyone with a half a brain realizes that the amount of debt being created is simply unsustainable. The ROW is still hopelessly reliant on the US consumer to drive their economies. Asia still can't make the necessary changes to bring about consumption, therefore they lend massive amounts of savings to Americans of increasingly questionable nature. I think a lot of the blame for housing is directly due to increasing government intervention in the capital markets. 5.5 trillion dollars in order to keep currencies cheaper than the US dollar is a lot of intervention. The ROW still wants gurantees and is afraid to let there economies become hostage to market forces. Private capital has taken a back seat to foreign official intervention in order to keep an incredibly unblanced system from collapsing. However, these efforts will most likely be in vain. The private sector is the most effecient allocator of credit and resources, but there presence has been contiously undermined by the chinese, oil exporter, and the japanese. Its kind of hard to sell the dollar or treasuries when the other side of the trade is a government with a printing press. At some point the system is going to go the way of the dodo and its not going to fun or pretty.
this is a bit from the Housingbubbleblog. I like it since it confirms what I have been saying here for sometime.
She predicts that the next round of foreclosures will affect more established homeowners, those at higher income levels who may have more resources to tap, and cause a small exodus as former homeowners leave the countys high-priced market.
But the real question, she asks, is what the banks are going to do with all those reclaimed homes, and what impact their pricing levels will have on the real estate market.
The debt on some properties is so far above what the properties are worth, she said, so the question is, how much is the bank going to want to absorb in their ability to get rid of the property?
"Consumers are showing some signs of stress. They fell behind on loan payments in the first quarter at the highest rate since 2001, the American Bankers Association reported."
The rate will go higher. There is blood in the water.
Dryfly, perhaps you've noticed. Machine tool prices have been dropping of late.
Interest rates are climbing steadily now...the death spiral has begun...I'm so glad I cashed out in late 2005. Let the RE market crash...I'll be sitting on my pile of $$$ sipping champagne!