Do we know now that CFC is insolvent ? Do we know that CFC owe more than it holds ?
How much does CFC really own as far as mortgages ? In how much can it sell it ? 95 cents on the dollar or 50 cents on the dollar ?
CFC survicing biz ? How many of CFC employees actually working in this area (my guess : not many) How much does it generate for CFC ? How much does it as a servicer loose on the hugh REO ?
is the Fed totaly out of their mind in trying to save CFC. Is that something that has no chance of working or is it just a matter of CFC loosing all it's current sources of funding due to fear ?
I use to short CFC big time but never out of a thought that it would go BK. maybe I was wrong and it is going to BK. BoA money made me think they will not let it go down but who knows - maybe I am very wrong.
It will be self perpetuating if you look at who as been occupying the space. Builders, mortgage, title and real estate companies. Not to mention all the strip mall fast food that has been feeding all the workers.
The market is still fully priced for a 25 bp cut at the September fed meeting, but any chance of an inter-meeting cut has now been taken out. I think the market's conviction on a September cut will take a big hit if the economic data between now and then isn't too bad, and the stock market holds in. Big ifs though.
I'm sure you've posted something like this in the past, but do you have a historcal chart of CRE investment as a percentage of GDP? I'd like to try and quantify the hit to gdp as CRE slows. Thanks for your excellent work.
Tony Crescenzi on RealMoney wrote this on his blog this morning:
"If not for recent credit problems, the combination of terrific demographics, lower prices and sturdy income gains would be a recipe for recovery in housing. The demographics are such that larger than normal amounts of people are entering homebuying age. The number of people aged 25-29, considered the prime age group for first-time home-buying, is rising faster than normal and will continue to do so for the next decade, and the number of people aged 55-plus is also rising fast and will do so for the next decade. Both of these factors will sow the seeds for the next housing boom."
I know demographics is a huge driver of the housing market, but I had not heard those stats. Anyone care to comment or provide deeper insights?
Way OT, but on BOA's investment in CFC. There's an opinion article on Bloomberg that seems to think that the investment in CFC may have been due to Fed arm twisting and not self-inspired control grab in CFC. (I was wondering this at the end of the CFC comments. It would be interesting if true, but we won't know for sure until much later, if ever.)
...
"If there's one takeaway from recent events, it's the reminder that the potency of global capital can leave central banks powerless. Bank of America Corp.'s $2 billion investment in Countrywide Financial Corp., the biggest U.S. mortgage lender, may have done more to stabilize financial markets than the hundreds of billions of dollars of short-term funds supplied by the Fed and the ECB."
...
" So on Aug. 22, the four largest U.S. banks stepped up, with Citigroup Inc., Bank of America, JPMorgan Chase & Co. and Wachovia Corp. each taking $500 million of funds at 5.75 percent, well above the 4 percent rate that the overnight Fed funds rate closed at that day.
Twisting Arms
The implied message to the smaller finance houses is that there shouldn't be any stigma attached to borrowing at the penalty rate if you need to.
You can imagine the telephone conversation with the Fed that inspired such munificence; not dissimilar from the 1998 chat that brought about the rescue of Long-Term Capital Management LP. A cynic might also wonder whether Bank of America's $2 billion vote of confidence in the U.S. mortgage market by buying preferred stock in Countrywide was similarly Fed-inspired.
All of this is evidence that the Fed will keep pulling new tricks to avoid cutting its key overnight target rate of 5.25 percent, either before or at its Sept. 18 gathering -- and will rally U.S. financial institutions to its cause, marshaling the forces of capital by reminding them that their interests in maintaining market order are 100 percent aligned. "
...
yal, the way I look at CFC and others in this space is to take a somewhat longer term view. The next phase of this credit market turmoil past the liquidity crunch, is likely to focus on the credit losses, as it may not be possible for the market to function without pricing information. A lot of low coupon paper that will need to be marked way down to reflect defaults and lower collateral values. Look for credit ratings downgrades galore and institutions heading into receivership...
In my town, local builders rent street level retail and then put in showrooms with all the bells and whistles $$$ kitchens and $$$ bathrooms that you can have if you build with them. My bet is those retail spaces will be empty by January.
I agree, barely. The first part of the Fed and other CB's response to the crisis is preventing the markets from seizing up by restoring liquidity. To use an ER analogy - "stabilize the patient". After that bit of triage, they can start to worry about dealing with the underlying insolvency issue in an orderly manner by allowing the repricing of securities and consolidation of the walking wounded by strong arming the survivors.
However, due to the size of the repricings that probably need to come I think that process is going to be nasty. Gonna be a lot of naked swimmers when this tide finally goes out.
"Does anyone have an explanation why new housing inventory is down?"
I've noticed in my home town (Pensacola, FL) that residential "for sale" inventory has gone down a tiny bit; however, in just the past month, land inventories started moving back up and rental inventories shot up about 10-12%. This is based on information from the online MLS.
What I meant was, can anyone elaborate (with stats) on the demographic trends to which he is referring.
Duceswild,
I guess you could go root around at the Census.gov site and run the numbers... but.. why?
I don't think Tony did that.. he probably heard something about more young people (hey, also more old people! More everyone!! almost every age group is growing faster than "normal"! Super!).. then he heard a separate mention of how much awesome money people make.. then he mixed it together to write a blog entry.
I don't know.. I've been seeing indication that people, in general, aren't making awesome money (my phrase) compared to what they were making in the recent past.
My stance is, who knows.. but I'm not preparing for the next housing boom, just yet.
Anecdotal sure, but here in SoCal's San Fernando valley I went driving up a street in areas I hadn't driven through in years.
In a particularly bad, very low rent area, I did a spit take as I drove past an empty, brand new strip mall. Not the crummy looking 7/11 with a coin-o-matic laundry and a Dollar store. No, this looked like strip malls in ritzier areas like Calabasas, or Thousand Oaks. Needless to say I was shocked...who in this area is going to be able to set up shop?
If I remember correctly, the land used to contain a lot and a rickety shack that offered instant cash for cars. Basically a car pawn shop. Drop off the cars and keys and docs, get cash. This was an appropriate business for the area. Please note as well, there are few businesses in the area, outside of sole proprietor car repair shops...oh and a Stripper Bar.
Regarding inventories. My personal observations are that more homes are being removed for sale and becoming rentals. Rental prices are declining and have been for the last year. Eventually these retal homes will come back on the market as REOs, it is just a matter of time.
Serious question: How important is an interest rate cut?
I am not so clueless I don't know it's important, especially when you are talking about such large numbers. But, isn't the proper assessment of value and risk more important. The housing market is overpriced and needs a correction. Our economy has too much dependence on credit and consumption. I am convinced a correction will come regardless what the Fed does. I am hoping they hold steady and we have our recession as I believe a cut will only delay and compound our existing problems. Thomas Paine said "If there must be trouble let it be in my day, that my child may have peace." If not peace, at least more economic security and opportunity. We cannot as a country keep racking up debt.
Duceswild, I'll try to write a response - do you have a link to the piece?
Turbo, I've probably posted it before - I'll have to look. CRE investment isn't as big a percentage of GDP as residential.
Residential has fallen to about 4.9% of GDP (from over 6% at the peak). Non-residential investment in structures (we could break it down further) is about 3.4% of GDP. So it's contribution is less than residential.
The problem with Tony Crescenzi's analysis of demographics is that the housing boom of 1996-2005 robbed a lot of the growth in the first-time buyer market from the future. The % of people in their 20s who own homes shot way up, compared to historic averages. You didn't have to wait years to save up a downpayment or reach a qualifying level of income.
One of the huge problems in today's market is that the number of qualified 1st time buyers has been thinned out so much. It will take years to rebuild the pipeline, especially now that mortgage qualifying standards are so much higher.
Eric Janzen at iTulip has published a link to a NY Fed report that throws some light on the Discount Window activity as well as the Countrywide deal titled "Rediscounting under Aggregate Risk with Moral Hazard".
The gist of the paper seems to be that, rather than using the Open Market to inject liquidity into the markets, where they run the risk of adding fuel to the fire, that a small group of gatekeeper banks get access to the Discount Window, and can intermediate between the leveraged speculators and the Fed by using anything that they deem worthy as collateral. That would explain why Tan Man says that CFC can't use the window, but B of A can; he's not trustworthy.
Of course, the big boys get compensated for their efforts, and the assets they accumulate are eventually going to need to be marked down, but this allows the markets to reliquify, without putting the money into reckless hands.
Sounds like a good theory, and has seemed to work for the "liquidity crisis" portion of our show. I suppose that means the markets will now return to the "insolvency" portion, after this word from our sponsors...
Do you know about the Real Capital Analytics data bases of commercial real estate price trends (updated quarterly). They use a methodology developed at MIT based on repeat sales of CRE, not appraisals. Most data is available to subscribers only but you can get a good flavor for free at rcaanalytics.com
My analysis of RCA data is that hotels, retail space and office space have produced a price bubble that soon will burst. Apartment and industrial prices have already started to level and aren't as vulnerable.
I think the declines in hotels, retail and office will be sharp, multi-year, and reflected in RCA quarterly data starting in the 4th quarter.
Btw, looks like we see eye to eye on Tony's views.
deuce,
Reading contrary views is always good.. but there's no point if they won't do any work to support what their saying.
So.. if I read someone like Tony and I think to myself "What a bunch of BS!", I'm not going to go out and re-run the numbers to convince myself that it really, really is BS.
Why? Because it's obvious I think it's BS.. and who's to say that I'm not just going to run the numbers in a way to confirm my belief.
So.. I really need to be reading people with contrarian views who actually run the numbers on their own. At least, they'll be trying to dig up the ones that support their views.
Rich, I am in agreement that hotels, retail space and office space have produced a price bubble. Otherwise why would predominant people in th industry like Zell and Hilton be selling off?
Everytime the Fed tries to provide liquidity where it's needed, it gets co-opted by Wall Street and funneled into more leveraging and bubbles.
Anything the Fed does to help benefits the ponzi complex more than the rest of the economy.
I hope the Fed is starting to realize that they really can't make the economy better on demand by providing additional liquidity. The gamblers will always be the first in line.
And don't forget that if all the first-time homebuyers who did all that forward-demand thing in 2001-2005 get divorced because of all this stress over the housing market, we double the demand for housing units! It makes great sense because it only halves household income! But if you do stated income, you can count the child support as income for one party while ignoring it as income offset for the other party. The divorced young 'uns can buy the big houses from the downsizing boomers, who can buy all the patio units in Phoenix from the first-time homebuyers who are moving up, and it's party time again!
My understanding of deals in the Class A office market is that buyers are purchasing buildings at incredibly low cap rates (4%) with the expectation that when leases roll over they can charge higher rates. The problem is that spec office construction has taken off again and a ton of new space will soon pound many markets. Additionally, the newly vacated mortgage and residential related business space will only add to the vacancy. With tighter credit and more avaible space, many of these Class A office buyers are going to be in a world of hurt.
Great youtube clip that pretty much summarizes the whole bubble with a real estate ad, and a clip from the Dr Laura show about a woman who has a pissed off husband because she made them buy too much house.
" Serious question: How important is an interest rate cut?"
That depends on what happens to the long rates. If the short rates go down enough then it may help marginal lenders as their spreads on existing paper improve and the relative coupons get at least a little more attractive so they can unload without getting crushed.
In terms of the crash in the housing market a deep cut, 100bpts+, will clearly soften the blow, but probably not by much. I don't know proportionally how LIBOR will be affected by the fed and that's the basis for ARMs...
Not to hijack the thread too much, but I think that the idea is to have the discount window just open enough that the markets can be made, and don't freeze up as we've seen over the last couple weeks. The idea seems to be that the small group of big banks will toe the line by doing the deals at a price that gives the collateral market value, but still have to make a profit. So the Fed protects itself from the direct losses, by putting a trusted intermediate in between that is too big to fail. I'm not a big bank, so I don't know how realistic the expectations are that they won't be tempted to step up to the role of leveraged speculator themselves, but in the extreme short term it seems to have worked.
ac, you got that right. One thing the Fed has never been able to do effectively is direct liquidity. The only one who was able to was Vockler when he raised interest rates and quickly pumped liquidity into the stock markets effectively directing inflation away from assets and into production. A consequence for his actions was creating a speculative stock market over the long term.
Tony Crescenzi on RealMoney wrote this on his blog this morning:
I read Tony's blog and find some useful info--but he is also housing cheer leader. Demographics are only fair, IMO. Many of the immigrants can't afford houses. There has been a lot of speculative buying, including boomers buying second homes that they don't really need, but expected to be great investments. Some evidence, pointed out by Jas, that new family formation is way down. More people living in one house and not as many divorces as in earlier decades. The number of family units may be more important than "raw population numbers." The big issue is that "prices are lower" but the decline is still miniscule relative to the run up. So, we need 20-40% futher decline before home prices will really start looking good. However, if we get such a decline over the period of five years or less, the economy will be in dire straits.
"Anything the Fed does to help benefits the ponzi complex more than the rest of the economy."
Anything the Fed does to help in an environment of regulatory laxity benefits the ponzi complex more than the rest of the economy. The playing field could be changed, but it won't be at least until 2009. And probably not ever.
Tanta - The investment thesis for your scenario would be furniture. Think of all the hide-a-beds that will be sold when households split up and the kids are spending time at both parents' houses. And minivans, lots of minivans...
Tony Crescenzi sounds like a spin doctor. Problems I have with his "forecast" are: the builders borrowed from future demand (as mentioned above)and overbuilt to boot; wages not rising; housing prices still too high relative to said wages; a return to more traditional loan underwriting will significantly reduce number of qualified buyers; boomers do not have significant wealth to buy multiple homes. Population numbers alone do not mean jack if the other necessary fundamentals are all out of whack. The only way we get another boom is if prices drop 50%. Otherwise, Crescenzi's piece is just fluff for the main stream and/or disinformation for the NAR.
"So much of our currency and debt is in foreign hands one wonders if a mirror Argentina could develop?"
Anything is possible, given enough stupidity and greed. If we weren't the USA, would it have already happened to us? Maybe.
While I'm not about to post the usual "Buy only physical gold and silver for safety" motto that somebody drops here every couple of days... it is not a bad idea to have some small part of one's assets in some asset class that is Argentina-resistant. Just as insurance.
To me, the tip-off on commercial real estate is seeing brand new upper end strip mall spaces rented out to tanning salons and martial arts studios. When they can afford the nice places, the nice places are losing $$$.
seems to me that just because u have big banks btwn the Fed and IB's/HF's/lenders doesn't guarantee they won't just pass thru the garbage ABS to the Fed as collateral. certainly will make it more expensive for those groups though.
Tanta - The investment thesis for your scenario would be furniture. Think of all the hide-a-beds that will be sold when households split up and the kids are spending time at both parents' houses. And minivans, lots of minivans...
MLM,
My outlook is for a boom in tents and camping equipment. The demographics are really strong and with the mental stresses from foreclosures and divorces.. a lot of these people will become crackpots who hide out in the woods.
All my money is in tents.. I'm just hoping they don't get too crazy to purchase the equipment before running off.
"To me, the tip-off on commercial real estate is seeing brand new upper end strip mall spaces rented out to tanning salons and martial arts studios. When they can afford the nice places, the nice places are losing $$$."
You point out something that I hadn't processed in my town. Retail space in the central business district is full, and new space is being developed. But the quality of the new businesses is going down. T-shirt shops. Inkjet cartridge refill businesses. Another Quizno's (already for sale). And yes, tanning salons.
Meanwhile, vacancies are increasing lower-grade retail space in the outlying neighborhoods. So there's no net gain on retail; it's just concentrating itself.
and I too saw Rangel (not Barney Frank as the other person stated)
on TV saying that the HMID is absolutley on the table....to pay for the change in AMT rates or removal which is doubtful.
Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, seemed determined yesterday to stick to pay-go, even if it means coming up with hard-to-find offsets to reform or patch the Alternative Minimum Tax (AMT) this year.
Rangel did not call for the elimination of any particular tax break. But he singled out the popular mortgage interest deduction for homeowners and the special tax status conferred on non-profits as items that ought to be on the table.
He also suggested that the government make tax rates for individuals more equitable, saying that at the very minimum, we have to set the tone that these things have to be discussed.
I imagine there is enough office space coming onto the market right now to serve about 40,000 cubicles.
Here in SoCal there is a sign in every commercial development I see that says Space Available. Large anchor stores like Good Guys, Comp USA, and Home Depot have stayed empty since closing. Yet new strip malls continue to open. Now I see Realtors(tm) putting their own space up for lease. The big new ReMax office here just put a sign up.
"We have to wonder whether foreigners will retrench from U.S. corporate debt, which has been financing more than half of the U.S. trade deficit," strategists from Societe Generale wrote in a note to clients.
Not to hijack the thread too much, but I think that the idea is to have the discount window just open enough that the markets can be made...
That's the idea, but that's not how it's working in reality. Since the Fed's liquidity injections and the lowering of the discount window rates, leveraging and gearing have come back with a vengance. Assets classes such as emerging market equities have gone right back into parabolic melt-up mode.
Bubbles end in crashes. But the Fed and our politicians want to do everything to avoid a crash - politically it's just not an option. So the bubble keeps bigger and bigger. And the ending ultimately gets more grim.
the unwind in residential comes when investors buy the vacant houses at a price which will enable them to carry at a market rental rate. Probably between 150 and 200 times monthly rental. The HSBC froth-finding linked to from Big picture yesterday (BP was linked here)has some dated charts on this ratio in different markets (3rd quarter '05). Its a long way to go. definitely lots fewer sales at lots lower prices. Producing further stresses on employment CRE $ etc. The present exercise as posters have said is to provide sufficient liquidity to start the mark down exercise. There will be lots of casualties (hfs, non-depositories), although the walking wounded (CFC, BKUNA, Corus)depositories will probably be shotgun merged.
That's the idea, but that's not how it's working in reality. Since the Fed's liquidity injections and the lowering of the discount window rates, leveraging and gearing have come back with a vengance. Assets classes such as emerging market equities have gone right back into parabolic melt-up mode.
I don't know AC. I don't see much of a meaningful rally in junk or the mortgage backs, do you? When's the last time an MBS that looked anything like the problem ones got issued? I don't think we're going to see zeros/piks etc. in the junk market anytime soon do you? Another indicator, I haven't heard the banks having any success laying off any Chrysler, anybody heard different?
OT but asked earlier. CFC servicing revenue booked as a loss for two most recent quarters, but it looks cash flow positive because I think the loss term is an impairment. So not contributing to a BK. $s in $000
Mar 31
Valuation changes, net of Servicing Hedge (363,306)
Pre-tax (loss) earnings (69,093)
Jun 30
Valuation changes, net of Servicing Hedge (313,760 )
Pre-tax (loss) earnings (147,358)
Re the quote posted by Duceswild that, ... The demographics are such that larger than normal amounts of people are entering homebuying age. The number of people aged 25-29, considered the prime age group for first-time home-buying, is rising faster than normal ...
In fact the demographics are horrible, because "buy now or be priced out forever" panic and "real estate always goes up" greed have pulled forward demand such that home ownership among the under-30s (and especially among under-25s) set new records at bubble peak.
Since many of these young people stretched to get into the most expensive home they could afford, using ARMs, IO, high-LTV mortgages etc., and are more likely than older people to have gotten bubble-related jobs (since they were such a large fraction of the new jobs over the last five years), there is going to be a particularly high rate of foreclosures and "moving back in with the 'rents" in the next few years. Financially they'll be wiped out, losing down payments, getting black marks on their credit records, and generally ending up "older but wiser", so they're not going to be buying another overpriced home anytime soon.
Moreover, their younger siblings, cousins and friends will be watching, so they, too, won't be prime suckers for real estate speculation in the years to come.
I second that observation. First-time homebuyer delinquencies are stratospheric and has finally been priced in to tighter underwriting for all mortgage product. Noone wanted FTHBs before the calamity, now, fughedaboutit...
Point 4: The number of people in their peak earning/spending years -- those that buy McMansions & multiple homes -- will fall dramatically starting in 2010.
Repeat after me: "Owner occupied homes are not investments."
Hi
I'm see the same thing in the I-5 and 99 area from Fresno to Sacto stuffs seating empty now for about 6 months. Contactors are finishing up what they started and I know of projects now on hold.
The young one learning what happened to the parent and won't repeat it. They won't be able to in debtors prison and when the family get out there also the IRS to deal later.
Sad
jo6pac
If it's to good to be true............
Commercial real estate is getting hot, but there is still a lot of opportunities in housing. You just have to look for the best strategies to make profit. You should definitely become a long term investor.
Commercial may not get as ugly as residential will but you never know. They are building a ton of commercial here in SoCal.
Curious if the fed funds projections have changed based on the recent data...
I am re-posting questions about CFC
Do we know now that CFC is insolvent ? Do we know that CFC owe more than it holds ?
How much does CFC really own as far as mortgages ? In how much can it sell it ? 95 cents on the dollar or 50 cents on the dollar ?
CFC survicing biz ? How many of CFC employees actually working in this area (my guess : not many) How much does it generate for CFC ? How much does it as a servicer loose on the hugh REO ?
is the Fed totaly out of their mind in trying to save CFC. Is that something that has no chance of working or is it just a matter of CFC loosing all it's current sources of funding due to fear ?
I use to short CFC big time but never out of a thought that it would go BK. maybe I was wrong and it is going to BK. BoA money made me think they will not let it go down but who knows - maybe I am very wrong.
It will be self perpetuating if you look at who as been occupying the space. Builders, mortgage, title and real estate companies. Not to mention all the strip mall fast food that has been feeding all the workers.
Does anyoen have an explnation why new housing inventory is down ?
when a new home is sold and the sale is cancled does it show up as inventory again ?
The market is still fully priced for a 25 bp cut at the September fed meeting, but any chance of an inter-meeting cut has now been taken out. I think the market's conviction on a September cut will take a big hit if the economic data between now and then isn't too bad, and the stock market holds in. Big ifs though.
I'm sure you've posted something like this in the past, but do you have a historcal chart of CRE investment as a percentage of GDP? I'd like to try and quantify the hit to gdp as CRE slows. Thanks for your excellent work.
Tony Crescenzi on RealMoney wrote this on his blog this morning:
"If not for recent credit problems, the combination of terrific demographics, lower prices and sturdy income gains would be a recipe for recovery in housing. The demographics are such that larger than normal amounts of people are entering homebuying age. The number of people aged 25-29, considered the prime age group for first-time home-buying, is rising faster than normal and will continue to do so for the next decade, and the number of people aged 55-plus is also rising fast and will do so for the next decade. Both of these factors will sow the seeds for the next housing boom."
I know demographics is a huge driver of the housing market, but I had not heard those stats. Anyone care to comment or provide deeper insights?
Way OT, but on BOA's investment in CFC. There's an opinion article on Bloomberg that seems to think that the investment in CFC may have been due to Fed arm twisting and not self-inspired control grab in CFC. (I was wondering this at the end of the CFC comments. It would be interesting if true, but we won't know for sure until much later, if ever.)
Central Banks Play `Whac-A-Mole' in Credit Freeze: Mark Gilbert - Bloomberg.com
...
"If there's one takeaway from recent events, it's the reminder that the potency of global capital can leave central banks powerless. Bank of America Corp.'s $2 billion investment in Countrywide Financial Corp., the biggest U.S. mortgage lender, may have done more to stabilize financial markets than the hundreds of billions of dollars of short-term funds supplied by the Fed and the ECB."
...
" So on Aug. 22, the four largest U.S. banks stepped up, with Citigroup Inc., Bank of America, JPMorgan Chase & Co. and Wachovia Corp. each taking $500 million of funds at 5.75 percent, well above the 4 percent rate that the overnight Fed funds rate closed at that day.
Twisting Arms
The implied message to the smaller finance houses is that there shouldn't be any stigma attached to borrowing at the penalty rate if you need to.
You can imagine the telephone conversation with the Fed that inspired such munificence; not dissimilar from the 1998 chat that brought about the rescue of Long-Term Capital Management LP. A cynic might also wonder whether Bank of America's $2 billion vote of confidence in the U.S. mortgage market by buying preferred stock in Countrywide was similarly Fed-inspired.
All of this is evidence that the Fed will keep pulling new tricks to avoid cutting its key overnight target rate of 5.25 percent, either before or at its Sept. 18 gathering -- and will rally U.S. financial institutions to its cause, marshaling the forces of capital by reminding them that their interests in maintaining market order are 100 percent aligned. "
...
yal, the way I look at CFC and others in this space is to take a somewhat longer term view. The next phase of this credit market turmoil past the liquidity crunch, is likely to focus on the credit losses, as it may not be possible for the market to function without pricing information. A lot of low coupon paper that will need to be marked way down to reflect defaults and lower collateral values. Look for credit ratings downgrades galore and institutions heading into receivership...
Who said the Fed has to announce a rate cut? It has been two weeks and the rate is still way below their 5.25% target
08/23 4.88
08/22 4.77
08/21 4.89
08/20 5.03
08/17 4.91
08/16 4.97
08/15* 4.71
08/14 4.54
08/13 4.81
08/10 4.68
08/09 5.41
Tony Crescenzi on RealMoney wrote this on his blog this morning:
Duceswild,
What stats are you talking about? All he did was state that there are more young people now.
Then he said, effectively, "Get ready for the next housing boom!! YEEEAH!"
Who knows what will happen in the future.. but it seems a little premature to be fantasizing about the next housing boom.
In my town, local builders rent street level retail and then put in showrooms with all the bells and whistles $$$ kitchens and $$$ bathrooms that you can have if you build with them. My bet is those retail spaces will be empty by January.
Tony Crescenzi wants to be the next NAR Chief Economist
Eli:
Wrote that to quick..sorry
What I meant was, can anyone elaborate (with stats) on the demographic trends to which he is referring.
I agree, barely. The first part of the Fed and other CB's response to the crisis is preventing the markets from seizing up by restoring liquidity. To use an ER analogy - "stabilize the patient". After that bit of triage, they can start to worry about dealing with the underlying insolvency issue in an orderly manner by allowing the repricing of securities and consolidation of the walking wounded by strong arming the survivors.
However, due to the size of the repricings that probably need to come I think that process is going to be nasty. Gonna be a lot of naked swimmers when this tide finally goes out.
"Does anyone have an explanation why new housing inventory is down?"
I've noticed in my home town (Pensacola, FL) that residential "for sale" inventory has gone down a tiny bit; however, in just the past month, land inventories started moving back up and rental inventories shot up about 10-12%. This is based on information from the online MLS.
What I meant was, can anyone elaborate (with stats) on the demographic trends to which he is referring.
Duceswild,
I guess you could go root around at the Census.gov site and run the numbers... but.. why?
I don't think Tony did that.. he probably heard something about more young people (hey, also more old people! More everyone!! almost every age group is growing faster than "normal"! Super!).. then he heard a separate mention of how much awesome money people make.. then he mixed it together to write a blog entry.
I don't know.. I've been seeing indication that people, in general, aren't making awesome money (my phrase) compared to what they were making in the recent past.
My stance is, who knows.. but I'm not preparing for the next housing boom, just yet.
Anecdotal sure, but here in SoCal's San Fernando valley I went driving up a street in areas I hadn't driven through in years.
In a particularly bad, very low rent area, I did a spit take as I drove past an empty, brand new strip mall. Not the crummy looking 7/11 with a coin-o-matic laundry and a Dollar store. No, this looked like strip malls in ritzier areas like Calabasas, or Thousand Oaks. Needless to say I was shocked...who in this area is going to be able to set up shop?
If I remember correctly, the land used to contain a lot and a rickety shack that offered instant cash for cars. Basically a car pawn shop. Drop off the cars and keys and docs, get cash. This was an appropriate business for the area. Please note as well, there are few businesses in the area, outside of sole proprietor car repair shops...oh and a Stripper Bar.
Cheers
Regarding inventories. My personal observations are that more homes are being removed for sale and becoming rentals. Rental prices are declining and have been for the last year. Eventually these retal homes will come back on the market as REOs, it is just a matter of time.
"Rental prices are declining and have been for the last year" - I expected this in Feb but many explained to me why it can not be this way.
Serious question: How important is an interest rate cut?
I am not so clueless I don't know it's important, especially when you are talking about such large numbers. But, isn't the proper assessment of value and risk more important. The housing market is overpriced and needs a correction. Our economy has too much dependence on credit and consumption. I am convinced a correction will come regardless what the Fed does. I am hoping they hold steady and we have our recession as I believe a cut will only delay and compound our existing problems. Thomas Paine said "If there must be trouble let it be in my day, that my child may have peace." If not peace, at least more economic security and opportunity. We cannot as a country keep racking up debt.
Duceswild, I'll try to write a response - do you have a link to the piece?
Turbo, I've probably posted it before - I'll have to look. CRE investment isn't as big a percentage of GDP as residential.
Residential has fallen to about 4.9% of GDP (from over 6% at the peak). Non-residential investment in structures (we could break it down further) is about 3.4% of GDP. So it's contribution is less than residential.
Best Wishes.
The problem with Tony Crescenzi's analysis of demographics is that the housing boom of 1996-2005 robbed a lot of the growth in the first-time buyer market from the future. The % of people in their 20s who own homes shot way up, compared to historic averages. You didn't have to wait years to save up a downpayment or reach a qualifying level of income.
One of the huge problems in today's market is that the number of qualified 1st time buyers has been thinned out so much. It will take years to rebuild the pipeline, especially now that mortgage qualifying standards are so much higher.
Eric Janzen at iTulip has published a link to a NY Fed report that throws some light on the Discount Window activity as well as the Countrywide deal titled "Rediscounting under Aggregate Risk with Moral Hazard".
The gist of the paper seems to be that, rather than using the Open Market to inject liquidity into the markets, where they run the risk of adding fuel to the fire, that a small group of gatekeeper banks get access to the Discount Window, and can intermediate between the leveraged speculators and the Fed by using anything that they deem worthy as collateral. That would explain why Tan Man says that CFC can't use the window, but B of A can; he's not trustworthy.
Of course, the big boys get compensated for their efforts, and the assets they accumulate are eventually going to need to be marked down, but this allows the markets to reliquify, without putting the money into reckless hands.
The iTulip link
Sounds like a good theory, and has seemed to work for the "liquidity crisis" portion of our show. I suppose that means the markets will now return to the "insolvency" portion, after this word from our sponsors...
Eli:
"My stance is, who knows.. but I'm not preparing for the next housing boom, just yet."
I'm with you on that one.
Btw, looks like we see eye to eye on Tony's views.
Do you know about the Real Capital Analytics data bases of commercial real estate price trends (updated quarterly). They use a methodology developed at MIT based on repeat sales of CRE, not appraisals. Most data is available to subscribers only but you can get a good flavor for free at rcaanalytics.com
My analysis of RCA data is that hotels, retail space and office space have produced a price bubble that soon will burst. Apartment and industrial prices have already started to level and aren't as vulnerable.
I think the declines in hotels, retail and office will be sharp, multi-year, and reflected in RCA quarterly data starting in the 4th quarter.
CR:
here's the link (premium content):
Financial Investments and Stock Market Tips for Real Money - TheStreet.com
On the demographics, the paragraph I quoted was all he had to say.
Btw, looks like we see eye to eye on Tony's views.
deuce,
Reading contrary views is always good.. but there's no point if they won't do any work to support what their saying.
So.. if I read someone like Tony and I think to myself "What a bunch of BS!", I'm not going to go out and re-run the numbers to convince myself that it really, really is BS.
Why? Because it's obvious I think it's BS.. and who's to say that I'm not just going to run the numbers in a way to confirm my belief.
So.. I really need to be reading people with contrarian views who actually run the numbers on their own. At least, they'll be trying to dig up the ones that support their views.
Duceswild, OK, thanks!
Rich, I am in agreement that hotels, retail space and office space have produced a price bubble. Otherwise why would predominant people in th industry like Zell and Hilton be selling off?
I think Wall Street has the Fed beat.
Everytime the Fed tries to provide liquidity where it's needed, it gets co-opted by Wall Street and funneled into more leveraging and bubbles.
Anything the Fed does to help benefits the ponzi complex more than the rest of the economy.
I hope the Fed is starting to realize that they really can't make the economy better on demand by providing additional liquidity. The gamblers will always be the first in line.
And don't forget that if all the first-time homebuyers who did all that forward-demand thing in 2001-2005 get divorced because of all this stress over the housing market, we double the demand for housing units! It makes great sense because it only halves household income! But if you do stated income, you can count the child support as income for one party while ignoring it as income offset for the other party. The divorced young 'uns can buy the big houses from the downsizing boomers, who can buy all the patio units in Phoenix from the first-time homebuyers who are moving up, and it's party time again!
My understanding of deals in the Class A office market is that buyers are purchasing buildings at incredibly low cap rates (4%) with the expectation that when leases roll over they can charge higher rates. The problem is that spec office construction has taken off again and a ton of new space will soon pound many markets. Additionally, the newly vacated mortgage and residential related business space will only add to the vacancy. With tighter credit and more avaible space, many of these Class A office buyers are going to be in a world of hurt.
Suzanne Researched This: Part 2 | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area.
Great youtube clip that pretty much summarizes the whole bubble with a real estate ad, and a clip from the Dr Laura show about a woman who has a pissed off husband because she made them buy too much house.
It would be hilarious if it weren't so sad.
" Serious question: How important is an interest rate cut?"
That depends on what happens to the long rates. If the short rates go down enough then it may help marginal lenders as their spreads on existing paper improve and the relative coupons get at least a little more attractive so they can unload without getting crushed.
In terms of the crash in the housing market a deep cut, 100bpts+, will clearly soften the blow, but probably not by much. I don't know proportionally how LIBOR will be affected by the fed and that's the basis for ARMs...
Lots of empty strip malls. Lots.
Euro climbing like a Pinnacle Air commuter jet deadheading for oblivion.
What does it mean?
Well, someone thinks that US rates are going to be materially lower in relation to ECB rates than they are today.
Or, that they already are.
So much of our currency and debt is in foreign hands one wonders if a mirror Argentina could develop?
ac,
Not to hijack the thread too much, but I think that the idea is to have the discount window just open enough that the markets can be made, and don't freeze up as we've seen over the last couple weeks. The idea seems to be that the small group of big banks will toe the line by doing the deals at a price that gives the collateral market value, but still have to make a profit. So the Fed protects itself from the direct losses, by putting a trusted intermediate in between that is too big to fail. I'm not a big bank, so I don't know how realistic the expectations are that they won't be tempted to step up to the role of leveraged speculator themselves, but in the extreme short term it seems to have worked.
ac, you got that right. One thing the Fed has never been able to do effectively is direct liquidity. The only one who was able to was Vockler when he raised interest rates and quickly pumped liquidity into the stock markets effectively directing inflation away from assets and into production. A consequence for his actions was creating a speculative stock market over the long term.
Tony Crescenzi on RealMoney wrote this on his blog this morning:
I read Tony's blog and find some useful info--but he is also housing cheer leader. Demographics are only fair, IMO. Many of the immigrants can't afford houses. There has been a lot of speculative buying, including boomers buying second homes that they don't really need, but expected to be great investments. Some evidence, pointed out by Jas, that new family formation is way down. More people living in one house and not as many divorces as in earlier decades. The number of family units may be more important than "raw population numbers." The big issue is that "prices are lower" but the decline is still miniscule relative to the run up. So, we need 20-40% futher decline before home prices will really start looking good. However, if we get such a decline over the period of five years or less, the economy will be in dire straits.
"Anything the Fed does to help benefits the ponzi complex more than the rest of the economy."
Anything the Fed does to help in an environment of regulatory laxity benefits the ponzi complex more than the rest of the economy. The playing field could be changed, but it won't be at least until 2009. And probably not ever.
Tanta - The investment thesis for your scenario would be furniture. Think of all the hide-a-beds that will be sold when households split up and the kids are spending time at both parents' houses. And minivans, lots of minivans...
Tony Crescenzi sounds like a spin doctor. Problems I have with his "forecast" are: the builders borrowed from future demand (as mentioned above)and overbuilt to boot; wages not rising; housing prices still too high relative to said wages; a return to more traditional loan underwriting will significantly reduce number of qualified buyers; boomers do not have significant wealth to buy multiple homes. Population numbers alone do not mean jack if the other necessary fundamentals are all out of whack. The only way we get another boom is if prices drop 50%. Otherwise, Crescenzi's piece is just fluff for the main stream and/or disinformation for the NAR.
"So much of our currency and debt is in foreign hands one wonders if a mirror Argentina could develop?"
Anything is possible, given enough stupidity and greed. If we weren't the USA, would it have already happened to us? Maybe.
While I'm not about to post the usual "Buy only physical gold and silver for safety" motto that somebody drops here every couple of days... it is not a bad idea to have some small part of one's assets in some asset class that is Argentina-resistant. Just as insurance.
To me, the tip-off on commercial real estate is seeing brand new upper end strip mall spaces rented out to tanning salons and martial arts studios. When they can afford the nice places, the nice places are losing $$$.
seems to me that just because u have big banks btwn the Fed and IB's/HF's/lenders doesn't guarantee they won't just pass thru the garbage ABS to the Fed as collateral. certainly will make it more expensive for those groups though.
Tanta - The investment thesis for your scenario would be furniture. Think of all the hide-a-beds that will be sold when households split up and the kids are spending time at both parents' houses. And minivans, lots of minivans...
MLM,
My outlook is for a boom in tents and camping equipment. The demographics are really strong and with the mental stresses from foreclosures and divorces.. a lot of these people will become crackpots who hide out in the woods.
All my money is in tents.. I'm just hoping they don't get too crazy to purchase the equipment before running off.
"To me, the tip-off on commercial real estate is seeing brand new upper end strip mall spaces rented out to tanning salons and martial arts studios. When they can afford the nice places, the nice places are losing $$$."
You point out something that I hadn't processed in my town. Retail space in the central business district is full, and new space is being developed. But the quality of the new businesses is going down. T-shirt shops. Inkjet cartridge refill businesses. Another Quizno's (already for sale). And yes, tanning salons.
Meanwhile, vacancies are increasing lower-grade retail space in the outlying neighborhoods. So there's no net gain on retail; it's just concentrating itself.
Off topic but to the Hon Robert Cote'
From previous thread regarding Rangle and AMT and HMID...
AMT reform: Tax breaks in lawmakers' crosshairs - Jun. 1, 2007
and I too saw Rangel (not Barney Frank as the other person stated)
on TV saying that the HMID is absolutley on the table....to pay for the change in AMT rates or removal which is doubtful.
Rep. Charles Rangel (D-N.Y.), chairman of the House Ways and Means Committee, seemed determined yesterday to stick to pay-go, even if it means coming up with hard-to-find offsets to reform or patch the Alternative Minimum Tax (AMT) this year.
Rangel did not call for the elimination of any particular tax break. But he singled out the popular mortgage interest deduction for homeowners and the special tax status conferred on non-profits as items that ought to be on the table.
He also suggested that the government make tax rates for individuals more equitable, saying that at the very minimum, we have to set the tone that these things have to be discussed.
A dreaded tax is slated to be fixed
Page Not Found | OMB Watch
Touche Cote
Opinion - TheHill.com
from the Hill....
Just because it seems stupid to do does not mean they won't do it.....
I imagine there is enough office space coming onto the market right now to serve about 40,000 cubicles.
Here in SoCal there is a sign in every commercial development I see that says Space Available. Large anchor stores like Good Guys, Comp USA, and Home Depot have stayed empty since closing. Yet new strip malls continue to open. Now I see Realtors(tm) putting their own space up for lease. The big new ReMax office here just put a sign up.
Move along nothing to see here...
Cote'
The Tax Foundation - Simplification Is A Productive Start For Reform
404 - Page not found | The Concord Coalition
and from the house notes:
http://www.house.gov/jct/x-38-07.pdf
Regarding the source of funds for all this building (and spending on "stuff")...
Subprime fallout may sour foreigners on U.S. debt
| Reuters
"We have to wonder whether foreigners will retrench from U.S. corporate debt, which has been financing more than half of the U.S. trade deficit," strategists from Societe Generale wrote in a note to clients.
ac,
Not to hijack the thread too much, but I think that the idea is to have the discount window just open enough that the markets can be made...
That's the idea, but that's not how it's working in reality. Since the Fed's liquidity injections and the lowering of the discount window rates, leveraging and gearing have come back with a vengance. Assets classes such as emerging market equities have gone right back into parabolic melt-up mode.
Bubbles end in crashes. But the Fed and our politicians want to do everything to avoid a crash - politically it's just not an option. So the bubble keeps bigger and bigger. And the ending ultimately gets more grim.
Chemotherapy sucks, but it's better than dying.
NYC might not feel a thing from any commercial downturn. As long as white collar jobs are around.
s&p Futures test 1475 again...
spy tested resistance number of 147.67 with a 147.65 print yesterday...
And again today with 147.53...
I think that's it for now... lower again til 1375 is REALLY Tested
the unwind in residential comes when investors buy the vacant houses at a price which will enable them to carry at a market rental rate. Probably between 150 and 200 times monthly rental. The HSBC froth-finding linked to from Big picture yesterday (BP was linked here)has some dated charts on this ratio in different markets (3rd quarter '05). Its a long way to go. definitely lots fewer sales at lots lower prices. Producing further stresses on employment CRE $ etc. The present exercise as posters have said is to provide sufficient liquidity to start the mark down exercise. There will be lots of casualties (hfs, non-depositories), although the walking wounded (CFC, BKUNA, Corus)depositories will probably be shotgun merged.
That's the idea, but that's not how it's working in reality. Since the Fed's liquidity injections and the lowering of the discount window rates, leveraging and gearing have come back with a vengance. Assets classes such as emerging market equities have gone right back into parabolic melt-up mode.
I don't know AC. I don't see much of a meaningful rally in junk or the mortgage backs, do you? When's the last time an MBS that looked anything like the problem ones got issued? I don't think we're going to see zeros/piks etc. in the junk market anytime soon do you? Another indicator, I haven't heard the banks having any success laying off any Chrysler, anybody heard different?
ooops , just printed 147.67 ... now I'm scared
OT but asked earlier. CFC servicing revenue booked as a loss for two most recent quarters, but it looks cash flow positive because I think the loss term is an impairment. So not contributing to a BK. $s in $000
Mar 31
Valuation changes, net of Servicing Hedge (363,306)
Pre-tax (loss) earnings (69,093)
Jun 30
Valuation changes, net of Servicing Hedge (313,760 )
Pre-tax (loss) earnings (147,358)
Re the quote posted by Duceswild that, ... The demographics are such that larger than normal amounts of people are entering homebuying age. The number of people aged 25-29, considered the prime age group for first-time home-buying, is rising faster than normal ...
In fact the demographics are horrible, because "buy now or be priced out forever" panic and "real estate always goes up" greed have pulled forward demand such that home ownership among the under-30s (and especially among under-25s) set new records at bubble peak.
Since many of these young people stretched to get into the most expensive home they could afford, using ARMs, IO, high-LTV mortgages etc., and are more likely than older people to have gotten bubble-related jobs (since they were such a large fraction of the new jobs over the last five years), there is going to be a particularly high rate of foreclosures and "moving back in with the 'rents" in the next few years. Financially they'll be wiped out, losing down payments, getting black marks on their credit records, and generally ending up "older but wiser", so they're not going to be buying another overpriced home anytime soon.
Moreover, their younger siblings, cousins and friends will be watching, so they, too, won't be prime suckers for real estate speculation in the years to come.
Jm,
I second that observation. First-time homebuyer delinquencies are stratospheric and has finally been priced in to tighter underwriting for all mortgage product. Noone wanted FTHBs before the calamity, now, fughedaboutit...
"Chemotherapy sucks, but it's better than dying."
does 'dying' imply the ultimate stage Jas refers to? Then why do people disagree with Jas so vehemently?
duceswild,
The demographics for future homebuying absolutely suck.
Point 1: As everyone has noted, future homebuyers were already pulled in to the present (and will not be buying again for a decade).
Point 2: The larger than expected growth in twentysomethings is almost certainly due to to illegal immigration. Their homebuying heyday is now gone.
Point 3: The growth in the 55+ crowd is decidedly negative. These people mostly already have homes and either stay put or downsize.
Don't drink the koolaid.
duceswild,
Forgot the big one...
Point 4: The number of people in their peak earning/spending years -- those that buy McMansions & multiple homes -- will fall dramatically starting in 2010.
Repeat after me: "Owner occupied homes are not investments."
NYC might not feel a thing from any commercial downturn. As long as white collar jobs are around.
Is that sarcasm? Hard to tell.
Hi
I'm see the same thing in the I-5 and 99 area from Fresno to Sacto stuffs seating empty now for about 6 months. Contactors are finishing up what they started and I know of projects now on hold.
The young one learning what happened to the parent and won't repeat it. They won't be able to in debtors prison and when the family get out there also the IRS to deal later.
Sad
jo6pac
If it's to good to be true............
Commercial real estate is getting hot, but there is still a lot of opportunities in housing. You just have to look for the best strategies to make profit. You should definitely become a long term investor.
Acording to the report, there is one bank whose percentage of loans related to LBOs is between 50% and 75%. Which banks is that? Anyone know?
I don't think normal applies here.
Normal is Sebastian's concept of how this all works:
recession -> housing bust + delayed commercial re bust.
This time around, I think it's (we're only at the first "housing bust part):
credit/home price/leverage ceiling -> housing bust -> credit lockup -> recession -> more housing bust + delayed commecial re bust.