On Roubini's CNBC recent interview, he mentions a 50% decline needed to return the housing price to rent ratio to historic levels. There was no time for details, like is he talking about a national drop.
I wouldn't be surprised if he is largely correct. I can't think of any better guidepost than the price to rent ratio. Rent should be driven by incomes and population. When these rise, so should rent and housing prices. There may be room for small changes in the ratio when interest rates change. but it is clear that over the last few years, the tremendous rise in the price to rent ratio was caused by toxic mortgages.
Help me out here - am I having a mental meltdown ...
I looked at that GS housing projection, and new home starts never falls below new home sales. How does the market ever clear? Or does it clear at some point beyond the time frame of the projection?
If starts never go below sales doesn't inventory tend toward infinity?
Duceswild - In California, Florida, Nevada I think you will be able to. In NY where I live, the suburbs will be down about 15-20% from the highs. they are already down about 6% for the year.
The excess inventory of unsold new property will move into the rental market capping rental increases.
I know in Philadelphia a large number of rentals were taken off the market to convert into condo's for specuvestors to buy. I suspect many of them will devolve back to rental units, as will many of the 1000's of units in towers under construction.
CR wrote about this "conondrum" a few times. Comparing starts and sales is a bit like comparing apples and oranges, because one number includes apartments, the other doesn't, etc. Quite a few things are counted in one number but not in the other. Someone may point you towards the article in the archives were CR discussed that.
Housing starts include rental units (normally about 35% of the total), but the GS forecast would still have new home construction greater than sales at the bottom, which doesn't exactly sound like the necessary market clearing to actually reach a bottom.
Eventhorizon - Your right. I agree. I forgot about that the brainy people who purchased homes will try to be landlords. Maybe they can get rents to cover the cost of the outlandish mortgage payments and tqaxes on the houses.
I'm with Turbo. Somehow, some way, starts are going to have to fall to the point at which inventory can start to reduce!
We're not seeing that point yet, are we?
Goldman's forecast for sales at 650 thousand and starts at over a million poses an obvious problem. How long can builders continue to build before they go bankrupt? Banks are increasingly unwilling to fund speculative construction. If builders aren't making money now, they are going to have to cut building back sharply.
The Credit Suisse and Backamerica reset charts have made the rounds, but see little if any talk about when negative amortizations converts to regular amortization. Clauses in these mortgages call for that to occur when neg am brings the balance up to 110 or 115% of the initial balance, depending on the loan terms.
Eventhorizon, others have already answered this question, but it is important: New Home sales are a subset of starts. Starts include apartments, owner built units, and some condos (certain condos are not included in New Home sales). So starts will always be higher than sales.
MaxedOutMama, I agree that starts at 1.33 million and new home sales at 795K will not work off any inventory. The same is probably true for Goldman's forecast of 1.1 million starts and sales at 650K.
But a big part of the problem is cancellations. When Goldman is forecasting REPORTED sales falling to 650K, they are probably forecasting actual sales somewhat higher as previous cancellations are resold. That is the only way the numbers seem to work.
When you consider that new home sales, adjusted for cancellations, are actually running somewhere around 550k (795*0.7=556.5) already, even the low end of Roubini's range at 800k (including 350k of rental construction) does nothing to clear the backlog currently in the system. It's not too hard to make a case for housing starts dropping to 700k or even lower in the next year or two.
Last year around this time, maybe a bit earlier, the talking heads were asking when the fed would raise rates and roubini said the next fed action would be a cut. He was prediciting a Q1 or Q2 recession though, he is a bit quick on the draw.
As for the "50%" price decline Schiller was in the same range on CNBC yesterday pointing to the vast gap between rental rates and housing prices and noting that historically they converge. They kept trying to get him to forecast and all he'd say was that based on history we've got a long...long way to go in sales and prices; and it takes a while to work out.
Gee, where have we heard that before ?
Speaking of which if you read Justin Lahart's Ahead of the Tape he talks about folk buying back into the Homebuilders because they keep guessing a bottom and getting surprised.
Well here's the odd thing - based on CR's prognostications which have been in place for a long while and accurate one didn't need to look at the XHB index to guestimate. The work was done here and it warn't a Black Swan. It was a known structural outlook which was ignored, is still just really settling in and not being reflected in market prices.
Turbo, it's grim, but probably not that grim. As we know, the Census Bureau reports sales excluding cancellations.
If we wanted to estimate actual sales for August (including cancellations), the number would be:
Actual Sales = 795K - current cancellations + previous cancellations sold this month.
The Census Bureau assumes that current cancellations equals previous cancellations sold. This month (August) that surely is way too optimistic, and Actual Sales is less than 795K. But when the housing market bottoms according to the Census Bureau (whenever that happens), the reported sales will be too low!
I wish they adjusted for cancellations. We have to watch the builder reports to figure out what is happening.
The team of noted housing bears would all prove to be way too optimistic and are going to be bowled out by a lone bowler.
The housing bubble informed me all I needed to know about how crooked and corrupt the US econo-political system really is. It will end in collapse like other great powers and empires before it.
Bad leadership would do any great power in. And we are #1! Greenspan, Bush, Bernanke... to be followed by...
Damn it I have tried to position my time to buy between Roubini, Shiller and CR...now even Mudd is calling bottom late 08 earliest and as long as we have taken to get this high when we hit bottom expect it to take us as long to get to stabalize....so NO Shorts....why do i feel the next line chart will look like a rescuers plan to retract miners 2 miles down and 6 miles in??????
Something about the ABCP outstanding posted by the Fed is bugging me - to wit, the rate of change for the decline in ABCP got worse for the first time - take a look, link posted below.
............................Rate of
ABCP.....Change...Change
998\t\t
966.7....-3.1%\t
945.1....-2.2%.....0.9%
929.5....-1.7%.....0.6%
912.2....-1.9%....-0.2%
see little if any talk about when negative amortizations converts to regular amortization. Clauses in these mortgages call for that to occur when neg am brings the balance up to 110 or 115% of the initial balance, depending on the loan terms.
Right, Russ, but ARM resets are contractual: they happen on the predetermined dates, regardless of borrower behavior. And it doesn't matter what the initial interest rate was. ARMs are "clockwork."
There are, for practical purposes, no loans with scheduled negative amortization; they all have "potential" neg am. It depends on whether the borrower chooses to make the minimum payment or not. And the rate of neg am depends on how deeply the initial rate was discounted, because the initial payment is set on that initial rate, and if the rate adjusts frequently during the fixed payment period and there's a big margin, the amount of neg am is greater. There are OAs out there with rates that adjust monthly, starting only three months after the loan closes. Others adjust only annually (while the payment is fixed for longer than that). Even if all borrowers make the minimum payment, those loans will accrue neg am balances at different speeds.
So it is an incredible amount of work to do a "neg am recast schedule." It's complicated by the fact that the majority of OAs are not securitized. You'd have to get loan-level data from a bunch of thrifts. And since so far the OA securities are doing well--no real downgrades yet--it's not like the RAs are motivated to crunch the numbers on neg am rates right at the moment.
I don't think it's that people aren't concerned about this; I think it's that the data is so hard to put together and project. And no, nobody thought of that when we originated the damned things.
Picking up on something AllanM said two threads down demand for houses could easily fall in areas that have previously depended on succession migration.
I think that might have happened already, in fact has been one of the tipping mechanisms. The biggest problems now are in the biggest immigration states - except maybe Texas, but I'm not sure it's as big an immigrant destination as Nevada, California, Florida, etc. We've seen from these numbers and the Morgan update that things are very bad in these places. The question comes: when does that spread to the rest of the economy and the areas that haven't taken much of a hit yet?
I believe the progression below will occur and market forces will ultimately solve the starts problem. First, and within the next two years, as profitability becomes nearly impossible, 75% of homebuilders will go BK. The few surviving national public builders will retrench back to only major primary markets as a shell of their former selves. The few surviving smaller private builders will only remain in secondary and tertiary markets. Hundreds of thousands of jobs will disappear and housing starts will plummet as new home sales stagnate around 400k-500k for at least of couple of years. New home sales will slowly pick up pace. However, starts will remain low as profitability remains low. After about five to eight years (7 to 10 years from now), the huge inventory problem will finally be reduced to normal levels or below normal levels. Small private builders will begin to dominate smaller local markets while large public builders focus on primary markets. Soon, demand will once again outstrip supply and the whole, crazy upside of the housing cycle will shoot up again, but will likely occur to the extent only seen between 1995 and 2000.
NEW YORK (CNNMoney.com) -- Mortgage rates rose for the third consecutive week in a row, Freddie Mac reported Thursday.
The government-sponsored loan buyer said the rate on a 30-year fixed-rate loan averaged 6.42 percent for the week ended Sept. 27, up from 6.34 percent last week.
Last year at this time, 30-year mortgage rates averaged 6.31 percent.
Once-in-a-generation event? This will be a once-in-a-lifetime event, a depression.
Elvis, your builder devolution sounds plausible to me.
Remember, demographics change to reflect economics; just look at the big drop in population growth in the '30s. Housing will not be saved by population growth; folks slow down on family formation in tough economic times.
We went through something real similiar in the late '80s to early '90s, anyone here old enough to remember? It doesn't happen often but housing corrects every now and then.
Foxtons, a discount realtor that brokered home sales for a 3 percent commission, shut its U.S. operations and may file for bankruptcy amid the slowing housing market.
Unanimity of market calls makes me nervous. Mudd, Schiller, Roubini, Cramer and everyone here. I know, sometimes the crowd is right - but it still makes me nervous.
"Rents can also rise if everyone wants to rent instead of own. Kind of like right now."
WRONG, maybe currently in a few areas. However, the rental market supply will outpace the formation of households. Now and then, I review the MLS rental market for condos in my FL hometown and rents effective haven't moved at all.
I'm currently looking for a new rental in Tampa, there are a lot of listings with great deals. Almost every apartment complex I drive by displays "move-in special" signs.
Going forward: falling homes prices, stagnant rents, and rising necessity costs (food and energy).
Decent memory back to early 70s. Most significant downturns in sales resulted from high interest rates. Current rates are very cheap relative to the previous 35 years which is one reason for extreme concern. Wish CR would put FNMA fixed rate 30Yr. as added feature to graphs.
No getting fuzzy math by you CR. I was actually thinking 795k * net cancellations (probably about 20%) * another 15% drop in demand, which yields a ballpark -30% or approx 550k new home sales. If that were to happen, and building were to continue at current levels, then inventory really balloons, and starts would have to fall to sub 800k to have any market clearing effect. That's not really my forecast, just a not terrible far-fetched fugly scenario. I would actually take GS's 650k as the bottom for sales, and Roubini's 800-900k on starts as being good working forecasts.
And accurate data, like net sales, and for that matter, non-hedonically adjusted inflation, would be very nice, but probably too much to ask (especially since neither would be pretty at the moment). Cheers. There's a beer waiting for me somewhere in Manhattan about now.
"Going forward: falling homes prices, stagnant rents, and rising necessity costs (food and energy)."
Right on.
I see housing going down in almost all areas through 2008 and 2009. Some areas haven't seen much or any depreciation yet, but I think most will.
From there I think there are many areas that will simply miss the next upturn, both in prices and rents. Areas like Arizona, Las Vegas, a lot of Socal, and Florida. I just don't see a lot of future job prospects in those areas, and essential costs will continue to rise. As the building and service industry winds down, I suspect there will be a long emigration from those areas.
I think people will follow the available jobs, and the areas that have them will benefit from the next upturn, however far away that may be.
I think people will follow the available jobs, and the areas that have them will benefit from the next upturn, however far away that may be.
Matt | 09.27.07 - 5:42 pm | #
Unanimity of market calls makes me nervous. Mudd, Schiller, Roubini, Cramer and everyone here. I know, sometimes the crowd is right - but it still makes me nervous.
Now, I am a subscriber to the "none of us is as dumb as all of us theory", but it works best when things are more subtle and nuanced. When there is a hurricane, and everyone thinks its windy, well, they are right, it's windy.
Decent memory back to early 70s. Most significant downturns in sales resulted from high interest rates. Current rates are very cheap relative to the previous 35 years which is one reason for extreme concern.
With so much leverage in the system these days, one might argue that rates are not cheap. Japan has even more leverage and the following might be worth a read.
Let Them Eat Cake! In 2000, then-BOJ Governor Masaru Hayami was widely derided for raising rates from zero to 0.25 percent. Pundits called him Japan's answer to Herbert Hoover. Yet Hayami was trying to force Japan Inc. to implement structural reforms. It didn't work and rates returned to zero in March 2001.
If I remember correctly, we've had our once-in-a-generation event with the stock market falling three years in a row 2000-2003. To claim there is now a depression following on top of such a bearish and rare event is completely absurd. The stock market falls for 3 consecutive years once every ~70 years and we're just thru with it. After such an event, strong and long lasting bull markets follow.
Regarding ECRI: they seem to be the only economic institution without false positive recession forecasts. This is certainly not the case with some perma-bear posters here. This by itself shows me who is more reliable.
Now, I am a subscriber to the "none of us is as dumb as all of us theory", but it works best when things are more subtle and nuanced. When there is a hurricane, and everyone thinks its windy, well, they are right, it's windy.
Very well said!
I think this is exactly why it might be much worse than most expect. The herd is not ALWAYS wrong and there are plenty of contrarians who take way too much comfort in assuming the herd is wrong yet again.
Herd behavior A group of animals fleeing a predator shows the nature of herd behavior. In the often cited article "Geometry For The Selfish Herd," evolutionary biologist W. D. Hamilton said each individual group member reduces the danger to itself by moving as close as possible to the center of the fleeing group. Thus the herd appears to act as a unit in moving together, but its function emerges from the uncoordinated behavior of self-seeking individuals.
If one must be a contrarian, note that there are no hits at all when searching for "overleveraged herd" on Google (include the quotes to get the exact phrase).
Here's a fun article that was close though (from 2006).
My Reality Check You are way overleveraged, said Hall. Meaning that the total equity of what I own, including my home, is not sufficiently clear of what I owe. When the property boom in Britain stops, the situation is going to be similar to that in the mid-1990s, because so many people are leveraged up. Do you remember what happened in the 1990s? I nod sagely. But broadly speaking, I tell him, capital values are never going to go back down to, say, price levels of the 1970s.
I am so glad you said that, said Hall. Because that is exactly the reason people will, excuse my language, get screwed. Your comparison is invalid. You dont compare prices to the 1970s! You compare prices to those when the market last corrected itself. And that little bit of delusion in you could lead to your downfall.
Foxton's isn't going. According to the news release, they are gone.
The way I read their incredible low listings and financial problems, the discount realtor is a broken business model in this environment. It seemed to me that Foxton's had their act together as well as anybody in the space. So, you might see other discount realtors following.
Discounters offered some hope for underwater owners to get out with minimal damage by saving $20,000 to $30,000 on the commission. If discounters go, it may be another nail in the coffin of existing sales.
Discounting was a good idea that came along at the wrong time. Maybe it will come back, but probably not for awhile.
I think the big kahuna of the housing downturn, the one that will knock people's eyes out, will be Manhattan coops and condos.
I'm one of those people who had a house that was worth close to $1 million at the peak. It's not a castle. Just your basic nice NYC burb house.
Could it drop by 50%? Maybe. But for my house to drop to $500,000, it would mean a hole-in-the-wall 2-bedroom in Manhattan would have to drop from about $1.5 million now to as low as $500,000. For a family that needs to economize in a recession, my house beats a Manhattan 2-bedroom any day (schools, taxes).
I think my house will go down by 25-30% and the 2-bedroom Manhattn coop or condo will go down by 50%. This may be deeper into recession, after all those Wall Street jobs and bonuses have dried up.
"...biggest problems now are in the biggest immigration states - except maybe Texas, but I'm not sure it's as big an immigrant destination as Nevada, California, Florida, etc."
Back in the '90s, California had a net out-migration for several years. Housing prices didn't start to kick back until '96.
I moved out of a 1BR apartment and into a house on the California coast in '90. That apartment rented for $625. Five years later, it was renting for $595. The demand just wasn't there; well-paid young professionals followed the work elsewhere.
Moral: when housing sales go down, rents can go down too -- if people leave the area.
"The stock market falls for 3 consecutive years once every ~70 years and we're just thru with it. After such an event, strong and long lasting bull markets follow."
Whew! Glad that's over then ... I'll just walk under ladders and dance with black cats now.
Your reasoning is absurd. No different from the guy that says "Well, I just lost my job, so I got all my bad luck out of the way, things can't get any worse". Until he loses his house because he can't make mortgage.
It's a common fallacy, I can't recall the name of it unfortunately.
PS And no the veneer of statistics from the last 70 years doesn't save the wishful thinking. The future holds what the future holds.
That mild little recession at the turn of the century was not a once-in-a-lifetime (OIAL) event. The pop of the tech bubble was a OIAL event, but the fact that a mild recession followed makes no sense whatsoever.
We merely delayed the depths of the recession and the full collapse of the equities market with an unprecedented infusion of liquidity, and the creation of another OIAL bubble in housing.
I don't see how that is bullish for stocks or the economy today, now that our proverbial chickens are coming home to roost.
We are already in one of the strongest bull markets of all time since the end of the OIAL 3-year stock market decline. The numbers should speak for themselves louder than any roaring perma-bear.
Banks for First Data, the biggest processor of credit-card payments, cut the loan sale to $5 billion earlier this month because of a lack of demand. The six banks issued $7.6 billion of the debt at a discount of 4 percent of face value, the people said. A further $1.8 billion was sold at a 3 percent cut, said the people, who declined to be identified because details of the sale are private.
The discounted price represents a loss of about $360 million for the banks before fees.
Yeah, yeah, okay, but I'd still rather hear the terms from a legit buyer, thanks. These guys are just protecting their models. I wonder what their 'granite countertops' were. Guaranteed ins for the next IPO ramp scam (when applicable)??
I agree that things in RE and the economy look bad but then how can the stock market go up EVERYday and be near all time highs? Yes, I know markets can act irrationally, but is the stock market already looking past all the negativity?
When ECRI team announced their recession call (March 2001) stock market had already in a bear market. Due to their excellent track record nowadays everyone is paying attention to ECRI. If and when they spell the R word market will sell off.
By the way, UCLA Anderson had also an excellent track record. From their site: September 12, 2007 - In its third quarterly report of 2007, the UCLA Anderson Forecast remains consistent in its assertion that the national economy is not technically in a recession, though the groups economists are calling current conditions a near recession experience.
Unless the current stock market rally becomes broad based this a huge distribuition process.
We are already in one of the strongest bull markets of all time since the end of the OIAL 3-year stock market decline. The numbers should speak for themselves louder than any roaring perma-bear.
In fact, the strongest bull market of all time is doing almost half as well as things that just pop up out of the ground. You know, things like oil, rocks, and housing. And don't even get me started on the strongest bull market compared to wages. That's some serious prosperity there I tell you.
There's a bull market in almost everything! Hurray! The prosperity we are creating with the monetary printing press cannot be denied!
In the late 70's the amount of debt burden was nothing like today and wages adjusted for inflation have not gone up since then. Comparing 1980 or 1990 to today is like comparing bananas to elephants. The only thing in common is a real estate slump. The rest will be written up in the history books.
We are already in one of the strongest bull markets of all time since the end of the OIAL 3-year stock market decline. The numbers should speak for themselves louder than any roaring perma-bear.
O-Joe
Optimistic Joe | 09.27.07 - 7:14 pm | #
Hear that banging? Yep, that is me pounding the sell button. Lots of smart people say you never go broke taking profits.
It sounds like we're focusing too much on the housing bubble. The MSM and Joe Sixpack still think the economy is going strong, the stock market is at all time highs and (apart from this little housing bump in the road) that everything is rosey. It's going to be a big shock when they're made aware of how sickly the economic fundamentals of the US really are.
I highly recommend Peter Schiff's commentary archive for anyone that has missed it:
O-Joe is the only one who sees light here. Is there any surprise, the world has only few hundred billionaires, but billions who do not make hundred dollars of profit from investments ?
It's going to be interesting when the decade long winter of recession kicks in. What will happen to all of the loud mouthed perma-bulls like Kudlow and Mad Money Cramer? Will they change their tunes or just be out of a job? No wonder they're the loudest bull horns on the block. Deny deny deny! That will make all our problems go away!
This is the farmer sowing his corn,
That fed the crowd which begged in the morn,
That bought the gold that rises reborn,
That hoarded wheat as some forewarned,
That dissed investments all forlorn,
That milked the cow without being stubborn,
That tossed his dogs,
That sold his flat,
That spoke to the rat,
That bought the oil,
That generated the light that O-Joe saw.
Yeah, he's the "only" one looking at the light. Uh huh, yeah right.
By the way, if O-Joe is the only one here who sees the light, and we are to believe that what you say is the absolute truth, then what does that make you?
I'd say it makes you a bit of a conundrum, a parodox if you will, lol.
It's going to be interesting when the decade long winter of recession kicks in. What will happen to all of the loud mouthed perma-bulls like Kudlow and Mad Money Cramer?
Kudlow's next act will be to bash the Democrats for tax-and-spend policies that led us into this recession mess.
S&P 500 has doubled in the past 5 years...that's pretty impressive...unless you check what precious metals, industrial metals, oil, real estate, etc... have done over those 5 years. Or try pricing the S&P in other currencies.
In any case, what a credit bubble giveth, a credit implosion can taketh away.
Funny you should mention billionaires. You should take a poll on how many of them are as bullish as you about US equities. I think you'd be feeling kinda lonely in that crowd.
The "Great Game" has always been played with the knowledge that on occasion the board must be wiped clean. The major players never lose their spot... there are of course the sacrificial pawns who's highlighted media demise, serves to insure the public that the "Game" is not rigged. This "Game" works well when population is increasing and there are no limits on resources...Well, there is a new game in town, and it is defined by diminishing resources while experiancing increased demand driven by an increase in an enabled population...We are at the provebial point of where the rubber meets the road. I wish I had never heard of "Globalization".
In any case, what a credit bubble giveth, a credit implosion can taketh away.
In my opinion, those who are willing to admit that they might be wrong are the most likely to adapt to changing conditions. Take your quote. You did not say that's how it will happen. You simply think it "can" happen and imply that the odds are fairly high. I'd probably agree.
I'm just trying to stay out of the path of the potential storm as best I can. I think people have underestimated the power of highly leveraged trivial things. There are times to seek return on capital and there are times to seek the return of capital. These days the latter is where I'm parked.
I am far from certain I am right and very much hope I am wrong. As of Tuesday, my girlfriend is looking for work (fortunately the job market is still good up here in Seattle it seems).
For O-Joe and Sebastian to be correct, all that has to happen is for the adjustment to happen through the dollar rather than through the stock market. Either way, I suspect it won't be a fun adjustment.
O....and all it'll take to make O-Joe and Sebastian wrong is a dollar decline followed by a competitive devaluation of the other world currencies because the other central banks don't want to halt their economy any more than we do.
Rich,
Do you suppose he'll forget to mention that spending increased just over 3% a year under Clinton, but about 7% a year under Bush, even with a Republican Congress?
He wouldn't forget that, would he? He would also put the two in perspective, including inflation which would put Clinton at about 0.5% and Bush at 5%, a ten fold increase. Would he also forget that discressionary spending is up even more?
If anyone's interested, have a look at the off-budget items pushed through each year. These are special expenditures that never are counted in the budget, but still cost money. This was popular in the late 90's in private industry. We beancounters called them "One time charges". This kept the bonus structure intact. It's no longer done. Now we have special compensation in conjunction with blah blah.
O-Joe,
Since 2002 the euro is up 63%, and Aussie and kiwi both up over 70% VS the dollar, the Fed's trade-weighted index for the dollar (not the dollar index), against major currencies like the euro, pound and the yen, is the lowest it has ever been and 30% lower than when floating exchange rates were adopted in the 1970's.
The US market may very well keep going up but I wouldn't be deluded into think it means one is getting wealthier, it is more a reflection of currency debasement.
Stop thinking of Kudlow as an intelligent human being. He's an actor.
He plays Ronald Reagan's equivalent of Marley's Ghost.
After last night's debate, it appears Hillary is nearly unstoppable barring a big error. And her strong suit is error-avoidance.
So, Kudlow is set up for 4 or 8 years as the head on-air anti-Hillary cheerleader. It's a fantastic gig for him, when you think about it. His ratings will do well.
Bob Dobbs I agree.
Rents follow real estate.
Here in NH I have seen a steady decline in rental prices over the past 8 months as more and more empty condos are taken off the market and rented out. I have also seen homes that have not sold rented with the hope that the market will turn around next spring.
But they are still building new condos and new homes. Go figure.
We will also see individuals moving back home (hi mom, hi dad, whats for dinner) or finding roommates in order to cut costs putting even more units out there for rent.
This one is gonna be a doooozy.
I remember the late 80's early 90's and we almost lost everything, lost 40k on my house, moved in with my in-laws in order to save our business, never thought the good times would or could end. I see many out there now thinkin the same way I did back then.
The real scary part.......this time it's a hell of a lot worse.
Not only are we more dependent on foreign oil, but now we are dependent on foreign $$$.
It shows how extraordinarily strong the economy is in that it can take the housing slowdown and strongly raising commodity prices for years now without slowing down meaningfully or succombing to 1970s style stagflation. This is the greatest story never told on this blog: the economy grows moderately without producing inflation. Yes, you may call it Goldilocks. I'm also a big fan of the FED steering of the economy so far. The experience from the early 1980s shows me they can kill inflation and the one from the early 2000s shows they can avert deflation. Of not is that after 5 of the last seven FED easings the inflation rate turned actually down for 2 years; something like that we seem to be seeing right now as well despite high energy prices. The two times inflation rose soon after they reverted to tightening very fast (Volcker 1980 and Greenspan 1998). This shows a lot of intellectual flexibility IMO, too.
KnotRP, "O....and all it'll take to make O-Joe and Sebastian wrong is a dollar decline followed by a competitive devaluation of the other world currencies because the other central banks don't want to halt their economy any more than we do."
In Chicago's northwest suburbs, condo/townhome MLS for-sale listing counts are now declining from the record heights reached about a month ago, but there has been about an equal increase in MLS rental listings. Most of those listings have been there for months -- the asking rents are way too high.
Coldwell CEO: There's No Housing Bubble
Coldwell Banker CEO Jim Gillespie says there was no bubble and the correction should run its course without a big decline in prices.
This is the greatest story never told on this blog: the economy grows moderately without producing inflation.
Nobody has to tell it, because it simply isn't true and everyone here (except you & Seb) knows it.
It's pretty damned easy to simulate a vibrant economy when you print money, and that's exactly what has been happening since Al "Bubbles" Greenspan took office 20 years ago. Normally such activities would result in inflation; however, AG's actions were largely offset by globalization. The rest was due to the USD being the reserve currency aka petrodollar.
Of course, just like a "homeowner" with a toxic mortgage, that game can only go on so long... and now the fit is hitting the shan.
One problem I see is rents will fall in a severe recession. Does he mean current rents or where they are headed.
My thing is this multi generational houses will become common again just like in the depression. Do you think the Waltons lived together becaused they liked each other!!!
You said, "This is the greatest story never told on this blog: the economy grows moderately without producing inflation.".
Again, we disagree. There's been plenty of inflation, but it went into things not measured by the CPI (like education, health care, housing, energy, luxury goods and financial assets). And some of it was swallowed by the nations that have pegged their currencies to our dollar. That might make it more palatible here, but doesn't make it more sustainable.
And as for the impressive strength of the economy, take a look back through history at other manic bubbles. They are always characterized by wide prosperity, and they've always ended in painful reversals when the bubble pops.
If this 5-year stretch has been so unprecedented in your mind, don't you worry that the remaining upside is small, as opposed to the potential downside?
As far as this bull market, 40% of the S&P 500 stocks are in the red year-to-date. Not a broad based rally at all. The S&P is where it was in March of 2000. It is finding significant resistance at its old high.
And as far as the economy doing well, why do the majority of Americans give Bush's handling of the economy a near 60% disapproval rating? And the same amount or greater think the U.S. is heading in the wrong direction. There are record foreclosures and the resets have only begun. MSM just repeats the talking points they're given, they want to remain upbeat, that's what their viewers want to hear. Sure, there's plenty of jobs, my neighbor is working two of them.
Have consumers ever entered a recession with a negative savings rate and record debt levels on mortgage, credit cards, HELOCs, car loans, and second mortgages? All this debt was racked up during the 'good times', but it will have to be paid off during the bad times. Yep, sounds like the makings of another leg of the bull run to me.
The real estate market I see is what Mike Morgan sees at ground zero
Worse than the Gov Stats and the Ivory Tower stats. Which are only rear view mirror, long lost visions.
I can't find better arguments than I've presented so far. At this point I guess we just have to see who will be right. I'm sure the same number of people will miss out on the continuation of the bull market as they did since 2004. I do see changes come to the currencies, PM and oil markets in that there will be significant tops and reversals next year after some more blow off. All the people who write obituaries to the US$ will be as wrong as they were about the stock market and the general economy IMO.
Rents can also rise if everyone wants to rent instead of own. Kind of like right now.
Well aside from the fact that "everyone" does not want to rent instead of buy now, you are quite wrong.
So suppose a prospective buyer decides to rent instead. What happens to the house he didn't buy? It gets bought by a investor, who rents it out at the market rate. One more renter, one more landlord.
The change in propensity to rent versus buy has no effect at all on rents, which are driven by household incomes. It does have an effect on prices, because the more people rent, the more pressure there is on prices to return to fundamentals. Landlords don't want to lose money.
Note that both rents and prices are falling in places like Florida and Arizona due to physical oversupply.
I was wondering if you think the American dream includes both owning a house and having a job?
Recent data from Europe indicate that high home ownership positively correlates with high unemployment.
For instance, Spain, Finland and Ireland had the highest rates of home ownership in the 1990s and also had uneployment rates of about 20%, the highest in Europe.
Funny you should mention billionaires. You should take a poll on how many of them are as bullish as you about US equities. I think you'd be feeling kinda lonely in that crowd."
And the fake "Sebastian" strikes again. That wasn't "me" you were responding to.
This development is good news for CR, though. "Bad" Sebastian drives out the "good" Sebastian, leaving the lesser one to make the intellectually and factually weaker posts. Very Karl Rove-ian.
By 2009, you will be able to buy a 1M home in the peak of the boom for half that.
On Roubini's CNBC recent interview, he mentions a 50% decline needed to return the housing price to rent ratio to historic levels. There was no time for details, like is he talking about a national drop.
I wouldn't be surprised if he is largely correct. I can't think of any better guidepost than the price to rent ratio. Rent should be driven by incomes and population. When these rise, so should rent and housing prices. There may be room for small changes in the ratio when interest rates change. but it is clear that over the last few years, the tremendous rise in the price to rent ratio was caused by toxic mortgages.
"By 2009, you will be able to buy a 1M home in the peak of the boom for half that."
Depends on where you live, because as we all know, all.....
...and 2009 may be a tad early
Rents can also rise if everyone wants to rent instead of own. Kind of like right now.
Help me out here - am I having a mental meltdown ...
I looked at that GS housing projection, and new home starts never falls below new home sales. How does the market ever clear? Or does it clear at some point beyond the time frame of the projection?
If starts never go below sales doesn't inventory tend toward infinity?
What am I missing here?
Duceswild - In California, Florida, Nevada I think you will be able to. In NY where I live, the suburbs will be down about 15-20% from the highs. they are already down about 6% for the year.
Brian,
The excess inventory of unsold new property will move into the rental market capping rental increases.
I know in Philadelphia a large number of rentals were taken off the market to convert into condo's for specuvestors to buy. I suspect many of them will devolve back to rental units, as will many of the 1000's of units in towers under construction.
Dark towers anyone?
Eventhorizon,
CR wrote about this "conondrum" a few times. Comparing starts and sales is a bit like comparing apples and oranges, because one number includes apartments, the other doesn't, etc. Quite a few things are counted in one number but not in the other. Someone may point you towards the article in the archives were CR discussed that.
Housing starts include rental units (normally about 35% of the total), but the GS forecast would still have new home construction greater than sales at the bottom, which doesn't exactly sound like the necessary market clearing to actually reach a bottom.
Goldman Sachs is still about 33% "too optimistic" on new home sales. I'm sure they will revise, again.
Eventhorizon - Your right. I agree. I forgot about that the brainy people who purchased homes will try to be landlords. Maybe they can get rents to cover the cost of the outlandish mortgage payments and tqaxes on the houses.
I'm with Turbo. Somehow, some way, starts are going to have to fall to the point at which inventory can start to reduce!
We're not seeing that point yet, are we?
Goldman's forecast for sales at 650 thousand and starts at over a million poses an obvious problem. How long can builders continue to build before they go bankrupt? Banks are increasingly unwilling to fund speculative construction. If builders aren't making money now, they are going to have to cut building back sharply.
Well, look at Lennar's, KBH, and just about every builders drop in closings, orders, and workforces.
Nothing but huge drops compared to last years beginning of the slowdown.
The real question is whether in four years or five years time any new homes are going to be built.
Now if that comes to pass, we are all going to be paddling very fast to stay in place.
The Credit Suisse and Backamerica reset charts have made the rounds, but see little if any talk about when negative amortizations converts to regular amortization. Clauses in these mortgages call for that to occur when neg am brings the balance up to 110 or 115% of the initial balance, depending on the loan terms.
That's Roubini being bearish on himself.
Eventhorizon, others have already answered this question, but it is important: New Home sales are a subset of starts. Starts include apartments, owner built units, and some condos (certain condos are not included in New Home sales). So starts will always be higher than sales.
MaxedOutMama, I agree that starts at 1.33 million and new home sales at 795K will not work off any inventory. The same is probably true for Goldman's forecast of 1.1 million starts and sales at 650K.
But a big part of the problem is cancellations. When Goldman is forecasting REPORTED sales falling to 650K, they are probably forecasting actual sales somewhat higher as previous cancellations are resold. That is the only way the numbers seem to work.
Best to all.
When you consider that new home sales, adjusted for cancellations, are actually running somewhere around 550k (795*0.7=556.5) already, even the low end of Roubini's range at 800k (including 350k of rental construction) does nothing to clear the backlog currently in the system. It's not too hard to make a case for housing starts dropping to 700k or even lower in the next year or two.
Last year around this time, maybe a bit earlier, the talking heads were asking when the fed would raise rates and roubini said the next fed action would be a cut. He was prediciting a Q1 or Q2 recession though, he is a bit quick on the draw.
As for the "50%" price decline Schiller was in the same range on CNBC yesterday pointing to the vast gap between rental rates and housing prices and noting that historically they converge. They kept trying to get him to forecast and all he'd say was that based on history we've got a long...long way to go in sales and prices; and it takes a while to work out.
Gee, where have we heard that before ?
Speaking of which if you read Justin Lahart's Ahead of the Tape he talks about folk buying back into the Homebuilders because they keep guessing a bottom and getting surprised.
Well here's the odd thing - based on CR's prognostications which have been in place for a long while and accurate one didn't need to look at the XHB index to guestimate. The work was done here and it warn't a Black Swan. It was a known structural outlook which was ignored, is still just really settling in and not being reflected in market prices.
Go figure.
Turbo, it's grim, but probably not that grim. As we know, the Census Bureau reports sales excluding cancellations.
If we wanted to estimate actual sales for August (including cancellations), the number would be:
Actual Sales = 795K - current cancellations + previous cancellations sold this month.
The Census Bureau assumes that current cancellations equals previous cancellations sold. This month (August) that surely is way too optimistic, and Actual Sales is less than 795K. But when the housing market bottoms according to the Census Bureau (whenever that happens), the reported sales will be too low!
I wish they adjusted for cancellations. We have to watch the builder reports to figure out what is happening.
Best Wishes.
--
One out ten to go (cricket).
The team of noted housing bears would all prove to be way too optimistic and are going to be bowled out by a lone bowler.
The housing bubble informed me all I needed to know about how crooked and corrupt the US econo-political system really is. It will end in collapse like other great powers and empires before it.
Bad leadership would do any great power in. And we are #1! Greenspan, Bush, Bernanke... to be followed by...
Jas
Damn it I have tried to position my time to buy between Roubini, Shiller and CR...now even Mudd is calling bottom late 08 earliest and as long as we have taken to get this high when we hit bottom expect it to take us as long to get to stabalize....so NO Shorts....why do i feel the next line chart will look like a rescuers plan to retract miners 2 miles down and 6 miles in??????
Something about the ABCP outstanding posted by the Fed is bugging me - to wit, the rate of change for the decline in ABCP got worse for the first time - take a look, link posted below.
............................Rate of
ABCP.....Change...Change
998\t\t
966.7....-3.1%\t
945.1....-2.2%.....0.9%
929.5....-1.7%.....0.6%
912.2....-1.9%....-0.2%
Commercial Paper Outstanding
see little if any talk about when negative amortizations converts to regular amortization. Clauses in these mortgages call for that to occur when neg am brings the balance up to 110 or 115% of the initial balance, depending on the loan terms.
Right, Russ, but ARM resets are contractual: they happen on the predetermined dates, regardless of borrower behavior. And it doesn't matter what the initial interest rate was. ARMs are "clockwork."
There are, for practical purposes, no loans with scheduled negative amortization; they all have "potential" neg am. It depends on whether the borrower chooses to make the minimum payment or not. And the rate of neg am depends on how deeply the initial rate was discounted, because the initial payment is set on that initial rate, and if the rate adjusts frequently during the fixed payment period and there's a big margin, the amount of neg am is greater. There are OAs out there with rates that adjust monthly, starting only three months after the loan closes. Others adjust only annually (while the payment is fixed for longer than that). Even if all borrowers make the minimum payment, those loans will accrue neg am balances at different speeds.
So it is an incredible amount of work to do a "neg am recast schedule." It's complicated by the fact that the majority of OAs are not securitized. You'd have to get loan-level data from a bunch of thrifts. And since so far the OA securities are doing well--no real downgrades yet--it's not like the RAs are motivated to crunch the numbers on neg am rates right at the moment.
I don't think it's that people aren't concerned about this; I think it's that the data is so hard to put together and project. And no, nobody thought of that when we originated the damned things.
Picking up on something AllanM said two threads down demand for houses could easily fall in areas that have previously depended on succession migration.
I think that might have happened already, in fact has been one of the tipping mechanisms. The biggest problems now are in the biggest immigration states - except maybe Texas, but I'm not sure it's as big an immigrant destination as Nevada, California, Florida, etc. We've seen from these numbers and the Morgan update that things are very bad in these places. The question comes: when does that spread to the rest of the economy and the areas that haven't taken much of a hit yet?
I believe the progression below will occur and market forces will ultimately solve the starts problem. First, and within the next two years, as profitability becomes nearly impossible, 75% of homebuilders will go BK. The few surviving national public builders will retrench back to only major primary markets as a shell of their former selves. The few surviving smaller private builders will only remain in secondary and tertiary markets. Hundreds of thousands of jobs will disappear and housing starts will plummet as new home sales stagnate around 400k-500k for at least of couple of years. New home sales will slowly pick up pace. However, starts will remain low as profitability remains low. After about five to eight years (7 to 10 years from now), the huge inventory problem will finally be reduced to normal levels or below normal levels. Small private builders will begin to dominate smaller local markets while large public builders focus on primary markets. Soon, demand will once again outstrip supply and the whole, crazy upside of the housing cycle will shoot up again, but will likely occur to the extent only seen between 1995 and 2000.
Mortgage rates jump
NEW YORK (CNNMoney.com) -- Mortgage rates rose for the third consecutive week in a row, Freddie Mac reported Thursday.
The government-sponsored loan buyer said the rate on a 30-year fixed-rate loan averaged 6.42 percent for the week ended Sept. 27, up from 6.34 percent last week.
Last year at this time, 30-year mortgage rates averaged 6.31 percent.
[snip]
Nobody ever expects a once-in-a-generation event, but every generation has one.
Washington Mutual is flush with "profits" from neg am. I don't see the problem.
Once-in-a-generation event? This will be a once-in-a-lifetime event, a depression.
Elvis, your builder devolution sounds plausible to me.
Remember, demographics change to reflect economics; just look at the big drop in population growth in the '30s. Housing will not be saved by population growth; folks slow down on family formation in tough economic times.
We went through something real similiar in the late '80s to early '90s, anyone here old enough to remember? It doesn't happen often but housing corrects every now and then.
Elvis,
You da man! You nailed it. Don't leave the building yet.
Foxtons Shuts U.S. Operations, Blames Housing Slump
Foxtons Shuts U.S. Operations, Blames Housing Slump (Update2) - Bloomberg.com
Foxtons, a discount realtor that brokered home sales for a 3 percent commission, shut its U.S. operations and may file for bankruptcy amid the slowing housing market.
Let's just hope this doesn't end up being a Massacre (new picture added at the bottom for those who may have read this previously).
Unanimity of market calls makes me nervous. Mudd, Schiller, Roubini, Cramer and everyone here. I know, sometimes the crowd is right - but it still makes me nervous.
I'm covering homebuilder shorts tomorrow.
"Rents can also rise if everyone wants to rent instead of own. Kind of like right now."
WRONG, maybe currently in a few areas. However, the rental market supply will outpace the formation of households. Now and then, I review the MLS rental market for condos in my FL hometown and rents effective haven't moved at all.
I'm currently looking for a new rental in Tampa, there are a lot of listings with great deals. Almost every apartment complex I drive by displays "move-in special" signs.
Going forward: falling homes prices, stagnant rents, and rising necessity costs (food and energy).
Novice
Decent memory back to early 70s. Most significant downturns in sales resulted from high interest rates. Current rates are very cheap relative to the previous 35 years which is one reason for extreme concern. Wish CR would put FNMA fixed rate 30Yr. as added feature to graphs.
DR
No getting fuzzy math by you CR. I was actually thinking 795k * net cancellations (probably about 20%) * another 15% drop in demand, which yields a ballpark -30% or approx 550k new home sales. If that were to happen, and building were to continue at current levels, then inventory really balloons, and starts would have to fall to sub 800k to have any market clearing effect. That's not really my forecast, just a not terrible far-fetched fugly scenario. I would actually take GS's 650k as the bottom for sales, and Roubini's 800-900k on starts as being good working forecasts.
If Foxton goes, will BuyOwner follow? God, I hate those Thanks BuyOwner ads.
And accurate data, like net sales, and for that matter, non-hedonically adjusted inflation, would be very nice, but probably too much to ask (especially since neither would be pretty at the moment). Cheers. There's a beer waiting for me somewhere in Manhattan about now.
"Going forward: falling homes prices, stagnant rents, and rising necessity costs (food and energy)."
Right on.
I see housing going down in almost all areas through 2008 and 2009. Some areas haven't seen much or any depreciation yet, but I think most will.
From there I think there are many areas that will simply miss the next upturn, both in prices and rents. Areas like Arizona, Las Vegas, a lot of Socal, and Florida. I just don't see a lot of future job prospects in those areas, and essential costs will continue to rise. As the building and service industry winds down, I suspect there will be a long emigration from those areas.
I think people will follow the available jobs, and the areas that have them will benefit from the next upturn, however far away that may be.
I think people will follow the available jobs, and the areas that have them will benefit from the next upturn, however far away that may be.
Matt | 09.27.07 - 5:42 pm | #
China?
On the starts vs new home sales conundrum - I recall you have addressed this issue numerous times - my bad, and thanks to all for reminding me.
Now if I could only remember where I left my marbles ...
Unanimity of market calls makes me nervous. Mudd, Schiller, Roubini, Cramer and everyone here. I know, sometimes the crowd is right - but it still makes me nervous.
I'm covering homebuilder shorts tomorrow.
gab | 09.27.07 - 5:22 pm | #
Now, I am a subscriber to the "none of us is as dumb as all of us theory", but it works best when things are more subtle and nuanced. When there is a hurricane, and everyone thinks its windy, well, they are right, it's windy.
Telegraph UK
Goldman Sachs tiptoeing into the bear camp
Goldman Sachs tiptoeing into the bear camp - Telegraph
OECD calls for UK rates to be cut
OECD calls for UK rates to be cut - Telegraph
DR,
Decent memory back to early 70s. Most significant downturns in sales resulted from high interest rates. Current rates are very cheap relative to the previous 35 years which is one reason for extreme concern.
With so much leverage in the system these days, one might argue that rates are not cheap. Japan has even more leverage and the following might be worth a read.
Let Them Eat Cake!
In 2000, then-BOJ Governor Masaru Hayami was widely derided for raising rates from zero to 0.25 percent. Pundits called him Japan's answer to Herbert Hoover. Yet Hayami was trying to force Japan Inc. to implement structural reforms. It didn't work and rates returned to zero in March 2001.
0.25% makes you a Herbert Hoover? Ouch.
If I remember correctly, we've had our once-in-a-generation event with the stock market falling three years in a row 2000-2003. To claim there is now a depression following on top of such a bearish and rare event is completely absurd. The stock market falls for 3 consecutive years once every ~70 years and we're just thru with it. After such an event, strong and long lasting bull markets follow.
Regarding ECRI: they seem to be the only economic institution without false positive recession forecasts. This is certainly not the case with some perma-bear posters here. This by itself shows me who is more reliable.
Everybody may judge for himself.
O-Joe
Red Pill,
Now, I am a subscriber to the "none of us is as dumb as all of us theory", but it works best when things are more subtle and nuanced. When there is a hurricane, and everyone thinks its windy, well, they are right, it's windy.
Very well said!
I think this is exactly why it might be much worse than most expect. The herd is not ALWAYS wrong and there are plenty of contrarians who take way too much comfort in assuming the herd is wrong yet again.
Herd behavior
A group of animals fleeing a predator shows the nature of herd behavior. In the often cited article "Geometry For The Selfish Herd," evolutionary biologist W. D. Hamilton said each individual group member reduces the danger to itself by moving as close as possible to the center of the fleeing group. Thus the herd appears to act as a unit in moving together, but its function emerges from the uncoordinated behavior of self-seeking individuals.
If one must be a contrarian, note that there are no hits at all when searching for "overleveraged herd" on Google (include the quotes to get the exact phrase).
Here's a fun article that was close though (from 2006).
My Reality Check
You are way overleveraged, said Hall. Meaning that the total equity of what I own, including my home, is not sufficiently clear of what I owe. When the property boom in Britain stops, the situation is going to be similar to that in the mid-1990s, because so many people are leveraged up. Do you remember what happened in the 1990s? I nod sagely. But broadly speaking, I tell him, capital values are never going to go back down to, say, price levels of the 1970s.
I am so glad you said that, said Hall. Because that is exactly the reason people will, excuse my language, get screwed. Your comparison is invalid. You dont compare prices to the 1970s! You compare prices to those when the market last corrected itself. And that little bit of delusion in you could lead to your downfall.
Foxton's isn't going. According to the news release, they are gone.
The way I read their incredible low listings and financial problems, the discount realtor is a broken business model in this environment. It seemed to me that Foxton's had their act together as well as anybody in the space. So, you might see other discount realtors following.
Discounters offered some hope for underwater owners to get out with minimal damage by saving $20,000 to $30,000 on the commission. If discounters go, it may be another nail in the coffin of existing sales.
Discounting was a good idea that came along at the wrong time. Maybe it will come back, but probably not for awhile.
I think the big kahuna of the housing downturn, the one that will knock people's eyes out, will be Manhattan coops and condos.
I'm one of those people who had a house that was worth close to $1 million at the peak. It's not a castle. Just your basic nice NYC burb house.
Could it drop by 50%? Maybe. But for my house to drop to $500,000, it would mean a hole-in-the-wall 2-bedroom in Manhattan would have to drop from about $1.5 million now to as low as $500,000. For a family that needs to economize in a recession, my house beats a Manhattan 2-bedroom any day (schools, taxes).
I think my house will go down by 25-30% and the 2-bedroom Manhattn coop or condo will go down by 50%. This may be deeper into recession, after all those Wall Street jobs and bonuses have dried up.
"...biggest problems now are in the biggest immigration states - except maybe Texas, but I'm not sure it's as big an immigrant destination as Nevada, California, Florida, etc."
Back in the '90s, California had a net out-migration for several years. Housing prices didn't start to kick back until '96.
I moved out of a 1BR apartment and into a house on the California coast in '90. That apartment rented for $625. Five years later, it was renting for $595. The demand just wasn't there; well-paid young professionals followed the work elsewhere.
Moral: when housing sales go down, rents can go down too -- if people leave the area.
Dallas (Texas) housing is still a bargain...
Report: Dallas housing is still a bargain |
News for Dallas, Texas | Dallas Morning News
| Dallas Business News
"The stock market falls for 3 consecutive years once every ~70 years and we're just thru with it. After such an event, strong and long lasting bull markets follow."
Whew! Glad that's over then ... I'll just walk under ladders and dance with black cats now.
Your reasoning is absurd. No different from the guy that says "Well, I just lost my job, so I got all my bad luck out of the way, things can't get any worse". Until he loses his house because he can't make mortgage.
It's a common fallacy, I can't recall the name of it unfortunately.
PS And no the veneer of statistics from the last 70 years doesn't save the wishful thinking. The future holds what the future holds.
O-Joe,
That mild little recession at the turn of the century was not a once-in-a-lifetime (OIAL) event. The pop of the tech bubble was a OIAL event, but the fact that a mild recession followed makes no sense whatsoever.
We merely delayed the depths of the recession and the full collapse of the equities market with an unprecedented infusion of liquidity, and the creation of another OIAL bubble in housing.
I don't see how that is bullish for stocks or the economy today, now that our proverbial chickens are coming home to roost.
ShortCourage & Dr Deflation,
We are already in one of the strongest bull markets of all time since the end of the OIAL 3-year stock market decline. The numbers should speak for themselves louder than any roaring perma-bear.
O-Joe
Telegraph UK
bcngold127.xml
Goldman Sachs tiptoeing into the bear camp
Telegraph | Error 404 | Sorry, the page you have requested is not available
OECD calls for UK rates to be cut
bcnoecd127.xml
Telegraph | Error 404 | Sorry, the page you have requested is not available
FFDIC | 09.27.07 - 5:56 pm | #
Welli, welli, well. Interesting read TY.
OT: RE - First Data
KKR's Banks Sell $9.4 Billion of First Data Loans
Banks for First Data, the biggest processor of credit-card payments, cut the loan sale to $5 billion earlier this month because of a lack of demand. The six banks issued $7.6 billion of the debt at a discount of 4 percent of face value, the people said. A further $1.8 billion was sold at a 3 percent cut, said the people, who declined to be identified because details of the sale are private.
The discounted price represents a loss of about $360 million for the banks before fees.
Yeah, yeah, okay, but I'd still rather hear the terms from a legit buyer, thanks. These guys are just protecting their models. I wonder what their 'granite countertops' were. Guaranteed ins for the next IPO ramp scam (when applicable)??
Yeah, I'm skeptical.
Serious question.
I agree that things in RE and the economy look bad but then how can the stock market go up EVERYday and be near all time highs? Yes, I know markets can act irrationally, but is the stock market already looking past all the negativity?
O-Joe,
Hey, it was sunny yesterday, must be sunny tomorrow!
Look, I'm not saying it's going to be a bull or bear market going forward. I'm saying your reasoning is silly.
Pick something better, such as expected economic growth, consumer spending, or anything in the real world.
O-Joe
When ECRI team announced their recession call (March 2001) stock market had already in a bear market. Due to their excellent track record nowadays everyone is paying attention to ECRI. If and when they spell the R word market will sell off.
By the way, UCLA Anderson had also an excellent track record. From their site: September 12, 2007 - In its third quarterly report of 2007, the UCLA Anderson Forecast remains consistent in its assertion that the national economy is not technically in a recession, though the groups economists are calling current conditions a near recession experience.
Unless the current stock market rally becomes broad based this a huge distribuition process.
Regards
EWZ
We are already in one of the strongest bull markets of all time since the end of the OIAL 3-year stock market decline. The numbers should speak for themselves louder than any roaring perma-bear.
In fact, the strongest bull market of all time is doing almost half as well as things that just pop up out of the ground. You know, things like oil, rocks, and housing. And don't even get me started on the strongest bull market compared to wages. That's some serious prosperity there I tell you.
There's a bull market in almost everything! Hurray! The prosperity we are creating with the monetary printing press cannot be denied!
Serious question.
If you think leverage makes the stock market more attractive, BUY STOCKS.
If you think it makes them more risky, get out.
People laughed at me when I said the CPI could be up 5% for this year. But just look at the one-month commodity price increases Tim Iacono has posted.
The Mess That Greenspan Made
It will take 2 months for some of these to filter through to the CPI.
Novice,
In the late 70's the amount of debt burden was nothing like today and wages adjusted for inflation have not gone up since then. Comparing 1980 or 1990 to today is like comparing bananas to elephants. The only thing in common is a real estate slump. The rest will be written up in the history books.
We are already in one of the strongest bull markets of all time since the end of the OIAL 3-year stock market decline. The numbers should speak for themselves louder than any roaring perma-bear.
O-Joe
Optimistic Joe | 09.27.07 - 7:14 pm | #
Hear that banging? Yep, that is me pounding the sell button. Lots of smart people say you never go broke taking profits.
rich,
Last years's commodity selloff leading to tame yoy headline CPI readings doesn't appear to be coming in on schedule this year? Oops.
There's still some hope though if the housing component can really start dragging down the average (like it did in August).
Chicago Tribune
Big projects may be pulled back to earth - high end residential developments in Chicago and around the country feel the squeeze as lenders turn cautious in global credit crunch...
Big projects may be pulled back to earth High-end residential developments in Chicago and around the country feelthe squeeze as lenders turn cautious in global credit crunch - Chicago Tribune
It sounds like we're focusing too much on the housing bubble. The MSM and Joe Sixpack still think the economy is going strong, the stock market is at all time highs and (apart from this little housing bump in the road) that everything is rosey. It's going to be a big shock when they're made aware of how sickly the economic fundamentals of the US really are.
I highly recommend Peter Schiff's commentary archive for anyone that has missed it:
Euro Pacific Capital | Commentary and Archives
GDP revised lower
Housing starts at 795,00
- NY Times
OTS Interest Rate Risk Exposure Report Q2 2007 (Area: US Total)
release date: 9/24/2007
http://www.ots.treas.gov/docs/2/211720.pdf
O-Joe is the only one who sees light here. Is there any surprise, the world has only few hundred billionaires, but billions who do not make hundred dollars of profit from investments ?
It's going to be interesting when the decade long winter of recession kicks in. What will happen to all of the loud mouthed perma-bulls like Kudlow and Mad Money Cramer? Will they change their tunes or just be out of a job? No wonder they're the loudest bull horns on the block. Deny deny deny! That will make all our problems go away!
Sebastian,
O-Joe is the only one who sees light here.
And what generates that light? Energy.
This is the farmer sowing his corn,
That fed the crowd which begged in the morn,
That bought the gold that rises reborn,
That hoarded wheat as some forewarned,
That dissed investments all forlorn,
That milked the cow without being stubborn,
That tossed his dogs,
That sold his flat,
That spoke to the rat,
That bought the oil,
That generated the light that O-Joe saw.
Yeah, he's the "only" one looking at the light. Uh huh, yeah right.
By the way, if O-Joe is the only one here who sees the light, and we are to believe that what you say is the absolute truth, then what does that make you?
I'd say it makes you a bit of a conundrum, a parodox if you will, lol.
Haha! That's funny. Mad Money Cramer has already changed his tune. Check this out:
Video - CNBC.com
Kudlow's next act will be to bash the Democrats for tax-and-spend policies that led us into this recession mess.
It's sad...but it's all he has left.
O-Joe,
We just disagree, that's all.
S&P 500 has doubled in the past 5 years...that's pretty impressive...unless you check what precious metals, industrial metals, oil, real estate, etc... have done over those 5 years. Or try pricing the S&P in other currencies.
In any case, what a credit bubble giveth, a credit implosion can taketh away.
Sebastian,
Funny you should mention billionaires. You should take a poll on how many of them are as bullish as you about US equities. I think you'd be feeling kinda lonely in that crowd.
The "Great Game" has always been played with the knowledge that on occasion the board must be wiped clean. The major players never lose their spot... there are of course the sacrificial pawns who's highlighted media demise, serves to insure the public that the "Game" is not rigged. This "Game" works well when population is increasing and there are no limits on resources...Well, there is a new game in town, and it is defined by diminishing resources while experiancing increased demand driven by an increase in an enabled population...We are at the provebial point of where the rubber meets the road. I wish I had never heard of "Globalization".
ShortCourage,
In any case, what a credit bubble giveth, a credit implosion can taketh away.
In my opinion, those who are willing to admit that they might be wrong are the most likely to adapt to changing conditions. Take your quote. You did not say that's how it will happen. You simply think it "can" happen and imply that the odds are fairly high. I'd probably agree.
I'm just trying to stay out of the path of the potential storm as best I can. I think people have underestimated the power of highly leveraged trivial things. There are times to seek return on capital and there are times to seek the return of capital. These days the latter is where I'm parked.
I am far from certain I am right and very much hope I am wrong. As of Tuesday, my girlfriend is looking for work (fortunately the job market is still good up here in Seattle it seems).
Change
For O-Joe and Sebastian to be correct, all that has to happen is for the adjustment to happen through the dollar rather than through the stock market. Either way, I suspect it won't be a fun adjustment.
Question---
How accurate has the Case-Shiller Index been at predicting prices?
"though the group's economists are calling current conditions 'a near recession experience.'"
WTF is a near recession experience?
Hello 50bp October rate cut.
O....and all it'll take to make O-Joe and Sebastian wrong is a dollar decline followed by a competitive devaluation of the other world currencies because the other central banks don't want to halt their economy any more than we do.
Rich,
Do you suppose he'll forget to mention that spending increased just over 3% a year under Clinton, but about 7% a year under Bush, even with a Republican Congress?
He wouldn't forget that, would he? He would also put the two in perspective, including inflation which would put Clinton at about 0.5% and Bush at 5%, a ten fold increase. Would he also forget that discressionary spending is up even more?
If anyone's interested, have a look at the off-budget items pushed through each year. These are special expenditures that never are counted in the budget, but still cost money. This was popular in the late 90's in private industry. We beancounters called them "One time charges". This kept the bonus structure intact. It's no longer done. Now we have special compensation in conjunction with blah blah.
Good night all.
O-Joe,
Since 2002 the euro is up 63%, and Aussie and kiwi both up over 70% VS the dollar, the Fed's trade-weighted index for the dollar (not the dollar index), against major currencies like the euro, pound and the yen, is the lowest it has ever been and 30% lower than when floating exchange rates were adopted in the 1970's.
The US market may very well keep going up but I wouldn't be deluded into think it means one is getting wealthier, it is more a reflection of currency debasement.
lama,
Stop thinking of Kudlow as an intelligent human being. He's an actor.
He plays Ronald Reagan's equivalent of Marley's Ghost.
After last night's debate, it appears Hillary is nearly unstoppable barring a big error. And her strong suit is error-avoidance.
So, Kudlow is set up for 4 or 8 years as the head on-air anti-Hillary cheerleader. It's a fantastic gig for him, when you think about it. His ratings will do well.
Bob Dobbs I agree.
Rents follow real estate.
Here in NH I have seen a steady decline in rental prices over the past 8 months as more and more empty condos are taken off the market and rented out. I have also seen homes that have not sold rented with the hope that the market will turn around next spring.
But they are still building new condos and new homes. Go figure.
We will also see individuals moving back home (hi mom, hi dad, whats for dinner) or finding roommates in order to cut costs putting even more units out there for rent.
This one is gonna be a doooozy.
I remember the late 80's early 90's and we almost lost everything, lost 40k on my house, moved in with my in-laws in order to save our business, never thought the good times would or could end. I see many out there now thinkin the same way I did back then.
The real scary part.......this time it's a hell of a lot worse.
Not only are we more dependent on foreign oil, but now we are dependent on foreign $$$.
Oh well
Short Courage, Kevin,
It shows how extraordinarily strong the economy is in that it can take the housing slowdown and strongly raising commodity prices for years now without slowing down meaningfully or succombing to 1970s style stagflation. This is the greatest story never told on this blog: the economy grows moderately without producing inflation. Yes, you may call it Goldilocks. I'm also a big fan of the FED steering of the economy so far. The experience from the early 1980s shows me they can kill inflation and the one from the early 2000s shows they can avert deflation. Of not is that after 5 of the last seven FED easings the inflation rate turned actually down for 2 years; something like that we seem to be seeing right now as well despite high energy prices. The two times inflation rose soon after they reverted to tightening very fast (Volcker 1980 and Greenspan 1998). This shows a lot of intellectual flexibility IMO, too.
O-Joe
KnotRP, "O....and all it'll take to make O-Joe and Sebastian wrong is a dollar decline followed by a competitive devaluation of the other world currencies because the other central banks don't want to halt their economy any more than we do."
Most of the export based economies already do.
In Chicago's northwest suburbs, condo/townhome MLS for-sale listing counts are now declining from the record heights reached about a month ago, but there has been about an equal increase in MLS rental listings. Most of those listings have been there for months -- the asking rents are way too high.
Coldwell CEO: There's No Housing Bubble
Coldwell Banker CEO Jim Gillespie says there was no bubble and the correction should run its course without a big decline in prices.
http://www.thestreet.com/video/index.html?clipId=1373_10381522&channel=Exec+Interviews&cm_ven=&cm_cat=FREE&cm_ite=NA#10381522
This is the greatest story never told on this blog: the economy grows moderately without producing inflation.
Nobody has to tell it, because it simply isn't true and everyone here (except you & Seb) knows it.
It's pretty damned easy to simulate a vibrant economy when you print money, and that's exactly what has been happening since Al "Bubbles" Greenspan took office 20 years ago. Normally such activities would result in inflation; however, AG's actions were largely offset by globalization. The rest was due to the USD being the reserve currency aka petrodollar.
Of course, just like a "homeowner" with a toxic mortgage, that game can only go on so long... and now the fit is hitting the shan.
One problem I see is rents will fall in a severe recession. Does he mean current rents or where they are headed.
My thing is this multi generational houses will become common again just like in the depression. Do you think the Waltons lived together becaused they liked each other!!!
O-Joe,
You said, "This is the greatest story never told on this blog: the economy grows moderately without producing inflation.".
Again, we disagree. There's been plenty of inflation, but it went into things not measured by the CPI (like education, health care, housing, energy, luxury goods and financial assets). And some of it was swallowed by the nations that have pegged their currencies to our dollar. That might make it more palatible here, but doesn't make it more sustainable.
And as for the impressive strength of the economy, take a look back through history at other manic bubbles. They are always characterized by wide prosperity, and they've always ended in painful reversals when the bubble pops.
If this 5-year stretch has been so unprecedented in your mind, don't you worry that the remaining upside is small, as opposed to the potential downside?
As far as this bull market, 40% of the S&P 500 stocks are in the red year-to-date. Not a broad based rally at all. The S&P is where it was in March of 2000. It is finding significant resistance at its old high.
And as far as the economy doing well, why do the majority of Americans give Bush's handling of the economy a near 60% disapproval rating? And the same amount or greater think the U.S. is heading in the wrong direction. There are record foreclosures and the resets have only begun. MSM just repeats the talking points they're given, they want to remain upbeat, that's what their viewers want to hear. Sure, there's plenty of jobs, my neighbor is working two of them.
Have consumers ever entered a recession with a negative savings rate and record debt levels on mortgage, credit cards, HELOCs, car loans, and second mortgages? All this debt was racked up during the 'good times', but it will have to be paid off during the bad times. Yep, sounds like the makings of another leg of the bull run to me.
Wait till the foreigners leave our stock exchanges as the dollar plummets. Up 20% in stocks doesn't help when you are down 40% on the currency.
Also if people are losing their jobs ands houses they will probably raid their 401K.
FLIPPERS IN TROUBLE WEBSITE IS THE FASTEST GROWING BLOG ON THE INTERNET!!!
Sacramento Area Flippers In Trouble
The real estate market I see is what Mike Morgan sees at ground zero
Worse than the Gov Stats and the Ivory Tower stats. Which are only rear view mirror, long lost visions.
I can't find better arguments than I've presented so far. At this point I guess we just have to see who will be right. I'm sure the same number of people will miss out on the continuation of the bull market as they did since 2004. I do see changes come to the currencies, PM and oil markets in that there will be significant tops and reversals next year after some more blow off. All the people who write obituaries to the US$ will be as wrong as they were about the stock market and the general economy IMO.
O-Joe
Rents can also rise if everyone wants to rent instead of own. Kind of like right now.
Well aside from the fact that "everyone" does not want to rent instead of buy now, you are quite wrong.
So suppose a prospective buyer decides to rent instead. What happens to the house he didn't buy? It gets bought by a investor, who rents it out at the market rate. One more renter, one more landlord.
The change in propensity to rent versus buy has no effect at all on rents, which are driven by household incomes. It does have an effect on prices, because the more people rent, the more pressure there is on prices to return to fundamentals. Landlords don't want to lose money.
Note that both rents and prices are falling in places like Florida and Arizona due to physical oversupply.
tj dont u mean shit hitting the mutherfucking son of a bitch'in fan?
"Of course, just like a "homeowner" with a toxic mortgage, that game can only go on so long... and now the fit is hitting the shan.?"
hope ur not holding dollars, my buddies in the rust belt tell me this "planned" masterpiece is just getting warmed-up!
Basel II my arse.
USD @ all time low, good news.
Credit contracting, good news
Fed & ECB allowing massive draws from the discount window, good news
Lowest new home sales in 7 years, good news.
Did I wake up on bizarro planet?
Did anybody notice when the ed cut that their ws a sgt stutter as smart money sold into the rally?
Hi all,
I was wondering if you think the American dream includes both owning a house and having a job?
Recent data from Europe indicate that high home ownership positively correlates with high unemployment.
For instance, Spain, Finland and Ireland had the highest rates of home ownership in the 1990s and also had uneployment rates of about 20%, the highest in Europe.
Read more here:
More renters, more jobs? « Roundup
Cheers,
Tracer
ShortCourage said: "Sebastian,
Funny you should mention billionaires. You should take a poll on how many of them are as bullish as you about US equities. I think you'd be feeling kinda lonely in that crowd."
And the fake "Sebastian" strikes again.
That wasn't "me" you were responding to.
This development is good news for CR, though. "Bad" Sebastian drives out the "good" Sebastian, leaving the lesser one to make the intellectually and factually weaker posts. Very Karl Rove-ian.
S.
Seb, I should've known. I spotted the fake Sebastian on past occasions, and I should've been able to tell this time too!
Seems you've been away for a while...kinda missed ya. Were you licking your wounds or off on vacation spending your windfall?