The above formula I understand. What I don't understand is where does the Fed get the information for the 4 items on the right side of the equation. How do they know how much was demolished, damaged, etc. Surely someone from the Fed doesn't walk around the country looking at every single house/condo and making their own estimate of these items?
Sorry if I'm way off-base, but I wonder whether we have large-value properties masking what is happening
with small-value.
Say we have one 10-million house that loses 0.2 million dollars in value and 20 million-dollar houses that each lose 0.1 million. In the aggregate, we have a loss of 2.2 million (7 percent), but there are a lot of people who have lost 10 percent.
Fred, unfortunately not all of this data is publicly available - and even the data that is available is complicated.
The Fed has estimates of all of the above inputs by geographical region: price changes, new homes, home improvement, houses demolished, etc. I know where they get some of the esiimates (like Census Bureau and BEA for home improvement), but I don't know where they get all the data.
The key here is it appears they are using price changes based on OFHEO or something similar.
This is important because it appears the Fed uses the OFHEO index (or something similar) to calculate changes in household real estate asset value. If the Case-Shiller index is more representative of recent price changes, then the Fed actually underestimated the recent increase in household real estate assets!
Holy Buckets CR... I've always suspected the OFHEO curve was 'damped' but that chart you posted all but proves it. Looks almost like a 'moving average' of previous price history. I guess we'll be having some real fun when some of the Case-Shiller plots cross the OFHEO curve. I think the techs call that a 'support point', yes/no? Not a tech so I plead stooopid on this stuff...
Anyway 0 the one think missing from the whole 'we got wealth' meme is you don't pay your bills with wealth - you pay it with case derived from income or monetization of wealth... and in a period of tight credit option two is questionable.
Its like the people who write these articles & do the analysis don't live in the real world or something. Oh well back to doing laundry...
Anyway the one thing missing from the whole 'we got wealth' meme is you don't pay your bills with wealth - you pay it with cash derived from income or monetization of wealth... and in a period of tight credit, option two is questionable.
Alas, "price change" is bogus because in the current environment, only the most desirable properties are changing hands, and the people trying to sell the others are still in denial, either refusing to cut their prices enough to sell, or taking their homes off the market and trying to rent them (almost invariably at asking rents no one will pay).
All of this is going to occur on the margins, where it always does. I'm happy for the taxi driver, but he bought in 2001, not 2005, and it is that vintage and later that is going to bind up the system.
I figured that the numbers were a little circumspect. This story was printed in the LA Times Real Estate (in other words, Advertising) section this morning.
the main reason for price "dampening" in these series is that, as jm noted, the properties with the biggest declines are the properties that are the slowest to transact (but they eventually will). This affects the Case-Shiller and OFHEO indices equally.
My money is on the idea that the main difference between OFHEO and Case-Shiller is that prices are falling the fastest in areas full of subprime loans. Think Sacramento-Modesto-Visalia, Inland Empire, etc. Case-Shiller would pick these up, and OFHEO wouldn't. Geographic coverage wouldn't explain the difference. I recall (but don't have the link) that for the Case-Shiller national index, they just plug in OFHEO numbers for the states that they don't cover. So state by state that wouldn't explain any difference. For rural parts of states with partial coverage, you could get some difference, but the rural parts are, almost by definition, too small to explain much. Jumbo wouldn't explain much - if you look at the Case-Shiller graphs for the metro areas that are broken out by house price, it is usually not the case that the most expensive houses are falling the fastest. I'm pretty much left with the subprime explanation as the only one, and an interesting one it would be.
With the daily bad news about the state of the housing market, it's easy to lose sight of some larger economic realities: Despite declining prices in many markets, homeowners still control near-record equity holdings, just under $11 trillion.
Likewise owners of dot.com stocks still had huge amounts of equity in April 2000 despite the recent power slide.
Both these claims ignore the essential fact that this wealth is not real. It is a market illusion that was created when genuinely wealthy individuals momentarily lost their minds and loaned their wealth to people who had no capacity to pay it back.
Now they know better.
Everybody is gradually waking up to the reality that there is no way this housing wealth can be realized in terms of actual goods or services.
On paper everybody can have 100 houses, 100 cars, and 100 tons of gold.
The problems start when people begin trying to convert these paper claims into real assets, which they inevitably do.
Every bubble in history has burst because every claim on wealth that does not exist is ultimately found out.
AP
OPEC to Study Effect of Dollar on Prices
Sunday November 18, 12:54 pm ET
By Sebastian Abbot, Associated Press Writer
Iranian Oil Minister Says OPEC Will Study Effect of Weak Dollar, Possible Currency Basket
RIYADH, Saudi Arabia (AP) -- OPEC will study the weak U.S. dollar's effect on the oil cartel's earnings and investigate the possibility of a currency basket, Iran's oil minister said Sunday.
Everybody is gradually waking up to the reality that there is no way this housing wealth can be realized in terms of actual goods or services.
Oh by the way, let me just clarify that this doesn't apply to my local housing market due to the large influx of illegal aliens and people moving in from farther south to escape the ravages of global warming.
Thought this was a nice summary from McCulley at PIMCO:
"Ive taken to calling the 2004-2006 vintages of limited or no document, no down payment, negative amortization (pay-option) subprime ARM loans as not loans at all, but rather free, at-the-money call and put options on property prices. Not exactly free, to be sure, as the putative borrower was obligated to pay something in cash interest, even if not the full amount, with the unpaid amount being added to the principal.
"But as a practical matter, the options were essentially free. If home prices went up, the putative 'borrower' would stay current, as the call went into the money, refinancing before the ARM reset, essentially re-striking the option exercise price higher. Simply stated, the borrower wouldnt default, as logical people do not walk away from in-the-money call options.
"And they didnt, until about a year ago. As a consequence, default rates on pools of such subprime loans came in amazingly low, soothing rating agencies nerves and re-enforcing the shadow banking systems appetite for securitized pools of them.
"But if house prices didnt rise, the call option would fall out of the money, and the put option the right to default on the full principal value of the loan would go into the money. Indeed, house prices didnt have to fall, but simply not rise for this outcome to unfold, given negative amortization. In which case, the putative borrower would no longer have any incentive to stay current: Why throw good money after bad for an at-the-money call option that you got for free, which has gone out of the money?
"And so it came to pass about a year ago, when early-payment defaults became a new phrase in our collective lexicon. The home price bubble popped, the at-the-money call options went out of the money, the at-the-money put options went into the money, and the holders of them remembered the wisdom of Paul Simons 1975 treatise on 50 ways to leave a bad situation:
You just slip out the back, Jack
Make a new plan, Stan
You dont need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You dont need to discuss much
Just drop off the key, Lee
And get yourself free
"And with Jack, Stan, Roy, Gus and Lee setting themselves free, the shadow banking system was revealed to be caught between the longing for love and the struggle for the legal tender, living life as Jackson Brownes Pretender, ships bearing their dreams sailing out of sight, with the junkman pounding their fenders."
"Both these claims ignore the essential fact that this wealth is not real. It is a market illusion that was created when genuinely wealthy individuals momentarily lost their minds and loaned their wealth to people who had no capacity to pay it back."
I would argue that those so called genuinely wealthy individuals needs only $100,000 to make a loan of $1 million.
Someone else need only $10,000 to lend those wealthy individual $100,000.
When the bubble burst, all lenders in this food-chain will default.
Thus the $11 Trillion is only virtual money. The people who where lucky enough to convert it to cash before the burst is the lucky winner of the game called greed-debt-production (aka GDP)
Thanks for the crisp McCulley view albrt.
Hard to believe that there is a contest between the OFHEO and the purpose built Case-Shiller index.
Do you want this OFHEO stick to feel the nature of the beast you nearly blind people, or this special instrument crafted to measure house price changes --prescription glasses?
All these words and numbers, and nobody has said that the Harney article lacks credibility because its premise is flawed:
"With the daily bad news about the state of the housing market, it's easy to lose sight of some larger economic realities: Despite declining prices in many markets, homeowners still control near-record equity holdings, just under $11 trillion."
You're all debating whether or not there's actually $11 trillion of home equity in America. You should be focusing on the assertion that homeowners "control" all equity.
They don't. If the equity was in money market funds instead of home equity, they would control it. But you can't control what you don't have and can't get.
CR, stop and get real. Talk about the portion of home equity that homeowners actually CONTROL. Thanks.
I would argue that those so called genuinely wealthy individuals needs only $100,000 to make a loan of $1 million.
Someone else need only $10,000 to lend those wealthy individual $100,000.
Someone else need only $1,000 to lend $10,000.
Pieces of paper or digits in a computer are not wealth.
The wealth of these individuals is fundamentally related to the integrity of the obligations this paper represents.
When central banks print excessive money these obligations dissolve and the "wealth" is lost.
What the Fed is really worried about is that these obligations will systematically intensify and create a sort of financial enslavement that will cripple the economy. This is called "deflation".
The question becomes one of which outcome is worse - the dissolution or intensification of these claims and obligations.
" there is no way this housing wealth can be realized in terms of actual goods or services"
That's not exactly true. There's a translation of housing wealth into goods & services simply by holding a constant housing cost in the face of increasing costs, because increasing costs are eventually reflected in salary.
"OFHEOs sales price data include only homes that have conforming mortgages"
So basically, in all the bubble markets with high prices (eg. most of California) OFHEO price index captures zero of the downward price spiral.
So what happened over the past few years as places like this went from 1/2 conforming to almost no conforming? First OFHEO captures the massive runup, then it drops out sales the past few years (as if CA was slowly disappearing?) and doesnt register the downturn?
They don't. If the equity was in money market funds instead of home equity, they would control it. But you can't control what you don't have and can't get.
rich, can you explain that further ? I don't understand. To my mind, we are talking equity ( not total value of home ) and though its illiquid and thus there a cost to liquifying it ( house sale cost, reverse mortgage rates or home equity loan rates ) its still something you control.
That's not exactly true. There's a translation of housing wealth into goods & services simply by holding a constant housing cost in the face of increasing costs, because increasing costs are eventually reflected in salary.
Where is this wealth, specifically?
You are speaking in financial terms. You are talking about information stores that are merely proxies for real wealth.
I want to know where this real wealth is that has supposedly been created.
I want to see it. This is not about words or numbers or definitions or beliefs.
S-curves (of growth) have certain measurable characteristics. One of them is the inflection point. There's a strong tendency towards "infinite behavior", re: irrationality at the inflection point because it's rate of change is infinite.
That mindset of irrationality often displays itself as a blowspike right around the inflection point.
OFHEO is run by Bush protectors. Don't expect OFHEO to "commit news" as they used to say of Reagan (he never committed news, i.e. never said anything).
I honestly do think it's worthwhile to look at the psychology a little.
The people who have been making out like bandits (just like bandits) and have been filling the coffers of the Republican Party are not repeat NOT going to tell the truth right now. They simply aren't.
Hence, the man in the street is forced to distinguish between lies and the truth in financial reporting.
I believe it was Tanta who said that quite a few months ago everybody realized that the housing market was DOA. Any "statistics" that show it is doing just fine are lies. Case-Shiller closed.
"Both these claims ignore the essential fact that this wealth is not real."
Sort of like mark-to-model, yes?
It's opaque(half-real/half-inflated) and mark-to-falling-market.
This wealth was more real, until the financial system got too-efficient and eat 64% equity of the borrowers.
Perception is reality.
There's about 36% of equity left of those ATM machines. But because of fear, these ATM machines can't no longer function. Those forclosures are those ATMs that have served 100% capacity and retired.
The wealth of these individuals is fundamentally related to the integrity of the obligations this paper represents.
When central banks print excessive money these obligations dissolve and the "wealth" is lost.
The central banks print excessive bonds, which now costs more than inflation-adjusted face value. Who would buy that debt ? (unless inflatio
rich, can you explain that further ? I don't understand. To my mind, we are talking equity ( not total value of home ) and though its illiquid and thus there a cost to liquifying it ( house sale cost, reverse mortgage rates or home equity loan rates ) its still something you control.
sk,
I will just tell you about my own situation by way of example. Keep in mind that I live in the one area of the U.S. (Metro NYC) that hasn't yet experienced much equity loss. My house at the very peak of the market might have been worth $1 million, supposedly. Let's say that I had equity of $800,000. Do I control $800,000? No. For starters, nobody will lend me that much. Then, to borrow even, say, $600,000 of that, I would have to get a current appraisal, and I'll bet that's below the peak supposed value. In other areas, it's way below.
But there's more. I don't feel like I control a lot of that equity, because I would feel uncomfortable taking it. I need a cushion of home equity to feel somewhat secure. For every person, it's different. But whatever that cushion is, you really don't control it. It kinda controls you. The more you fear getting deep in debt, the more it controls you.
there's no question that equity holdings have declined recently and may well be lower when the Fed issues its next quarterly report, in mid-December. But in an $11 trillion marketplace, a $6 billion giveback in a cyclical correction is not a cause for panic
This is more mark to model nonsense except it's on a grand scale led by the Federal Reserve. Homeowners equity is based on closing not on projections. When you have paid for all the expenses of the sale minus mortgage balance then we can discuss equity otherwise it is a Disney experience. Also just how is this 11 trillion plus 10.7 trillion of debt going to be rolled over? Who is going to finance this number. I imagine that Paulson and others go around the globe pointing out to our various friends and lenders how this proves the value of their buying agency paper and investing in the growth and development of the USA.
No reason to beat up on Fannie and Freddie for lack of capital and IB and others for mark to model issues when the Gov't and the Federal Reserve t are the leaders in this farce.
"So basically, in all the bubble markets with high prices (eg. most of California) OFHEO price index captures zero of the downward price spiral."
Sheesh. Talk about assuming away the problem. Harney must be taking lessons in economic obtuseness from Bob Samuelson.
Why is it that whenever I read the Washington Post and the New York Times these days I feel like I'm reliving the dying days of the Soviet Union -- from the other side?
Geoff - to the extent that existing units are rising past the conforming loan limit effect, OFHEO misses both the run-up and the run-down in California. But the parts of California that seem to be falling the fastest, like the Central Valley, are precisely the parts of California that are not jumbo land, and would be in OFHEO's data. San Diego and LA and especially San Francisco, where almost everything is jumbo, seem to be falling slower. And the top end is falling slower than the bottom end - there was a nice post at Piggington's Econo-Almanac | San Diego Housing Bubble News and Analysis that should still be on the home page showing this for San Diego.
I try to explain the issue of wealth vs survival in the near future as follows.
Example I gave
You are in the desert, you have food and water.
Theres the other guy who has gold and diamonds.
He offers all / part gold and diamonds for all/part of the food and water.
a) Extreme case 1: You refuse offer, hang on to food and water, other dies , you survive take gold and diamonds as well
b) An intermediate case. Offer half food and water for half gold and diamonds. Half food and water not enough to survive to make it thru desert. Both dead.
Of course this is assuming above transactions are orderly. Its very possible it might not be, i.e break of law and order and mob rules.
There are many differences between the OFHEO index and the SP/Case-Shiller index, and geographic coverage is not the biggest source of the difference.
For one, the OFHEO index includes appraisals from refinance transactions, which caused an understatememnt of HPA a few years ago when rate-term refis dominated, and which has more recently dramatically overstated HPA as cash-out refis have dominated.
For another, OFHEO only includes loans purchased/securitized by Fannie/Freddie, whose share of the purchase mortgage market in some regions was really low in many areas.
In re the national index, OFHEO uses weights based on household counts from the 2000 Census, while SPCS uses estimated market value weights from the 2000 Census.
Net, the SPCS is a boatload better than the OFHEO index, and using the OFEHO index underestimated the gain in homeowner equity from 2001 to 2005, and has it has since dramatically overstated changes in homeowners equity.
Yes, the Fed uses the OFHEO index, and yes they know it is horribly flawed.
BTW: neither index includes condo valuations which over the last year have fallen by more than prices of SF detached homes -- especially in FL but also in other key states.
The fact that OFHEO data basically excludes the bubble markets is critical.
Pretty much half of the total value of housing in the US is concentrated along the coasts, and the huge price gains in those areas were all driven by toxic lending.
Once you bring bubble market prices back in line with those representative of sane lending then there will be no equity left, period.
I'm curious about the geographic distribution of MEW. I would venture that bubble market homeowners were heavily overrepresented in this group, too. Anyone have data?
I would like to point out that in an era during which appraisals, especially refi appraisals, were overwhelmingly inflated, OFHEO's indexes are particularly flawed.
In support of that comment, I offer some real live evidence. Page 7 of this Fannie Mae credit supplement shows that from 2005 to 2007, REO sales price/unpaid principal decreased from 93% to 86%, in other words the deficiency doubled from 7% to 14%.
I think you all will find the chart on that page interesting as well. FNMA's internal HP chart does not agree with the Fed numbers.
The OFHEO index does seem abnormally high, and quite possibly by a lot. I can only speculate that the index derives from the banks' mark-to-model valuations. As in, 2005 valuations.
Anecdotal case in point, each month my mortgage statement includes home equity loan offer based on LTV figures that imply a V of around $510K. I never gave it any thought til now, but when I looked back at the statements I saw that this valuation HAS STILL NOT TURNED DOWNWARD! I'm settled for the long-term, but if somebody came to my door with a check for $420K, I can assure you I'd be out by Wednesday. And if I needed to sell, I'd be lucky to get $385. But the bank is still saying it's worth 33 percent more!! That's how overblown these model valuations have gotten.
Here is a shocking thought- what if the worst damage is in the nonconforming jumbo stuff?
Realistically, a house in Phoenix ain't worth twice the house in Chicago unless the jobs pay twice as much (ceteris paribus, taxes, cola, etc.) So Phoenix will adjust back towards the carrying ability of the workforce.
The wealth differentials will equalize, but I don't think the national housing index will crash- maybe just settle to 160-175 range while the inflation that is shoving through the raw goods system jacks up the price of replacement housing. Price a new ac/heating unit lately? Funny, the price doesn't match ten years ago.
So now we can just live with a dead housing market, and creeping cost of living inflation. Your next housing bubble is scheduled for roughly 25 years, after that pesky boomer overhead is cleared off. I predict that a lot of McMansions will not be worth what was paid for them in terms of real money, but in inflated dollar- which match the debt owned on them- they will do fine over ten years.
Flip the lenses around to see different perspectives, and what might be seen is illuminating.
OT - I was re-reading CNN/Money's coverage of Goldman's Jan Hatzius prediction of $2 Trillion in lending being possibly cut and was struck by the following - Seems there is leverage on handing out leverage due to having to maintain lending capitalization ratios. To the engineer in me, who is admittedly a novice when it comes to banking, this seems to be a nasty exponential slope likely to severely magnify the effects of a credit crunch. Particularly if lending institutions have to start dedicating more and more reserves to cover potential bad loan loses. I suspect, if true, the rising lending standards will soon get draconian. However, I seem to recall reading an article recently about the Fed allowing several of the larger institutions (Citi) to blow through these capitalization ratios (by allowing cash to be invested in troubled but not banking/FDIC related subsidiaries) in August's liquidity crunch and with the SIV/ABCP crisis. Does anyone (MOM, FFDIC, Tanta, etc.) have a better read on what's going on or am I just repeating MSM rumors again?
"A $400 billion loss is equal to just about 2.5 percent of U.S. stock market capitalization - or a bad day on Wall Street... But most stock investors don't react aggressively to capital losses the way banks and other lenders do. A bank that aims to maintain a capital ratio of 10 percent would need to shrink its balance sheet by $10 for every $1 in credit losses, the note said.
That means that if lenders end up suffering just half of the $400 billion in potential credit losses, they could be forced to reduce the amount they loan by $2 trillion. Such a drastic credit crunch could have dire consequences for the economy."
Bear in mind, Andrew, that Hatzius is the mouthpiece for the firm whose CEO openly professed to being short the mortgage market last week. Not saying he's wrong, just saying we might want to apply the same level of skepticism to certain sources on the bearish side that we did to the bullish homebuilders a couple summers ago. Pump and dump can work the other way too.
Iran gets over 85 pct oil income in non-US currencies.
The bigger question is how other OPEC members will follow their lead besides Venezuela.
The petrodollar is getting closer to life support so when Paulsen says the US will maintain a strong US dollar policy I simply have to ask what the hell is this guy smoking ?
The one really obvious retort to people who see available home equity as a bottomless pit of consumer spending is to ask why in the very deep recession of the early 1980s, when owners' equity was even higher, didn't it help aleviate the pain?
For the same reason it didn't help in the 1930s, the people who could borrow against their homes in a downturn are precisely the ones who don't need to.
That's why I'm askin' Mike. I got a sharp reminder on the value of skepticism of what you read in the media with Tanta's well researched post on Fortune's recent Fannie Mae articles.
However, I was also remembering what our host, CR, said in regards to credit crunches generally being due not to rising interest rates but rising lending standards (i.e., the nothing's worse than a reformed sinner effect). This sort of negative info can have an effect, even if only causes an increased level of lending standards due to lending institutions having to defend their integrity in the public's and financial market's view (and not due to an actual pull back due to weak capitalization ratios).
Here is a shocking thought- what if the worst damage is in the nonconforming jumbo stuff?
Allenm, how can it not be?
10% loss on $100K is only $10K -- hardly worth the loan fees. OTOH, 10% loss on $600K (~CA bubble median) is $60K, and we know where all the "equity locusts" came from.
OFHEO should be showing larger declines than C/S if prices in Jumbo Land are holding up better than the lower priced conforming loans in Ginnieton and Freddyville. OFHEO only samples conforming (correct?) so if Jumbo Land goes unsampled by OFHEO and is sampled by C/S why is OFHEO estimates of values holding up better than C/S?
Is it possible that contrary to what the anecdotal stories we read, Jumbo Land is actually sicker than the mid-priced cohorts? That would be consistent with a more rapidly falling C/S (sampling Jumbo) and a more sluggish OFHEO (not sampling JUMBO)... Since both sample conforming.
Something weird is going on with those curves and I'm not certain what it is.
It's in the ability to NOT pay the current rent. Anyone that's owned a house for more than ten years understands the concept.
Broward Horne you are paying rent in the form of taxes on a depreciating assert which must be maintained and insured. Try not paying the taxes and let us know how it works out for you.
In your analogy a car that is paid for must represents wealth if it is paid for because one doesn't have to make a car payment despite the fact that it to has to be maintained, insured and have taxes paid on it.
You may be saving money by not having to pay rent, but a home is a liability not an asset. A rental property that produces income after all expenses is an asset and the path to wealth.
"you are paying rent in the form of taxes on a depreciating assert"
The current tax rate doesn't equal the amount being saved on rent. what exactly do you think is going on, then?
The function of debt is the transferrence of future income from the next generation and that's accomplished by rising real estate costs via increased borrowing.
This is all pretty basic stuff, I could argue with links if I really cared (which I don't).
The people who have lived in areas like Los Angeles, Chicago for long periods are earning the average income but paying below average rent to live there, ergo they're making a net profit on owning the house beyond the capital gains costs, a CASH FLOW profit.
I'm sorry if you don't understand this, if you haven't lived and seen it like I have but I don't care enough to argue over something which seems self-evident.
House has been paid off over 10 years so I don't pay diddly for interest or rent. I don't pay for the outlandish premiums the insurance companies charge. Do my own maintenance. My yearly taxes are less the the cost to buy a Starbucks (if I did) on the way to work each morning.
Too much risk to sell and reinvest while interest are rates going to zero. There are no guarantees that any investment will return squat.
your analogy a car that is paid for must represents wealth if it is paid for because one doesn't have to make a car payment despite the fact that it to has to be maintained, insured and have taxes paid on it.
I knew leasing a new car every three years was cheaper. (I am a housing bear)
I wouldn't disagree that this is a credit crunch, but I wonder if the perspective that "homeowners may have equity but they can't tap the ATM anymore" isn't more than a little bit too negative?
*** asbestos suit ***
In past credit crunches I've experienced (Oilpatch mid-80s, commercial real estate early 90s), it was quite true that lenders had NPAs rising so rapidly that in the aggregate, capital was clobbered so hard that highly credit-worthy borrowers in the tainted sector had a very difficult time keeping the credit they had rolling, much less getting more credit above what they already had on their books.
The current environment in residential real estate, for now, really is different -- if you have a lot of equity in your house, and you have a handsome 1040 and a decent credit history, you can Refi without much trouble -- and you might even get a good/great rate going forward, if the ten year treasury yield keeps spiraling down into the high 3's.
There's no question but that the gross value of the asset itself is not going up anywhere in the country, and in nearly all markets homeprices are going to decline. And in the worst markets, home prices will almost certainly decline precipitously.
That said, I do not think that the ATM has been turned off and I don't think the evidence supports that notion. Good quality borrowers have no problem getting loans at the moment, and the data support that.
So, IMHO and in the interest of balance, the ATM spigot has been reduced from a firehose gushing liquidity all over creation back to the sedate, conservative garden hose of the 60's and 70's and 80's that many of us grew up with.
Pretty much half of the total value of housing in the US is concentrated along the coasts, and the huge price gains in those areas were all driven by toxic lending.
I've heard the number is more like 60% of housing value is concentrated along the coasts - specifically The NE Corridor from Boston to DC, Florida and So Cal & Bay Area. There is a lot of people & expensive property in those areas... in between, not so much.
The bigger question is how other OPEC members will follow their lead besides Venezuela.
They have always taken other currencies - OPEC countries will write delivery contracts in whatever currency you want to give them just as long as it is readily convertible to dollars, yen, euros, gold.
The posted target price is in dollars but they do the arbitrage conversion instantly in just about any other currency... just takes mouse clicks to move in and out of dollars, yen, euros - whatever.
The important question is will they continue to hold dollar reserves or diversify out of dollars into a basket. I vote for basket - and it's been overdue for a long time.
Is the government lying "duh". Do we all know they are lying yes. However if they told the real truth it would be similar to yelling fire in a crowded building. As long as they can keep the sheeple fooled it will be orderly. When that is no longer possible I hope I am out of the country for a few weeks.
Anarchus, I agree with you regarding availability of credit. I got an unsolicited offer of a large equity line at prime-.75 from my bank a month ago. Of course I declined it, but that's the point.
For the economy as a whole, reversion to the "sedate, conservative garden hose" of yesteryear will not help in the short run, because it means granting credit to those who need it and spend it least. Against the backdrop of recent history, that does seem like a credit crunch. In the long run, of course, we'll be better off with the garden hose. but the transition will be painful for many.
"You may be saving money by not having to pay rent, but a home is a liability not an asset. A rental property that produces income after all expenses is an asset and the path to wealth."
Hmph. We bought in 91 and paid our house off ten years later. Our property taxes now work out to $250 a month, homeowners insurance about $60. Let's just say over time that maintenance averages $250 a month, spreading out the cost of painting, new roof, repairs, etc. Our total cost to occupy is $560 a month estimated, versus $1700 minimum to rent the equivalent around here. And good rentals are hard to find.
Our household income has decreased by 50 percent over the last five years because of reverses on the career front. But we still live comfortably, and even still put money away, in large part because of that grand a month we don't have to spend.
I don't know what your opinion is based on, but a paid-off house that you occupy in a high-rent area is an asset, a major producer of "shadow income." It may be an asset that requires maintenance, but what doesn't?
That said, I'm a big believer in income property. Just.... not right now.
Andrew ...if lending institutions have to start dedicating more and more reserves to cover potential bad loan loses. I suspect, if true, the rising lending standards will soon get draconian. However, I seem to recall reading an article recently about the Fed allowing several of the larger institutions (Citi) to blow through these capitalization ratios (by allowing cash to be invested in troubled but not banking/FDIC related subsidiaries) in August's liquidity crunch and with the SIV/ABCP crisis.
The big institutions are still going to have to withdraw money that would have been lent to cover their losses. The exemptions to which you refer relate not to overall capitalization but to the percent of investment in affiliates. The leverage involved in lending is why credit contractions have such fearsome ripple effects.
As for an example of real tightening in lending standards, see
Tanta's earlier post on the Fannie March revision. In July Fannie imposed higher LLPs, then in October another revision, and there is one already scheduled for December. March will be the fourth. Each of these moves have been progressive in scope so as to limit more and more lending. And believe me, when Fannie does it many institutions will have to follow. For one thing, you really can't expect Fannie to bail you out any more.
Over about the last 40 days the real tightening set in. Also there is more and more scrutiny with regard to appraisals, which are the major factor allowing a lot of excess equity extraction.
But it's more than that. CC standards and rates are going up. The ability of the average consumer to draw on credit is being whittled down. It's impossible for this not to have a big effect on consumer spending over time.
There is a parallel development going on in commercial lending. Terms and costs there had become very lax, and they are now tightening and becoming more expensive.
dryfly said: OFHEO should be showing larger declines than C/S if prices in Jumbo Land are holding up better than the lower priced conforming loans in Ginnieton and Freddyville.
A partial explanation may be that in Ca and Ma, the low end is in Jumbo Land. Even though the low end seems to be falling faster in SF Bay Area, it doesn't show up in OFHEO since it's still more than conforming limits.
Skewed - one of the paradoxes of credit crunches are that truly good lending prospects become more valuable. A bank has to lend in order to maintain its deposit base. Those accounts cost money to service, and when you are paying interest you have to be able to cover the costs of servicing plus the interest on deposits. So the search for individuals and companies that are truly creditworthy is on, and that is why rates for those individuals aren't going to rise much. They may even fall.
What goes up sharply is the cost of credit to less creditworthy prospects. Therefore even during a credit crunch, individuals and companies who are secure financially can usually get credit. It's the businesses and individuals who really need credit to continue their current operations or current lifestyles who get chopped off (usually).
"By raising rates further China could have risked boosting the value of its currency, the yuan, too much for the comfort of the country's powerful exporters, the lifeblood of its economy. A stronger yuan would make Chinese exports less competitive in world markets".
Yes I agree that the Chinese would rather economically 'waterboard' Bush, Cheney. Paulson, Bernanke and the rest of the asshat Bushco administration.
Skewed, I think we more-or-less agree, though I'd argue that there's a measurable difference between the hard credit crunches of energy in the 80s and commercial real estate in the early 90s and the kinder, gentler credit crunch of the present.
It's also certainly possible that by this time next year FNM and FRE have NPA rates up around 12-16 bp rather than 8-10 bp, and in that case we may very well have a near-contraction in credit. But we're not there now, and we're nowhere close to that yet.
Off topic, I'll admit, but I thought this WSJ article on Peak Oil was interesting:
Interesting for two reasons: (1) up until this point, "peak oil" articles have practically laughed out loud at the idea and this one manages to laugh out loud at peak oil believers but acknowledges that we may never get much over 100 mbl/day, and (2) the data in the article pretty clearly supports peak oil of closer to 90 mbl/day than 100 mbl/day, but the authors are oblivious to the mathematics.
Let's see, current oil production is around 86 mbl/day and global capacity is maybe 90 mbl/day (but most of the unused 4 mbl/day is very heavy or really sour crude). If depletion is 4%+ per year (and everyone agrees it is), then you need about 3 mbl/day of new production every year just to stay even.
The Saudi's, our last best hope, are investing very roughly $50 billion+ to increase production capacity by 30% or 3 mbl/day by early in the next decade. Which is great, but that only takes care of aggregate depletion in '08. We still need 3 mbl/day of new production to offset depletion in '09, '10 and '11 (which is about when the full amount of the Saudi investment comes on line).
ANWR, even if it started up at max production instantaneously, which is impossible, gets us all of 0.6 mbl/day. OK, let's consider Oil Sands. Exxon/Mobil put out their annual global long-term outlook a few weeks back, and they have Oil Sands production rising from around 1 mbl/day presently to 4 mbl/day BY 2030. Helpful at the margin, but still pretty marginal - and I won't mention that recent cost overruns have been dramatic, that without a nuclear reactor or two on-site that processing Oil Sands is extremely environmentally ugly and that even done right the initial quality of the "crude" is downright crude.
Using data from the article itself, you cannot get there from here, and the reporters are clueless.
Last but not least, a passing grade in freshman composition at most accredited universities requires students to understand that freestanding conclusions unsupported by facts constitute malpractice: "Traditional peak-oil theorists, many of whom are industry outsiders or retired geologists, have argued that global oil production will soon peak and enter an irreversible decline because nearly half the available oil in the world has been pumped. They've been proved wrong so of
Anarcus, "Good quality borrowers have no problem getting loans at the moment, and the data support that"
I will agree with you that AT THE MOMENT credit is still available for the right customers at the right price. But as quickly as the liquidity faucet got clamped shut on higher risk borrowers it will get squeezed shut on good credit quality borrowers too. Just wait until lenders start getting those nasty notes from regulators, next year, forcing them to shore up reserves as NPAs rocket higher as they face a solvency crisis. Lending money against rapidly depreciating collateral will be the last thing they will be concentrating on.
FFDIC- I called, GM said she forwarded them to you. She also muttered something under her breath about bitter old Texans. I don't know what she was talking about, do you?
You keep posting articles that use logic and bankers are liable to panic.
By the way, I mean that literally.
Liable: Legally obligated Panic: Finance. a sudden widespread fear concerning financial affairs leading to credit contraction and widespread sale of securities at depressed prices in an effort to acquire cash.
Recall how recently what was the hypothetical is now the base case - I suspect the current round of tightening has only begun after the 'fog a mirror' lending frenzy that has just abated - only time will tell on that score.
Peak Oil is a basic physics problem writ large, some excellent technical work on that subject can be found at The Oil Drum.
Stuff is worth what people will pay for it, and that means what they are able to pay, not simply what they might want to pay.
I've always felt that the price outrunning the market is the fundamental issue in this housing bubble, not credit problems. You can't claim that you sit on 'x' trillions of equity if the market cannot pay you that much. This is exactly the same as the 'mark to myth' problems the banks are now discovering.
In the asset value equation, you rightly touched on the price change variable, but what about the assets added variable? If we are still running up new home starts at over 1 mil a year rate, are all of these just going into asset values? One problem is, a lot of them are sitting unsold - do these get counted or only the ones that sell? And what about the new home sales prices which are not only heavily discounted - there is the issue of incentives that dont get reflected in values.
I just have a feeling that the actual value for assets is lower still than what we'd think after any simple OFHEO price adjustment you'd make.
Yep, thanks EE -- I've been a regular lurker at The Oil Drum, and James Hamilton at econbrowser is also a good read to capture the more mainstream economics view.
I took a class in engineering geology from Dr. H.C. Clarke at Rice in the late 1970s that covered Hubbert in pretty good detail - Clarke had been a student of Hubbert's at Stanford sometime in the 60's or early 70's. As you know, in 1958 Hubbert pretty much correctly forecast that the peak in lower 48 production would hit in 1972, and of course even with the North Slope production the second local peak in US production was well below the earlier 1972 peak.
There's certainly rabid crazy end of the world believers in peak oil who sometimes make no sense, but to my mind all peak oil says is that when you get close to producing half the oil you've found, it gets very difficult, maybe even mathematically impossible to achieve further meaningful increases in production. What's so crazy about that?
More importantly, even after oil has "peaked", there's no reason that the decline HAS TO BE abrupt - in fact, I think we'll probably be stuck around 90 mbl/day of production for quite a while - maybe 5-7 years, and maybe after that, without any astonishing technological breakthroughs, production may start to decline at a rate that becomes unmanageable.
The problem, of course, is that the rapid industrialization and auto-building booms in China and India mean that global demand for crude oil wants to increase at 1-3 mbl/day, and from where we are currently at 86 mbl/day of decent quality production and another 4 mbl/day of garbage production (gross oversimplification, but not inaccurate) I just don't see how we're going to keep the price of oil under $120+++ coming out of the next recession.
you pose good questions. I think you are seeing both, ie a reaction to cap ratios and the realization that they are now having to pay a "penalty" in the capital markets which will very likely cause an over reaction on the tightening side in order to restore confidence. This is the reaction that is being missed by many economists in the projection of future growth or lack thereof.
My contention, as opposed to relying on the MSM would be to research recently publically disclosed debt offerings and the rates being paid by the financial institutions.
A question that I ponder lately, is what portion of the Treasury market is a "fear element" and what portion is a reaction to a dramatically slowing/recessionary economy?
Some suggest that we are in deep trouble, I say define trouble. Tough period, yes, more? At this point, I think not.
can one of u techies tell me how to go back and capture a Bloomberg article that has already been taken down on their website from earlier today? can i go back into my cache?
It's getting exciting now, 2 and 1/2. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium.
Is this story true?? I just heard Kundlow on live radio saying it's total bullcrap.
Kudlow doesn't know squat - neither do we. Hell the folks in the Politburo probably don't know... and if they got the memo would they heed the order unless some of their fellow cronies were hauled out and publicly shot (like their equivalent of the FDA guy).
But it is so typically (Red) Chinese - do nothing, do nothing, do nothing... KA BOOM, do it all and more at once.
The guys I work with doing business in China are a hoot to go drinking with, the stories they tell even if half true...
idoc - Try Google's cache first, then try search for a string inside a file in the c:/Documents and Settings/yourusername folder on your comp. Local caches tend to get overwritten fairly often, unfortunately.
Yeah, I know... I agree Kudlow is full of crap, BUT... He was really adamant that this story was untrue, and I don't see any reason for him to refute it so strongly unless he was certain that it's not.
AND... Yeah, the Chicoms have a penchant for this sort of crazy crap.
Am I mistaken in assuming this is kind of a big deal as far as global economies are concerned? It's kind of the ultimate credit siezure, is it not??
The story is still top-of-the-fold at WSJ last I looked. (minutes ago).
Maybe I'm missing something here, but all the reaction about the differences between OFHEO and Case-Shiller has been focussed on Jumbo loans.
Surely there are non-conforming loans below the conforming limit; isn't that what Subprime is all about?
So does that mean the OFHEO numbers don't reflect price changes where the house was bought with a Subprime loan either? If so, it seems to me that it could be a poor index for the 2005-06 period where the Subprime percentage was very high.
Yeah, I know... I agree Kudlow is full of crap, BUT... He was really adamant that this story was untrue, and I don't see any reason for him to refute it so strongly unless he was certain that it's not.
I'm not saying he's right or wrong I'm sayin' he doesn't know - no one knows except the very inner circle and if they said it even they don't know if it will stick without shooting some of their friends.
Deals get done in China the way they got done in Imperial times... by who you know & how well you 'favor them'. So are the inner circle gonna shoot some of their local bosses over this? They might have to if they want it to REALLY stick.
Old Chinese saying... "The mountains are high and the Emperor is far away."
Nothing much has changed since that phrase was first spoken. Kudlow needs to just soak that one in a bit and watch.
Am I mistaken in assuming this is kind of a big deal as far as global economies are concerned? It's kind of the ultimate credit siezure, is it not??
If it sticks & no exceptions then yes it will have an effect - however, it is almost Black Friday. Next year isn't that far off... There is a lot of money sloshing around China. Maybe they want some of that hot money to find a home (and send a message simultaneously).
Then again it could be an opportunity for exceptions galore and the local party bosses get to hand them out and be the good guys... think of them as 'party favors' like at a kids birthday party. A way for the inner ring to help their local bosses cement power considering some of the current unrest?
Who knows?
I'll believe (and simultaneously disbelieve) it when I see it...
...but for some reason not ha-ha funny. I wonder why not?
I'm determined to make you laugh. You'd prefer funny with reason?
funny: warranting suspicion; deceitful; underhanded: We thought there was something funny about those extra charges. with reason: with justification; properly: The government is concerned about the latest crisis, and with reason.
Thanks for doing the legwork on this CR---I knew immediately that this article and data were flawed but didn't have the expertise or background to understand exactly why.
It's similar to the excellent work Barry Ritholtz does on the horrible inflation numbers BLS puts out.
I would like to point out that Harney has done some good work over the years on many mortgage related issues.
It is just in this case that like too many people, he relied on a government generated statistic without understanding the serious methodological flaws.
Here is a shocking thought- what if the worst damage is in the nonconforming jumbo stuff?
Allenm, how can it not be?
10% loss on $100K is only $10K -- hardly worth the loan fees. OTOH, 10% loss on $600K (~CA bubble median) is $60K, and we know where all the "equity locusts" came from.
tj & the bear | 11.18.07 - 7:01 pm
This has been my 4 yr fear here in DC MSA. I watch NOW w/ David Bronconchio on Friday night talking w/; congressmen Ellis and they are walking through minority 'hoods where poor HO's bought 2 and 3 homes that may be 100K tops...crappy low income hoods..
These are the current problem reflected on, while the real damage will/is coming in the coast areas where there are no houses being FC on under the 417K because you couldn't BUY one for under 417K...
All homes here in this area were >417, ALT-A. There were a few more moral HB's that used their on site lenders to offer 40/50/60 yr fixed to minorities ..
In Indian Head MD white security guard for Lenner burns down minorities homes cause everyday he sees "them" getting 50 /60 yr fixed or no money , 0 interst arms...and "whites" not...
Iran gets over 85 pct oil income in non-US currencies.
The bigger question is how other OPEC members will follow their lead besides Venezuela.
It's a complete non-issue. All major currencies are freely convertible.
There is no functional difference between the Saudis selling at a USD price, and changing the proceeds to Euros (which may just be a ledger operation without any actual USD changing hands at all), and just selling for Euros in the first place.
The Venezuelans and Iranians are pumping this because it's a way to annoy the Americans without actually doing anything concrete.
Oh one more thing - it does matter a lot how much USD debt the Saudis and other OPEC members choose to hold, but that's a completely different issue. The Chinese hold a lot of USD debt too, and they don't export any oil (except to the North Koreans).
Could you elaborate on how the Fed determines the market value of residental real-estate in the B.100 table of the flow of funds report?
All the data isn't publicly available, and the calculation is very complicated, but here is a simple formula:
Assets (Q2) = Assets (Q1) * PriceChange (Q2) + Assets Added (New Homes, Home improvement) - Assets Subtracted (demolished, damaged, etc.)</i>
The above formula I understand. What I don't understand is where does the Fed get the information for the 4 items on the right side of the equation. How do they know how much was demolished, damaged, etc. Surely someone from the Fed doesn't walk around the country looking at every single house/condo and making their own estimate of these items?
CR, now we're getting somewhere. Conjure Bag's eyes just narrowed to little slits as he finished reading, then lit another cigar.
"Data, more data," he's saying.
Sorry if I'm way off-base, but I wonder whether we have large-value properties masking what is happening
with small-value.
Say we have one 10-million house that loses 0.2 million dollars in value and 20 million-dollar houses that each lose 0.1 million. In the aggregate, we have a loss of 2.2 million (7 percent), but there are a lot of people who have lost 10 percent.
Fred, unfortunately not all of this data is publicly available - and even the data that is available is complicated.
The Fed has estimates of all of the above inputs by geographical region: price changes, new homes, home improvement, houses demolished, etc. I know where they get some of the esiimates (like Census Bureau and BEA for home improvement), but I don't know where they get all the data.
The key here is it appears they are using price changes based on OFHEO or something similar.
Best Wishes.
This is important because it appears the Fed uses the OFHEO index (or something similar) to calculate changes in household real estate asset value. If the Case-Shiller index is more representative of recent price changes, then the Fed actually underestimated the recent increase in household real estate assets!
Holy Buckets CR... I've always suspected the OFHEO curve was 'damped' but that chart you posted all but proves it. Looks almost like a 'moving average' of previous price history. I guess we'll be having some real fun when some of the Case-Shiller plots cross the OFHEO curve. I think the techs call that a 'support point', yes/no? Not a tech so I plead stooopid on this stuff...
Anyway 0 the one think missing from the whole 'we got wealth' meme is you don't pay your bills with wealth - you pay it with case derived from income or monetization of wealth... and in a period of tight credit option two is questionable.
Its like the people who write these articles & do the analysis don't live in the real world or something. Oh well back to doing laundry...
Let's try that again...
Anyway the one thing missing from the whole 'we got wealth' meme is you don't pay your bills with wealth - you pay it with cash derived from income or monetization of wealth... and in a period of tight credit, option two is questionable.
Now back to laundry...
Alas, "price change" is bogus because in the current environment, only the most desirable properties are changing hands, and the people trying to sell the others are still in denial, either refusing to cut their prices enough to sell, or taking their homes off the market and trying to rent them (almost invariably at asking rents no one will pay).
All of this is going to occur on the margins, where it always does. I'm happy for the taxi driver, but he bought in 2001, not 2005, and it is that vintage and later that is going to bind up the system.
I figured that the numbers were a little circumspect. This story was printed in the LA Times Real Estate (in other words, Advertising) section this morning.
the main reason for price "dampening" in these series is that, as jm noted, the properties with the biggest declines are the properties that are the slowest to transact (but they eventually will). This affects the Case-Shiller and OFHEO indices equally.
My money is on the idea that the main difference between OFHEO and Case-Shiller is that prices are falling the fastest in areas full of subprime loans. Think Sacramento-Modesto-Visalia, Inland Empire, etc. Case-Shiller would pick these up, and OFHEO wouldn't. Geographic coverage wouldn't explain the difference. I recall (but don't have the link) that for the Case-Shiller national index, they just plug in OFHEO numbers for the states that they don't cover. So state by state that wouldn't explain any difference. For rural parts of states with partial coverage, you could get some difference, but the rural parts are, almost by definition, too small to explain much. Jumbo wouldn't explain much - if you look at the Case-Shiller graphs for the metro areas that are broken out by house price, it is usually not the case that the most expensive houses are falling the fastest. I'm pretty much left with the subprime explanation as the only one, and an interesting one it would be.
With the daily bad news about the state of the housing market, it's easy to lose sight of some larger economic realities: Despite declining prices in many markets, homeowners still control near-record equity holdings, just under $11 trillion.
Likewise owners of dot.com stocks still had huge amounts of equity in April 2000 despite the recent power slide.
Both these claims ignore the essential fact that this wealth is not real. It is a market illusion that was created when genuinely wealthy individuals momentarily lost their minds and loaned their wealth to people who had no capacity to pay it back.
Now they know better.
Everybody is gradually waking up to the reality that there is no way this housing wealth can be realized in terms of actual goods or services.
On paper everybody can have 100 houses, 100 cars, and 100 tons of gold.
The problems start when people begin trying to convert these paper claims into real assets, which they inevitably do.
Every bubble in history has burst because every claim on wealth that does not exist is ultimately found out.
The question is only one of how long it takes.
Totally OT
AP
OPEC to Study Effect of Dollar on Prices
Sunday November 18, 12:54 pm ET
By Sebastian Abbot, Associated Press Writer
Iranian Oil Minister Says OPEC Will Study Effect of Weak Dollar, Possible Currency Basket
RIYADH, Saudi Arabia (AP) -- OPEC will study the weak U.S. dollar's effect on the oil cartel's earnings and investigate the possibility of a currency basket, Iran's oil minister said Sunday.
Expired
Everybody is gradually waking up to the reality that there is no way this housing wealth can be realized in terms of actual goods or services.
Oh by the way, let me just clarify that this doesn't apply to my local housing market due to the large influx of illegal aliens and people moving in from farther south to escape the ravages of global warming.
Thought this was a nice summary from McCulley at PIMCO:
"Ive taken to calling the 2004-2006 vintages of limited or no document, no down payment, negative amortization (pay-option) subprime ARM loans as not loans at all, but rather free, at-the-money call and put options on property prices. Not exactly free, to be sure, as the putative borrower was obligated to pay something in cash interest, even if not the full amount, with the unpaid amount being added to the principal.
"But as a practical matter, the options were essentially free. If home prices went up, the putative 'borrower' would stay current, as the call went into the money, refinancing before the ARM reset, essentially re-striking the option exercise price higher. Simply stated, the borrower wouldnt default, as logical people do not walk away from in-the-money call options.
"And they didnt, until about a year ago. As a consequence, default rates on pools of such subprime loans came in amazingly low, soothing rating agencies nerves and re-enforcing the shadow banking systems appetite for securitized pools of them.
"But if house prices didnt rise, the call option would fall out of the money, and the put option the right to default on the full principal value of the loan would go into the money. Indeed, house prices didnt have to fall, but simply not rise for this outcome to unfold, given negative amortization. In which case, the putative borrower would no longer have any incentive to stay current: Why throw good money after bad for an at-the-money call option that you got for free, which has gone out of the money?
"And so it came to pass about a year ago, when early-payment defaults became a new phrase in our collective lexicon. The home price bubble popped, the at-the-money call options went out of the money, the at-the-money put options went into the money, and the holders of them remembered the wisdom of Paul Simons 1975 treatise on 50 ways to leave a bad situation:
You just slip out the back, Jack
Make a new plan, Stan
You dont need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You dont need to discuss much
Just drop off the key, Lee
And get yourself free
"And with Jack, Stan, Roy, Gus and Lee setting themselves free, the shadow banking system was revealed to be caught between the longing for love and the struggle for the legal tender, living life as Jackson Brownes Pretender, ships bearing their dreams sailing out of sight, with the junkman pounding their fenders."
Northern Rock bailout goes further:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/11/18/cnrock118.xml
"Both these claims ignore the essential fact that this wealth is not real. It is a market illusion that was created when genuinely wealthy individuals momentarily lost their minds and loaned their wealth to people who had no capacity to pay it back."
I would argue that those so called genuinely wealthy individuals needs only $100,000 to make a loan of $1 million.
Someone else need only $10,000 to lend those wealthy individual $100,000.
Someone else need only $1,000 to lend $10,000.
etc... That's called
Fractional-reserve banking - Wikipedia, the free encyclopedia
When the bubble burst, all lenders in this food-chain will default.
Thus the $11 Trillion is only virtual money. The people who where lucky enough to convert it to cash before the burst is the lucky winner of the game called greed-debt-production (aka GDP)
Thanks for the crisp McCulley view albrt.
Hard to believe that there is a contest between the OFHEO and the purpose built Case-Shiller index.
Do you want this OFHEO stick to feel the nature of the beast you nearly blind people, or this special instrument crafted to measure house price changes --prescription glasses?
All these words and numbers, and nobody has said that the Harney article lacks credibility because its premise is flawed:
"With the daily bad news about the state of the housing market, it's easy to lose sight of some larger economic realities: Despite declining prices in many markets, homeowners still control near-record equity holdings, just under $11 trillion."
You're all debating whether or not there's actually $11 trillion of home equity in America. You should be focusing on the assertion that homeowners "control" all equity.
They don't. If the equity was in money market funds instead of home equity, they would control it. But you can't control what you don't have and can't get.
CR, stop and get real. Talk about the portion of home equity that homeowners actually CONTROL. Thanks.
I would argue that those so called genuinely wealthy individuals needs only $100,000 to make a loan of $1 million.
Someone else need only $10,000 to lend those wealthy individual $100,000.
Someone else need only $1,000 to lend $10,000.
Pieces of paper or digits in a computer are not wealth.
The wealth of these individuals is fundamentally related to the integrity of the obligations this paper represents.
When central banks print excessive money these obligations dissolve and the "wealth" is lost.
What the Fed is really worried about is that these obligations will systematically intensify and create a sort of financial enslavement that will cripple the economy. This is called "deflation".
The question becomes one of which outcome is worse - the dissolution or intensification of these claims and obligations.
" there is no way this housing wealth can be realized in terms of actual goods or services"
That's not exactly true. There's a translation of housing wealth into goods & services simply by holding a constant housing cost in the face of increasing costs, because increasing costs are eventually reflected in salary.
This is all you need to know :
"OFHEOs sales price data include only homes that have conforming mortgages"
So basically, in all the bubble markets with high prices (eg. most of California) OFHEO price index captures zero of the downward price spiral.
So what happened over the past few years as places like this went from 1/2 conforming to almost no conforming? First OFHEO captures the massive runup, then it drops out sales the past few years (as if CA was slowly disappearing?) and doesnt register the downturn?
==========================
They don't. If the equity was in money market funds instead of home equity, they would control it. But you can't control what you don't have and can't get.
rich, can you explain that further ? I don't understand. To my mind, we are talking equity ( not total value of home ) and though its illiquid and thus there a cost to liquifying it ( house sale cost, reverse mortgage rates or home equity loan rates ) its still something you control.
-K
"Both these claims ignore the essential fact that this wealth is not real."
Sort of like mark-to-model, yes?
OT - notice how Starbuck's web traffic has a blow spike almost exactly in line with the Homebuild stock crash in April, 2006.
starbucks.com - Site Info from Alexa
That's not exactly true. There's a translation of housing wealth into goods & services simply by holding a constant housing cost in the face of increasing costs, because increasing costs are eventually reflected in salary.
Where is this wealth, specifically?
You are speaking in financial terms. You are talking about information stores that are merely proxies for real wealth.
I want to know where this real wealth is that has supposedly been created.
I want to see it. This is not about words or numbers or definitions or beliefs.
@ Broward Horn
Interesting OT Starbucks link.
Can you explain what you mean by
"a blow spike almost exactly in line with the Homebuild stock crash in April, 2006"
S-curves (of growth) have certain measurable characteristics. One of them is the inflection point. There's a strong tendency towards "infinite behavior", re: irrationality at the inflection point because it's rate of change is infinite.
That mindset of irrationality often displays itself as a blowspike right around the inflection point.
Here's a couple of examples...
http://www.realmeme.com/roller/page/realmeme?entry=mono_meme_update_mono_still
Fascinating post.
OFHEO is run by Bush protectors. Don't expect OFHEO to "commit news" as they used to say of Reagan (he never committed news, i.e. never said anything).
I honestly do think it's worthwhile to look at the psychology a little.
The people who have been making out like bandits (just like bandits) and have been filling the coffers of the Republican Party are not repeat NOT going to tell the truth right now. They simply aren't.
Hence, the man in the street is forced to distinguish between lies and the truth in financial reporting.
I believe it was Tanta who said that quite a few months ago everybody realized that the housing market was DOA. Any "statistics" that show it is doing just fine are lies. Case-Shiller closed.
N'est-ce pas?
"Where is this wealth, specifically?"
It's in the ability to NOT pay the current rent.
Anyone that's owned a house for more than ten years understands the concept. 
"Both these claims ignore the essential fact that this wealth is not real."
Sort of like mark-to-model, yes?
It's opaque(half-real/half-inflated) and mark-to-falling-market.
This wealth was more real, until the financial system got too-efficient and eat 64% equity of the borrowers.
Perception is reality.
There's about 36% of equity left of those ATM machines. But because of fear, these ATM machines can't no longer function. Those forclosures are those ATMs that have served 100% capacity and retired.
The wealth of these individuals is fundamentally related to the integrity of the obligations this paper represents.
When central banks print excessive money these obligations dissolve and the "wealth" is lost.
The central banks print excessive bonds, which now costs more than inflation-adjusted face value. Who would buy that debt ? (unless inflatio
In the computing business a pretty commonly used acronym, GIGO, seems to apply in this case wrt the Fed's data and analysis:
Garbage in, Garbage Out
rich, can you explain that further ? I don't understand. To my mind, we are talking equity ( not total value of home ) and though its illiquid and thus there a cost to liquifying it ( house sale cost, reverse mortgage rates or home equity loan rates ) its still something you control.
sk,
I will just tell you about my own situation by way of example. Keep in mind that I live in the one area of the U.S. (Metro NYC) that hasn't yet experienced much equity loss. My house at the very peak of the market might have been worth $1 million, supposedly. Let's say that I had equity of $800,000. Do I control $800,000? No. For starters, nobody will lend me that much. Then, to borrow even, say, $600,000 of that, I would have to get a current appraisal, and I'll bet that's below the peak supposed value. In other areas, it's way below.
But there's more. I don't feel like I control a lot of that equity, because I would feel uncomfortable taking it. I need a cushion of home equity to feel somewhat secure. For every person, it's different. But whatever that cushion is, you really don't control it. It kinda controls you. The more you fear getting deep in debt, the more it controls you.
there's no question that equity holdings have declined recently and may well be lower when the Fed issues its next quarterly report, in mid-December. But in an $11 trillion marketplace, a $6 billion giveback in a cyclical correction is not a cause for panic
This is more mark to model nonsense except it's on a grand scale led by the Federal Reserve. Homeowners equity is based on closing not on projections. When you have paid for all the expenses of the sale minus mortgage balance then we can discuss equity otherwise it is a Disney experience. Also just how is this 11 trillion plus 10.7 trillion of debt going to be rolled over? Who is going to finance this number. I imagine that Paulson and others go around the globe pointing out to our various friends and lenders how this proves the value of their buying agency paper and investing in the growth and development of the USA.
No reason to beat up on Fannie and Freddie for lack of capital and IB and others for mark to model issues when the Gov't and the Federal Reserve t are the leaders in this farce.
"So basically, in all the bubble markets with high prices (eg. most of California) OFHEO price index captures zero of the downward price spiral."
Sheesh. Talk about assuming away the problem. Harney must be taking lessons in economic obtuseness from Bob Samuelson.
Why is it that whenever I read the Washington Post and the New York Times these days I feel like I'm reliving the dying days of the Soviet Union -- from the other side?
Garbage in, Garbage Out
It's sticky on the way down:-)
Geoff - to the extent that existing units are rising past the conforming loan limit effect, OFHEO misses both the run-up and the run-down in California. But the parts of California that seem to be falling the fastest, like the Central Valley, are precisely the parts of California that are not jumbo land, and would be in OFHEO's data. San Diego and LA and especially San Francisco, where almost everything is jumbo, seem to be falling slower. And the top end is falling slower than the bottom end - there was a nice post at Piggington's Econo-Almanac | San Diego Housing Bubble News and Analysis
that should still be on the home page showing this for San Diego.
I try to explain the issue of wealth vs survival in the near future as follows.
Example I gave
You are in the desert, you have food and water.
Theres the other guy who has gold and diamonds.
He offers all / part gold and diamonds for all/part of the food and water.
a) Extreme case 1: You refuse offer, hang on to food and water, other dies , you survive take gold and diamonds as well
b) An intermediate case. Offer half food and water for half gold and diamonds. Half food and water not enough to survive to make it thru desert. Both dead.
Of course this is assuming above transactions are orderly. Its very possible it might not be, i.e break of law and order and mob rules.
There are many differences between the OFHEO index and the SP/Case-Shiller index, and geographic coverage is not the biggest source of the difference.
For one, the OFHEO index includes appraisals from refinance transactions, which caused an understatememnt of HPA a few years ago when rate-term refis dominated, and which has more recently dramatically overstated HPA as cash-out refis have dominated.
For another, OFHEO only includes loans purchased/securitized by Fannie/Freddie, whose share of the purchase mortgage market in some regions was really low in many areas.
In re the national index, OFHEO uses weights based on household counts from the 2000 Census, while SPCS uses estimated market value weights from the 2000 Census.
Net, the SPCS is a boatload better than the OFHEO index, and using the OFEHO index underestimated the gain in homeowner equity from 2001 to 2005, and has it has since dramatically overstated changes in homeowners equity.
Yes, the Fed uses the OFHEO index, and yes they know it is horribly flawed.
BTW: neither index includes condo valuations which over the last year have fallen by more than prices of SF detached homes -- especially in FL but also in other key states.
re : rich and control over equity.
Ahhh, ok thanks for the clarification. Though with a moniker like yours, what have YOU got to worry about ?
-K
Ahhh, ok thanks for the clarification. Though with a moniker like yours, what have YOU got to worry about ?
I always try to be humble and give alms to the poor.
(It's better than giving them money.)
The fact that OFHEO data basically excludes the bubble markets is critical.
Pretty much half of the total value of housing in the US is concentrated along the coasts, and the huge price gains in those areas were all driven by toxic lending.
Once you bring bubble market prices back in line with those representative of sane lending then there will be no equity left, period.
I'm curious about the geographic distribution of MEW. I would venture that bubble market homeowners were heavily overrepresented in this group, too. Anyone have data?
I would like to point out that in an era during which appraisals, especially refi appraisals, were overwhelmingly inflated, OFHEO's indexes are particularly flawed.
In support of that comment, I offer some real live evidence. Page 7 of this Fannie Mae credit supplement shows that from 2005 to 2007, REO sales price/unpaid principal decreased from 93% to 86%, in other words the deficiency doubled from 7% to 14%.
I think you all will find the chart on that page interesting as well. FNMA's internal HP chart does not agree with the Fed numbers.
Yahoo! 404 - Page Not Found
I hear Taps in the background....we are so screwed.
The OFHEO index does seem abnormally high, and quite possibly by a lot. I can only speculate that the index derives from the banks' mark-to-model valuations. As in, 2005 valuations.
Anecdotal case in point, each month my mortgage statement includes home equity loan offer based on LTV figures that imply a V of around $510K. I never gave it any thought til now, but when I looked back at the statements I saw that this valuation HAS STILL NOT TURNED DOWNWARD! I'm settled for the long-term, but if somebody came to my door with a check for $420K, I can assure you I'd be out by Wednesday. And if I needed to sell, I'd be lucky to get $385. But the bank is still saying it's worth 33 percent more!! That's how overblown these model valuations have gotten.
Here is a shocking thought- what if the worst damage is in the nonconforming jumbo stuff?
Realistically, a house in Phoenix ain't worth twice the house in Chicago unless the jobs pay twice as much (ceteris paribus, taxes, cola, etc.) So Phoenix will adjust back towards the carrying ability of the workforce.
The wealth differentials will equalize, but I don't think the national housing index will crash- maybe just settle to 160-175 range while the inflation that is shoving through the raw goods system jacks up the price of replacement housing. Price a new ac/heating unit lately? Funny, the price doesn't match ten years ago.
So now we can just live with a dead housing market, and creeping cost of living inflation. Your next housing bubble is scheduled for roughly 25 years, after that pesky boomer overhead is cleared off. I predict that a lot of McMansions will not be worth what was paid for them in terms of real money, but in inflated dollar- which match the debt owned on them- they will do fine over ten years.
Flip the lenses around to see different perspectives, and what might be seen is illuminating.
Someday this war's gonna end...
OT - I was re-reading CNN/Money's coverage of Goldman's Jan Hatzius prediction of $2 Trillion in lending being possibly cut and was struck by the following - Seems there is leverage on handing out leverage due to having to maintain lending capitalization ratios. To the engineer in me, who is admittedly a novice when it comes to banking, this seems to be a nasty exponential slope likely to severely magnify the effects of a credit crunch. Particularly if lending institutions have to start dedicating more and more reserves to cover potential bad loan loses. I suspect, if true, the rising lending standards will soon get draconian. However, I seem to recall reading an article recently about the Fed allowing several of the larger institutions (Citi) to blow through these capitalization ratios (by allowing cash to be invested in troubled but not banking/FDIC related subsidiaries) in August's liquidity crunch and with the SIV/ABCP crisis. Does anyone (MOM, FFDIC, Tanta, etc.) have a better read on what's going on or am I just repeating MSM rumors again?
"A $400 billion loss is equal to just about 2.5 percent of U.S. stock market capitalization - or a bad day on Wall Street... But most stock investors don't react aggressively to capital losses the way banks and other lenders do. A bank that aims to maintain a capital ratio of 10 percent would need to shrink its balance sheet by $10 for every $1 in credit losses, the note said.
That means that if lenders end up suffering just half of the $400 billion in potential credit losses, they could be forced to reduce the amount they loan by $2 trillion. Such a drastic credit crunch could have dire consequences for the economy."
Economist: $2 trillion lending crunch may be ahead - Nov. 16, 2007
Bear in mind, Andrew, that Hatzius is the mouthpiece for the firm whose CEO openly professed to being short the mortgage market last week. Not saying he's wrong, just saying we might want to apply the same level of skepticism to certain sources on the bearish side that we did to the bullish homebuilders a couple summers ago. Pump and dump can work the other way too.
Iran gets over 85 pct oil income in non-US currencies.
The bigger question is how other OPEC members will follow their lead besides Venezuela.
The petrodollar is getting closer to life support so when Paulsen says the US will maintain a strong US dollar policy I simply have to ask what the hell is this guy smoking ?
The one really obvious retort to people who see available home equity as a bottomless pit of consumer spending is to ask why in the very deep recession of the early 1980s, when owners' equity was even higher, didn't it help aleviate the pain?
For the same reason it didn't help in the 1930s, the people who could borrow against their homes in a downturn are precisely the ones who don't need to.
That's why I'm askin' Mike. I got a sharp reminder on the value of skepticism of what you read in the media with Tanta's well researched post on Fortune's recent Fannie Mae articles.
However, I was also remembering what our host, CR, said in regards to credit crunches generally being due not to rising interest rates but rising lending standards (i.e., the nothing's worse than a reformed sinner effect). This sort of negative info can have an effect, even if only causes an increased level of lending standards due to lending institutions having to defend their integrity in the public's and financial market's view (and not due to an actual pull back due to weak capitalization ratios).
Here is a shocking thought- what if the worst damage is in the nonconforming jumbo stuff?
Allenm, how can it not be?
10% loss on $100K is only $10K -- hardly worth the loan fees. OTOH, 10% loss on $600K (~CA bubble median) is $60K, and we know where all the "equity locusts" came from.
And the top end is falling slower than the bottom end - there was a nice post at Piggington's Econo-Almanac | San Diego Housing Bubble News and Analysis
that should still be on the home page showing this for San Diego.
OFHEO should be showing larger declines than C/S if prices in Jumbo Land are holding up better than the lower priced conforming loans in Ginnieton and Freddyville. OFHEO only samples conforming (correct?) so if Jumbo Land goes unsampled by OFHEO and is sampled by C/S why is OFHEO estimates of values holding up better than C/S?
Is it possible that contrary to what the anecdotal stories we read, Jumbo Land is actually sicker than the mid-priced cohorts? That would be consistent with a more rapidly falling C/S (sampling Jumbo) and a more sluggish OFHEO (not sampling JUMBO)... Since both sample conforming.
Something weird is going on with those curves and I'm not certain what it is.
Allenm, how can it not be?
Allen beat me to it. Good thing we got smart people here or we'd be in trouble.
"Where is this wealth, specifically?"
It's in the ability to NOT pay the current rent.
Anyone that's owned a house for more than ten years understands the concept. 
Broward Horne you are paying rent in the form of taxes on a depreciating assert which must be maintained and insured. Try not paying the taxes and let us know how it works out for you.
In your analogy a car that is paid for must represents wealth if it is paid for because one doesn't have to make a car payment despite the fact that it to has to be maintained, insured and have taxes paid on it.
You may be saving money by not having to pay rent, but a home is a liability not an asset. A rental property that produces income after all expenses is an asset and the path to wealth.
Housing Starts May Drop to 14-Year Low:
Housing Starts May Drop to 14-Year Low: U.S. Economy Preview - Bloomberg.com
"you are paying rent in the form of taxes on a depreciating assert"
The current tax rate doesn't equal the amount being saved on rent. what exactly do you think is going on, then?
The function of debt is the transferrence of future income from the next generation and that's accomplished by rising real estate costs via increased borrowing.
This is all pretty basic stuff, I could argue with links if I really cared (which I don't).
The people who have lived in areas like Los Angeles, Chicago for long periods are earning the average income but paying below average rent to live there, ergo they're making a net profit on owning the house beyond the capital gains costs, a CASH FLOW profit.
I'm sorry if you don't understand this, if you haven't lived and seen it like I have but I don't care enough to argue over something which seems self-evident.
From the same good folks who back in the Spring brought you:
"The credit crisis is well contained to sub-prime"
"Housing is at its bottom"
And just the other week, from Ben!
"Dollar declines against foreign currencies do not translate into inflation for Americains, unless you're traveling abroad" LOL!!
Bernanke is quickly losing credibility, and along with it, any shred of control over the unstable economy. We're officially in trouble.
House has been paid off over 10 years so I don't pay diddly for interest or rent. I don't pay for the outlandish premiums the insurance companies charge. Do my own maintenance. My yearly taxes are less the the cost to buy a Starbucks (if I did) on the way to work each morning.
Too much risk to sell and reinvest while interest are rates going to zero. There are no guarantees that any investment will return squat.
Once the stock market drops 40-50%, then household wealth will look a lot less impressive.
Article is yet another example of shallow analysis. Good job by the CR commenters in straightening out the narrative...
OT- Is there anyway to pull all of CR's archives off so I can read them offline?
your analogy a car that is paid for must represents wealth if it is paid for because one doesn't have to make a car payment despite the fact that it to has to be maintained, insured and have taxes paid on it.
I knew leasing a new car every three years was cheaper. (I am a housing bear)
I wouldn't disagree that this is a credit crunch, but I wonder if the perspective that "homeowners may have equity but they can't tap the ATM anymore" isn't more than a little bit too negative?
*** asbestos suit ***
In past credit crunches I've experienced (Oilpatch mid-80s, commercial real estate early 90s), it was quite true that lenders had NPAs rising so rapidly that in the aggregate, capital was clobbered so hard that highly credit-worthy borrowers in the tainted sector had a very difficult time keeping the credit they had rolling, much less getting more credit above what they already had on their books.
The current environment in residential real estate, for now, really is different -- if you have a lot of equity in your house, and you have a handsome 1040 and a decent credit history, you can Refi without much trouble -- and you might even get a good/great rate going forward, if the ten year treasury yield keeps spiraling down into the high 3's.
There's no question but that the gross value of the asset itself is not going up anywhere in the country, and in nearly all markets homeprices are going to decline. And in the worst markets, home prices will almost certainly decline precipitously.
That said, I do not think that the ATM has been turned off and I don't think the evidence supports that notion. Good quality borrowers have no problem getting loans at the moment, and the data support that.
So, IMHO and in the interest of balance, the ATM spigot has been reduced from a firehose gushing liquidity all over creation back to the sedate, conservative garden hose of the 60's and 70's and 80's that many of us grew up with.
Pretty much half of the total value of housing in the US is concentrated along the coasts, and the huge price gains in those areas were all driven by toxic lending.
I've heard the number is more like 60% of housing value is concentrated along the coasts - specifically The NE Corridor from Boston to DC, Florida and So Cal & Bay Area. There is a lot of people & expensive property in those areas... in between, not so much.
The bigger question is how other OPEC members will follow their lead besides Venezuela.
They have always taken other currencies - OPEC countries will write delivery contracts in whatever currency you want to give them just as long as it is readily convertible to dollars, yen, euros, gold.
The posted target price is in dollars but they do the arbitrage conversion instantly in just about any other currency... just takes mouse clicks to move in and out of dollars, yen, euros - whatever.
The important question is will they continue to hold dollar reserves or diversify out of dollars into a basket. I vote for basket - and it's been overdue for a long time.
Is the government lying "duh". Do we all know they are lying yes. However if they told the real truth it would be similar to yelling fire in a crowded building. As long as they can keep the sheeple fooled it will be orderly. When that is no longer possible I hope I am out of the country for a few weeks.
GM red tag event WSJ page 1
GM is cutting prices to offset lower demand levels which have set in as buyers cope with a housing downturn and high fuel prices.
GM Launches Year-End 'Red Tag' Incentive Campaign - WSJ.com
Containment, alas, we hardly knew ye.
Anarchus, I agree with you regarding availability of credit. I got an unsolicited offer of a large equity line at prime-.75 from my bank a month ago. Of course I declined it, but that's the point.
For the economy as a whole, reversion to the "sedate, conservative garden hose" of yesteryear will not help in the short run, because it means granting credit to those who need it and spend it least. Against the backdrop of recent history, that does seem like a credit crunch. In the long run, of course, we'll be better off with the garden hose. but the transition will be painful for many.
Chinea Curbs Bank Loans To Cool Investment Fever - banks freeze lending to EOY or beyond...
China Freezes Lending to Curb Investing Frenzy - WSJ.com
"You may be saving money by not having to pay rent, but a home is a liability not an asset. A rental property that produces income after all expenses is an asset and the path to wealth."
Hmph. We bought in 91 and paid our house off ten years later. Our property taxes now work out to $250 a month, homeowners insurance about $60. Let's just say over time that maintenance averages $250 a month, spreading out the cost of painting, new roof, repairs, etc. Our total cost to occupy is $560 a month estimated, versus $1700 minimum to rent the equivalent around here. And good rentals are hard to find.
Our household income has decreased by 50 percent over the last five years because of reverses on the career front. But we still live comfortably, and even still put money away, in large part because of that grand a month we don't have to spend.
I don't know what your opinion is based on, but a paid-off house that you occupy in a high-rent area is an asset, a major producer of "shadow income." It may be an asset that requires maintenance, but what doesn't?
That said, I'm a big believer in income property. Just.... not right now.
Andrew ...if lending institutions have to start dedicating more and more reserves to cover potential bad loan loses. I suspect, if true, the rising lending standards will soon get draconian. However, I seem to recall reading an article recently about the Fed allowing several of the larger institutions (Citi) to blow through these capitalization ratios (by allowing cash to be invested in troubled but not banking/FDIC related subsidiaries) in August's liquidity crunch and with the SIV/ABCP crisis.
The big institutions are still going to have to withdraw money that would have been lent to cover their losses. The exemptions to which you refer relate not to overall capitalization but to the percent of investment in affiliates. The leverage involved in lending is why credit contractions have such fearsome ripple effects.
As for an example of real tightening in lending standards, see
Tanta's earlier post on the Fannie March revision. In July Fannie imposed higher LLPs, then in October another revision, and there is one already scheduled for December. March will be the fourth. Each of these moves have been progressive in scope so as to limit more and more lending. And believe me, when Fannie does it many institutions will have to follow. For one thing, you really can't expect Fannie to bail you out any more.
Over about the last 40 days the real tightening set in. Also there is more and more scrutiny with regard to appraisals, which are the major factor allowing a lot of excess equity extraction.
But it's more than that. CC standards and rates are going up. The ability of the average consumer to draw on credit is being whittled down. It's impossible for this not to have a big effect on consumer spending over time.
There is a parallel development going on in commercial lending. Terms and costs there had become very lax, and they are now tightening and becoming more expensive.
dryfly said: OFHEO should be showing larger declines than C/S if prices in Jumbo Land are holding up better than the lower priced conforming loans in Ginnieton and Freddyville.
A partial explanation may be that in Ca and Ma, the low end is in Jumbo Land. Even though the low end seems to be falling faster in SF Bay Area, it doesn't show up in OFHEO since it's still more than conforming limits.
Skewed - one of the paradoxes of credit crunches are that truly good lending prospects become more valuable. A bank has to lend in order to maintain its deposit base. Those accounts cost money to service, and when you are paying interest you have to be able to cover the costs of servicing plus the interest on deposits. So the search for individuals and companies that are truly creditworthy is on, and that is why rates for those individuals aren't going to rise much. They may even fall.
What goes up sharply is the cost of credit to less creditworthy prospects. Therefore even during a credit crunch, individuals and companies who are secure financially can usually get credit. It's the businesses and individuals who really need credit to continue their current operations or current lifestyles who get chopped off (usually).
Now this could prove quite interesting-
China Freezes Lending to Curb Investing Frenzy - WSJ.com
London Times - Rumsfeld logic serves as guide to direction of US economy - known known and unknown unknown risks...
Rumsfeld logic serves as guide to direction of US economy - Times Online
"By raising rates further China could have risked boosting the value of its currency, the yuan, too much for the comfort of the country's powerful exporters, the lifeblood of its economy. A stronger yuan would make Chinese exports less competitive in world markets".
Yes I agree that the Chinese would rather economically 'waterboard' Bush, Cheney. Paulson, Bernanke and the rest of the asshat Bushco administration.
Here's what the "ownership society" is becoming:
- NY Times
sdtfs - Gretchen Morgenson has all of CR's archives. Call her at 1-800-698-4637. Be sure and say Tanta says hidy and she's a HEWMONGUS fan.
Skewed, I think we more-or-less agree, though I'd argue that there's a measurable difference between the hard credit crunches of energy in the 80s and commercial real estate in the early 90s and the kinder, gentler credit crunch of the present.
It's also certainly possible that by this time next year FNM and FRE have NPA rates up around 12-16 bp rather than 8-10 bp, and in that case we may very well have a near-contraction in credit. But we're not there now, and we're nowhere close to that yet.
Off topic, I'll admit, but I thought this WSJ article on Peak Oil was interesting:
Oil Officials See Limit Looming on Production - WSJ.com
Interesting for two reasons: (1) up until this point, "peak oil" articles have practically laughed out loud at the idea and this one manages to laugh out loud at peak oil believers but acknowledges that we may never get much over 100 mbl/day, and (2) the data in the article pretty clearly supports peak oil of closer to 90 mbl/day than 100 mbl/day, but the authors are oblivious to the mathematics.
Let's see, current oil production is around 86 mbl/day and global capacity is maybe 90 mbl/day (but most of the unused 4 mbl/day is very heavy or really sour crude). If depletion is 4%+ per year (and everyone agrees it is), then you need about 3 mbl/day of new production every year just to stay even.
The Saudi's, our last best hope, are investing very roughly $50 billion+ to increase production capacity by 30% or 3 mbl/day by early in the next decade. Which is great, but that only takes care of aggregate depletion in '08. We still need 3 mbl/day of new production to offset depletion in '09, '10 and '11 (which is about when the full amount of the Saudi investment comes on line).
ANWR, even if it started up at max production instantaneously, which is impossible, gets us all of 0.6 mbl/day. OK, let's consider Oil Sands. Exxon/Mobil put out their annual global long-term outlook a few weeks back, and they have Oil Sands production rising from around 1 mbl/day presently to 4 mbl/day BY 2030. Helpful at the margin, but still pretty marginal - and I won't mention that recent cost overruns have been dramatic, that without a nuclear reactor or two on-site that processing Oil Sands is extremely environmentally ugly and that even done right the initial quality of the "crude" is downright crude.
Using data from the article itself, you cannot get there from here, and the reporters are clueless.
Last but not least, a passing grade in freshman composition at most accredited universities requires students to understand that freestanding conclusions unsupported by facts constitute malpractice: "Traditional peak-oil theorists, many of whom are industry outsiders or retired geologists, have argued that global oil production will soon peak and enter an irreversible decline because nearly half the available oil in the world has been pumped. They've been proved wrong so of
Anarcus, "Good quality borrowers have no problem getting loans at the moment, and the data support that"
I will agree with you that AT THE MOMENT credit is still available for the right customers at the right price. But as quickly as the liquidity faucet got clamped shut on higher risk borrowers it will get squeezed shut on good credit quality borrowers too. Just wait until lenders start getting those nasty notes from regulators, next year, forcing them to shore up reserves as NPAs rocket higher as they face a solvency crisis. Lending money against rapidly depreciating collateral will be the last thing they will be concentrating on.
FFDIC- I called, GM said she forwarded them to you. She also muttered something under her breath about bitter old Texans. I don't know what she was talking about, do you?
CR,
You keep posting articles that use logic and bankers are liable to panic.
By the way, I mean that literally.
Liable: Legally obligated
Panic: Finance. a sudden widespread fear concerning financial affairs leading to credit contraction and widespread sale of securities at depressed prices in an effort to acquire cash.
Anarchus,
Recall how recently what was the hypothetical is now the base case - I suspect the current round of tightening has only begun after the 'fog a mirror' lending frenzy that has just abated - only time will tell on that score.
Peak Oil is a basic physics problem writ large, some excellent technical work on that subject can be found at The Oil Drum
.
Stuff is worth what people will pay for it, and that means what they are able to pay, not simply what they might want to pay.
I've always felt that the price outrunning the market is the fundamental issue in this housing bubble, not credit problems. You can't claim that you sit on 'x' trillions of equity if the market cannot pay you that much. This is exactly the same as the 'mark to myth' problems the banks are now discovering.
Ive got a question :
In the asset value equation, you rightly touched on the price change variable, but what about the assets added variable? If we are still running up new home starts at over 1 mil a year rate, are all of these just going into asset values? One problem is, a lot of them are sitting unsold - do these get counted or only the ones that sell? And what about the new home sales prices which are not only heavily discounted - there is the issue of incentives that dont get reflected in values.
I just have a feeling that the actual value for assets is lower still than what we'd think after any simple OFHEO price adjustment you'd make.
Geoff,
That is a great question!
Chinea Curbs Bank Loans To Cool Investment Fever - banks freeze lending to EOY or beyond...
Yah, that could be interesting.
Sounds like someone in China got the memo about past runaway capital spending disasters.
Stag Mark- Beautiful play with words, but for some reason not ha-ha funny. I wonder why not?
Yep, thanks EE -- I've been a regular lurker at The Oil Drum, and James Hamilton at econbrowser is also a good read to capture the more mainstream economics view.
I took a class in engineering geology from Dr. H.C. Clarke at Rice in the late 1970s that covered Hubbert in pretty good detail - Clarke had been a student of Hubbert's at Stanford sometime in the 60's or early 70's. As you know, in 1958 Hubbert pretty much correctly forecast that the peak in lower 48 production would hit in 1972, and of course even with the North Slope production the second local peak in US production was well below the earlier 1972 peak.
There's certainly rabid crazy end of the world believers in peak oil who sometimes make no sense, but to my mind all peak oil says is that when you get close to producing half the oil you've found, it gets very difficult, maybe even mathematically impossible to achieve further meaningful increases in production. What's so crazy about that?
More importantly, even after oil has "peaked", there's no reason that the decline HAS TO BE abrupt - in fact, I think we'll probably be stuck around 90 mbl/day of production for quite a while - maybe 5-7 years, and maybe after that, without any astonishing technological breakthroughs, production may start to decline at a rate that becomes unmanageable.
The problem, of course, is that the rapid industrialization and auto-building booms in China and India mean that global demand for crude oil wants to increase at 1-3 mbl/day, and from where we are currently at 86 mbl/day of decent quality production and another 4 mbl/day of garbage production (gross oversimplification, but not inaccurate) I just don't see how we're going to keep the price of oil under $120+++ coming out of the next recession.
Anarchus,
You have to have read about the "Export Land" theory.
Andrew-
you pose good questions. I think you are seeing both, ie a reaction to cap ratios and the realization that they are now having to pay a "penalty" in the capital markets which will very likely cause an over reaction on the tightening side in order to restore confidence. This is the reaction that is being missed by many economists in the projection of future growth or lack thereof.
My contention, as opposed to relying on the MSM would be to research recently publically disclosed debt offerings and the rates being paid by the financial institutions.
A question that I ponder lately, is what portion of the Treasury market is a "fear element" and what portion is a reaction to a dramatically slowing/recessionary economy?
Some suggest that we are in deep trouble, I say define trouble. Tough period, yes, more? At this point, I think not.
ac,
Nobody is paying attention to this China story... it's been up on WSJ for an hour, now.
Shanghai and Hang Seng both down a bit, not a lot, though.
Is this story true?? I just heard Kundlow on live radio saying it's total bullcrap.
What's the deal?
can one of u techies tell me how to go back and capture a Bloomberg article that has already been taken down on their website from earlier today? can i go back into my cache?
It's getting exciting now, 2 and 1/2. Think of everything we've accomplished, man. Out these windows, we will view the collapse of financial history. One step closer to economic equilibrium.
Is this story true?? I just heard Kundlow on live radio saying it's total bullcrap.
Kudlow doesn't know squat - neither do we. Hell the folks in the Politburo probably don't know... and if they got the memo would they heed the order unless some of their fellow cronies were hauled out and publicly shot (like their equivalent of the FDA guy).
But it is so typically (Red) Chinese - do nothing, do nothing, do nothing... KA BOOM, do it all and more at once.
The guys I work with doing business in China are a hoot to go drinking with, the stories they tell even if half true...
Harney's column, unfortunately, is not restricted to the Washington Post, but helps muddy the waters all over the country, like in our local Strib.
idoc - Try Google's cache first, then try search for a string inside a file in the c:/Documents and Settings/yourusername folder on your comp. Local caches tend to get overwritten fairly often, unfortunately.
Dry,
Yeah, I know... I agree Kudlow is full of crap, BUT... He was really adamant that this story was untrue, and I don't see any reason for him to refute it so strongly unless he was certain that it's not.
AND... Yeah, the Chicoms have a penchant for this sort of crazy crap.
Am I mistaken in assuming this is kind of a big deal as far as global economies are concerned? It's kind of the ultimate credit siezure, is it not??
The story is still top-of-the-fold at WSJ last I looked. (minutes ago).
Maybe I'm missing something here, but all the reaction about the differences between OFHEO and Case-Shiller has been focussed on Jumbo loans.
Surely there are non-conforming loans below the conforming limit; isn't that what Subprime is all about?
So does that mean the OFHEO numbers don't reflect price changes where the house was bought with a Subprime loan either? If so, it seems to me that it could be a poor index for the 2005-06 period where the Subprime percentage was very high.
Yeah, I know... I agree Kudlow is full of crap, BUT... He was really adamant that this story was untrue, and I don't see any reason for him to refute it so strongly unless he was certain that it's not.
I'm not saying he's right or wrong I'm sayin' he doesn't know - no one knows except the very inner circle and if they said it even they don't know if it will stick without shooting some of their friends.
Deals get done in China the way they got done in Imperial times... by who you know & how well you 'favor them'. So are the inner circle gonna shoot some of their local bosses over this? They might have to if they want it to REALLY stick.
Old Chinese saying... "The mountains are high and the Emperor is far away."
Nothing much has changed since that phrase was first spoken. Kudlow needs to just soak that one in a bit and watch.
Am I mistaken in assuming this is kind of a big deal as far as global economies are concerned? It's kind of the ultimate credit siezure, is it not??
If it sticks & no exceptions then yes it will have an effect - however, it is almost Black Friday. Next year isn't that far off... There is a lot of money sloshing around China. Maybe they want some of that hot money to find a home (and send a message simultaneously).
Then again it could be an opportunity for exceptions galore and the local party bosses get to hand them out and be the good guys... think of them as 'party favors' like at a kids birthday party. A way for the inner ring to help their local bosses cement power considering some of the current unrest?
Who knows?
I'll believe (and simultaneously disbelieve) it when I see it...
sdtfs,
...but for some reason not ha-ha funny. I wonder why not?
I'm determined to make you laugh. You'd prefer funny with reason?
funny: warranting suspicion; deceitful; underhanded: We thought there was something funny about those extra charges.
with reason: with justification; properly: The government is concerned about the latest crisis, and with reason.
Credit Card National Bank
The story is still top-of-the-fold at WSJ last I looked. (minutes ago).
Dave S - It might have made top of fold in WSJ but China Daily doesn't have anything on it as of the time I write this (1 AM CST USA).
You'd think it would at least get a passing mention over there, yes/no? Again not saying Kudlows right, just sayin'.
Thanks for doing the legwork on this CR---I knew immediately that this article and data were flawed but didn't have the expertise or background to understand exactly why.
It's similar to the excellent work Barry Ritholtz does on the horrible inflation numbers BLS puts out.
JW
I would like to point out that Harney has done some good work over the years on many mortgage related issues.
It is just in this case that like too many people, he relied on a government generated statistic without understanding the serious methodological flaws.
Here is a shocking thought- what if the worst damage is in the nonconforming jumbo stuff?
Allenm, how can it not be?
10% loss on $100K is only $10K -- hardly worth the loan fees. OTOH, 10% loss on $600K (~CA bubble median) is $60K, and we know where all the "equity locusts" came from.
tj & the bear | 11.18.07 - 7:01 pm
This has been my 4 yr fear here in DC MSA. I watch NOW w/ David Bronconchio on Friday night talking w/; congressmen Ellis and they are walking through minority 'hoods where poor HO's bought 2 and 3 homes that may be 100K tops...crappy low income hoods..
These are the current problem reflected on, while the real damage will/is coming in the coast areas where there are no houses being FC on under the 417K because you couldn't BUY one for under 417K...
All homes here in this area were >417, ALT-A. There were a few more moral HB's that used their on site lenders to offer 40/50/60 yr fixed to minorities ..
In Indian Head MD white security guard for Lenner burns down minorities homes cause everyday he sees "them" getting 50 /60 yr fixed or no money , 0 interst arms...and "whites" not...
Charles County arson -- baltimoresun.com
Funny, that was the start, and he didnt even know it.. Dec 2004
Lennar Corporation: Error Page
Iran gets over 85 pct oil income in non-US currencies.
The bigger question is how other OPEC members will follow their lead besides Venezuela.
It's a complete non-issue. All major currencies are freely convertible.
There is no functional difference between the Saudis selling at a USD price, and changing the proceeds to Euros (which may just be a ledger operation without any actual USD changing hands at all), and just selling for Euros in the first place.
The Venezuelans and Iranians are pumping this because it's a way to annoy the Americans without actually doing anything concrete.
Oh one more thing - it does matter a lot how much USD debt the Saudis and other OPEC members choose to hold, but that's a completely different issue. The Chinese hold a lot of USD debt too, and they don't export any oil (except to the North Koreans).