Re: "Covert nationalization of the U.S. banking system"
The history of sterilized interventions in foreign exchange markets is mixed at best, and that's why I'm not holding my breath while Bernanke's variation plays out.
I suspect we're going to revisit this again and again until the Fed (read American taxpayer) becomes the ultimate bagholder.
Of course, that still doesn't solve Mr. and Mrs. Smith's problem, which is going to tank the macroeconomy.
"Remember, don't ever keep more than $100k in a single bank for this reason! All the insured funds are safe, but all uninsured funds may be lost in this bank!
Sparhawk"
That's not entirely correct. You have $250k in coverage in an IRA - $200k in certain joint accounts - and there are a lot of other rules relating to things like ITF accounts.
Here is a neat little calculator to use to see whether your deposits are insured: http://www4.fdic.gov/EDIE/.
BTW - We always keep a stock of non-perishables around (we're in hurricane country). Also things like important prescription drugs - some cash (ATMs don't work when the power is out). It's probably more important for those of you in blizzard country than it is for us (you don't tend to evacuate for snow storms). Also a grill with extra propane - and a little gas cooking hot plate (you don't want to use a grill to heat up a little soup). Lots of water. BTW - if you buy the tuna - don't forget the mayo (you can pick up boxes of little packets at Costco). So most people should probably have this stuff even if the end of the world isn't around the corner. Roby
I suspect we're going to revisit this again and again until the Fed (read American taxpayer) becomes the ultimate bagholder.
I have no doubt that at least one major bank is going down. I also have no doubt that a couple of IBs are also going down, and that will happen at the climax of the hedge fund unwind.
I am intrigued by the idea of covert nationalization, however. It's dastardly brilliant in a way. One day, an announcement comes that a major bank that starts with a 'c''s account have been transferred to x, and it's all happened behind everyone's back.
"Unless my source was mistaken, I heard San Diego has already dropped 30%?
Outsider"
Do you ever really know what your house is worth until you go to sell it - or an identical house nearby sells? I know what we spent to build our house in 1996 - and I know people were talking all over the place about skyrocketing property values in 2004-06 - but I always found it hard to believe that our house went up 50% in 2 years. If it did - I wouldn't be surprised if it went down 30% in the following 2 years.
BTW - this kind of apppreciation seems pretty tame. There's an article in yesterday's NYT which said that the median price of a house in Sacramento tripled between 2000 and 2005. If this is correct - then a 30% price decrease would still leave people with more than a double since 2000. Of course - that doesn't help people who bought at the top of the bubble - or those who borrowed out all of their equity. Roby
I'm looking for information at a balanced point.
On the one hand, you have the predicted housing price decline nationwide, 15%, 25% 30%, take your pick. On the other, you have the observation that all real estate is unique and you won't know what your particular house is worth unless you sell it.
I also know that Case Shiller, etc. do track price trends by metropolitan area.
My question, is there anybody compiling information that granulates the national trend other than by metro area?
For instance, fringe/suburban/inner city location. Or single family v. townhouse v. condo unit. Or second/vacation homes v. primary residences? I know there are some efforts at developing the info by price level ($1MM plus, conforming/non-conforming, etc.) and that's part of the picture, but not the whole thing.
Just curious.
It seems to me that a single family dwelling in an established neighborhood with good schools and near stable employers, in a community that participated modestly in the recent bubble is likely to see price changes quite a bit less dramatic than, say a penthouse vacation condo in a incomplete project on which construction has halted, located on the Mexican Riviera or the Florida Coast.
I know that may be a bit granular for the people looking to make a global point about the future of the free world the moral fibre of the American public, or whatever, but I'm curious if there is any information out there.
an interesting comparison is with the dotcom recession. This saw s&p down 49% in 25 months from 8/00, nasdaq down 3/4. IMO supprime will be worse because consumers are in so much worse shape, and because borrowers wanted to buy homes when the fed slashed rates and lenders wanted to lend. Pretty different now.
Linear Algebra - I haven't read about anyone who is putting together data with that degree of precision. For example - we'll be in Miami week after next. Accountant visit. He lives in a very classy waterfront condo (large units - lots of older professionals who moved there out of large houses) in Coral Gables which was completed about 6 years ago. I'm sure the prices have gone down in that building in the last couple of years - but nowhere near as much as the prices in all the new condos north of downtown on/near Biscayne Blvd. (smaller units in a relatively crummy neighborhood - you walk 3 blocks west and you're in a slum). Most buyers there were speculators. I understand there are more than 10,000 units that have recently been finished in that area - or which will be finished soon. I don't know who the heck is interested in buying from those speculators in that area at anywhere near the original prices (there are rumors of vulture funds buying at 30-50 cents on the dollar).
And I'm just talking about condos in 2 small areas of Miami. I don't know what's going on in South Beach - or Aventura - or dozens of other "micro-markets" in the metro Miami area. Just for condos.
Who knows about single family houses (although I'd guess that my brother's waterfront house in Miami Beach is doing better than a crummy cookie-cutter spec house in far western Dade County at the edge of the Everglades)? Waterfront doesn't mean no losses though. My father sold his waterfront house at the top of the market after my mother died - and I suspect the place is worth at least 30% less than he sold it for in late 2005.
I think a lot depends on the degree of speculative buying in a particular area - and also the demographics of the potential buyers (e.g., did people who can afford $200k houses stretch beyond their financial means to buy $400k ones).
About all I can say in terms of my immediate neighborhood is that there is one house for sale on my block now (out of 30 houses). It is - in the opinion of a lot of us neighbors - priced very unrealistically (sold for $395k in 1995 - asking $900k now - and none of us thinks it's worth more than $700k - if that). Roby
Back in the early 1990s we saw the price of houses in New England fall by 30-40% and nobody gave a rat's ass. It can happen. It also has taken fifteen years for the house values in the region to slowly work their way back up to the price levels of the late 1980s. Except of course, they'll probably fall back by 20% again. This is for an area that has not seen any of the go-go house price inflation experienced in the major urban markets like Boston or New York. We shouldn't be surprised when it happens all across the US.
Did I mention that not one major regional bank survived? All got gobbled up by larger banks with stronger balance sheets. Only some of the smaller mid-sized financial institutions made it through the pinch point of the great winnowing.
Just to put things into perspective, there are blogs that receive lots more comments than those that dwell on the demise of western civilization.
Anonymous | 03.08.08 - 7:04 pm | #
Thanks Anon - now I know where my wife hangs out... blogging that is. She must be one of those on that thread as her headlights are always on high beam.
Well, yes they can if their jobs survive the economic turbulence that would result from that kind of a drop
Your talking as though the bubble prices were normal, and the drop is the problem. It's the bubble prices that were the problem, and the drop is the solution.
Inflated asset prices are not real wealth and do not create income. The US needs to go back to a real economy based on making things rather than asset speculation.
When we were rising, everyone was giddy with "wealth". After a while even a good portion of the RE bulls starting saying it was perhaps rising too far, too fast. Now that is is falling, and even though we ALL now admit it is a massive bubble, bulls are still desperately grasping at rationalizations for high prices.
For example:
If prices drop, then the economy gets hurt and you won't be able to buy at all, you laid-off loser!
If prices drop, then everyone feels poorer and that is just right.
If prices drop, then some banks and hedge funds might fail and no one wants that.
If prices fall, then we'll need a bail out which will cost everyone money.
You will notice that we don't hear too many of the original bubble justifications any more (RE is local, they aren't making more land, prices always rise, etc.). Now we hear only whining and begging, basically screwed owners and lenders complaining that prices should NOT drop because it sucks for them. No fundamental economic arguments, no reasoning. But hey, we got the bubble using the same sorts of logic so why not keep applying it to hold the bubble in place.
Nah. It's over. Prices will drop until homes are affordable. And homes are not going to be affordable, as it was cleverly pointed out, because of the massive recession caused by the massive bubble. If median income drops to $47,500, then the median house price will drop to about $120,000 (it's about $200k right now).
There is no counter argument which stands up to simple affordability. Who cares if houses are bigger or better appointed? Just because a Fifth Avenue Penthouse is five thousand square feet with gold fittings does not mean you can afford it.
The excesses of the past thirty years are being washed away in the great draining of credit.
I apologize for the length of this post, especially when Yoghurt said the same thing perfectly well in just two sentences.
but I always found it hard to believe that our house went up 50% in 2 years. If it did - I wouldn't be surprised if it went down 30% in the following 2 years
Expat and yogurt are right, and this is the sort of conversation we ought to be having to shape public policy (instead of selling short and stimulating panic in order to beef up those investments).
Affordability and the underlying fundamentals of it: comparison to rentals, supply and demand, percentage of household income. If we truly want a strong US middle class it will be based on a return to affordable housing, education and medical services. Jobs in an environment of growing global consumerism and a shrinking US labor force as baby-boomers retire will not be an insurmountable challenge.
The pain experienced by our economy in getting from here to there will be largely absorbed by the good will of family, friends and communities, and a return to middle class values- working hard and loving well vs. sipping lattes, leveraged speculating and thinking everyone with a conscience is a loser.
My wife and I will buy a home when they are once again affordable, and we'll plan plenty of room for parents or kids who need to weather the economic storm for a few years. We plan to have fun doing it.
I third expat! With the charming expat spelling of 'yogurt.'
I always wonder with the price predictions how much weight they give to potential buyers -- i.e., try to figure how many buyers can actually purchase homes under the given market conditions, or deteriorating market conditions.
30 pct might be kinda optimistic, given the unrealistic prices of the bubble, the recession and the lack of savings of most buyers..
"....target homeowners who have low incomes or credit problems or who are elderly by deceiving them about loan terms or giving them loans they cannot afford to repay.
Borrowing from an unscrupulous lender, especially one who offers you a high-cost loan using your home as security, is risky business. You could lose your home and your money."
Why in h3ll is 30% thrown about, why not 35% or 50%. Who ever makes statements such as this should be required to state their reasons for why it should stop THERE. What constitutes the pend up demand and money in the piggy bank, just waiting for a 30% drop to buy in big? Anyone who could crawl into a mortgage boutique was given a loan. That leaves WHO to buy on the dip???
Banks facing margin calls? Stocks in the crapper? I think this was brought up in Bernanke's congressional testimony:
http://tinyurl.com/yta942
CR, when will we see a post of CR 2008 year end predictions?
And any thoughts on whether the Bush admin has made any promises to SWFs in exchange for their capital infusions to private US banks, e.g. Citi?
Covert nationalization of the U.S. banking system
Interfluidity :: Repurchase agreements and covert nationalization
Gary, I've been a little busy to put a forecast together - other than it will be grim. I'll try to pull some ideas together.
No question 2008 will be worse than '07 by every measure (sales, starts, residential investment, foreclosures, etc.). How much worse is the question.
Best Wishes
On a brighter note, I predict a record year for CR/Tanta post starts and completions.
Re: "Covert nationalization of the U.S. banking system"
The history of sterilized interventions in foreign exchange markets is mixed at best, and that's why I'm not holding my breath while Bernanke's variation plays out.
I suspect we're going to revisit this again and again until the Fed (read American taxpayer) becomes the ultimate bagholder.
Of course, that still doesn't solve Mr. and Mrs. Smith's problem, which is going to tank the macroeconomy.
Gary,
Why in the world would single white females try to bail out the U.S. Financ
Oh, I get it! Let's change that alphabet alignment to Sovereign Money Monkeys, SMM.
Did you hear that "crack" in 2 of the supports underneath the HELOCs?
Unless my source was mistaken, I heard San Diego has already dropped 30%?
Just to put things into perspective, there are blogs that receive lots more comments than those that dwell on the demise of western civilization.
"Remember, don't ever keep more than $100k in a single bank for this reason! All the insured funds are safe, but all uninsured funds may be lost in this bank!
Sparhawk"
That's not entirely correct. You have $250k in coverage in an IRA - $200k in certain joint accounts - and there are a lot of other rules relating to things like ITF accounts.
Here is a neat little calculator to use to see whether your deposits are insured: http://www4.fdic.gov/EDIE/.
BTW - We always keep a stock of non-perishables around (we're in hurricane country). Also things like important prescription drugs - some cash (ATMs don't work when the power is out). It's probably more important for those of you in blizzard country than it is for us (you don't tend to evacuate for snow storms). Also a grill with extra propane - and a little gas cooking hot plate (you don't want to use a grill to heat up a little soup). Lots of water. BTW - if you buy the tuna - don't forget the mayo (you can pick up boxes of little packets at Costco). So most people should probably have this stuff even if the end of the world isn't around the corner. Roby
I suspect we're going to revisit this again and again until the Fed (read American taxpayer) becomes the ultimate bagholder.
I have no doubt that at least one major bank is going down. I also have no doubt that a couple of IBs are also going down, and that will happen at the climax of the hedge fund unwind.
I am intrigued by the idea of covert nationalization, however. It's dastardly brilliant in a way. One day, an announcement comes that a major bank that starts with a 'c''s account have been transferred to x, and it's all happened behind everyone's back.
"Unless my source was mistaken, I heard San Diego has already dropped 30%?
Outsider"
Do you ever really know what your house is worth until you go to sell it - or an identical house nearby sells? I know what we spent to build our house in 1996 - and I know people were talking all over the place about skyrocketing property values in 2004-06 - but I always found it hard to believe that our house went up 50% in 2 years. If it did - I wouldn't be surprised if it went down 30% in the following 2 years.
BTW - this kind of apppreciation seems pretty tame. There's an article in yesterday's NYT which said that the median price of a house in Sacramento tripled between 2000 and 2005. If this is correct - then a 30% price decrease would still leave people with more than a double since 2000. Of course - that doesn't help people who bought at the top of the bubble - or those who borrowed out all of their equity. Roby
Foreclosures have actually dropped a bit in San Diego. To behold the good news, set the start year to 1982.
For those of you who have forgotten the S&L debacle in the 80's - here is a small reminder:
a link
I had CDs in lots of places - and I think more than half of the institutions I dealt with went under. Roby
JP Morgan is a wild eyed optimist.
JPM is a bunch of scum sucking bastidges. They are probably short right now, along with GS, et al. Let the panic begin!
I'm looking for information at a balanced point.
On the one hand, you have the predicted housing price decline nationwide, 15%, 25% 30%, take your pick. On the other, you have the observation that all real estate is unique and you won't know what your particular house is worth unless you sell it.
I also know that Case Shiller, etc. do track price trends by metropolitan area.
My question, is there anybody compiling information that granulates the national trend other than by metro area?
For instance, fringe/suburban/inner city location. Or single family v. townhouse v. condo unit. Or second/vacation homes v. primary residences? I know there are some efforts at developing the info by price level ($1MM plus, conforming/non-conforming, etc.) and that's part of the picture, but not the whole thing.
Just curious.
It seems to me that a single family dwelling in an established neighborhood with good schools and near stable employers, in a community that participated modestly in the recent bubble is likely to see price changes quite a bit less dramatic than, say a penthouse vacation condo in a incomplete project on which construction has halted, located on the Mexican Riviera or the Florida Coast.
I know that may be a bit granular for the people looking to make a global point about the future of the free world the moral fibre of the American public, or whatever, but I'm curious if there is any information out there.
an interesting comparison is with the dotcom recession. This saw s&p down 49% in 25 months from 8/00, nasdaq down 3/4. IMO supprime will be worse because consumers are in so much worse shape, and because borrowers wanted to buy homes when the fed slashed rates and lenders wanted to lend. Pretty different now.
i hope home prices drop 50% at least, that way young people can save for other needs, like retirement and college for kids.
San Diego isn't quite down 30%. More like 26%: from Piggington, a San Diego housing bubble blog. Should make it in the next month or two, though.
Yes! SMM's, as I always read SWF as single white female. Yes, I did read the personals in the local paper at one time in my life.
Linear Algebra - I haven't read about anyone who is putting together data with that degree of precision. For example - we'll be in Miami week after next. Accountant visit. He lives in a very classy waterfront condo (large units - lots of older professionals who moved there out of large houses) in Coral Gables which was completed about 6 years ago. I'm sure the prices have gone down in that building in the last couple of years - but nowhere near as much as the prices in all the new condos north of downtown on/near Biscayne Blvd. (smaller units in a relatively crummy neighborhood - you walk 3 blocks west and you're in a slum). Most buyers there were speculators. I understand there are more than 10,000 units that have recently been finished in that area - or which will be finished soon. I don't know who the heck is interested in buying from those speculators in that area at anywhere near the original prices (there are rumors of vulture funds buying at 30-50 cents on the dollar).
And I'm just talking about condos in 2 small areas of Miami. I don't know what's going on in South Beach - or Aventura - or dozens of other "micro-markets" in the metro Miami area. Just for condos.
Who knows about single family houses (although I'd guess that my brother's waterfront house in Miami Beach is doing better than a crummy cookie-cutter spec house in far western Dade County at the edge of the Everglades)? Waterfront doesn't mean no losses though. My father sold his waterfront house at the top of the market after my mother died - and I suspect the place is worth at least 30% less than he sold it for in late 2005.
I think a lot depends on the degree of speculative buying in a particular area - and also the demographics of the potential buyers (e.g., did people who can afford $200k houses stretch beyond their financial means to buy $400k ones).
About all I can say in terms of my immediate neighborhood is that there is one house for sale on my block now (out of 30 houses). It is - in the opinion of a lot of us neighbors - priced very unrealistically (sold for $395k in 1995 - asking $900k now - and none of us thinks it's worth more than $700k - if that). Roby
Back in the early 1990s we saw the price of houses in New England fall by 30-40% and nobody gave a rat's ass. It can happen. It also has taken fifteen years for the house values in the region to slowly work their way back up to the price levels of the late 1980s. Except of course, they'll probably fall back by 20% again. This is for an area that has not seen any of the go-go house price inflation experienced in the major urban markets like Boston or New York. We shouldn't be surprised when it happens all across the US.
Did I mention that not one major regional bank survived? All got gobbled up by larger banks with stronger balance sheets. Only some of the smaller mid-sized financial institutions made it through the pinch point of the great winnowing.
Anon 7:04-
FYI, this blog isn't about the demise of Western civilization, it's about the demise of the financial system. Big difference.
If you've confused the two, you may be part of the problem.
i hope home prices drop 50% at least, that way young people can save for other needs, like retirement and college for kids.
Well, yes they can if their jobs survive the economic turbulence that would result from that kind of a drop.
Just to put things into perspective, there are blogs that receive lots more comments than those that dwell on the demise of western civilization.
Anonymous | 03.08.08 - 7:04 pm | #
Thanks Anon - now I know where my wife hangs out... blogging that is. She must be one of those on that thread as her headlights are always on high beam.
Well, yes they can if their jobs survive the economic turbulence that would result from that kind of a drop
Your talking as though the bubble prices were normal, and the drop is the problem. It's the bubble prices that were the problem, and the drop is the solution.
Inflated asset prices are not real wealth and do not create income. The US needs to go back to a real economy based on making things rather than asset speculation.
Yoghurt hits the nail on the head. Splat!
When we were rising, everyone was giddy with "wealth". After a while even a good portion of the RE bulls starting saying it was perhaps rising too far, too fast. Now that is is falling, and even though we ALL now admit it is a massive bubble, bulls are still desperately grasping at rationalizations for high prices.
For example:
If prices drop, then the economy gets hurt and you won't be able to buy at all, you laid-off loser!
If prices drop, then everyone feels poorer and that is just right.
If prices drop, then some banks and hedge funds might fail and no one wants that.
If prices fall, then we'll need a bail out which will cost everyone money.
You will notice that we don't hear too many of the original bubble justifications any more (RE is local, they aren't making more land, prices always rise, etc.). Now we hear only whining and begging, basically screwed owners and lenders complaining that prices should NOT drop because it sucks for them. No fundamental economic arguments, no reasoning. But hey, we got the bubble using the same sorts of logic so why not keep applying it to hold the bubble in place.
Nah. It's over. Prices will drop until homes are affordable. And homes are not going to be affordable, as it was cleverly pointed out, because of the massive recession caused by the massive bubble. If median income drops to $47,500, then the median house price will drop to about $120,000 (it's about $200k right now).
There is no counter argument which stands up to simple affordability. Who cares if houses are bigger or better appointed? Just because a Fifth Avenue Penthouse is five thousand square feet with gold fittings does not mean you can afford it.
The excesses of the past thirty years are being washed away in the great draining of credit.
I apologize for the length of this post, especially when Yoghurt said the same thing perfectly well in just two sentences.
correction to second rationalization: should read "...and that is just NOT right!"
but I always found it hard to believe that our house went up 50% in 2 years. If it did - I wouldn't be surprised if it went down 30% in the following 2 years
$100K up 50% = $150K
$150K down 30% = ~$100K . . .
Expat and yogurt are right, and this is the sort of conversation we ought to be having to shape public policy (instead of selling short and stimulating panic in order to beef up those investments).
Affordability and the underlying fundamentals of it: comparison to rentals, supply and demand, percentage of household income. If we truly want a strong US middle class it will be based on a return to affordable housing, education and medical services. Jobs in an environment of growing global consumerism and a shrinking US labor force as baby-boomers retire will not be an insurmountable challenge.
The pain experienced by our economy in getting from here to there will be largely absorbed by the good will of family, friends and communities, and a return to middle class values- working hard and loving well vs. sipping lattes, leveraged speculating and thinking everyone with a conscience is a loser.
My wife and I will buy a home when they are once again affordable, and we'll plan plenty of room for parents or kids who need to weather the economic storm for a few years. We plan to have fun doing it.
Which part of my town is "subprime"?
I third expat! With the charming expat spelling of 'yogurt.'
I always wonder with the price predictions how much weight they give to potential buyers -- i.e., try to figure how many buyers can actually purchase homes under the given market conditions, or deteriorating market conditions.
30 pct might be kinda optimistic, given the unrealistic prices of the bubble, the recession and the lack of savings of most buyers..
FDIC: Putting Your Home on the Loan Line is a Risky Business
"....target homeowners who have low incomes or credit problems or who are elderly by deceiving them about loan terms or giving them loans they cannot afford to repay.
Borrowing from an unscrupulous lender, especially one who offers you a high-cost loan using your home as security, is risky business. You could lose your home and your money."
Somebody knew.
From 1998, HELOCs 125% of value of home.
Article: Big Home Equity Loans Usually a Mistake - The Washington Post | HighBeam Research - FREE trial
And those HELOCS in 1997 were not used to add value to anything, but instead to pay off debt...
Article: The Loans That PayThe Bills - The Washington Post | HighBeam Research - FREE trial
Why in h3ll is 30% thrown about, why not 35% or 50%. Who ever makes statements such as this should be required to state their reasons for why it should stop THERE. What constitutes the pend up demand and money in the piggy bank, just waiting for a 30% drop to buy in big? Anyone who could crawl into a mortgage boutique was given a loan. That leaves WHO to buy on the dip???