I think homes < 3x income is a fair guess at a bottom. Even then, a house should be viewed as a place to live rather than an investment. Long term growth will probably match wage growth from there. And I don't see much wage growth.
This worked in the past, it should work in the future.
The baseball analogy is bad because it doesn't take into account the second and third wave effects of each default. So, there will be an acceleration in credit crunch impact and a deceleration in the economy as things play out. So far, it's all gone at a snail's pace.
I just can't get it out of my mind that U.S. life insurance companies own probably about one trillion dollars or so of residential mortgage-backed, commercial-mortgaged backed, CMO and asset-backed paper and it's pretty well distributed by grade among all investment grades down to high Bs. The only unknown is whether they laid off any risk with swaps or hedges. But it's not the way they work. They buy plain vanilla investment-grade bonds and hold. So, wouldn't you think up to $200 billion in losses?
That's huge. Never happened to the U.S. life insurance industry before. It's all on one side of their biz -- general account. But it's coming at a time when the other side -- variable account (stocks) is also vulnerable. It's not lost assets on the variable side but rather lost income.
KB Home's Broad Says Home Prices May Drop Another 20%
Eli Broad, a philanthropist and co- founder of KB Home, the fifth-largest U.S. homebuilder by revenue, said he expects home prices to drop another 20 percent.
I've been surprised too that the insurance companies haven't visited the confessional.
Back during the 1990s stock boom, insurance companies were cutting rates like crazy just to get the premiums so they could invest. We made a killing on some of our long term contracts. The good times didn't last though. Within a three year period after the dot-com bust, my firms insurance costs tripled (G.L. & Umrella).
Needless to say, some of our long term contracts suffered.
although the general view was the crisis was overblown and it's just a matter of "confidence".
And that is proof that we're not out of the woods by a long shot. These guys see nothing wrong with their business approach to risk; if we all hold hands and sing kumbaya, everything will be OK.
Sorry guys; the credit crunch is for real, and consumer debt load is the cause.
Whoa, what happened to the stock market in the last 30 minutes? Did someone get word that there will be no rate cut this week? Tomorrow could be very interesting...
agree about the opportunity to put on shorts in front of GDP but have to admit I did squadoosh today. given the recent sentiment turn and how GDP is sometimes funky going into recessions (i remember a big GDP qtr going into the 2001 recession) i didn't have the nuggets to make a call on tomorrows number and position accordingly. good luck tomorrow if you did.
i'm still sticking to this is a bear rally and things end up crappy for 08 but in the short term this market sees it different than me.
If people just had the confidence to give their wealth away with no hope of getting it back everything would be just fine.
I guess it's even worse than that. The MBS buyers are all feeling lied to and ripped off. Of course there's a "confidence" issue when nobody believes a word these guys say.
The Fed can create money all day long, but there's no press in the world that can print trust.
I just want to see an analyst say we are still in "spring training". Maybe somebody could talk Roubini into it...
Nemo | Homepage | 04.28.08 - 4:03 pm | #
As for baseball analogies, we're on the bus back to the minor leagues is where we are...
"Eli Broad, a philanthropist and co- founder of KB Home, the fifth-largest U.S. homebuilder by revenue, said he expects home prices to drop another 20 percent."
Shill. Scare tactic, Shilling for a full blown government bailout.
craig said: "agree about the opportunity to put on shorts in front of GDP but have to admit I did squadoosh today. given the recent sentiment turn and how GDP is sometimes funky going into recessions (i remember a big GDP qtr going into the 2001 recession) i didn't have the nuggets to make a call on tomorrows number and position accordingly...."
Discretion is probably the better part of valor. I'm not sure a "bet" on a poor showing in GDP would get you anywhere. Q1 2007 GDP report was terrible, but the market (SP500 as proxy) was in a rally that lasted from mid-March to mid-July.
Of course it was. Q1 2007 marked the economic end of the bear market rally from 2002-2007. We just returned to the regularly scheduled program, that's all.
CR- ...although the general view was the crisis was overblown and it's just a matter of "confidence".
Well, isn't it always? It's kind of like saying that life is a matter of "survival," without revealing anything about the infinite variety of ways in which "survival" plays itself out.
Just watch Metlife when it reports later this week, I think on Thursday.
They have huge exposure to RMBS, CMBS, CMO, asset-backed, and direct commercial mortgages. If they don't report some writedowns, it can only be because they're not marking to market.
Genworth is big in long-term care insurance and health insurance and reportedly they are jacking up rates already to cover losses in mortgage insurance. But like all insurance companies, they may have portfolio losses in general account bond holdings, in addition to mortgage insurance underwriting losses. The double whammy.
Like I said, a run on a life insurance company is worse than a run on the bank because there's no Fed and no FDIC. It's Wylie Cyote for consumers.
The run would be on:
Fixed annuities (backed by bonds)
Variable annuities (backed by the stock market)
Whole life and universal life (backed by bonds)
Variable life (backed by the stock market)
Insurance companies don't have any real portfolio liability on variable. It's a straight passthrough. But a run on variable could be a negative for the market.
Insurance companies are even more leveraged than they look because only their general account side is vulnerable to bond losses. For some companies, that's about half of total assets. So if they report capital to assets leverage ratios of 10, it might be 20 on the bonds.
I don't see how there will be a run on insurance companies. It is usually a slow bleed event. Heck, rating agencies haven't even downgraded Ambac or MBI fully.
I'd be surprised if the insurers didn't have a lot of the mortgage junk on their books though. I know for a fact a lot of them swallowed the tech boom hook line & sinker. Same thing with Enron.
CNBC says we're playing 5 year old t-ball and its only a 3 inning game so load up. You missed the memo, the BSC debacle signaled the end of all credit problems. Its in the "Finding Bottom Manual".
I bet onefity on GDP > Countrywide, in terms of surprise not the performance.
I would call current situation a 3 rd cycle too.
1 st mortgages
2 nd liquidity
3 rd lower profits and inability of FED to lower rates due to inflationary pressure
(I hope they will be able to raise those on time to avoid double digits)
Re Morgan Stanley, NY mag has a great piece on the firing of Zoe Cruz. To wit, she was at her vacation home in Aspen, on July 4, 2007, when the reality of the real estate bubble and MBS first became clear to her...despite having deployed billions in that market as late as summer 07. Great read on the smart thinking on Wall Street. The Crash of Morgan Stanley Executive Zoe Cruz -- New York Magazine
Ben: Welcome brothers and sisters. As you are all aware we have to decide on interest rate policy today and make some comments.
Governor No1: Ok let us vote...down 1 full point?
Governor No.2: Are you crazy? I say up a half point.
Governor No.3: We have to do what Greenspan says makes sense......drop her down to .50.
Ben: I am in charge here, not Greenspan. Anybody who does not like that can leave.
Ben: Ok, Ok, sorry, please come back. We will follow the Greenspan model.
Governor No.8: I thought you said Greenspan was out to lunch by dropping rates for so long in '03?
Ben: His books outsold mine by alot. Maybe he is right.
Governor No.2: Look, Ben, your models suck and you know it.
Ben: Well, it is all we have.
Governor No.5: And Ben, what about that billionaire guy that called you an idiot?
Ben: He is right
Ben: Sorry, delete that last answer from the transcript.
Transcriptionist: Done.
Security Guard: Excuse me, but there is somebody at the door claiming there is a large quantity of rice stored here.
Ben: Tell the guy to get lost. I have been misquoted again. The Federal Reserve is not hoarding rice.
Governor No.6: Ben, this is getting out of hand. We have to do something with the interest rates. If we cut them again, the inflation expectations may rise.
Governor No.5: If we cut them again the commodity boom may continue. We do not want gold going over a $1000.00, right? And what about the price of oil? Serious stuff.
Governor No.9: Look, Ben, some people are calling you a wimp and that you should raise rates. Be tough, be like Volker maybe. Defend the dollar.
Ben: Anybody have a rolaids?
Governor No.4: I am going golfing in 15 minutes. Can we finish this please?
Ben: O.K. All those in favor of ordering in a pizza raise their hands.
I think it's fairly simple. The bottom will be reached when the average worker, with varified earnings and a 10% down payment, can afford to purchase the average home. Only buyers with savings or inheritance will be pushing prices a little higher than that.
Some brokers, in Northern Cal., are saying the the buyers are starting to come out. When questioned, it's investors (bottom fishing speculators) who remain true believers. They will soon run out of cash.
We will hit bottom when 20% down is the norm and it is about 35% of income. Then this is affordable.
Just about everyone from the banks to the realwhores to politicians just cannot get themselves to admit the problem is affordability.
HOUSE PRICES MUST DROP DOWN TO AFFORDABLE LEVELS. In bubble markets we could see 30-60% drops in home prices to accomplish this.
Baseball analogies are terrible. There was a 22 inning game a couple of weeks ago.
I'm starting to like "third inning" as a word/phrase of the year
What a great opportunity to put on some shorts today. What will be worse tomorrow? Countrywide or GDP?
I just want to see an analyst say we are still in "spring training". Maybe somebody could talk Roubini into it...
I think homes < 3x income is a fair guess at a bottom. Even then, a house should be viewed as a place to live rather than an investment. Long term growth will probably match wage growth from there. And I don't see much wage growth.
This worked in the past, it should work in the future.
The baseball analogy is bad because it doesn't take into account the second and third wave effects of each default. So, there will be an acceleration in credit crunch impact and a deceleration in the economy as things play out. So far, it's all gone at a snail's pace.
I just can't get it out of my mind that U.S. life insurance companies own probably about one trillion dollars or so of residential mortgage-backed, commercial-mortgaged backed, CMO and asset-backed paper and it's pretty well distributed by grade among all investment grades down to high Bs. The only unknown is whether they laid off any risk with swaps or hedges. But it's not the way they work. They buy plain vanilla investment-grade bonds and hold. So, wouldn't you think up to $200 billion in losses?
That's huge. Never happened to the U.S. life insurance industry before. It's all on one side of their biz -- general account. But it's coming at a time when the other side -- variable account (stocks) is also vulnerable. It's not lost assets on the variable side but rather lost income.
KB Home's Broad Says Home Prices May Drop Another 20%
Eli Broad, a philanthropist and co- founder of KB Home, the fifth-largest U.S. homebuilder by revenue, said he expects home prices to drop another 20 percent.
KB Home's Broad Says Home Prices May Drop Another 20% (Update2) - Bloomberg.com
Another analogy:
They couldn't find the bottom of their Real Estate cycle using both hands.
I think this is going to more like a cricket match, maybe a 2 week test match.
I guess its tea time at the moment.
rich,
I've been surprised too that the insurance companies haven't visited the confessional.
Back during the 1990s stock boom, insurance companies were cutting rates like crazy just to get the premiums so they could invest. We made a killing on some of our long term contracts. The good times didn't last though. Within a three year period after the dot-com bust, my firms insurance costs tripled (G.L. & Umrella).
Needless to say, some of our long term contracts suffered.
although the general view was the crisis was overblown and it's just a matter of "confidence".
And that is proof that we're not out of the woods by a long shot. These guys see nothing wrong with their business approach to risk; if we all hold hands and sing kumbaya, everything will be OK.
Sorry guys; the credit crunch is for real, and consumer debt load is the cause.
Whoa, what happened to the stock market in the last 30 minutes? Did someone get word that there will be no rate cut this week? Tomorrow could be very interesting...
Vermont Trader:
agree about the opportunity to put on shorts in front of GDP but have to admit I did squadoosh today. given the recent sentiment turn and how GDP is sometimes funky going into recessions (i remember a big GDP qtr going into the 2001 recession) i didn't have the nuggets to make a call on tomorrows number and position accordingly. good luck tomorrow if you did.
i'm still sticking to this is a bear rally and things end up crappy for 08 but in the short term this market sees it different than me.
although the general view was the crisis was overblown and it's just a matter of "confidence".
I agree.
If people just had the confidence to give their wealth away with no hope of getting it back everything would be just fine.
Maybe they are talking little league
When 1 team is getting shellaced, the 5th inning it is all over.
E.G. The Mercy Rule..
Gomer
If people just had the confidence to give their wealth away with no hope of getting it back everything would be just fine.
I guess it's even worse than that. The MBS buyers are all feeling lied to and ripped off. Of course there's a "confidence" issue when nobody believes a word these guys say.
The Fed can create money all day long, but there's no press in the world that can print trust.
"Where Is the Bottom"
Well, since not one of the experts at the conference was able to go out on a limb, Allow me to give you THE answer to the pricing bottom...
Somewhere between here and ZERO. Probably closer to here.
"ac writes:
although the general view was the crisis was overblown and it's just a matter of "confidence".
I agree.
If people just had the confidence to give their wealth away with no hope of getting it back everything would be just fine."
LOL!!
I just want to see an analyst say we are still in "spring training". Maybe somebody could talk Roubini into it...
Nemo | Homepage | 04.28.08 - 4:03 pm | #
As for baseball analogies, we're on the bus back to the minor leagues is where we are...
This conference is great. It's good to have repeated reminders that our economy is controlled by idiots and liars.
"Eli Broad, a philanthropist and co- founder of KB Home, the fifth-largest U.S. homebuilder by revenue, said he expects home prices to drop another 20 percent."
Shill. Scare tactic, Shilling for a full blown government bailout.
Baseball analogies are terrible... unless one can tie this mess to the Black Sox scandal.
Gamblers in charge and top players in the game cheating their asses off.
craig said: "agree about the opportunity to put on shorts in front of GDP but have to admit I did squadoosh today. given the recent sentiment turn and how GDP is sometimes funky going into recessions (i remember a big GDP qtr going into the 2001 recession) i didn't have the nuggets to make a call on tomorrows number and position accordingly...."
Discretion is probably the better part of valor.
I'm not sure a "bet" on a poor showing in GDP would get you anywhere. Q1 2007 GDP report was terrible, but the market (SP500 as proxy) was in a rally that lasted from mid-March to mid-July.
Sebastian
Sebastian - "Q1 2007 GDP report was terrible"
Of course it was. Q1 2007 marked the economic end of the bear market rally from 2002-2007. We just returned to the regularly scheduled program, that's all.
CR- ...although the general view was the crisis was overblown and it's just a matter of "confidence".
Well, isn't it always? It's kind of like saying that life is a matter of "survival," without revealing anything about the infinite variety of ways in which "survival" plays itself out.
It's a cop-out.
More like pitchers & catchers reporting for spring training.
Without wage gains or lower interest rates a housing bottom is nowhere in sight. Period.
What's worse, we're facing job losses, recession & rising CPI inflation.
Angry Saver,
Just watch Metlife when it reports later this week, I think on Thursday.
They have huge exposure to RMBS, CMBS, CMO, asset-backed, and direct commercial mortgages. If they don't report some writedowns, it can only be because they're not marking to market.
Genworth is big in long-term care insurance and health insurance and reportedly they are jacking up rates already to cover losses in mortgage insurance. But like all insurance companies, they may have portfolio losses in general account bond holdings, in addition to mortgage insurance underwriting losses. The double whammy.
Like I said, a run on a life insurance company is worse than a run on the bank because there's no Fed and no FDIC. It's Wylie Cyote for consumers.
The run would be on:
Fixed annuities (backed by bonds)
Variable annuities (backed by the stock market)
Whole life and universal life (backed by bonds)
Variable life (backed by the stock market)
Insurance companies don't have any real portfolio liability on variable. It's a straight passthrough. But a run on variable could be a negative for the market.
Insurance companies are even more leveraged than they look because only their general account side is vulnerable to bond losses. For some companies, that's about half of total assets. So if they report capital to assets leverage ratios of 10, it might be 20 on the bonds.
Insurance .. CNA reported today.. 37% to the downside, profits, prices and sales. Bad mix.
Loews Net Income Declines 14 Percent on Insurance (Update6) - Bloomberg.com
rich,
I don't see how there will be a run on insurance companies. It is usually a slow bleed event. Heck, rating agencies haven't even downgraded Ambac or MBI fully.
I'd be surprised if the insurers didn't have a lot of the mortgage junk on their books though. I know for a fact a lot of them swallowed the tech boom hook line & sinker. Same thing with Enron.
I think we are at least in the top of the forth.
1st inning - Realization of the problem
Bears 1 Bulls 0
2nd Inning - Sell off of market highs contagion.
Bears 2 Bulls 0
3rd Inning - Bears Stearns BAILOUT.
Bears 3 Bulls 1 However the bears left three men on base before the Fed came in for relief
4th Inning - Yet to come probably realization of prolonged recessio
The only baseball quote that's applicable: "It ain't over 'til it's over."
Looks like CR got about as much "value" from this pony showas Milken's junk bond clients in the '80s!
"Today I consider myself the luckiest man in the world" - Angelo Mozilo
Too bad it's CFC that has Lou Gehrig's Disease . . . or your quote would be spot on.
The only baseball quote that's applicable: "It ain't over 'til it's over."
What about Satchel Paige: "If you see a woman in a red dress, say hello" and "Don't look back. Somebody may be gaining on you."
CNBC says we're playing 5 year old t-ball and its only a 3 inning game so load up. You missed the memo, the BSC debacle signaled the end of all credit problems. Its in the "Finding Bottom Manual".
The fact of the matter is that
THREE strikes and your OUT
The guessing games over already
Insurance bigshot Hartford reports, and it's not good:
CNNMoney.com: 404 Page Not Found
William -
Not in T-Ball - you keep swinging until you get a hit...
Not too good on sports analogies, but when his fighter lost didn't Jake LaMotta once grab the announcer's mike and shout, "We was robbed!!"
Seems to me Main Street and the tax payers is gettin' robbed.
BTW does this housing cycle have pedals?
"although the general view was the crisis was overblown"
OKAY - So Bear had no issues. Banks are still lendin' like there is no tomorrow. Companies diluting shareholder value...
This is a CJ of like minded folks.
I bet onefity on GDP > Countrywide, in terms of surprise not the performance.
I would call current situation a 3 rd cycle too.
1 st mortgages
2 nd liquidity
3 rd lower profits and inability of FED to lower rates due to inflationary pressure
(I hope they will be able to raise those on time to avoid double digits)
Why the baseball analogy? I'm thinking more like a cricket test match.
A nickel ain't worth a dime anymore.
Yogi Berra
dont matter what inning were in cause its a double header
Re Morgan Stanley, NY mag has a great piece on the firing of Zoe Cruz. To wit, she was at her vacation home in Aspen, on July 4, 2007, when the reality of the real estate bubble and MBS first became clear to her...despite having deployed billions in that market as late as summer 07. Great read on the smart thinking on Wall Street.
The Crash of Morgan Stanley Executive Zoe Cruz -- New York Magazine
The Important Fed Meeting.
Ben: Welcome brothers and sisters. As you are all aware we have to decide on interest rate policy today and make some comments.
Governor No1: Ok let us vote...down 1 full point?
Governor No.2: Are you crazy? I say up a half point.
Governor No.3: We have to do what Greenspan says makes sense......drop her down to .50.
Ben: I am in charge here, not Greenspan. Anybody who does not like that can leave.
Ben: Ok, Ok, sorry, please come back. We will follow the Greenspan model.
Governor No.8: I thought you said Greenspan was out to lunch by dropping rates for so long in '03?
Ben: His books outsold mine by alot. Maybe he is right.
Governor No.2: Look, Ben, your models suck and you know it.
Ben: Well, it is all we have.
Governor No.5: And Ben, what about that billionaire guy that called you an idiot?
Ben: He is right
Ben: Sorry, delete that last answer from the transcript.
Transcriptionist: Done.
Security Guard: Excuse me, but there is somebody at the door claiming there is a large quantity of rice stored here.
Ben: Tell the guy to get lost. I have been misquoted again. The Federal Reserve is not hoarding rice.
Governor No.6: Ben, this is getting out of hand. We have to do something with the interest rates. If we cut them again, the inflation expectations may rise.
Governor No.5: If we cut them again the commodity boom may continue. We do not want gold going over a $1000.00, right? And what about the price of oil? Serious stuff.
Governor No.9: Look, Ben, some people are calling you a wimp and that you should raise rates. Be tough, be like Volker maybe. Defend the dollar.
Ben: Anybody have a rolaids?
Governor No.4: I am going golfing in 15 minutes. Can we finish this please?
Ben: O.K. All those in favor of ordering in a pizza raise their hands.
I think it's fairly simple. The bottom will be reached when the average worker, with varified earnings and a 10% down payment, can afford to purchase the average home. Only buyers with savings or inheritance will be pushing prices a little higher than that.
Some brokers, in Northern Cal., are saying the the buyers are starting to come out. When questioned, it's investors (bottom fishing speculators) who remain true believers. They will soon run out of cash.
Lee in Santa Rosa
We will hit bottom when 20% down is the norm and it is about 35% of income. Then this is affordable.
Just about everyone from the banks to the realwhores to politicians just cannot get themselves to admit the problem is affordability.
HOUSE PRICES MUST DROP DOWN TO AFFORDABLE LEVELS. In bubble markets we could see 30-60% drops in home prices to accomplish this.
I blame buyers now if they overpay. It is mainstream now that housing is imploding. Buyers must bid alot lower.