"Housing prices still too high"

Sanity, at last!

dr dan, the patient is dying!

LOL. I'm a Californian housing developer who has spent the last week cruising around Miami. It's amazing to see this place.....the sheer number of incomplete beachfront condos should, between here and California, pretty much ensure housing prices will be a disaster scenario for years to come. It's not impossible to contemplate 5-7 years to absorb the inventory here.

ZIRP-USA writes:
LOL. I'm a Californian housing developer who has spent the last week cruising around Miami. It's amazing to see this place.....the sheer number of incomplete beachfront condos should, between here and California, pretty much ensure housing prices will be a disaster scenario for years to come.

Don't forget Atlanta. Novare alone has four big hi-rise developments totalling well over 1,000 units in various stages of construction within about a 5-mile radius of downtown.

I mean, downtown Atlanta never was all that great a place to live, even when they had enough water.

The speculators went crazy.

Well, I said the same thing on this very blog a week or 2 back. It's about price, price, price. Did I get quoted in a post? No.

Maybe what the govt. "bailout" plan should entail is an opportunity for 1% fixed rate financing/refinancing for anyone for a window of, say, 6 months. Then anyone who wants to refinance out of their loser loans can, anyone who wants to buy can, whatever. Maybe it will help everyone get back on their feet enough to move forward again. It's better than watching everyone get thrown out of their homes.

CR people. My latest post from NR. What do you think?

Anyone familiar with the subprime crisis/credit crunch; its history, the excessive leverage, the off balance sheet vehicles, the derivatives impossible to understand, should realize that this is all a continuation of Enron.

So CR said "it is all subprime".

Couldn't we go a bit further back and say:

"It is all Enron"

PIMCO bonds (commenting on J. Yellen)
Fed Focus /Paul McCulley, Sept. 2005
Pyrrhic Victory
It’s a time inconsistency problem! Why should we in the bond market bearishly discount an ever-rising Fed funds rate, if an ever-rising Fed funds rate will surely burst property prices, begetting a reversal to vigorous easing?

Indeed, San Francisco Federal Reserve Bank President Janet Yellen explicitly made the case for just such a scenario two weeks ago, when she declared7:

“Wealth effects - positive or negative - tend to affect spending with fairly long lags. So, a drop in house prices probably would lead to a gradual cutback in spending, giving the Fed time to respond by lowering short-term interest rates and keeping the economy steady.

Now let’s complicate things. Suppose house prices started falling because bond and mortgage interest rates started rising as the conundrum was resolved, say, because the risk premium in bonds rose due to concerns about federal budget deficits or other factors. Then we’d have the cutback in spending because of the wealth effect, plus there’d likely be further spending cutbacks, as borrowing costs for households rose. Furthermore, a rise in long-term rates would have effects beyond just households - it also would dampen business investment in capital goods through a higher cost of capital.

How manageable would this scenario be? Like the wealth effect, these added interest-rate effects operate with a lag, so, again, there probably would be time for monetary policy to respond by lowering short-term interest rates. This obviously would not be a ‘slam dunk,’ but in many circumstances it would seem manageable.”
PIMCO - FF September 2005

It's like Mish said a while back, everybidy wants to go back to 2005 and just delete the downturn.

It is like trying to delete you cheated on your wife after she finds out.

Although we all give the Fed-heads a hard time, they know exactly what's going on. Now that the cat is out of the bag, they're trying to prep the sheeple for the outcome. They're facing the collapse of a monstrous credit bubble. Not a whole lot they can do now, just try to keep the patient comfortable.

OT, but read the other day that the Fed was spending some time talking with the Nordic folks re their problems about 15 years ago.

http://www.kredittilsynet.no/archive/f-avd_word/01/02/8Lars012.doc

This is a brief overview. I'm curious about what happened to the Krona and Finnish Markka vis a vis PM during that period.

koolaid still FLOWING

Financially Illiterate: U bery handi luking up stuff:-)

Janet L. Yellen, Sept. 8, 2005
"I'm not making any predictions about house prices here or anywhere else. I'm only pointing out some issues that should be considered."
Views on the Economy and Implications for Monetary Policy (09/08/2005)

When I look closely at some of these upscale hi-rise downtown condo projects, it becomes more clear how expensive these things are to plan and build. The projects take about two and a half years from ground break to move in, not counting design and permits. The higher the projects go, the slower construction is. There are tons of amenities built in that eat up saleable floor space.

I'm thinking that in some of these projects, part of the developer's profit was planned to be the appreciation in price between planning and sale. In other words, the developers didn't make too much on people who signed up early, hoping to make it up after prices increased in 2-3 years. In that case, you can figure what a killer a 30-40% decline in the market price would be for the developers and lenders.

It will be interesting to see how many of these projects just stop in their tracks, 20 floors up. It shouldn't be long until the bust-up in hi-rise condos starts, and it will get ugly fast.

A data point from Palo Alto.
House 2 weeks on the market. Offered at $1.4million.. 1040 sq ft on a 4000 sq ft lot. Sold today.
However a 4000 sq ft house on a 20,000 or so sq ft lot nearby has not had an offer in a year. Would an asking of $8million have anything to do with that?
It is a strange world.

Dear Tom,

Where do you live?

Regards,

My concern goes something like this...

1. Existing home prices decline. Many of these homes (not all tho) will have a negative price from original construction (iow, the home construction was subsidized by borrowers/lenders who didn't expect the price to decline).
2. How will new-new construction occur, if existing homes cost less than it is possible to build a new one. Some material costs are tied directly to energy costs (which certainly are showing no signs of declining).

Until the existing supply gets consumed, this could be a really strange situation.

NY Times - Investors Stalk the Wounded of Wall Street

"Almost two centuries ago, as Napoleon marched on Waterloo, a scion of the Rothschilds banking dynasty is said to have declared: The time to buy is when blood is running in the streets."
Investors Stalk The Wounded Of Wall Street - NY Times

IHT - Bad loans leave small U.S. banks short of capital
Bad loans leave small U.S. banks short of capital - The New York Times

AZ_Cowboy writes:
Although we all give the Fed-heads a hard time, they know exactly what's going on. Now that the cat is out of the bag, they're trying to prep the sheeple for the outcome. They're facing the collapse of a monstrous credit bubble. Not a whole lot they can do now, just try to keep the patient comfortable.
AZ_Cowboy | 04.03.08 - 11:18 pm

Well said.  If you step back and try to visualize the big picture the situation makes a lot more sense than focusing on the action at an ever shifting 'ground zero'.  We as a country began to shift in earnest from one of being a net producer to that of a net consumer in the world market perhaps 25 years ago.  Production of goods and rendering of services were 'off-shored' and 'out-sourced'.  The economic engine became our ability to consume imported goods and to export the debt (debt is money).  The fuel was asset appreciation - first the tech run-up and then the housing boom.

All attempts that have been proposed to stabilize the depreciation of assets (within the actual economy) have proven to be 'nothing burgers' and have 'dead-ended' when their adequacies became evident.  On the otherhand the real efforts to salvage assets have targeted the financial sector and have seemingly done the trick despite the fact that they appeared destined to failure.  And for what reason(s)?

I believe that the pendulum has reversed and we will return to being a producer of goods and services rather than the worlds primary consumer.  The economy will rebalance.  The 'Fed-heads' know this and are paving the way.  Life as we know it will become 'more challenging'.  On the other hand the financial sector will continue to function - as it must if we are to make the transition from consumer to producer with the least amount of 'pain'.  There will be short term inflation but for the most part there will be deflation - in money and our way of life.  Case in point: Everyone keeps referring to the FED paying for the 'bail-outs' via the 'printing presses' yet the actual money supply has remained flat for the past 6 months...

The bottom line in my opinion is that every possible measure will be employed to save the financial sector while the economy will be subjected to a slow/controlled 'recalibration' in keeping with change in economic policy.  At least that's the way I see it.

I have said for some time that every day oil is this high is a bad day for the U.S. economy, regardless what else happens.

Two small airlines shutting down in two weeks shows the stress that high energy costs are putting on tourism and corporate travel.

Tourism and corporate travel are discretionary luxuries. There are easy to eliminate when times are tough and travel is expensive. But they are powerful drivers of economic activity. So...look for more pain in hotels, travel agencies, restaurants, rental cars and taxi-limo companies.

These may not seem like big industries. But they are big employers.

O-No, it's O-Blow!

Total residential housing stock equals about $22 trillion. IIRC, less than half of that is homeowner equity, so about $12 trillion is owed on home mortgages.

Let's be generous and say house prices will only fall another 33%, or $7 trillion dollars in valuation.

Maybe half of that constitutes lost equity, which is harsh but hardly intolerable. But the other half constitutes an additional $3.5 trillion in uncollateralized household debt.

So suddenly, the average American household has taken on at least $35,000 in uncollateralized debt at 6-7% interest. In interest payments alone, that's $200/month. With small payment on the principle, $300/month.

Even assuming no households default and go BK, that makes for a horrific recession, especially considering the concomitant burden of the increased cost of food and fuel.

But if a third of that $3.5 trillion ends up losses through defaults and bankruptcies, the financial world eats it, in a reverse of 30X leverage. That's an utter wipeout, with $35 trillion dollars evaporated.

I am not sanguine.

How to live rent free... like the quote,.. "Now she's afraid to mail in a payment for fear it'll come to somebody's attention"

Lenders Swamped By Foreclosures Let Homeowners Stay (Update1) - Bloomberg.com

The primary residential bankruptcy cramdown proposal many here favored was tabled in the senate yesterday.

The proposal to let bankruptcy judges alter loan terms on primary homes, as they can already do on vacation homes and investment properties, was the most controversial in a series of amendments to the larger housing measure. It faced stiff opposition from many Republicans as well as the banking and mortgage loan industries. . .

Senate Rejects a Proposal to Allow Bankruptcy Judges to Alter Home Mortgages - NY Times

OT (kinda/sorta),

When do first quarter bank numbers get posted to the FDIC call reports ?

Pondering the Mess

This article was written for you.

Or perhaps it was written by you?

In addition to the -80K number, there was another -67K of revisions to Jan/Feb...

Yes but, energyecon, looking that far back into history is sooooo hard. Don't ya know.

No government program will help and there is no incentive to hold the properties. Wondering how widespread this is?

This is like the Beardstown Ladies of the mail room?

I heard the Beardstown Ladies lost their shirts, too. Only they didn't write another book about it.

The Feb revision was from -63K to -76K, so that means Jan took another -54K haircut!

What was the base number for Jan again? That was some color on Feb revisions from AP on Yahoo, going to chase down the stats to confirm...

Maybe what the govt. "bailout" plan should entail is an opportunity for 1% fixed rate financing/refinancing for anyone (...) It's better than watching everyone get thrown out of their homes.

No, no bail-outs, and not everyone is foreclosed upon, only those who were imprudent or hit by fate (medical bills). Prices have to come down first, to get a normal housing market back, and the only reliable way for that to happen is a large enough must-sell supply to meet non-too-eager demand. Remember, it's about price.

No, no bail-outs,
PeterT, I'm not a bail-outer either, but when I see them winding up in Congress, I know they're coming. If we're going to make it a bailout, let's pick the most efficient way. Just throwing ideas.

ipodius: I'd further bound that set with anyone that put less than 10% down.
In bubble areas like Miami condos or tract homes in the Inland Empire price declines are likely to be MUCH more severe. 10% barely covers the 7%transaction costs to sell a house.