So do you have a prescription, CR? I mean, if you were Treasury Secretary, would you be attempting to prop up house prices? Or the prices of anything derived from housing?
Jas is right on this one IMHO. Where will the consumption magically come from when household are burdened with debt? So what if the banks can get rid of their toxix assets - who are they going to lend to?!?
my response to whoever used an analogy of Bubba not wanting to use his soda to put out a fuse he hadn't lit:
So Bubba and the banker sit on the keg. Bubba has his lunch and his soda, banker is temporarily out of soda as he spent all his money on a yacht and a castle.
The fuse is lit, but the banker is sitting on the fuse, not giving Bubba easy view or access.
Banker then asks Bubba to give him all Bubba's soda. When scared Bubba complies, banker drinks it all, and then pees on the fuse, pees on Bubba, pees on the keg, and then runs away laughing.
CR,
Do your charts account for homeowners (homedebtors) holding the homes "to maturity"? Your chart only captures the current "firesale" prices which do not reflect "fundamental" value. You may want to update that one!
Interesting view from high altitude. Amazing how an estimated potential $840 billion loss has triggered much larger potential carnage on Wall Street.
The other part that strikes me from this is what will happen to the recently constructed and sold developments, where the vintages are concentrated. Some areas will be almost 100% underwater.
That is, when natural seepage and leaking water mains fill the smoking craters.
Fitch Places Citigroup's 'AA-' IDR on Watch Negative; Lowers Wachovia Corp. to 'BB-'
The strategic benefits of Citigroup Inc.'s (Citi) acquisition of Wachovia Corporation's (Wachovia) retail, corporate/investment and private banking operations are tempered by Citi's own escalating asset quality challenges, according to Fitch Ratings. Fitch has placed Citi's 'AA-' long-term Issuer Default Rating (IDR) on Rating Watch Negative following the announced agreement.
Nemo, trying to prop up house prices seems crazy. To me, any government intervention should be to make sure credit worthy customer can still borrow - and also to make sure the systems doesn't implode because of CDS type exposure.
I still support an RFC type investment program.
donnam, the most recent number I've seen is $550 billion (global write downs). There are losses that are hidden too (like hedge funds).
The IBs write down in advance of the price declines (as examples, JPMorgan is using 25% peak-to-trough pricing for their estimates, Goldman is probably around 27%, and I'm guessing somewhere in the low to mid 30% range right now.
.. this blog now who don't even know who Sebastian is.
What about Jas? There are many here that need to be identified as regulars; who has a list... CR? I used to be on a list, but then I pissed off Tanta, so I'm on a different list now...
house prices peak to trough? my bet down 80% in real terms because no credit no house price. I even think the failure of the plan is probably a good thing because it keeps the losses where they belong, among the oligarch's and foreigners. Our current illustrious administration will go down in history as the one that dragged the US into the quagmire of petty land grabbing global politics and the one that bankrupted the US at a time when a solid financial position wasWmost needed. well done all!!
BTW not too impressed with last admin either, they were just as aggressive in inflating the "asset based economy" HA!! Now we see the flip side of that particular economic strategy!
Luckily, I have had many comments exchanged with Sebastian. How he was calling his book about buying at the lows in January and feeling really good back in May. Unfortunately, he might still be long the market, but not nearly as happy.
After explaining how his models are flawed - he refused to accept. I only hope he eventually listened to others on this site and myself for the warnings.
I don't think you can compare stock losses (there are based on some multiple of earnings and cash flow) to capital losses - at least not directly. The mortgage related losses to the lenders have a multiplier effect on lending.
The decline in the stock market can impact capital spending plans and has some wealth effect on consumers - but the impact on the economy is small compared to the capital losses.
8:00 AM in Hong Kong and guess I'll check the news-- wah! Bill fails! Too many comments to read but I am still wondering what Hank's bogey man is, and whether he'll do a strip tease to reveal it.
At any rate, an amazing display of the power of votes over influence peddling. Not that the vigil is over.
More on topic,
Back in the darkest days of the HK RE meltdown there were estimates of close to one third of mortgages being upsidedown-- and the average Joe knew it since this is a very liquid market with daily info about transactions about as widely read as stock market results.
Big difference was higher dp requirements and stringent recourse loans. Since walking wasn't an option, people toughed it out; stories of three generations pooling a payment, etc. The amount of family wealth tied up in these chicken coops never ceases to amaze me.
But stateside, lord knows what the US homedebtor will do, especially if his income goes south.
Interesting view from high altitude. Amazing how an estimated potential $840 billion loss has triggered much larger potential carnage on Wall Street.
Look, let's get real.
Imagine that you have trillions of dollars, times are normal, interest rates are normal, etc.
I say to you: There's a big company over there for sale. Would you like to buy it?
You say: How much?
The answer based on common negotiated sense between rational people in normal times is somewhere between 10-15 times earnings. That's what decent companies are worth in normal times.
Even after all the carnage and wailing and gnashing of teeth on CNBC today, the S&P 500 still has a P/E ratio above 20. The Russell 2000 still has a P/E ratio of "nil."
And these are far from normal times.
Did Congress cost the stock market $1 trillion plus today? No.
Congress just helped everything get back to reality by exploding a lot of the hype and govt. intervention that has propped up the market.
Bernanke was a runaway train before today. Now, hopefully he's knows he's not bigger than Mr. Market and Mr. Public.
"You know, it just occurred to me that there's probably a thousand people who regularly hit this blog now who don't even know who Sebastian is.
They probably think he's a cabinet member or something."
Twould be a waste of time. Simple really. Seb uses the Wright Model B Flying Turkey to analyze the economy. Said model is broken. Seb thinks there is and will be no recession and the sky's the limit on the stock market.
Mission Accomplished! The Bush disaster is almost over people. Let the rotten financial companies fail, bacstop payrolls. Spend the 700 billion on infrastructure, schools, science. The stuff with real value! Build some Dams...Rebuild AMTRAK...Recapitalize the auto industry...get AMERICANS working. No need to bail out the trash on wall street. They are lazy filth, who produce nothing but Credit Default Swaps. Wake up America, PUT THE CRACK PIPE DOWN!
I think there are a lot of "hidden bubble markets" which are just waiting to implode. Everyone's been paying attention to Florida, California, and Nevada, but there are a lot of other markets where we haven't begun to see these kinds of prices declines.
The worst are Maryland and Northern Virginia, Massachusetts, and New Jersey. These areas are NOWHERE NEAR where they need to be in terms of home prices compared to income.
I think they'll fall in the "great wave of option ARM recasts" coming in the next few years. And God help us all when it does come.
I agree with you, stocks are overvalued. What struck me was that today's action on the stock markets was larger than the long-term total loss on bad mortgages, the expectation of which is what seemingly disturbed the financial house of cards.
Just an interesting observation on the numbers, not an argument that stocks were reasonably prices. As I have posted elsewhere, I think currently forward P/Es are way off because earnings estimates are bogus. They remind me of Realtors' estimates of housing appreciation back in 2006.
CR keep us updated on how registration/moderation system progresses, because I was already thinking of writing a simple python script for showing the posts of people on the friend list
"peak-to-trough price decline would be about $840 billion"
a bit more that Hanky's plan; but bail 'em all out. Have a cadre of folks completely mortgage free! Therefore no losses on the housing side, no losses on the housing MBSs, CDOs.
Just FWIW - the equity markets lost $1.7 trillion in market value today. Makes everything else look like chump change. Happy Retirement. Robyn
Robyn | 09.29.08 - 8:20 pm | #
That "value" was imaginary to begin with. Just like a $800k crackerbox in Torrance.
"the equity markets lost $1.7 trillion in market value today"
And if it loses another 2T, it will have crashed all the way down to 10% total return over the last 20 years. (My numbers need checking, but I'm pretty sure it's right)
Question: anybody have a guess as to whether the PPT was purposefully not utilized today? Seems like if dubya wants to scare/herd the citizens into telling their reps and senators to vote for the plan he would want the PPT to NOT try to mitigate the big slide today - it helps his case that there's an imminent threat of an economic mushroom cloud.
Remember this craptastic bailout plan morphed into a bailout plan for everything and everyone.
They didn't limit which assets, nor did they limit it to only US institutions.
Whatever numbers we come up for mortgage backed losses are only part of the number. This is part of what makes this bailout plan so piss-poor. It is an unlimited ability of the Treasury to prop up institutions they like and kill institutions they don't.
Add in transactions costs (6% for liquidating said home). Also add in that the remaining equity is locked in place, it ain't going anywhere. Certainly not to buy a new home.
Even even if these loans don't go bad, the liquidity they would have added from the normal turnover of home sales isn't going back into the market. Losses are just insult to injury.
I have an O/T, odd question - how are these swaps with other CBs reflected either in M2 or M3 or where ever. Since they are meant to be temp. How are they captured? I only ask now because of the huge push in the last 9 days - esp. today.
as you can see we have another 3 years of bloodshed in the housing market ...
Sadly,
The goobermint and the Fed have no more games left to play and even if they get this bailout passed on another try, it won't matter.
That graph is horrifying to us who understand.
WHY?
Because Wall Street and their ilk can't absorb another 3 years like that last one and that doesn't include the lack of equity graph as shown here or the other HELOCs waiting to go off.
I realize a busted clock is right twice and us uberdoomers have been calling this for 5-10 years, at least, but the day of reckoning is coming for this once great country.
YOU CANNOT KEEP RUNNING A COUNTRY AT EVERY LEVEL FROM THE WHITE HOUSE TO THE UNEMPLOYED J6P ON DEBT FOREVER.
Eventually the interest and the amount owed will become too great.
We are sooooooooooooooo at that point for almost everyone in the US.
And if it loses another 2T, it will have crashed all the way down to 10% total return over the last 20 years. (My numbers need checking, but I'm pretty sure it's right)
What a f***in' nightmah!" Mona Lisa Vito.
Austin Tex
"Question: anybody have a guess as to whether the PPT was purposefully not utilized today? Seems like if dubya wants to scare/herd the citizens into telling their reps and senators to vote for the plan he would want the PPT to NOT try to mitigate the big slide today - it helps his case that there's an imminent threat of an economic mushroom cloud."
Like they're manufacturing something?
BZZZT! Ack!
Time to replace the damned batteris on the Super Colander Tin Foil Hat.
Yes-I predict a real healthcare crisis, almost every hospital overbuilt in the last five years. The cost of insurance and higher deductibles for patients are going to drive people away. Prescriptions have already dropped and watch the bomb explode when the hospitals don't have enough money to pay for their expansion. Businesses can't absorb the cost anymore and that tsunami is following close behind.
Calculated Risk writes:
Voter Database, I'm working on a better comment system with registration and better moderation. Hopefully we can get bring back the regulars.
Best to all.
Calculated Risk | Homepage | 09.29.08 - 8:30 pm | #
totally agree CR.
for better or worse, I used to spend a lot of time on the comments because of the useful dialogue. now its just "oh shit" comments from the new guys, "short this stock" from the trader folks, and "comrade this and that" from the regulars that stuck around - all of course buddy whipped into action by misean.
i mean, we can't even get a reasonable discussion of mass transit economics in this comments any more...
hell, the inflation deflation arguments are crowded out!
"Some elite schools (Harvard and Stanford I know for sure) are forecasting that they may do away with tuition entirely."
That, however, is dependent on the performance of their endowments. Harvard (the largest endowment) has been threatened with losing its endowment's tax exempt status if it did not more closely tie its earnings to the U's educational mission.
Anyway, they really only charge list price to unqualified legacies and specials (president's grandchildren, etc) as it is. A bright, special kid who impresses the interviewer rides for free already.
I have looked around today for some info on US def. and credit rating (I thought the House was going to pass the Golden Hanky Nugget)...have not seen anything published on the debt tolerance (per GDP) to keep a AAA rating. Have you? IMF has a lot of goop but really relevant (imho) to a peg currency.
Any guesstimate that considers the worst of the housing losses behind us just can't pass muster, since the economy is only now becoming a factor. They can bailout every financial institution in the country and we'll still have a depression, and that'll multiply the losses experienced thus far.
Why can't the fed subsidize mortgage rates so that they get close to zero. That would instantly add many first time buyers to the market who are credit worthy. This would reduce loss sevarity, reduce the number of underwater home owners, reduce foreclosures, and give affordable homes to millions, plus the spending to furnish these homes. Instead of buying CDOs, spend the $700B on subsidizing mortgage rates to first time home buyers. I know that pisses off anyone who has a mortgage, but it also will help keep home prices high which seems to benifit everyone.
Win win win so it will never happen.
The worst are Maryland and Northern Virginia, Massachusetts, and New Jersey. These areas are NOWHERE NEAR where they need to be in terms of home prices compared to income.
I think they'll fall in the "great wave of option ARM recasts" coming in the next few years. And God help us all when it does come.
Nobody | Homepage | 09.29.08 - 8:35 pm | #
Oh yeah, DC proper and inner suburbs have not had hardly any pain. It's a-comin' tho.
" Are they really going to reset though, or will they be crammed down by then. How much more in terms of writedowns can the system take."
Scooby
~~~~~~~~
don't know about cramdowns , the Republicans won't have it ...
Thee problem with these loans is that most were little down , can't be refinanced without more owner capital and ...
will have mortgage payments adjusting upwards, some to the tune of 300% ...
I've heard of people whose mortgage payments have gone from $1300 a month to $3900 a month...
I assume that $800B to $1T+ loss estimate is just for straight MBS? That is, not including the CDOs, CDO^2s, CDO^4s, etc. that are derivatives of the straight up, non levered MBS?
If it's just the straight MBS losses...ruh roh.
If I follow CR's analysis, $700B is just the downpayment:( That's cool, though, I'll just think of it as an 80/20 neg-am loan for $3.5 Trillion.
Some elite schools (Harvard and Stanford I know for sure) are forecasting that they may do away with tuition entirely.
Citizen Scotto | 09.29.08 - 8:46 pm | #
Ask them about it again if the DOW goes down another 20% or the fixed income market goes poof... There isn't an 'Endowment Fairy' even at HAH-VAHD.
Comrade Misean - NO NOT AN EFFORT TO PUSH DOWN THE MARKET - that's as stupid as the "9/11 truthers."
I understand the PPT to be used to mitigate downturns and I'm wondering if they allowed the market to move down with no effort to mitigate it as they wanted people to see the consquences of failure to pass the bill.
Just 'cause I live in Texas doesn't mean I'm stupid.
"Why can't the fed subsidize mortgage rates so that they get close to zero"[?]
You want another, final, gasp out of the housing bubble? How does that help anything? We already had $1 million apartments in LA, so how does bidding them up to $2 million help, when they're only worth $250K at best?
I am of the opinion that only food and energy will go up, but almost everything else will go down.
Why?
Because if money hyperinflates, food is going to skyrocket.
Look, houses, baseball memoribilia, cars, artwork, etc. can't be eaten or used as energy unless burned.
Me and a friend were discussing this after consoling one another after the USC upset loss last weekend. We both came to the conclusion that in the end the bottom line is food and water, all else if negotiable.
No home, but car...live in car.
No job, but canned food and can opener, I eat.
You cannot eat gold. Well, I guess you caould try, but I'll take even jello over gold.
As for water, well, let's say if you don't have anything to drink after several days, it is game over. Sure, those people who survived on a raft for several days/weeks did it, but that is a few.
DO you really think 99.99999% of Americans will make it 2 days without anything to eat or drink if things go off the deep end?
Propping up housing is not the answer, it's the problem! Too much land has been cleared to lay down unproductive, now decaying, wooden and gypsum boxes. All this due to government fixing the price of money / credit.
Oh yeah, DC proper and inner suburbs have not had hardly any pain. It's a-comin' tho.
Yeah - anywhere near DC is ridiculously overvalued. Look at this beauty in Bethesda. You have to love how they're advertising a dump like this, which is listed at $600,000, as a "starter home". Like any first time home buyer can come up with $600,000.
Anyone think this is done for the week? I believe Hank et al will want the House Boyz back early Thursday for a 5 am vote. Get the business done before the east coast gets moving. Any thoughts...
Did anyone else catch the part of the Wachovia/Citi deal where any mortgage loan losses over $42 million that are incurred By Citi on loans made by Wachovia will be paid for by the FDIC ? This equates to anything over about a 12% loss.
Nobody writes:
Oh yeah, DC proper and inner suburbs have not had hardly any pain. It's a-comin' tho.
Yeah - anywhere near DC is ridiculously overvalued. Look at this beauty in Bethesda. You have to love how they're advertising a dump like this, which is listed at $600,000, as a "starter home". Like any first time home buyer can come up with $600,000.
I love how the taxes in a 2 font are stated to be $5800+. Good grief, even if you pay that sucker off, you are liable to county tax man for $500/month for as long as you live in that tomb.
Why even bother? And you know those taxes will creep as your neighbors leave in the dark of night, leaving the county to raise so they can cover the dog catcher's $150K salary.
Comrade Misean says "Well it's pretty clear that deflation won"
Yes it is working thru the K markets, but how will migrate to other sectors? Commodities are over bought in a softer economy, pressure on wages as jobs vanish, housing sucks so does all the inputs,taxpayer is exhausted as municpalities become strapped to fund programs. Is this how?
I don't see demand for oil falling in the country as fast as many seem to. Hard to see how consumption patterns can turn on a dime, oil is used in so many things like fertilizer, plastics, etc. in addition to motor fuel.
For example, people didn't stop driving last spring when the cost of fuel was higher than it is now. Heck, the trash pickers in the alley can still afford to gap up their truck on the income from collecting cans and bottles.
RE inflation V deflation...if Monetary (not price) in/deflation is being talked about, I think the M3 data clearly shows that inflation is still raging, albeit with deceleration in growth which should pick right back up with upcoming data sets
Here's a guess about what happens in the house this week:
the bill gets revised to allow BK judges to modify terms of home loans and a few other sops get thrown to the democrats. Then we see another vote in the House either Thursday or Friday. They'll have to hurry to cut a deal and get the thing revised in time for the Senate's vote on Wed.
If that fails then a full blown reconsideration of the bailout will have to happen.
Learning and Stealth, what is funny is that my wife is catching on, but the kids think dad is out to lunch.
Anyway, the condo unit we rent was tented for termites, so we had to put all the canned food, etc. in special plastic bags.
When we moved back in and upacked them I asked my 12 yr. old son to count all the cans since I have too many. Well, we got to 25, not much mind you, I have only started on this part of prepping for the biggest depression ever.
I then asked him to divide 25 by the 4 of us and the wheels are now spinning. He comes up with 4. I know told him that when the SHTF, you get 4 cans of food. Might last you 2 days. See, how much we consume, now multiply that by 300 million in this country. Not a pretty sight.
I also said, hey of it all holds, we can donate the food to the food banks or use and save the week's grocery bill. Win-Win-Win, no matter what.
Builder Bob writes:
I might do better by selling some of the gold I still hold and buying some of that survival / backpacking gear I've been meaning to buy anyway.
Builder Bob | 09.29.08 - 9:01 pm | #
You will get no argument from me on that decision.
When everything goes out the window, survival is all that matters.
That doesn't include people with equity that are going to default because of a recession doesn't it? Losses are going to be chump change if something doesn't happen or else its just gonna downward spiral.
Since you're looking at falling prices and not negative amortization, I think you're being alarmist. Just because a house loses value doesn't mean it will suffer default. I think you need to look at how many of those mortgages are fixed and discount almost all of them. Then, you might be onto something.
I love how the taxes in a 2 font are stated to be $5800+. Good grief, even if you pay that sucker off, you are liable to county tax man for $500/month for as long as you live in that tomb.
Why even bother? And you know those taxes will creep as your neighbors leave in the dark of night, leaving the county to raise so they can cover the dog catcher's $150K salary.
OCDan | 09.29.08 - 9:01 pm | #
Dan you've just nailed why it's unlikely I will repatriate myself and buy into this sucker, even if asking prices fall another 30%
Thanks CR, this is the core information that I love.
Question, what is your current source of data for estimating negative equity mortgages?
Does it control for which mortgage were written when in which markets? Does it consider piggyback mortgages or HELOCs? Does it factor in closing costs, or can one assume those are rolled into the mortgage?
FYI other readers: The old chart from First American CoreLogic data in the Goldman Sachs report is @: discussed by CR in this post
"Commodities are over bought in a softer economy, pressure on wages as jobs vanish, housing sucks so does all the inputs,taxpayer is exhausted as municpalities become strapped to fund programs. Is this how?"
Not sure. That will definately do something bad.
Thing is all assets will show weakening. And they are all underwritten (levered) by short term paper. So the short term paper dries up and the assets become more expensive due to interest on short term paper increasing, or sal at a discount. It's fairly complex, but nothing is really looking good.
Anyway, they really only charge list price to unqualified legacies and specials (president's grandchildren, etc) as it is. A bright, special kid who impresses the interviewer rides for free already.
Austin Tex | 09.29.08 - 8:51 pm | #
Thanks Austin, did notknow that about Harvard's tax exempt status.
FWIW my faculty acquaintances at Stanford have told me that they always have many top-notch applicants who end up choosing some other school for financial reasons.
How does variability influence your analysis? A very big part of the problem is that price declines aren't even. You have the bubble zones - maybe 1/2 of the market pricewise - declining 50% and the rest of the market more like 20%. In the rest of the market defaults will be better but in the bubble zones they will be far worse. In CA 2004-2007 you're looking at 40%+ price declines on negligible equity at 8x-10x incomes. Defaults with those kinds of statistics will approach 100%. and severities will be more than 60% - sometimes approaching total loss. Staying simply isn't an option when the mortgage is most of your takehome pay. The other bubble areas aren't much better. We already have ghostburbs and ghost towers and I would estimate we're 2 years from peak emptiness.
Do the math. For every 100K borrowed at 6% for 30 years, you pay about $600/month.
Therefore, at $500/month, you will have a mortgage, inessence, of $85,000, which YOU WILL NEVER EVER NEVER PAY OFF!
Most of us midle class buyers have to begin to think like this. It is a matter of financial survival and must be factored into any home purchase. Also, consider that if you somehow, I know it assuming much, that if you live in the house 50 years, you will have spent $300K on taxes. HOLY SMOKES!
Also, don't forget HOAs. I noticied none on that sucker, but here in the "OC" they are everywhere.
If you want to see real situations borrowers are facing that lend (pun intended) credence to what this article says, go to the forums on the Latest News - LoanSafe.org site. Walking away is clearly on the increase.
well with your well-wishes and a personal guarantee, i now can't even get a cup of coffee much less a C&D loan!
just kidding, we're still seeing capital available for the right deal in the right place at the right time with the right sponsors and the right tenants.
Since you're looking at falling prices and not negative amortization, I think you're being alarmist. Just because a house loses value doesn't mean it will suffer default. I think you need to look at how many of those mortgages are fixed and discount almost all of them. Then, you might be onto something.
Rob | 09.29.08 - 9:09 pm |
I have experience with housing bubbles. Anytime negative equity becomes 'common' bad things happen no matter the ability to service the mortgage.
People commit insurance-arson. People walk away because they can save xx% by walking away and repurchasing (it is possible in several circumstances despite what you know about credit scores, at worst a bankruptcy has a 7 year expiry -- never mind the whole market is in the same boat and banks still have to lend to somebody)
Once enough of the housing stock gets converted to rentals, then the price for rentals will drop and stay low until there is no more housing inventory left to convert (say around the 6 months of sales mark)
Only when the price of houses stops falling will banks stop experiencing crippling mortgage losses
The ummmmm conservative crowd is ( and has so done on this very site) laying this financial crisis right at the feet of mortgage lenders forced by Gov. regs to give loans to "people of color"
The statistical skewering of that rumor might be a civic service. I am unfortunately not qualified to perform such a service or I'd volunteer. How about it?
CR has been such a tremendous resource, that it seems very selfish to do what I am about to do, and suggest topics, but that seems to be the thread here. My wish list:
*What really are the assets of, and who are the creditors to, Citicorp's
$1 Trillion off-balance sheet caper?
*What is the current solvency of the monolines, and why haven't we heard much from them lately?
*Links to a couple of Bernanke's actual papers on the gold standard, bank failures, debt-deflation and Great Depression. Among the libertarian leaners here there lots of dismissal, but not much specificity about putative flaws in evidence, methods, etc. (Due to the nature of comments sections in blogs, not the aforementioned commentors).
*Other historical parallels, such as the Panic of 1837.
How long could you hold out? Is your survival scenario one of "order will be restored eventually' or are you going full Conan (the Barbarian, not the O'Brien)?
Do these numbers include second mortages used to avoud PMI as well as helocs - used to fuel the great consumer lead GDP run of the past 5 years. If not the loses should be much greater. My gut says this is not 'only' a $850 billion problem. Again CFC used to originate $30 billion a month - think about that. Stunning.
EngineerJim writes:
Just FWIW - the equity markets lost $1.7 trillion in market value today. Makes everything else look like chump change. Happy Retirement. Robyn
Speaking for myself, I wasn't planning on retireing today.
EngineerJim | 09.29.08 - 9:15 pm | #
Hey, it's nice to see Robyn back, and anyway she's mainly in munies IIRC.
Jeff,
I am dead serious. Heck, I mentioned that I have a meager 25 cans of food. Anyway, went on to Target and Ralph's last Friday and bought another 10 cans of soup and Chili. Sure, we have enough stored for 3-4 days. Not gonna last 2 years on that.
However, I think people are going to figure out that local community and food and water are what we need right now.
Wall Street and DC can go to Hades for all I care. I realize that will wipe out a lot of innocent people and I may lose my job, but if it makes this a stronger and better country I think I could go along.
We have partied for 25 years like there is no tomorrow, well tomorrow is here for the next 3 years, look at the housing reset chart.
I am usually not the most alarmist, although I can be the most bearish. However, having a week's worth of food and water on hand is always good, esp. in weather/earthquake challenged areas.
Food (no pun intended) for thought...
Most grocery stores only have 3 days of food in the store. If you live in a large metropolitan area, that will not last long.
I meant to tack on the point that if negative equity becomes common, defaulting on a mortgage loses its stigma and transmits like a social virus. It's pretty clear that we can clear the tipping point where stigma keeps defaulting a taboo
Nanook writes:
No home equity means you can't pay for the kids' college. No credit system means the kids can't take out student loans. This could get ugly.
Nanook
Most of the chest thumping free thinkers on these boards unfortunately have a "short" position on progeny.
mykillk writes:
"RE inflation V deflation...if Monetary (not price) in/deflation is being talked about, I think the M3 data clearly shows that inflation is still raging, albeit with deceleration in growth which should pick right back up with upcoming data sets"
Well, M3 isn't showing much of anything since they stopped publishing it...
More seriously, there is considerable evidence that the growth in bank lending can largely be traced to (1) commercial paper issuers being frozen out of the market and having to tap backup bank lines; (2) precautionary draw downs of existing bank lines by borrowers who are afraid of being frozen out of financing.
In other words, the increase in bank lending may not be the result of banks extending credit, it's just that they previously over-extended credit lines and it's too late for them to do anything about it.
If true, that's not the recipe for inflation. It's more the Wile E. Coyote moment where the economy went off the cliff and has not yet started to fall.
"But if we estimate one half of homeowners with negative equity will eventually default, use a 50% loss severity, and a 35% price decline (23.6 million households with negative equity), and use the median house price from the Census Bureau of $216 thousand, we get $1.3 trillion in mortgage losses for lenders."
WAY TOO OPTIMISTIC. Defaults are highly concentrated in FL CA AZ & NV where equity is lower and price declines are much higher. @2T in direct losses and leverage makes the notional losses 30X higher still.
Interesting view from high altitude. Amazing how an estimated potential $840 billion loss has triggered much larger potential carnage on Wall Street.
The other part that strikes me from this is what will happen to the recently constructed and sold developments, where the vintages are concentrated. Some areas will be almost 100% underwater.
That is, when natural seepage and leaking water mains fill the smoking craters.
I'd agree insurance adjustment is about to get to be a real lively business. Maybe that'll provide some jobs.
"forced by Gov. regs to give loans to "people of color""
More like "people of no visible means of support". It wasn't just people of color. Kids in their 20's who were buying condos as investments. Strawberry pickers buying $700K houses with their occupation listed as "agricultural engineer" and their income listed in six figures.
It was a colorblind orgy of loans to the indigent.
Yeah - anywhere near DC is ridiculously overvalued. Look at this beauty in Bethesda. You have to love how they're advertising a dump like this, which is listed at $600,000, as a "starter home". Like any first time home buyer can come up with $600,000.
Nobody- That's not far from where I live. Yes, that's about the lowest price you will find in Bethesda. Across the DC border in Tenleytown there are even smaller houses for $700k+ (and you don't get the benefit of Bethesda schools over there)
Believe it or not with that location, walking distance to the Bethesda Metro, you could rent that house out for probably $4k per month.
The incomes here are high, and this is a desirable area, but the multiples are still unsustainable. Lots of ARMs hereabouts I fear.
The good news is these 1930-1960 vintage houses are solidly built and will last for a long time, unlike much of the newer stuff.
In a full blown meltdown depression, the rich will have some insulation for a period of time. At least some of them. The poor are the poor. I mean no disrespect to them. Heck, I have a guy who lives in his car come into my work every day.
The people who scare are my fellow American middle class. These are the people who eat out once a day every day and are now told that you will eat PB&J and baloney samwiches for the next 10 years. Oh, that is not going to sit well with the 30K millionaires' club that financed everything from soup to nuts. I know some of these people, they will take to the streets to feed themselves and their chilluns.
EvilHenryPaulson,
Here in OC CA the bubble victims I know no longer feel stigma from walking, or at least not enough to matter with the amounts at hand. I see posts at the Irvine Housing Blog of people who do still care. The main thing holding them back is that most people still cannot accept the possibility of 50%+ price declines. Most still expect a halt to declines soon and a resumption of increases and with those assumptions it more or less would make sense to tough it out.
re: forced by Gov. regs to give loans to "people of color"
I realize no one is blaming that here, but I thought I would share. FNMA/FRE were doing deals where once a reporting period they borrowed such loans overnight from the banks that had them anyways -- it really didn't affect their book of business
I don't know what your plans are, but if the Greater LA/OC area goes to hell in a handbasket I'm getting O-U-T.
Comrade Bear (tj & the bear) | 09.29.08 - 9:23 pm | #
Bear, are the same from Ben's HBB? If so, we have agreed on many points before over there.
Yes, I agree with this point. Sure, when the OC fires hiot, people worked together.
However, not having food and water for the masses is a'hole different creature. Look at Katrina. Look at the King and Watts riots. This area will go nuts when people don't have access to the happy meal.
I agree I will get out too. Besides food and water, make sure you ALWAYS have 3/4 of a tank of gas to get of of DODGE.
I love how the taxes in a 2 font are stated to be $5800+. Good grief, even if you pay that sucker off, you are liable to county tax man for $500/month for as long as you live in that tomb.
Could be worse, a relative in Westchester NY pays twice the tax for a similar assessed value.
No home equity means you can't pay for the kids' college. No credit system means the kids can't take out student loans. This could get ugly.
I'm sympathetic -- up to a point.
Working class Americans have had it ugly for three decades. The white collar crew's about to find out what living within its means, er, actually means.
Also until everyone stops believing the government can do something to bail us out we won't hit the bottom - that just seems like commonsense. Still way too many people looking to the government to help them.
Anyone know if these numbers include HELOCS and seconds?
My father sold his house in south Florida at the end of 2005 - peak of the market - for $1.5 million (now it is back to being worth maybe about $800,000). That is real money in his pocket. FWIW - he wasn't a genius. My mom died in 2005 and it made sense to sell the house then. There is a really big difference between unrealized gains that disappear and your so-called imaginary money. Roby
No argument. My hometwon of Ridgewood, NJ has a tax rate of 3% and many homes are 700K. Imagine 21K in taxes per year FOREVER. That is almost 2K a month. For that, the county better provide limo service anywhere, chef service to every home, an Ivy League High School, a laptop to everyone. Well, you get my point.
Question from a mostly-lurker: are the survivalist types here for real, or just using sarcasm to "lighten the mood", as it were?
It varies. I'm with Misean -- I have considerable stores set aside for emergency rations. Other people are just sorta discovering the concept.
Many people have relatively unexamined "nuclear war / oregon trail" concepts -- they will go someplace remote and live in a shack. Others have differing or more sophisticated concepts.
Mostly every regular here is pretty crazy, with the possible exception of CR. Each has their own unique take on the situation and the world it's taking place in.
Here in OC CA the bubble victims I know no longer feel stigma from walking, or at least not enough to matter with the amounts at hand. I see posts at the Irvine Housing Blog of people who do still care. The main thing holding them back is that most people still cannot accept the possibility of 50%+ price declines. Most still expect a halt to declines soon and a resumption of increases and with those assumptions it more or less would make sense to tough it out.
Fair Economist | 09.29.08 - 9:26 pm |
Exactly. It's only a matter of time before the 'social virus' shows up in middle America. Also keep in mind some markets are years behind Vegas/Florida/California/Arizona, like the Pac NW was rising until sometime this year so ~2-3 years lag time
Some Homebuilder CEO was on CNBC pushing his plan of government spending a few trillion to backstop housing prices. His chief complaint were they were reselling for less than replacement costs -- genius didn't realize homebuilding supplies and labour will also have to come down in price to service a less exuberant market
Comrade Bear (tj & the bear) writes:
Fair Economist,
Amazing what people will cling to, isn't it? For the most part the fun still hasn't even started in the nicer areas of SoCal.
Comrade Bear (tj & the bear) | 09.29.08 - 9:27 pm |
Deflation is gonna make those $3K house payments the equivalent of $5-7K in today's money. This exacerbating effect forcing default is still "contained". When it gets out is when it'll get innerestin.
Nobody- That's not far from where I live. Yes, that's about the lowest price you will find in Bethesda. Across the DC border in Tenleytown there are even smaller houses for $700k+ (and you don't get the benefit of Bethesda schools over there)
Believe it or not with that location, walking distance to the Bethesda Metro, you could rent that house out for probably $4k per month.
The incomes here are high, and this is a desirable area, but the multiples are still unsustainable. Lots of ARMs hereabouts I fear.
The good news is these 1930-1960 vintage houses are solidly built and will last for a long time, unlike much of the newer stuff.
Yeah - I used to live in Bethesda. I sold in 2004 before the bubble really hit Baltimore and moved north. Pocketed a nice chunk of money, bought a nicer place, and I ride the MARC train to work. It's really not that bad of a ride - kind of relaxing in the morning, actually.
I understand that this particular listing in unrealistic, but the choice areas around DC are just as ridiculously overpriced. After all, a government salary isn't that fantastic. It's times like this, though, that I enjoy the job security.
Anyone holding dear to "nuclear war / Oregon trail" notions about survival owes it to him or herself to read Cormac McCarthy's "The Road."
While apocalyptic literature is a pretty rich field (we humans love to imagine our own end), "The Road" will help even the most cynical pessimist rediscover a belief in society.
Wait until the level 3 "assets" have to be brought to bear on the banks balance sheets. Then you will see the true scope of the danger. It is much larger than just propping up current home values. Jobs are the driving force in price as a fundemental. However, that leg has been broken for some time and I don't see any way to inflate homes without making more "free" money available. That was Paulsons plan but that dog won't hunt. Values will not moderate until 2012 when all the pay option loans work through the system and job creation begins. I don't believe for a minute that banks would lend now...even if they were solvent or propped up. The plan would not make one borrower more creditworthy.
No argument. My hometwon of Ridgewood, NJ has a tax rate of 3% and many homes are 700K. Imagine 21K in taxes per year FOREVER. That is almost 2K a month. For that, the county better provide limo service anywhere, chef service to every home, an Ivy League High School, a laptop to everyone. Well, you get my point.
OCDan | 09.29.08 - 9:32 pm | #
Montgomery county MD (location of Bethesda) raised property taxes by 13% this year. High taxes but the county provides great parks, libraries, transit, etc. Great schools. But the county budget is starting to get really pinched by rising energy prices and RE assessed value collapse out in the hinterlands.
"now take out the % of people that own their homes out right ..."
Did that, mmckinl. That's the figure for houses with mortgages. Of course, the market value was high because the Fed uses OFHEO data to figure market value.
Johnny Lee writes:
Deflation is gonna make those $3K house payments the equivalent of $5-7K in today's money. This exacerbating effect forcing default is still "contained". When it gets out is when it'll get innerestin.
Johnny Lee | 09.29.08 - 9:34 pm | #
Exactly.
As bad as it is to be paying $3k for a mortgage now, which would mean about a 500K house w/no money down,
imagine paying 3K for a house worth 300K.
WOWZERS!
What should be about 1800/w/no money down for a 300K home, is costing you 3K/month. Oh that is gonna hurt.
Builder Bob writes: If the current bailout proposal passed, would that cause significant inflationary pressure or would it be offset by other factors?
Good question! Be careful, this is a question that runs very close to the hearts of many posters. You may be called a "mishbot".
My personal feeling is, the balance between the yin of deflation and the yang of hyperinflation is something that will be an emergent property of the crisis. I think hyperinflation wins in the end, but it will all be kinda irrelevant 'cause your wages will not keep pace and you'll have the same diminsihing purchasing power.
Please don't let me be eaten by a pack of mad deflationists now.
Hey, thanks to the survivalists who answered. I truly didn't know if it was snark or not. Here in Brooklyn, there's not much you can do if civilization fails...anyway, I'm only planning for palatable outcomes. I wouldn't want to live in a world where people fight over cat food anyway. Bought more shares today during the PM plummet. Looking good.
I doubt the average "survivalist" here keeps on hand even as much as is recommended to keep on hand in Florida during hurricane season. We keep enough on hand - but a lot has to be replaced every 2-3 years (I know the recommendation is to eat the stuff - but I can't stomach the thought of eating low sodium canned veggies). Roby
I'm looking forward to purchasing quite a bit of art over the next few years. I live in San Francisco, there will be a lot of very fine pieces available soon... at very good prices.
I read "The Road" when it first came out. I'm still having nightmares. By the way, does anybody remember back in the Seventies lining up for "commodities"? The good old days...
I doubt the average "survivalist" here keeps on hand even as much as is recommended to keep on hand in Florida during hurricane season.
My rice bags are not my surrogate penis, I do not feel driven to compare. I will say we try to prepare according to pre-Green Revolution standards for hardship stores.
Nice post. Just a thought. You failed to discuss real estate transfer costs. Home owners may be under water by a couple of percent...but it costs money to sell a home. Transfer taxes, Realtor fees, moving expenses, and repairs and maintenance all eat equity. A homeowner may have a loan at par value but will be unable to sell because they would have to bring cash to the settlement.
People commit insurance-arson...
EvilHenryPaulson | 09.29.08 - 9:17 pm |
I'm a renter, but have always been curious about how that works. If your house burns down doesn't the insurance just give the "owner" rebuilding costs and the mortgage/tax bills keep comming?
the consumer is broke, they overconsumed for yrs and didnt save, that is reversing. there is no reflating the credit bubble. they didnt realize it because their own highly skewed statistics no longer show it.
Robyn writes:
I am 61. I remember gas lines in the 70's.
I'm ten years younger and remember. I was in line for a couple of hours (running on fumes) one day when they placed the "last car" sign on my back window. As I recall we had to push the car to the pump to fill her up.
Dr. Strangedebt writes:
No home equity means you can't pay for the kids' college. No credit system means the kids can't take out student loans. This could get ugly.
I'm sympathetic -- up to a point.
Working class Americans have had it ugly for three decades. The white collar crew's about to find out what living within its means, er, actually means.
OK Strangelove: Suppose for ex. I'm a row-crop farmer with well over...well I have sufficient equity ( A+ farm/timber land ) and little debt ( equipment paid for.... replacement escrow in mutual funds/ stocks. a little wb which is now a very little..ouch) Crop's contracted but not delivered. It's the absolute low point, cash-wise of my annual cycle. I need a small draw on my 0 balance heloc to pay tuition for daughter # 1's second semester. Sure I can work around but I did not budget for that expense in this cycle ( and will for the next ) I guess this ( and my degree) makes me a member of the "white collar crew" ? I'm sure there are plenty of hard-working people this situation puts in a bind; however slight or temporary. Actually I'm sure there are plenty of other people who might be bringing the kids home soon. Actually I know a few of those. The idea here was I believe to illustrate the impact a credit freeze might have in the most pedestrian of ways on things like the dream of a college education for decent hard-working people who have saved and built instead of spent.
Some of you people don't seem to have really thought this thing through. Not everybody has the type of job/business with weekly pay-checks. Not to mention 52 weekends off a year, all holidays, 3 weeks vacation, personal days, sick days JEEEEZZZZZ.
You want food I can grow food. Come by for a visit sometime. I can also operate a 12ga scattergun and a Remington 7mm magnum.
Dr. Strangedebt writes:
Anyone holding dear to "nuclear war / Oregon trail" notions about survival owes it to him or herself to read Cormac McCarthy's "The Road."
While apocalyptic literature is a pretty rich field (we humans love to imagine our own end), "The Road" will help even the most cynical pessimist rediscover a belief in society
The stock market value declined over $1T today. Loss on mortgage defaults $850B. Doesn't compute.
Price is set at the margin. If company A has 1M shares in the stock market currently valued at $10, all it takes is one person buying a share at $15 from another to raise the market cap of the company from $10M to $15M. See? The increased value exists only theoretically. It is not really there.
The same goes for the stock market value decline today. People believed that the stock market is worth $(x+1)B, and today they believe that it is only worth $(x)B. Nothing real was really lost; what was lost was just a mere illusion.
Voter Database, I'm working on a better comment system with registration and better moderation. Hopefully we can get bring back the regulars.
Registration is nice, but I hope the system will allow registered users to post under other (unregistered) names. I kind of enjoy seeing Paulson, Shrub, Cramer, and other famous personality dropping in once in a while.
Sure I can work around but I did not budget for that expense in this cycle ( and will for the next ) I guess this ( and my degree) makes me a member of the "white collar crew" ? I'm sure there are plenty of hard-working people this situation puts in a bind; however slight or temporary.
Respectfully, I'd suggest you research founding a grange / credit union for your area. Nothing behooves farmers more than sharing capital and helping one-another with capital expenses.
For those of you who are of a survivalist bent, I will note that 1 gallon of vegetable oil contains about 30,000 calories. Corn oil used to be the cheapest; haven't checked lately. Canola is probably the best mixture of price and health implications. I have the impression that corn oil is not a high quality calorie source --- something about a wrong ratio of Omegas.
Just a dark thought, a throwback to the days of the Y2K scare.
"No home equity means you can't pay for the kids' college. No credit system means the kids can't take out student loans. This could get ugly."
OMG STATE COLLEGE
Also, the ARMY will pay for college, but you probably can make more money by using that experience to become a cop. Or if you are a really good, some kind of mercenary ninja for a government security contractor.
Thanks for the thread CR, we can't lose sight of the fact that our global financial clusterf is rooted in stupid real estate deals.
I fear that this understates the potential number of homeowners with negative equity, because the places with the largest % declines are also the places that likely had the largest %LTVs.
oc dan and tj -
defintely have more than 25 cans for 4 people! you can always donate it in a year if you find you don't use it. I do and the foodbank is greatful. I too post on HBB (M.B.A)
Misean - I for real have over 6 mos of food and I have my own well so I have water. Brian may have 200 acres (wish I did) but I only have 1 acre...
The mail negative dynamic is the pressure of Reo on house prices.
Can someone tell me why the idea of pooling the foreclosed properties and renting as many of them as can be is not being given consideration.
This would create a firm foundation on which to build rescue packages for financial institutions and make the rescue far less costly than it might be: as the excellent analysis above warns
Comrade LeftEm: "The same goes for the stock market value decline today. People believed that the stock market is worth $(x+1)B, and today they believe that it is only worth $(x)B. Nothing real was really lost; what was lost was just a mere illusion."
Lol, maybe you could tell Joe Schmoe, whose house lost value since he bought in 2006 that the loss is just an illusion.
Also how about if you looked at the value of the market in a different way? Like, say, how much of the market value in the last ten years (or 20 or 30 years) was based on people spending beyond their means?
Just like the appreciation on a house bought in 2005 was an illusion, I wonder how much of the stock market's value is an illusion. The stock market is dependant on people buying things, so what percentage of purchases are people buying beyond their means?
Today things are not so bad for most people no matter if the market loses 777 points. Wait until Christmas season sales are reported. Wait until next year when foreclosures keep rising and housing prices keep falling. Just like the housing market took a few years to peak, it may take a few years before things get really tough all around.
I have an MBA but this topic puzzles me. My first take on this is that Americans valued their real estate too highly and failed to see that people like me found it cheaper to rent long term. When I was in my early thirties, I got a few hundred thousand dollars in a buyout. The first thing I did was NOT buy real estate which would have chained me down geographically.
Instead, I used the money to travel the world and broaden my horizons. I also sold out my 401K, feeling it was better to spend money while I was young and could enjoy it, for instance by dating gorgeous women on the Riviera. I do not regret that either.
Believe me, I do not regret that Riviera part.
So...why should I cry or pay for all the schmucks who:
1) Stayed home in a boring town, married a house (both a human house and a wooden one) and kept feeding their 401Ks with over-priced stocks thinking they were "building a nest egg for the future"?
What future?
So they could have the ability to go to the Riviera when they are 70 and nobody wants to date them? Beautiful European women feel sorry for old American male tourists who start showing up for the first time in their lives in the various resort towns.
Now these people won't even be able to do that. Boo hoo. Serves them right for basically sitting in an uncomfortable and smoky gambling casino when they could have been spending their money wisely outside in the fresh air all along.
Bottom line: there is no excuse for wasting your youth gambling (or working too hard to get money that you do not need to enjoy your youth now).
There was also no excuse for anyone to keep all their money in $. There is a world out there. Diversication was obviously needed.
2) Why should I pay to keep the value of housing higher than I am willing to pay for it?
That would keep rents higher than otherwise wouldn't it?
I want mansions to go for $100,000 again because I might soon have that sum and want to live in one.
I have always disliked the class of real estate investor who was billions of times richer than I was because I had no real estate.
Now that I might finally want to settle down and buy a home to raise children, I want that home to be a good value that I can maybe even pay cash for.
My girlfriend now has $65,000 now in Euros. We should be able to buy at least a one room apartment with that.
But we cannot because a one room apartment in Europe still costs twice that.
Why would I pay taxes to help stop that apartment from becoming more affordable to me? I want real estate to be cut in half pricewise.
Sounds like this bailout is for saving those richer than I who own real estate.
Thus this is like Ancient Rome when the patrician class wanted to use the Senate to bilk the plebes out of their money while the patricians kept all the land.
My house in California was purchased for 360k in 2004, peaked at 490k in 2005, and no I'm getting no bites on it at 220k. The bank wants to auction it at 299k, which is a joke considering that I found a buyer at 240k with no agent commisions, which they rejected.
Jack- house prices going down is a good thing for the economy and Main St, because it means that people can afford homes. It's just too bad for investment banks who bet that they would keep going up. The 700 billion should finance loans for home buyers, who are taking a major risk buying now. It should not be used to buy dead loans.
CR. Just read your thoughts about better commentary (way above). It would be much appreciated.
I was directed here by a regular. As a newbie, it is hard to sift through the pointless comments that are being made just to (to me) prove how smart they are, but end up being very mean spirited and ultimately useless and timewasting.
The insightful comments are both educational and provocative. These are the comments that cause me to continue reading.
Thank you for the analysis -lets go with $1.3 trillion to cover home equity. According to the FDIC there is about $1.3 trillion in capital in the banking system. So throw in the bond holders and there is sufficient capital in the banking system to absorb all the loses. This the route that the Fed &FDIC should be going down. Force everybody to mark to market at the valuation you are suggesting. The solvent institutions raise more capital and the insolvent ones get taken over.
Yes, probably less than 50% will default. However, using the US median price for your calculations is not consistent with the distribution of housing price declines. More of the negative equity households are located in states with higher prices.
I estimate that the peak to trough decline needs to be much larger than 35% to unwind this bubble. We're talking 60%. 50% at the very least. That puts the losses over 2 trillion.
"I think there are a lot of "hidden bubble markets" which are just waiting to implode. Everyone's been paying attention to Florida, California, and Nevada, but there are a lot of other markets where we haven't begun to see these kinds of prices declines.
The worst are Maryland and Northern Virginia, Massachusetts, and New Jersey. These areas are NOWHERE NEAR where they need to be in terms of home prices compared to income.
I think they'll fall in the "great wave of option ARM recasts" coming in the next few years. And God help us all when it does come."
As a long-time suffering saver in the great state of "Bedlam on the Bay" (Maryland), where tiny condos in bad areas and 60-year old, falling apart junk houses sell for 4+ times median household income, and a real house starts at 5+ times median household income, I look forward to the crash, and the sooner the better!
I was way upside down on my mortgage i owd 242k and it appraised at 147k 12 monthes after I bought it. I found Professional Loan Modifications after one of my bosses recommended them. They got my balance reduced to 190k and my rate fixed. I think this company is a godsent and if anybody owes more than their house is worth i recommend using them
Insert standard comment about "pent-up demand"
Foist
So why don't we just cover the $840B of losses, instead of this ridiculous $700B fund...
Oh yeah, covering borrower's losses wouldn't DIRECTLY help Goldman Sachs.
Home equity loans probably skew these numbers to much greater losses.
So do you have a prescription, CR? I mean, if you were Treasury Secretary, would you be attempting to prop up house prices? Or the prices of anything derived from housing?
ewbie question-
what are the loss numbers to date?
it's about the debt....
Jas is right on this one IMHO. Where will the consumption magically come from when household are burdened with debt? So what if the banks can get rid of their toxix assets - who are they going to lend to?!?
Deflation first.
Inflation for dessert.
Cheers
This is yet another monstrous shoe to drop on the American economy.
Add in the Option ARMS that are starting in Cally and the next 12 months are gonna put a fork in America.
Jas was right.
It is all about the debt.
Got (don't have) any?
It only gets worse from here. The next side show will be some sort of global conflict to redirect attention away from our miserable future in Amerika.
**
**
This is good:
Congressional votes database | washingtonpost.com
Database for Congressional voting!!!!
Umm, this is probably a bad time to bring up CRE..
my response to whoever used an analogy of Bubba not wanting to use his soda to put out a fuse he hadn't lit:
So Bubba and the banker sit on the keg. Bubba has his lunch and his soda, banker is temporarily out of soda as he spent all his money on a yacht and a castle.
The fuse is lit, but the banker is sitting on the fuse, not giving Bubba easy view or access.
Banker then asks Bubba to give him all Bubba's soda. When scared Bubba complies, banker drinks it all, and then pees on the fuse, pees on Bubba, pees on the keg, and then runs away laughing.
Sorry, but you should not fall for that bill.
CR,
Do your charts account for homeowners (homedebtors) holding the homes "to maturity"? Your chart only captures the current "firesale" prices which do not reflect "fundamental" value. You may want to update that one!
Cue Sarcasm
No home equity means you can't pay for the kids' college. No credit system means the kids can't take out student loans. This could get ugly.
The stock market value declined over $1T today. Loss on mortgage defaults $850B. Doesn't compute.
Just FWIW - the equity markets lost $1.7 trillion in market value today. Makes everything else look like chump change. Happy Retirement. Roby
Nikkei 225 is -481
CR:
Interesting view from high altitude. Amazing how an estimated potential $840 billion loss has triggered much larger potential carnage on Wall Street.
The other part that strikes me from this is what will happen to the recently constructed and sold developments, where the vintages are concentrated. Some areas will be almost 100% underwater.
That is, when natural seepage and leaking water mains fill the smoking craters.
Fitch Places Citigroup's 'AA-' IDR on Watch Negative; Lowers Wachovia Corp. to 'BB-'
The strategic benefits of Citigroup Inc.'s (Citi) acquisition of Wachovia Corporation's (Wachovia) retail, corporate/investment and private banking operations are tempered by Citi's own escalating asset quality challenges, according to Fitch Ratings. Fitch has placed Citi's 'AA-' long-term Issuer Default Rating (IDR) on Rating Watch Negative following the announced agreement.
--
Hey CR,
You may want to check out my forecast on this made 6-12 months ago!
There are those who know where housing and economy are going and then there are those who constantly catch up with the reality.
Jas
mkt fell 8% in Us, should follow in Asia
You know, it just occurred to me that there's probably a thousand people who regularly hit this blog now who don't even know who Sebastian is.
They probably think he's a cabinet member or something.
Do you think CR should write a post about Sebastian for all the newbies?
Kind of like a Welcome Wagon thing?
People walking away from their underwater homes frees them of the debt, no? Banks take the losses, and get nationalized or bailed by Paulson.
840 billion nominal loss
but that is levered money
actual loss via gearing MUCH, MUCH bigger
the internation credit cartel is TOO BIG TO SAVE
WORLDWIDE DEFLATION/DEPRESSION unstoppable
good that we didn't vote for bailout, being 700B less in debt will help
Nemo, trying to prop up house prices seems crazy. To me, any government intervention should be to make sure credit worthy customer can still borrow - and also to make sure the systems doesn't implode because of CDS type exposure.
I still support an RFC type investment program.
donnam, the most recent number I've seen is $550 billion (global write downs). There are losses that are hidden too (like hedge funds).
The IBs write down in advance of the price declines (as examples, JPMorgan is using 25% peak-to-trough pricing for their estimates, Goldman is probably around 27%, and I'm guessing somewhere in the low to mid 30% range right now.
Best to all.
Nanook, doesn't this mean tuitions will come down to affordable levels? Don't really see the problem..
.. this blog now who don't even know who Sebastian is.
What about Jas? There are many here that need to be identified as regulars; who has a list... CR? I used to be on a list, but then I pissed off Tanta, so I'm on a different list now...
but who is worthy of long term credit when so many jobs are at risk? Its a vicious cycle on the way down too.
People walking away from their underwater homes frees them of the debt, no? Banks take the losses, and get nationalized or bailed by Paulson.
Steven
~~~~~~~~~~~
Exactly ... if banks and insurance companies can set up bad banks and good banks why can't people set up good homes and bad homes ?
house prices peak to trough? my bet down 80% in real terms because no credit no house price. I even think the failure of the plan is probably a good thing because it keeps the losses where they belong, among the oligarch's and foreigners. Our current illustrious administration will go down in history as the one that dragged the US into the quagmire of petty land grabbing global politics and the one that bankrupted the US at a time when a solid financial position wasWmost needed. well done all!!
BTW not too impressed with last admin either, they were just as aggressive in inflating the "asset based economy" HA!! Now we see the flip side of that particular economic strategy!
Luckily, I have had many comments exchanged with Sebastian. How he was calling his book about buying at the lows in January and feeling really good back in May. Unfortunately, he might still be long the market, but not nearly as happy.
After explaining how his models are flawed - he refused to accept. I only hope he eventually listened to others on this site and myself for the warnings.
I don't think you can compare stock losses (there are based on some multiple of earnings and cash flow) to capital losses - at least not directly. The mortgage related losses to the lenders have a multiplier effect on lending.
The decline in the stock market can impact capital spending plans and has some wealth effect on consumers - but the impact on the economy is small compared to the capital losses.
Best Wishes.
There are many here that need to be identified as regulars; who has a list...
funny how people always want to create elitist cliques.
8:00 AM in Hong Kong and guess I'll check the news-- wah! Bill fails! Too many comments to read but I am still wondering what Hank's bogey man is, and whether he'll do a strip tease to reveal it.
At any rate, an amazing display of the power of votes over influence peddling. Not that the vigil is over.
More on topic,
Back in the darkest days of the HK RE meltdown there were estimates of close to one third of mortgages being upsidedown-- and the average Joe knew it since this is a very liquid market with daily info about transactions about as widely read as stock market results.
Big difference was higher dp requirements and stringent recourse loans. Since walking wasn't an option, people toughed it out; stories of three generations pooling a payment, etc. The amount of family wealth tied up in these chicken coops never ceases to amaze me.
But stateside, lord knows what the US homedebtor will do, especially if his income goes south.
Soylent green is people!
Sebastian is Hank Paulson!
Alas, we have clarity.
These are some of the best comment threads on the net, no need to create cliques at the moment.
Look, let's get real.
Imagine that you have trillions of dollars, times are normal, interest rates are normal, etc.
I say to you: There's a big company over there for sale. Would you like to buy it?
You say: How much?
The answer based on common negotiated sense between rational people in normal times is somewhere between 10-15 times earnings. That's what decent companies are worth in normal times.
Even after all the carnage and wailing and gnashing of teeth on CNBC today, the S&P 500 still has a P/E ratio above 20. The Russell 2000 still has a P/E ratio of "nil."
And these are far from normal times.
Did Congress cost the stock market $1 trillion plus today? No.
Congress just helped everything get back to reality by exploding a lot of the hype and govt. intervention that has propped up the market.
Bernanke was a runaway train before today. Now, hopefully he's knows he's not bigger than Mr. Market and Mr. Public.
Voter Database, I'm working on a better comment system with registration and better moderation. Hopefully we can get bring back the regulars.
Best to all.
Comrade Bagholder rich,
"You know, it just occurred to me that there's probably a thousand people who regularly hit this blog now who don't even know who Sebastian is.
They probably think he's a cabinet member or something."
Twould be a waste of time. Simple really. Seb uses the Wright Model B Flying Turkey to analyze the economy. Said model is broken. Seb thinks there is and will be no recession and the sky's the limit on the stock market.
Nostrovia,
CR
I say watch the economy ... I see higher losses than you ...
Most families are two income , only one job loss, one sickness pushes them over ...
I've always thought blogs are democracies and everybody has equal voice, old or new.
But I agree...do a Welcome Wagon on Jas, too.
CR, why not use Slashcode? It's open source, and works well.
so are we in a recession yet?
Mission Accomplished! The Bush disaster is almost over people. Let the rotten financial companies fail, bacstop payrolls. Spend the 700 billion on infrastructure, schools, science. The stuff with real value! Build some Dams...Rebuild AMTRAK...Recapitalize the auto industry...get AMERICANS working. No need to bail out the trash on wall street. They are lazy filth, who produce nothing but Credit Default Swaps. Wake up America, PUT THE CRACK PIPE DOWN!
God love ya, CR, but your post gives rise to the reminder that there are lies, damn lies and statistics.
Same sort of mathematical modeling that brought us to this place.
Comrade,
I'm not thinking about Seb. He is a totally discredited comrade and should be taken out behind the workers' dorms and put out of his misery.
I'm talking about indoctrinating all the new comrades who have joined the CR revolution in the past few days.
Cynical Yes writes:
Mission Accomplished!
Maybe you underestimate the stakes and their power?
I think there are a lot of "hidden bubble markets" which are just waiting to implode. Everyone's been paying attention to Florida, California, and Nevada, but there are a lot of other markets where we haven't begun to see these kinds of prices declines.
The worst are Maryland and Northern Virginia, Massachusetts, and New Jersey. These areas are NOWHERE NEAR where they need to be in terms of home prices compared to income.
I think they'll fall in the "great wave of option ARM recasts" coming in the next few years. And God help us all when it does come.
I really missed your graphs, CR!
Only 840 gigabucks? Just have Comrade Paulson write the cheque, and lets get this mess over with.
Im with Nobody.
I always like to pull out my favorite graph when discussing the housing bust ...
distressing picture of the day ...
Econbrowser: Distressing Picture of the Day
as you can see we have another 3 years of bloodshed in the housing market ...
rich,
I agree with you, stocks are overvalued. What struck me was that today's action on the stock markets was larger than the long-term total loss on bad mortgages, the expectation of which is what seemingly disturbed the financial house of cards.
Just an interesting observation on the numbers, not an argument that stocks were reasonably prices. As I have posted elsewhere, I think currently forward P/Es are way off because earnings estimates are bogus. They remind me of Realtors' estimates of housing appreciation back in 2006.
CR keep us updated on how registration/moderation system progresses, because I was already thinking of writing a simple python script for showing the posts of people on the friend list
"peak-to-trough price decline would be about $840 billion"
a bit more that Hanky's plan; but bail 'em all out. Have a cadre of folks completely mortgage free! Therefore no losses on the housing side, no losses on the housing MBSs, CDOs.
Comrade Bagholder rich,
"I'm talking about indoctrinating all the new comrades who have joined the CR revolution in the past few days."
I was being a bit flip, as is my wont.
But weeks could be spent on such a list.
You...dryfly, ac, Nemo, O-joe, Seb, Jas, mp, crispy, Max, Bob Dobbs, Bob_MA, idoc, dc-1000, ipodious...quite a list there.
Just read and enjoy.
But I do understand your point.
Nostrovia,
Anonymous writes:
"peak-to-trough price decline would be about $840 billion"
~~~~~~~~
wrong, those are the bank losses .... the peak to trough house decline is in the trillions , some say around 8 trillion ...
Anybody have any idea why AGG and BND have been moving in opposite directions lately?
Just FWIW - the equity markets lost $1.7 trillion in market value today. Makes everything else look like chump change. Happy Retirement. Robyn
Robyn | 09.29.08 - 8:20 pm | #
That "value" was imaginary to begin with. Just like a $800k crackerbox in Torrance.
"the equity markets lost $1.7 trillion in market value today"
And if it loses another 2T, it will have crashed all the way down to 10% total return over the last 20 years. (My numbers need checking, but I'm pretty sure it's right)
What a f***in' nightmah!" Mona Lisa Vito.
. R.I.P. .
Trade deficit tolerance.
Budget deficit tolerance.
Industrial ignorance.
Service/consumer economy.
Grading on curves. MTV.
Hot dogs & Coke. Flab.
Overconfidence. Entitlement.
Amateurism. Advertising budgets.
Medicare. Mathphobia.
Easy Street. 30-to-1 CDS.
Wasting oil.
.
Do you think CR should write a post about Sebastian for all the newbies?
Kind of like a Welcome Wagon thing?
rich | 09.29.08 - 8:22 pm | #
I thought you guys were talking about Sebastian the crab from The Little Mermaid (LOL)
"Hopefully we can get bring back the regulars"
Some of us are still here, even Jas. I do miss banker, it has been a long time.
mmckinl that was beautiful..been looking for that info for a while.
Waves of insolvency...
Are they really going to reset though, or will they be crammed down by then. How much more in terms of writedowns can the system take.
Okay, I've been coming here for about 3 weeks.
Question: anybody have a guess as to whether the PPT was purposefully not utilized today? Seems like if dubya wants to scare/herd the citizens into telling their reps and senators to vote for the plan he would want the PPT to NOT try to mitigate the big slide today - it helps his case that there's an imminent threat of an economic mushroom cloud.
Remember this craptastic bailout plan morphed into a bailout plan for everything and everyone.
They didn't limit which assets, nor did they limit it to only US institutions.
Whatever numbers we come up for mortgage backed losses are only part of the number. This is part of what makes this bailout plan so piss-poor. It is an unlimited ability of the Treasury to prop up institutions they like and kill institutions they don't.
It is BS.
Add in transactions costs (6% for liquidating said home). Also add in that the remaining equity is locked in place, it ain't going anywhere. Certainly not to buy a new home.
Even even if these loans don't go bad, the liquidity they would have added from the normal turnover of home sales isn't going back into the market. Losses are just insult to injury.
Nanook, doesn't this mean tuitions will come down to affordable levels? Don't really see the problem..
Anonymous | 09.29.08 - 8:23 pm | #
Some elite schools (Harvard and Stanford I know for sure) are forecasting that they may do away with tuition entirely.
"Voter Database, I'm working on a better comment system with registration and better moderation"
Registration is going to crush Kona.
Comrade Bagholder Barely,
"Some of us are still here, even Jas. I do miss banker, it has been a long time."
So do I. Enjoyed my debates with him. Didn't always agree with him, but 'twas always civil and good spirited.
Nostrovia,
I have an O/T, odd question - how are these swaps with other CBs reflected either in M2 or M3 or where ever. Since they are meant to be temp. How are they captured? I only ask now because of the huge push in the last 9 days - esp. today.
Kind of easy to get lost in the crowd these days, what with the 1000+ comment posts and all. Whew! NWIH to keep up anymore.
mmckinl writes:
I always like to pull out my favorite graph when discussing the housing bust ...
distressing picture of the day ...
Econbrowser
archi...sing_pic_1.html
as you can see we have another 3 years of bloodshed in the housing market ...
Sadly,
The goobermint and the Fed have no more games left to play and even if they get this bailout passed on another try, it won't matter.
That graph is horrifying to us who understand.
WHY?
Because Wall Street and their ilk can't absorb another 3 years like that last one and that doesn't include the lack of equity graph as shown here or the other HELOCs waiting to go off.
I realize a busted clock is right twice and us uberdoomers have been calling this for 5-10 years, at least, but the day of reckoning is coming for this once great country.
YOU CANNOT KEEP RUNNING A COUNTRY AT EVERY LEVEL FROM THE WHITE HOUSE TO THE UNEMPLOYED J6P ON DEBT FOREVER.
Eventually the interest and the amount owed will become too great.
We are sooooooooooooooo at that point for almost everyone in the US.
And if it loses another 2T, it will have crashed all the way down to 10% total return over the last 20 years. (My numbers need checking, but I'm pretty sure it's right)
What a f***in' nightmah!" Mona Lisa Vito.
Austin Tex
~~~~~~~~~
is that in constant dollars ?
Non-Financial firms wallowing in low interest money
Fed banks all over the world helicoptering in liquidity.
How is this deflationary?
I understand assests like houses and cars are losing value, but the money supply is increasing dramatically - yes?
Items we really care about like FOOD, will go up,
Yes/No?
Comrade Bagholder TEBB,
"Question: anybody have a guess as to whether the PPT was purposefully not utilized today? Seems like if dubya wants to scare/herd the citizens into telling their reps and senators to vote for the plan he would want the PPT to NOT try to mitigate the big slide today - it helps his case that there's an imminent threat of an economic mushroom cloud."
Like they're manufacturing something?
BZZZT! Ack!
Time to replace the damned batteris on the Super Colander Tin Foil Hat.
This is getting expensive.
Nostrovia,
Yes-I predict a real healthcare crisis, almost every hospital overbuilt in the last five years. The cost of insurance and higher deductibles for patients are going to drive people away. Prescriptions have already dropped and watch the bomb explode when the hospitals don't have enough money to pay for their expansion. Businesses can't absorb the cost anymore and that tsunami is following close behind.
Calculated Risk writes:
Voter Database, I'm working on a better comment system with registration and better moderation. Hopefully we can get bring back the regulars.
Best to all.
Calculated Risk | Homepage | 09.29.08 - 8:30 pm | #
totally agree CR.
for better or worse, I used to spend a lot of time on the comments because of the useful dialogue. now its just "oh shit" comments from the new guys, "short this stock" from the trader folks, and "comrade this and that" from the regulars that stuck around - all of course buddy whipped into action by misean.
i mean, we can't even get a reasonable discussion of mass transit economics in this comments any more...
hell, the inflation deflation arguments are crowded out!
TED edging down from earlier highs (~3.56) to 3.25.
"Some elite schools (Harvard and Stanford I know for sure) are forecasting that they may do away with tuition entirely."
That, however, is dependent on the performance of their endowments. Harvard (the largest endowment) has been threatened with losing its endowment's tax exempt status if it did not more closely tie its earnings to the U's educational mission.
Anyway, they really only charge list price to unqualified legacies and specials (president's grandchildren, etc) as it is. A bright, special kid who impresses the interviewer rides for free already.
CR
I have looked around today for some info on US def. and credit rating (I thought the House was going to pass the Golden Hanky Nugget)...have not seen anything published on the debt tolerance (per GDP) to keep a AAA rating. Have you? IMF has a lot of goop but really relevant (imho) to a peg currency.
Any guesstimate that considers the worst of the housing losses behind us just can't pass muster, since the economy is only now becoming a factor. They can bailout every financial institution in the country and we'll still have a depression, and that'll multiply the losses experienced thus far.
Why can't the fed subsidize mortgage rates so that they get close to zero. That would instantly add many first time buyers to the market who are credit worthy. This would reduce loss sevarity, reduce the number of underwater home owners, reduce foreclosures, and give affordable homes to millions, plus the spending to furnish these homes. Instead of buying CDOs, spend the $700B on subsidizing mortgage rates to first time home buyers. I know that pisses off anyone who has a mortgage, but it also will help keep home prices high which seems to benifit everyone.
Win win win so it will never happen.
Comrade Bagholder Bear,
"Kind of easy to get lost in the crowd these days, what with the 1000+ comment posts and all. Whew! NWIH to keep up anymore."
Yeah, no doubt. I can't even keep up at work anymore.
Evenings at least allow some kind of conversation.
Nostrovia,
i mean, we can't even get a reasonable discussion of mass transit economics in this comments any more...
LOL! No worries, every mass transit system in the country will need a bailout shortly, too.
The worst are Maryland and Northern Virginia, Massachusetts, and New Jersey. These areas are NOWHERE NEAR where they need to be in terms of home prices compared to income.
I think they'll fall in the "great wave of option ARM recasts" coming in the next few years. And God help us all when it does come.
Nobody | Homepage | 09.29.08 - 8:35 pm | #
Oh yeah, DC proper and inner suburbs have not had hardly any pain. It's a-comin' tho.
"Why can't the fed subsidize mortgage rates so that they get close to zero"
That how we got into this mess! God forbid we try it again.
" Are they really going to reset though, or will they be crammed down by then. How much more in terms of writedowns can the system take."
Scooby
~~~~~~~~
don't know about cramdowns , the Republicans won't have it ...
Thee problem with these loans is that most were little down , can't be refinanced without more owner capital and ...
will have mortgage payments adjusting upwards, some to the tune of 300% ...
I've heard of people whose mortgage payments have gone from $1300 a month to $3900 a month...
Logito Ergo Boom:
I assume that $800B to $1T+ loss estimate is just for straight MBS? That is, not including the CDOs, CDO^2s, CDO^4s, etc. that are derivatives of the straight up, non levered MBS?
If it's just the straight MBS losses...ruh roh.
If I follow CR's analysis, $700B is just the downpayment:( That's cool, though, I'll just think of it as an 80/20 neg-am loan for $3.5 Trillion.
No prob. Cash, check or charge?
Some elite schools (Harvard and Stanford I know for sure) are forecasting that they may do away with tuition entirely.
Citizen Scotto | 09.29.08 - 8:46 pm | #
Ask them about it again if the DOW goes down another 20% or the fixed income market goes poof... There isn't an 'Endowment Fairy' even at HAH-VAHD.
"I'll just think of it as an 80/20 neg-am loan for $3.5 Trillion"
good analogy!
Comrade Misean - NO NOT AN EFFORT TO PUSH DOWN THE MARKET - that's as stupid as the "9/11 truthers."
I understand the PPT to be used to mitigate downturns and I'm wondering if they allowed the market to move down with no effort to mitigate it as they wanted people to see the consquences of failure to pass the bill.
Just 'cause I live in Texas doesn't mean I'm stupid.
"Why can't the fed subsidize mortgage rates so that they get close to zero"[?]
You want another, final, gasp out of the housing bubble? How does that help anything? We already had $1 million apartments in LA, so how does bidding them up to $2 million help, when they're only worth $250K at best?
Stealthwii that is the trillion dollar question.
I am of the opinion that only food and energy will go up, but almost everything else will go down.
Why?
Because if money hyperinflates, food is going to skyrocket.
Look, houses, baseball memoribilia, cars, artwork, etc. can't be eaten or used as energy unless burned.
Me and a friend were discussing this after consoling one another after the USC upset loss last weekend. We both came to the conclusion that in the end the bottom line is food and water, all else if negotiable.
No home, but car...live in car.
No job, but canned food and can opener, I eat.
You cannot eat gold. Well, I guess you caould try, but I'll take even jello over gold.
As for water, well, let's say if you don't have anything to drink after several days, it is game over. Sure, those people who survived on a raft for several days/weeks did it, but that is a few.
DO you really think 99.99999% of Americans will make it 2 days without anything to eat or drink if things go off the deep end?
Didn't think so!
i assume AGG was red because AAA paper was under pressure (as it should be)?
in regards to the above question...
Comrade Bagholder dc1000,
"hell, the inflation deflation arguments are crowded out!"
Well it's pretty clear that deflation won.
Nostrovia,
Propping up housing is not the answer, it's the problem! Too much land has been cleared to lay down unproductive, now decaying, wooden and gypsum boxes. All this due to government fixing the price of money / credit.
dryfly | 09.29.08 - 8:55 pm
LOL
Oh yeah, DC proper and inner suburbs have not had hardly any pain. It's a-comin' tho.
Yeah - anywhere near DC is ridiculously overvalued. Look at this beauty in Bethesda. You have to love how they're advertising a dump like this, which is listed at $600,000, as a "starter home". Like any first time home buyer can come up with $600,000.
FranklyMLS.com Home Not Listed
Will the (financial) world end in fire or in ice? Probably ice.
OCDan,
Thanks for the reply.
I fully agree. I get the asset deflation arguments, but I can only see food going up.
I could see gas going down/staying constant, but food, thats gonna go up.
In most of the world food is 70% of daily income. Here its less than 10%.
Housing will go down, but food will take its place.
OcDan: I agree!!!
from Wiki:" While the body can survive without food for about five weeks, the body cannot survive without water for longer than five days. "
An average adult male can survive for 30 to 40 days without food.
Anyone think this is done for the week? I believe Hank et al will want the House Boyz back early Thursday for a 5 am vote. Get the business done before the east coast gets moving. Any thoughts...
Housing will go down, but food will take its place.
stealthwii
~~~~~~~~~~~
you forgot energy and health care ...
"Just 'cause I live in Texas doesn't mean I'm stupid."
For those who do not, some translations:
Rubber for the car: tahr
Cell phone relay point: tahr
Road surface: tahr
Subordinated debenture: bosheet
Have to go and get caught up.
Well it's pretty clear that deflation won.
it's pretty clear that there is enough data out there for both deflationists and inflationists to declare victory.
and it's all fleeting, too.
Did anyone else catch the part of the Wachovia/Citi deal where any mortgage loan losses over $42 million that are incurred By Citi on loans made by Wachovia will be paid for by the FDIC ? This equates to anything over about a 12% loss.
In most of the world food is 70% of daily income. Here its less than 10%.
It's even cheaper if you take out restaurants and reduce consumption by 1000 calories a day. We could all lose a little weight.
Nobody writes:
Oh yeah, DC proper and inner suburbs have not had hardly any pain. It's a-comin' tho.
Yeah - anywhere near DC is ridiculously overvalued. Look at this beauty in Bethesda. You have to love how they're advertising a dump like this, which is listed at $600,000, as a "starter home". Like any first time home buyer can come up with $600,000.
I love how the taxes in a 2 font are stated to be $5800+. Good grief, even if you pay that sucker off, you are liable to county tax man for $500/month for as long as you live in that tomb.
Why even bother? And you know those taxes will creep as your neighbors leave in the dark of night, leaving the county to raise so they can cover the dog catcher's $150K salary.
Comrade Bagholder TEBB,
"that's as stupid as the "9/11 truthers.""
rich might be onto something. Erm...Building 7 anyone?
I refuse to debate that here.
Nostrovia,
I might do better by selling some of the gold I still hold and buying some of that survival / backpacking gear I've been meaning to buy anyway.
Comrade Misean says "Well it's pretty clear that deflation won"
Yes it is working thru the K markets, but how will migrate to other sectors? Commodities are over bought in a softer economy, pressure on wages as jobs vanish, housing sucks so does all the inputs,taxpayer is exhausted as municpalities become strapped to fund programs. Is this how?
"LOL! No worries, every mass transit system in the country will need a bailout shortly, too."
...so will every car maker and let's not even get started on car loans. At least there's no mass transit bubble to speak of.
An average adult male can survive for 30 to 40 days without food.
so Hank only has about a week left to him to resolve the crisis?
Builder Bob,
You'll want this, then:
The Zombie Survival Guide: Recorded Attacks by Max Brooks
Much more fun than run-of-the-mill survivalist guides, I imagine.
I don't see demand for oil falling in the country as fast as many seem to. Hard to see how consumption patterns can turn on a dime, oil is used in so many things like fertilizer, plastics, etc. in addition to motor fuel.
For example, people didn't stop driving last spring when the cost of fuel was higher than it is now. Heck, the trash pickers in the alley can still afford to gap up their truck on the income from collecting cans and bottles.
RE inflation V deflation...if Monetary (not price) in/deflation is being talked about, I think the M3 data clearly shows that inflation is still raging, albeit with deceleration in growth which should pick right back up with upcoming data sets
Comrade Bagholder Missed Info,
"it's pretty clear that there is enough data out there for both deflationists and inflationists to declare victory."
Erm...dc1000 hates me for some reason. So I'll tweak him any time I can.
Nostrovia,
Here's a guess about what happens in the house this week:
the bill gets revised to allow BK judges to modify terms of home loans and a few other sops get thrown to the democrats. Then we see another vote in the House either Thursday or Friday. They'll have to hurry to cut a deal and get the thing revised in time for the Senate's vote on Wed.
If that fails then a full blown reconsideration of the bailout will have to happen.
Learning and Stealth, what is funny is that my wife is catching on, but the kids think dad is out to lunch.
Anyway, the condo unit we rent was tented for termites, so we had to put all the canned food, etc. in special plastic bags.
When we moved back in and upacked them I asked my 12 yr. old son to count all the cans since I have too many. Well, we got to 25, not much mind you, I have only started on this part of prepping for the biggest depression ever.
I then asked him to divide 25 by the 4 of us and the wheels are now spinning. He comes up with 4. I know told him that when the SHTF, you get 4 cans of food. Might last you 2 days. See, how much we consume, now multiply that by 300 million in this country. Not a pretty sight.
I also said, hey of it all holds, we can donate the food to the food banks or use and save the week's grocery bill. Win-Win-Win, no matter what.
Well I see most of Asia is dancing to the same tune...
Bloomberg.com:
World Indexes
Builder Bob writes:
I might do better by selling some of the gold I still hold and buying some of that survival / backpacking gear I've been meaning to buy anyway.
Builder Bob | 09.29.08 - 9:01 pm | #
You will get no argument from me on that decision.
When everything goes out the window, survival is all that matters.
That doesn't include people with equity that are going to default because of a recession doesn't it? Losses are going to be chump change if something doesn't happen or else its just gonna downward spiral.
Consider the opportunity costs of being without the jobs and income generated over the past few years to create that 800 billion + loss.
Looks like the senate approved the "small" 25 billion bailout for automakers already, while the wall street bail out was hogging the limelight.
Since you're looking at falling prices and not negative amortization, I think you're being alarmist. Just because a house loses value doesn't mean it will suffer default. I think you need to look at how many of those mortgages are fixed and discount almost all of them. Then, you might be onto something.
I love how the taxes in a 2 font are stated to be $5800+. Good grief, even if you pay that sucker off, you are liable to county tax man for $500/month for as long as you live in that tomb.
Why even bother? And you know those taxes will creep as your neighbors leave in the dark of night, leaving the county to raise so they can cover the dog catcher's $150K salary.
OCDan | 09.29.08 - 9:01 pm | #
Dan you've just nailed why it's unlikely I will repatriate myself and buy into this sucker, even if asking prices fall another 30%
Question from a mostly-lurker: are the survivalist types here for real, or just using sarcasm to "lighten the mood", as it were?
Thanks CR, this is the core information that I love.
Question, what is your current source of data for estimating negative equity mortgages?
Does it control for which mortgage were written when in which markets? Does it consider piggyback mortgages or HELOCs? Does it factor in closing costs, or can one assume those are rolled into the mortgage?
FYI other readers: The old chart from First American CoreLogic data in the Goldman Sachs report is @:
discussed by CR in this post
Barely,
"Commodities are over bought in a softer economy, pressure on wages as jobs vanish, housing sucks so does all the inputs,taxpayer is exhausted as municpalities become strapped to fund programs. Is this how?"
Not sure. That will definately do something bad.
Thing is all assets will show weakening. And they are all underwritten (levered) by short term paper. So the short term paper dries up and the assets become more expensive due to interest on short term paper increasing, or sal at a discount. It's fairly complex, but nothing is really looking good.
Nostrovia,
An average adult male can survive for 30 to 40 days without food....
In other news....
The game show Survivor will finally be held in.....drumroll pleeze
America
Hungry-would-be-contestants are floading the CBS switchboard to be on the show
Anyway, they really only charge list price to unqualified legacies and specials (president's grandchildren, etc) as it is. A bright, special kid who impresses the interviewer rides for free already.
Austin Tex | 09.29.08 - 8:51 pm | #
Thanks Austin, did notknow that about Harvard's tax exempt status.
FWIW my faculty acquaintances at Stanford have told me that they always have many top-notch applicants who end up choosing some other school for financial reasons.
Jeff,
What? You haven't filled your closet with jars of Jiffy, too?!?
Erm...dc1000 hates me for some reason. So I'll tweak him any time I can.
no way Misean! This stems from one night i made a bad 'tini time induced joke that misfired....
nah, dog, you my boy
Jeff: a little of both
Comrade Bagholder Jeff,
"Question from a mostly-lurker: are the survivalist types here for real, or just using sarcasm to "lighten the mood", as it were?"
I'm for real. Have ammo, food, water, etc.
FWIW.
Nostrovia,
CR,
How does variability influence your analysis? A very big part of the problem is that price declines aren't even. You have the bubble zones - maybe 1/2 of the market pricewise - declining 50% and the rest of the market more like 20%. In the rest of the market defaults will be better but in the bubble zones they will be far worse. In CA 2004-2007 you're looking at 40%+ price declines on negligible equity at 8x-10x incomes. Defaults with those kinds of statistics will approach 100%. and severities will be more than 60% - sometimes approaching total loss. Staying simply isn't an option when the mortgage is most of your takehome pay. The other bubble areas aren't much better. We already have ghostburbs and ghost towers and I would estimate we're 2 years from peak emptiness.
Anak,
Do the math. For every 100K borrowed at 6% for 30 years, you pay about $600/month.
Therefore, at $500/month, you will have a mortgage, inessence, of $85,000, which YOU WILL NEVER EVER NEVER PAY OFF!
Most of us midle class buyers have to begin to think like this. It is a matter of financial survival and must be factored into any home purchase. Also, consider that if you somehow, I know it assuming much, that if you live in the house 50 years, you will have spent $300K on taxes. HOLY SMOKES!
Also, don't forget HOAs. I noticied none on that sucker, but here in the "OC" they are everywhere.
Comrade Misean - the price of raw uncut diamonds increased approx. 22% over the weekend. Its not a supply issue, either.
Just FWIW - the equity markets lost $1.7 trillion in market value today. Makes everything else look like chump change. Happy Retirement. Robyn
Speaking for myself, I wasn't planning on retireing today.
If you want to see real situations borrowers are facing that lend (pun intended) credence to what this article says, go to the forums on the Latest News - LoanSafe.org site. Walking away is clearly on the increase.
Daniel
Comrade Bagholder dc1000,
"no way Misean! This stems from one night i made a bad 'tini time induced joke that misfired....
nah, dog, you my boy
:)"
Well I never had anything against you. And I was glad you got your deals done.
'Tini time can do that. BTW...I forgot to stop and get some Stoli. BBL.
Nostrovia,
Question from a mostly-lurker: are the survivalist types here for real, or just using sarcasm to "lighten the mood", as it were?
Well, it is a little bit of both, especially since the link was to The Complete Zombie Survival Guide. Gotta shoot 'em in the head.
"the price of raw uncut diamonds increased approx. 22% over the weekend."
Sounds like a lot of folks need to get to their islands PDQ.
You...dryfly, ac, Nemo, O-joe, Seb, Jas, mp, crispy, Max, Bob Dobbs, Bob_MA, idoc, dc-1000, ipodious...quite a list there.
Heh. Doc doesn't make the list.
Oh, is he on that other list?
well with your well-wishes and a personal guarantee, i now can't even get a cup of coffee much less a C&D loan!
just kidding, we're still seeing capital available for the right deal in the right place at the right time with the right sponsors and the right tenants.
like, you know, a good deal.
Since you're looking at falling prices and not negative amortization, I think you're being alarmist. Just because a house loses value doesn't mean it will suffer default. I think you need to look at how many of those mortgages are fixed and discount almost all of them. Then, you might be onto something.
Rob | 09.29.08 - 9:09 pm |
I have experience with housing bubbles. Anytime negative equity becomes 'common' bad things happen no matter the ability to service the mortgage.
People commit insurance-arson. People walk away because they can save xx% by walking away and repurchasing (it is possible in several circumstances despite what you know about credit scores, at worst a bankruptcy has a 7 year expiry -- never mind the whole market is in the same boat and banks still have to lend to somebody)
Once enough of the housing stock gets converted to rentals, then the price for rentals will drop and stay low until there is no more housing inventory left to convert (say around the 6 months of sales mark)
Only when the price of houses stops falling will banks stop experiencing crippling mortgage losses
What fraction of the homes under water do you believe were made as speculative investments?
What fraction have been and remain own-occupied 1st homes?
The ummmmm conservative crowd is ( and has so done on this very site) laying this financial crisis right at the feet of mortgage lenders forced by Gov. regs to give loans to "people of color"
The statistical skewering of that rumor might be a civic service. I am unfortunately not qualified to perform such a service or I'd volunteer. How about it?
OCDan: Do the math. For every 100K borrowed at 6% for 30 years, you pay about $600/month.
LOL, over here rates are less than 4% but we still rent the apartment rather than the money!
CR has been such a tremendous resource, that it seems very selfish to do what I am about to do, and suggest topics, but that seems to be the thread here. My wish list:
*What really are the assets of, and who are the creditors to, Citicorp's
$1 Trillion off-balance sheet caper?
*What is the current solvency of the monolines, and why haven't we heard much from them lately?
*Links to a couple of Bernanke's actual papers on the gold standard, bank failures, debt-deflation and Great Depression. Among the libertarian leaners here there lots of dismissal, but not much specificity about putative flaws in evidence, methods, etc. (Due to the nature of comments sections in blogs, not the aforementioned commentors).
*Other historical parallels, such as the Panic of 1837.
Comrade Misean,
How long could you hold out? Is your survival scenario one of "order will be restored eventually' or are you going full Conan (the Barbarian, not the O'Brien)?
I am positive Sebastian has taken a new identity and still actively participates in the comment threads.
My guess is he updated his model and is the person (to lazy to search for the posting) who called for an 80% drop in RE pricing.
Do these numbers include second mortages used to avoud PMI as well as helocs - used to fuel the great consumer lead GDP run of the past 5 years. If not the loses should be much greater. My gut says this is not 'only' a $850 billion problem. Again CFC used to originate $30 billion a month - think about that. Stunning.
SR
EngineerJim writes:
Just FWIW - the equity markets lost $1.7 trillion in market value today. Makes everything else look like chump change. Happy Retirement. Robyn
Speaking for myself, I wasn't planning on retireing today.
EngineerJim | 09.29.08 - 9:15 pm | #
Hey, it's nice to see Robyn back, and anyway she's mainly in munies IIRC.
Jeff,
I am dead serious. Heck, I mentioned that I have a meager 25 cans of food. Anyway, went on to Target and Ralph's last Friday and bought another 10 cans of soup and Chili. Sure, we have enough stored for 3-4 days. Not gonna last 2 years on that.
However, I think people are going to figure out that local community and food and water are what we need right now.
Wall Street and DC can go to Hades for all I care. I realize that will wipe out a lot of innocent people and I may lose my job, but if it makes this a stronger and better country I think I could go along.
We have partied for 25 years like there is no tomorrow, well tomorrow is here for the next 3 years, look at the housing reset chart.
I am usually not the most alarmist, although I can be the most bearish. However, having a week's worth of food and water on hand is always good, esp. in weather/earthquake challenged areas.
Food (no pun intended) for thought...
Most grocery stores only have 3 days of food in the store. If you live in a large metropolitan area, that will not last long.
I've been watching Max Keiser on YouTube, I know he's probably at least a little crazy, but he's certainly interesting.
I meant to tack on the point that if negative equity becomes common, defaulting on a mortgage loses its stigma and transmits like a social virus. It's pretty clear that we can clear the tipping point where stigma keeps defaulting a taboo
Nanook writes:
No home equity means you can't pay for the kids' college. No credit system means the kids can't take out student loans. This could get ugly.
Nanook
Most of the chest thumping free thinkers on these boards unfortunately have a "short" position on progeny.
mykillk writes:
"RE inflation V deflation...if Monetary (not price) in/deflation is being talked about, I think the M3 data clearly shows that inflation is still raging, albeit with deceleration in growth which should pick right back up with upcoming data sets"
Well, M3 isn't showing much of anything since they stopped publishing it...
More seriously, there is considerable evidence that the growth in bank lending can largely be traced to (1) commercial paper issuers being frozen out of the market and having to tap backup bank lines; (2) precautionary draw downs of existing bank lines by borrowers who are afraid of being frozen out of financing.
In other words, the increase in bank lending may not be the result of banks extending credit, it's just that they previously over-extended credit lines and it's too late for them to do anything about it.
If true, that's not the recipe for inflation. It's more the Wile E. Coyote moment where the economy went off the cliff and has not yet started to fall.
yes bond guy. thus low yields.
no inflation here. none at all. really. look away.
Dr. Strangedebt:
I for one, am preparing for the full zombie apocalypse scenario, as you suggested.
OCDan,
I don't know what your plans are, but if the Greater LA/OC area goes to hell in a handbasket I'm getting O-U-T.
"But if we estimate one half of homeowners with negative equity will eventually default, use a 50% loss severity, and a 35% price decline (23.6 million households with negative equity), and use the median house price from the Census Bureau of $216 thousand, we get $1.3 trillion in mortgage losses for lenders."
WAY TOO OPTIMISTIC. Defaults are highly concentrated in FL CA AZ & NV where equity is lower and price declines are much higher. @2T in direct losses and leverage makes the notional losses 30X higher still.
sm_landlord writes:
CR:
Interesting view from high altitude. Amazing how an estimated potential $840 billion loss has triggered much larger potential carnage on Wall Street.
The other part that strikes me from this is what will happen to the recently constructed and sold developments, where the vintages are concentrated. Some areas will be almost 100% underwater.
That is, when natural seepage and leaking water mains fill the smoking craters.
I'd agree insurance adjustment is about to get to be a real lively business. Maybe that'll provide some jobs.
Anonymous writes:
The stock market value declined over $1T today. Loss on mortgage defaults $850B. Doesn't compute.
Anonymous | 09.29.08 - 8:19 pm | #
Comparing apples and oranges rarely does.
"forced by Gov. regs to give loans to "people of color""
More like "people of no visible means of support". It wasn't just people of color. Kids in their 20's who were buying condos as investments. Strawberry pickers buying $700K houses with their occupation listed as "agricultural engineer" and their income listed in six figures.
It was a colorblind orgy of loans to the indigent.
Yeah - anywhere near DC is ridiculously overvalued. Look at this beauty in Bethesda. You have to love how they're advertising a dump like this, which is listed at $600,000, as a "starter home". Like any first time home buyer can come up with $600,000.
FranklyMLS.com Home Not Listed
Nobody | Homepage | 09.29.08 - 8:58 pm | #
Nobody- That's not far from where I live. Yes, that's about the lowest price you will find in Bethesda. Across the DC border in Tenleytown there are even smaller houses for $700k+ (and you don't get the benefit of Bethesda schools over there)
Believe it or not with that location, walking distance to the Bethesda Metro, you could rent that house out for probably $4k per month.
The incomes here are high, and this is a desirable area, but the multiples are still unsustainable. Lots of ARMs hereabouts I fear.
The good news is these 1930-1960 vintage houses are solidly built and will last for a long time, unlike much of the newer stuff.
I see this way...
In a full blown meltdown depression, the rich will have some insulation for a period of time. At least some of them. The poor are the poor. I mean no disrespect to them. Heck, I have a guy who lives in his car come into my work every day.
The people who scare are my fellow American middle class. These are the people who eat out once a day every day and are now told that you will eat PB&J and baloney samwiches for the next 10 years. Oh, that is not going to sit well with the 30K millionaires' club that financed everything from soup to nuts. I know some of these people, they will take to the streets to feed themselves and their chilluns.
I'm for real. Have ammo, food, water, etc.
FWIW.
Nostrovia,
Comrade Misean | Homepage | 09.29.08 - 9:13 pm | #
200 acres of land with freshwater river access. Not that I planned for this, but thank Jeebus my great grandfather did.
EvilHenryPaulson,
Here in OC CA the bubble victims I know no longer feel stigma from walking, or at least not enough to matter with the amounts at hand. I see posts at the Irvine Housing Blog of people who do still care. The main thing holding them back is that most people still cannot accept the possibility of 50%+ price declines. Most still expect a halt to declines soon and a resumption of increases and with those assumptions it more or less would make sense to tough it out.
Fair Economist,
Amazing what people will cling to, isn't it? For the most part the fun still hasn't even started in the nicer areas of SoCal.
re: forced by Gov. regs to give loans to "people of color"
I realize no one is blaming that here, but I thought I would share. FNMA/FRE were doing deals where once a reporting period they borrowed such loans overnight from the banks that had them anyways -- it really didn't affect their book of business
Comrade Bear (tj & the bear) writes:
OCDan,
I don't know what your plans are, but if the Greater LA/OC area goes to hell in a handbasket I'm getting O-U-T.
Comrade Bear (tj & the bear) | 09.29.08 - 9:23 pm | #
Bear, are the same from Ben's HBB? If so, we have agreed on many points before over there.
Yes, I agree with this point. Sure, when the OC fires hiot, people worked together.
However, not having food and water for the masses is a'hole different creature. Look at Katrina. Look at the King and Watts riots. This area will go nuts when people don't have access to the happy meal.
I agree I will get out too. Besides food and water, make sure you ALWAYS have 3/4 of a tank of gas to get of of DODGE.
I love how the taxes in a 2 font are stated to be $5800+. Good grief, even if you pay that sucker off, you are liable to county tax man for $500/month for as long as you live in that tomb.
Could be worse, a relative in Westchester NY pays twice the tax for a similar assessed value.
No home equity means you can't pay for the kids' college. No credit system means the kids can't take out student loans. This could get ugly.
I'm sympathetic -- up to a point.
Working class Americans have had it ugly for three decades. The white collar crew's about to find out what living within its means, er, actually means.
Also until everyone stops believing the government can do something to bail us out we won't hit the bottom - that just seems like commonsense. Still way too many people looking to the government to help them.
Anyone know if these numbers include HELOCS and seconds?
SR
OCDan,
Yes, it's me. Just watching the trainwreck from a different vantage point these days.
On a national basis, using the Q4 Z.1 data, equity has fallen to 28.5% of market.
My father sold his house in south Florida at the end of 2005 - peak of the market - for $1.5 million (now it is back to being worth maybe about $800,000). That is real money in his pocket. FWIW - he wasn't a genius. My mom died in 2005 and it made sense to sell the house then. There is a really big difference between unrealized gains that disappear and your so-called imaginary money. Roby
Scotto,
No argument. My hometwon of Ridgewood, NJ has a tax rate of 3% and many homes are 700K. Imagine 21K in taxes per year FOREVER. That is almost 2K a month. For that, the county better provide limo service anywhere, chef service to every home, an Ivy League High School, a laptop to everyone. Well, you get my point.
Question from a mostly-lurker: are the survivalist types here for real, or just using sarcasm to "lighten the mood", as it were?
It varies. I'm with Misean -- I have considerable stores set aside for emergency rations. Other people are just sorta discovering the concept.
Many people have relatively unexamined "nuclear war / oregon trail" concepts -- they will go someplace remote and live in a shack. Others have differing or more sophisticated concepts.
Mostly every regular here is pretty crazy, with the possible exception of CR. Each has their own unique take on the situation and the world it's taking place in.
Here in OC CA the bubble victims I know no longer feel stigma from walking, or at least not enough to matter with the amounts at hand. I see posts at the Irvine Housing Blog of people who do still care. The main thing holding them back is that most people still cannot accept the possibility of 50%+ price declines. Most still expect a halt to declines soon and a resumption of increases and with those assumptions it more or less would make sense to tough it out.
Fair Economist | 09.29.08 - 9:26 pm |
Exactly. It's only a matter of time before the 'social virus' shows up in middle America. Also keep in mind some markets are years behind Vegas/Florida/California/Arizona, like the Pac NW was rising until sometime this year so ~2-3 years lag time
Some Homebuilder CEO was on CNBC pushing his plan of government spending a few trillion to backstop housing prices. His chief complaint were they were reselling for less than replacement costs -- genius didn't realize homebuilding supplies and labour will also have to come down in price to service a less exuberant market
Comrade Bear (tj & the bear) writes:
Fair Economist,
Amazing what people will cling to, isn't it? For the most part the fun still hasn't even started in the nicer areas of SoCal.
Comrade Bear (tj & the bear) | 09.29.08 - 9:27 pm |
I second that!
Also, don't forget HOAs. I noticied none on that sucker, but here in the "OC" they are everywhere.
OCDan | 09.29.08 - 9:14 pm | #
No HOAs around here in Bethesda that I am aware of.
Mostly every regular here is pretty crazy, with the possible exception of CR.
Yeah, sane people didn't see any of this coming.
Deflation is gonna make those $3K house payments the equivalent of $5-7K in today's money. This exacerbating effect forcing default is still "contained". When it gets out is when it'll get innerestin.
Nobody- That's not far from where I live. Yes, that's about the lowest price you will find in Bethesda. Across the DC border in Tenleytown there are even smaller houses for $700k+ (and you don't get the benefit of Bethesda schools over there)
Believe it or not with that location, walking distance to the Bethesda Metro, you could rent that house out for probably $4k per month.
The incomes here are high, and this is a desirable area, but the multiples are still unsustainable. Lots of ARMs hereabouts I fear.
The good news is these 1930-1960 vintage houses are solidly built and will last for a long time, unlike much of the newer stuff.
Yeah - I used to live in Bethesda. I sold in 2004 before the bubble really hit Baltimore and moved north. Pocketed a nice chunk of money, bought a nicer place, and I ride the MARC train to work. It's really not that bad of a ride - kind of relaxing in the morning, actually.
I understand that this particular listing in unrealistic, but the choice areas around DC are just as ridiculously overpriced. After all, a government salary isn't that fantastic. It's times like this, though, that I enjoy the job security.
Byzantine- "Mostly every regular here is pretty crazy, ..."
Speak for yourself.
Anyone holding dear to "nuclear war / Oregon trail" notions about survival owes it to him or herself to read Cormac McCarthy's "The Road."
While apocalyptic literature is a pretty rich field (we humans love to imagine our own end), "The Road" will help even the most cynical pessimist rediscover a belief in society.
Comrade Bear: LOL
mp:
Speak for yourself.
Is that you or the fetich talking? =)
mp,
You speaking for CB or just yourself?
If the current bailout proposal passed, would that cause significant inflationary pressure or would it be offset by other factors?
Wait until the level 3 "assets" have to be brought to bear on the banks balance sheets. Then you will see the true scope of the danger. It is much larger than just propping up current home values. Jobs are the driving force in price as a fundemental. However, that leg has been broken for some time and I don't see any way to inflate homes without making more "free" money available. That was Paulsons plan but that dog won't hunt. Values will not moderate until 2012 when all the pay option loans work through the system and job creation begins. I don't believe for a minute that banks would lend now...even if they were solvent or propped up. The plan would not make one borrower more creditworthy.
"You speaking for CB or just yourself? "
Conjure takes umbrage.
No argument. My hometwon of Ridgewood, NJ has a tax rate of 3% and many homes are 700K. Imagine 21K in taxes per year FOREVER. That is almost 2K a month. For that, the county better provide limo service anywhere, chef service to every home, an Ivy League High School, a laptop to everyone. Well, you get my point.
OCDan | 09.29.08 - 9:32 pm | #
Montgomery county MD (location of Bethesda) raised property taxes by 13% this year. High taxes but the county provides great parks, libraries, transit, etc. Great schools. But the county budget is starting to get really pinched by rising energy prices and RE assessed value collapse out in the hinterlands.
Ut oh TJ, better prepare a squirrel for sacrifice.
mp writes:
On a national basis, using the Q4 Z.1 data, equity has fallen to 28.5% of market.
~~~~~
now take out the % of people that own their homes out right ...
Weren't Level 3 to be brought on this year, but the Banksters were able to get the rules changed so they won't come on until next year?
Oh, we are so screwed!!!!!!!!!!!!!
Conjure says, "You ingrates owe me a herd of pink ponies."
I not crazy. I just on drugs.
OCDan,
No, that was the SIV/QSPEs. Level III assets are already on the books, just using imaginary valuations.
mp writes:
Byzantine- "Mostly every regular here is pretty crazy, ..."
Speak for yourself.
mp | 09.29.08 - 9:35 pm | #
Hey MP, does conjure bag second that or is he trying to dial down the crazy?
"now take out the % of people that own their homes out right ..."
Did that, mmckinl. That's the figure for houses with mortgages. Of course, the market value was high because the Fed uses OFHEO data to figure market value.
mp, will pink unicorns suffice ?
mp,
I was just attempting to clarify that you were the crazy one and not CB.
New thread.
"Hey MP, does conjure bag second that or is he trying to dial down the crazy?"
Pass..., Conjure doesn't care one way or the other unless someone attacks him personally.
When that happens, well, you don't want to know.
Johnny Lee writes:
Deflation is gonna make those $3K house payments the equivalent of $5-7K in today's money. This exacerbating effect forcing default is still "contained". When it gets out is when it'll get innerestin.
Johnny Lee | 09.29.08 - 9:34 pm | #
Exactly.
As bad as it is to be paying $3k for a mortgage now, which would mean about a 500K house w/no money down,
imagine paying 3K for a house worth 300K.
WOWZERS!
What should be about 1800/w/no money down for a 300K home, is costing you 3K/month. Oh that is gonna hurt.
Builder Bob writes:
If the current bailout proposal passed, would that cause significant inflationary pressure or would it be offset by other factors?
Good question! Be careful, this is a question that runs very close to the hearts of many posters. You may be called a "mishbot".
My personal feeling is, the balance between the yin of deflation and the yang of hyperinflation is something that will be an emergent property of the crisis. I think hyperinflation wins in the end, but it will all be kinda irrelevant 'cause your wages will not keep pace and you'll have the same diminsihing purchasing power.
Please don't let me be eaten by a pack of mad deflationists now.
mp:
http://www.stephaniehaywood.com/uploads/my%20little%20pony.jpg
Does US constitution provision for a referendum. Or the people are not "educated" enought to make any decision?
Hey, thanks to the survivalists who answered. I truly didn't know if it was snark or not. Here in Brooklyn, there's not much you can do if civilization fails...anyway, I'm only planning for palatable outcomes. I wouldn't want to live in a world where people fight over cat food anyway. Bought more shares today during the PM plummet. Looking good.
Comrade Bagholders,
There's a reason I vacationed in Mt, west side just south of the Canadian border a few weeks ago.
You know, they have open carry laws there. And Moose, and squirrel. And fire wood.
Just sayin'
Nostrovia,
"Please don't let me be eaten by a pack of mad deflationists now."
Offer them a sacrificial squirrel in a goldman sachs t-shirt.
Works everytime.
Better pack more than a 9mm or.45 for a moose-Comrade. Those are agressive critters that will gore your innards.
Hey, I lived on the Lower East Side of Manhattan in the 80s. You do not want to know...
OT
Wachovia 3mo. debt now has a 90% YTM.
I'd say the debt markets have spoken about the prospects for Citi taking over WB and assuming the debt.
Original Eric: YTM stands for ? Thanks for the info
I doubt the average "survivalist" here keeps on hand even as much as is recommended to keep on hand in Florida during hurricane season. We keep enough on hand - but a lot has to be replaced every 2-3 years (I know the recommendation is to eat the stuff - but I can't stomach the thought of eating low sodium canned veggies). Roby
OCDan:
I'm looking forward to purchasing quite a bit of art over the next few years. I live in San Francisco, there will be a lot of very fine pieces available soon... at very good prices.
Here in Brooklyn, there's not much you can do if civilization fails
FWIW, the portrait of civilization failing we have as a society is deeply flawed. It'll be much slower and more organized.
Read Three Kingdoms by Luo Guangzhong. Unabridged Moss Roberts translation recommended.
YTM = yield to maturity, or what the bonds yield at their current price. Annualized, so it is currently about 22% for three months.
Misean:
Butte.
Up gradient from The Pit of course.
I read "The Road" when it first came out. I'm still having nightmares. By the way, does anybody remember back in the Seventies lining up for "commodities"? The good old days...
citygirl: wherever you lived now rents for $3,000/month LOL. Come the apocalypse, it will plummet to $2,500/month.
I am 61. I remember gas lines in the 70's. Roby
peon:
I was scarred by the 70s.
Which is probably why I save half my take home into cash. And why I have 6 years expenses at my current burn rate.
I doubt the average "survivalist" here keeps on hand even as much as is recommended to keep on hand in Florida during hurricane season.
My rice bags are not my surrogate penis, I do not feel driven to compare. I will say we try to prepare according to pre-Green Revolution standards for hardship stores.
Nice post. Just a thought. You failed to discuss real estate transfer costs. Home owners may be under water by a couple of percent...but it costs money to sell a home. Transfer taxes, Realtor fees, moving expenses, and repairs and maintenance all eat equity. A homeowner may have a loan at par value but will be unable to sell because they would have to bring cash to the settlement.
People commit insurance-arson...
EvilHenryPaulson | 09.29.08 - 9:17 pm |
I'm a renter, but have always been curious about how that works. If your house burns down doesn't the insurance just give the "owner" rebuilding costs and the mortgage/tax bills keep comming?
fed and govmt just dont get it.
the consumer is broke, they overconsumed for yrs and didnt save, that is reversing. there is no reflating the credit bubble. they didnt realize it because their own highly skewed statistics no longer show it.
we had the boom, now we must have the bust
Robyn writes:
I am 61. I remember gas lines in the 70's.
I'm ten years younger and remember. I was in line for a couple of hours (running on fumes) one day when they placed the "last car" sign on my back window. As I recall we had to push the car to the pump to fill her up.
Dr. Strangedebt writes:
No home equity means you can't pay for the kids' college. No credit system means the kids can't take out student loans. This could get ugly.
I'm sympathetic -- up to a point.
Working class Americans have had it ugly for three decades. The white collar crew's about to find out what living within its means, er, actually means.
OK Strangelove: Suppose for ex. I'm a row-crop farmer with well over...well I have sufficient equity ( A+ farm/timber land ) and little debt ( equipment paid for.... replacement escrow in mutual funds/ stocks. a little wb which is now a very little..ouch) Crop's contracted but not delivered. It's the absolute low point, cash-wise of my annual cycle. I need a small draw on my 0 balance heloc to pay tuition for daughter # 1's second semester. Sure I can work around but I did not budget for that expense in this cycle ( and will for the next ) I guess this ( and my degree) makes me a member of the "white collar crew" ? I'm sure there are plenty of hard-working people this situation puts in a bind; however slight or temporary. Actually I'm sure there are plenty of other people who might be bringing the kids home soon. Actually I know a few of those. The idea here was I believe to illustrate the impact a credit freeze might have in the most pedestrian of ways on things like the dream of a college education for decent hard-working people who have saved and built instead of spent.
Some of you people don't seem to have really thought this thing through. Not everybody has the type of job/business with weekly pay-checks. Not to mention 52 weekends off a year, all holidays, 3 weeks vacation, personal days, sick days JEEEEZZZZZ.
You want food I can grow food. Come by for a visit sometime. I can also operate a 12ga scattergun and a Remington 7mm magnum.
Dr. Strangedebt writes:
Anyone holding dear to "nuclear war / Oregon trail" notions about survival owes it to him or herself to read Cormac McCarthy's "The Road."
While apocalyptic literature is a pretty rich field (we humans love to imagine our own end), "The Road" will help even the most cynical pessimist rediscover a belief in society
Amen to that. Should be required reading.
The stock market value declined over $1T today. Loss on mortgage defaults $850B. Doesn't compute.
Price is set at the margin. If company A has 1M shares in the stock market currently valued at $10, all it takes is one person buying a share at $15 from another to raise the market cap of the company from $10M to $15M. See? The increased value exists only theoretically. It is not really there.
The same goes for the stock market value decline today. People believed that the stock market is worth $(x+1)B, and today they believe that it is only worth $(x)B. Nothing real was really lost; what was lost was just a mere illusion.
I hazzz negative equity.
Can I hazzz bailout NOW!!!
LOL- just give the survivors 2% rates on their loans.
I'll keep paying at that rate!
Someday this war's gonna end...
Voter Database, I'm working on a better comment system with registration and better moderation. Hopefully we can get bring back the regulars.
Registration is nice, but I hope the system will allow registered users to post under other (unregistered) names. I kind of enjoy seeing Paulson, Shrub, Cramer, and other famous personality dropping in once in a while.
Anon:
Sure I can work around but I did not budget for that expense in this cycle ( and will for the next ) I guess this ( and my degree) makes me a member of the "white collar crew" ? I'm sure there are plenty of hard-working people this situation puts in a bind; however slight or temporary.
Respectfully, I'd suggest you research founding a grange / credit union for your area. Nothing behooves farmers more than sharing capital and helping one-another with capital expenses.
Comrade Misean writes:
Comrade Bagholders,
There's a reason I vacationed in Mt, west side just south of the Canadian border a few weeks ago.
You know, they have open carry laws there. And Moose, and squirrel. And fire wood.
Just sayin'
Gonna be a mental toss flycoon . . . .
For those of you who are of a survivalist bent, I will note that 1 gallon of vegetable oil contains about 30,000 calories. Corn oil used to be the cheapest; haven't checked lately. Canola is probably the best mixture of price and health implications. I have the impression that corn oil is not a high quality calorie source --- something about a wrong ratio of Omegas.
Just a dark thought, a throwback to the days of the Y2K scare.
"No home equity means you can't pay for the kids' college. No credit system means the kids can't take out student loans. This could get ugly."
OMG STATE COLLEGE
Also, the ARMY will pay for college, but you probably can make more money by using that experience to become a cop. Or if you are a really good, some kind of mercenary ninja for a government security contractor.
Thanks for the thread CR, we can't lose sight of the fact that our global financial clusterf is rooted in stupid real estate deals.
I fear that this understates the potential number of homeowners with negative equity, because the places with the largest % declines are also the places that likely had the largest %LTVs.
oc dan and tj -
defintely have more than 25 cans for 4 people! you can always donate it in a year if you find you don't use it. I do and the foodbank is greatful. I too post on HBB (M.B.A)
Misean - I for real have over 6 mos of food and I have my own well so I have water. Brian may have 200 acres (wish I did) but I only have 1 acre...
The mail negative dynamic is the pressure of Reo on house prices.
Can someone tell me why the idea of pooling the foreclosed properties and renting as many of them as can be is not being given consideration.
This would create a firm foundation on which to build rescue packages for financial institutions and make the rescue far less costly than it might be: as the excellent analysis above warns
Comrade LeftEm: "The same goes for the stock market value decline today. People believed that the stock market is worth $(x+1)B, and today they believe that it is only worth $(x)B. Nothing real was really lost; what was lost was just a mere illusion."
Lol, maybe you could tell Joe Schmoe, whose house lost value since he bought in 2006 that the loss is just an illusion.
Also how about if you looked at the value of the market in a different way? Like, say, how much of the market value in the last ten years (or 20 or 30 years) was based on people spending beyond their means?
Just like the appreciation on a house bought in 2005 was an illusion, I wonder how much of the stock market's value is an illusion. The stock market is dependant on people buying things, so what percentage of purchases are people buying beyond their means?
Today things are not so bad for most people no matter if the market loses 777 points. Wait until Christmas season sales are reported. Wait until next year when foreclosures keep rising and housing prices keep falling. Just like the housing market took a few years to peak, it may take a few years before things get really tough all around.
I have an MBA but this topic puzzles me. My first take on this is that Americans valued their real estate too highly and failed to see that people like me found it cheaper to rent long term. When I was in my early thirties, I got a few hundred thousand dollars in a buyout. The first thing I did was NOT buy real estate which would have chained me down geographically.
Instead, I used the money to travel the world and broaden my horizons. I also sold out my 401K, feeling it was better to spend money while I was young and could enjoy it, for instance by dating gorgeous women on the Riviera. I do not regret that either.
Believe me, I do not regret that Riviera part.
So...why should I cry or pay for all the schmucks who:
1) Stayed home in a boring town, married a house (both a human house and a wooden one) and kept feeding their 401Ks with over-priced stocks thinking they were "building a nest egg for the future"?
What future?
So they could have the ability to go to the Riviera when they are 70 and nobody wants to date them? Beautiful European women feel sorry for old American male tourists who start showing up for the first time in their lives in the various resort towns.
Now these people won't even be able to do that. Boo hoo. Serves them right for basically sitting in an uncomfortable and smoky gambling casino when they could have been spending their money wisely outside in the fresh air all along.
Bottom line: there is no excuse for wasting your youth gambling (or working too hard to get money that you do not need to enjoy your youth now).
There was also no excuse for anyone to keep all their money in $. There is a world out there. Diversication was obviously needed.
2) Why should I pay to keep the value of housing higher than I am willing to pay for it?
That would keep rents higher than otherwise wouldn't it?
I want mansions to go for $100,000 again because I might soon have that sum and want to live in one.
I have always disliked the class of real estate investor who was billions of times richer than I was because I had no real estate.
Now that I might finally want to settle down and buy a home to raise children, I want that home to be a good value that I can maybe even pay cash for.
My girlfriend now has $65,000 now in Euros. We should be able to buy at least a one room apartment with that.
But we cannot because a one room apartment in Europe still costs twice that.
Why would I pay taxes to help stop that apartment from becoming more affordable to me? I want real estate to be cut in half pricewise.
Sounds like this bailout is for saving those richer than I who own real estate.
Thus this is like Ancient Rome when the patrician class wanted to use the Senate to bilk the plebes out of their money while the patricians kept all the land.
My house in California was purchased for 360k in 2004, peaked at 490k in 2005, and no I'm getting no bites on it at 220k. The bank wants to auction it at 299k, which is a joke considering that I found a buyer at 240k with no agent commisions, which they rejected.
Jack- house prices going down is a good thing for the economy and Main St, because it means that people can afford homes. It's just too bad for investment banks who bet that they would keep going up. The 700 billion should finance loans for home buyers, who are taking a major risk buying now. It should not be used to buy dead loans.
CR. Just read your thoughts about better commentary (way above). It would be much appreciated.
I was directed here by a regular. As a newbie, it is hard to sift through the pointless comments that are being made just to (to me) prove how smart they are, but end up being very mean spirited and ultimately useless and timewasting.
The insightful comments are both educational and provocative. These are the comments that cause me to continue reading.
Thank you for the analysis -lets go with $1.3 trillion to cover home equity. According to the FDIC there is about $1.3 trillion in capital in the banking system. So throw in the bond holders and there is sufficient capital in the banking system to absorb all the loses. This the route that the Fed &FDIC should be going down. Force everybody to mark to market at the valuation you are suggesting. The solvent institutions raise more capital and the insolvent ones get taken over.
Yes, probably less than 50% will default. However, using the US median price for your calculations is not consistent with the distribution of housing price declines. More of the negative equity households are located in states with higher prices.
I estimate that the peak to trough decline needs to be much larger than 35% to unwind this bubble. We're talking 60%. 50% at the very least. That puts the losses over 2 trillion.
"I think there are a lot of "hidden bubble markets" which are just waiting to implode. Everyone's been paying attention to Florida, California, and Nevada, but there are a lot of other markets where we haven't begun to see these kinds of prices declines.
The worst are Maryland and Northern Virginia, Massachusetts, and New Jersey. These areas are NOWHERE NEAR where they need to be in terms of home prices compared to income.
I think they'll fall in the "great wave of option ARM recasts" coming in the next few years. And God help us all when it does come."
As a long-time suffering saver in the great state of "Bedlam on the Bay" (Maryland), where tiny condos in bad areas and 60-year old, falling apart junk houses sell for 4+ times median household income, and a real house starts at 5+ times median household income, I look forward to the crash, and the sooner the better!
I was way upside down on my mortgage i owd 242k and it appraised at 147k 12 monthes after I bought it. I found Professional Loan Modifications after one of my bosses recommended them. They got my balance reduced to 190k and my rate fixed. I think this company is a godsent and if anybody owes more than their house is worth i recommend using them