"...second quarter of 2009 if prices drop another 20%"
Based on what we've seen to date, that seems way too quick to me. I think the loss peak - at least the 'fessed loss peak - will lag far, far behind the price drops. This stuff has taken a long time to get through the system and I think we still do not have an accounting of losses than should have been recognozed back in 2007.
These Goldman 'house price' if-thens, really shouldnt be headlined news.
"If prices hold steady,then things are not bad; if prices drop, things stay bad; if prices crater, then things are worse. "
How enlightening, GS.
Does anyone know why some of the Lehman options ticker symbols were changed today?
I had to call my broker this morning and was on the phone with them for a half hour trying to figure out what happened to my position, and while they informed me of the ticker change they didn't explain why it happened.
This analysis seems to be ignoring the Alt-A problem which, from the charts we've seen here, doesn't start to tail off until 2011. How can losses peak late 08/early 09 unless you assume Alt-A's are going to somehow perform?
The whole statement is silly and can't possibly ever be true if prices continue to drop in 2009. Or did I miss something are we still planning a H2 2008 recovery, in December?
I agree with CathyG, that the analysis seemed to exclude the AltA problem. It also seems to exclude HELOCs. (Auto loans, credit cards, and CRE are probably out of scope.)
They also dismissed rising unemployment as a causal factor in their model, which I think could be a major cause of walkaways over the period.
Nevertheless, I'm glad they took a rigorous look at the problem and I'm looking forward to version 1.1.
"Now 20% of the 10T which the banking system owns is 2T. Have they realised 2T in losses? The last figure I heard was 0.5T of realised losses so far."
Good calculations, but not every homeowner whose home equity is negative walks away. For example, if I bought a $500k house at the peak with a 10% down payment, which is now worth $400k, I can choose to continue to make my mortgage payments.
tyaresun said: "These are 2007-2012 losses. So they include the known losses as of Q2 2008. These are extreme understatements if anyone asks me."
The statements have always been too extreme, but that's how you sell newspapers and build up your web traffic.
Even the worst-case Hatzius mentions, with predicted losses of $868 billion spread out over 5 years is only the equivalent of 5 quarters of SP500 operating earnings. And those are the most-recent quarters when earnings were already down.
A lot of money if it was coming out of my checking account, but considering how big the U.S. economy is and how much U.S. companies earn, this whole "disaster" is hugely overblown.
Reading on the other thread about the new lending guidelines, and combining that with the fact that you can still get 30-year fixed-rate mortgages around 6%, this has got to be one of the mildest financial "catastrophes" the U.S. has ever faced.
You said "Now 20% of the 10T which the banking system owns is 2T. Have they realised 2T in losses? The last figure I heard was 0.5T of realised losses so far."
All I am saying is that your calculations depend on how many loans would go bad. At the other extreme, if none of the underwater homeowners walked away, the banking system itself would not incur any losses.
Yes, everyone with a -ve equity has either walked away or will walk away in the near future.
Just as you have a stop loss in ur trading account, home owners have their limit too.
But you don't have to mark to market ur trading account every quarter. U r saying the loss occurred only when u realised it.
I am talking about the disparity between mark to market realised by banks versus the actual loss.
Home owners too have taken a hit or 2T, but has it been realised? No. Because most house holds think like you. They don't count a loss until it has been realised.
Think of u and ur wife opening a joint trading account with 10K each.
A total 20K was invested.
Now the market value fell by 20%. Each of you has an unrealised loss of 2K.
Now imagine the 20T US Housing Market owned by Home Owners and the banking system with 10T each.
Now if the Housing Market drops by 20%. Then both the Home Owners and the banking system have a loss of 2T each.
How the banks "realise" that 2T loss is upto them. What I am saying is that this loss has already occurred. Part realised, part not realised.
Teich writes:
Does everyone walk away from his/her trading account if the stocks he/she bought went below the cost basis?
A truly terrible analogy!
If you could invest a million bucks, with no money down, and then walk away when you lose and let E-Trade take the hit... you bet a lot of people would do it.
Can any pronouncement from Goldman Sachs be trusted and taken at face value? Hatzius seems pretty credible - but is he? Didn't Goldman just call for oil to hit $200? Were they really trading for that?
Here in truly middle America it seems that there is considerably more downward movement coming. One exception is that exceptional properties seem to move faster than the normal 3/2 house. For example, a house with 4 acres and a pond recently sold within 60 days of listing. (That's in metro Atlanta, and I don't know what the price was, but it was a beautiful piece of property.)
But other very nice houses, priced at a discount to the market, are still on the market many months after listing.
Several upper income subdivisons are stymied, with not a single new house under construction for weeks, if not months. One unfortunate subdivision has spent a ton of money on a fancy new fence, a new community center, a new tennis court, and a new pool, but there's not a single new house under construction anywhere in the huge subdivision.
If someone can afford their house payments, they wont' necessarily walk just because they are negative. Some people actually planned to live in their house more than 5 years, and those people are not going to benefit by walking away if they put substantial money down. If the market dropped another 5%, are they going to buy back their house with 0% down plus effectively 3% commission tacked on? That would be more underwater than they started considering their bad credit and higher interest.
People who own homes are not betting on a further 10-20% drop. Those that do will walk, those that don't won't.
BAC buying LEH
Anonymous writes:
BAC buying LEH
Is BAC becoming the bag holder?
How can they do it with Countrywide coming in?
maybe they want to ensure that they're "too big to fail"?
I guess he hasn't seen your prior IMF by way of Credit Suisse ARMS reset chart. That was an eye opener, showing problems out to2011.
These are 2007-2012 losses. So they include the known losses as of Q2 2008. These are extreme understatements if anyone asks me.
Lastest, but for how long?
Gov't has to be the bagholder, doesn't it? Or is BAC going to say that it won't guarantee LEH liabilities?
"...second quarter of 2009 if prices drop another 20%"
Based on what we've seen to date, that seems way too quick to me. I think the loss peak - at least the 'fessed loss peak - will lag far, far behind the price drops. This stuff has taken a long time to get through the system and I think we still do not have an accounting of losses than should have been recognozed back in 2007.
These Goldman 'house price' if-thens, really shouldnt be headlined news.
"If prices hold steady,then things are not bad; if prices drop, things stay bad; if prices crater, then things are worse. "
How enlightening, GS.
That end of day pump looked familiar.
Is it harder trade a bear market from the long side or the short side?
I can't decide.
I think they should start beavering away finding out the losses at 50% and beyond, stretching out "to infinity and beyond!"
Bailouts Will Push US into Depression: Manager
Bailouts Will Push US into Depression: Manager - CNBC
Does anyone know why some of the Lehman options ticker symbols were changed today?
I had to call my broker this morning and was on the phone with them for a half hour trying to figure out what happened to my position, and while they informed me of the ticker change they didn't explain why it happened.
This analysis seems to be ignoring the Alt-A problem which, from the charts we've seen here, doesn't start to tail off until 2011. How can losses peak late 08/early 09 unless you assume Alt-A's are going to somehow perform?
The whole statement is silly and can't possibly ever be true if prices continue to drop in 2009. Or did I miss something are we still planning a H2 2008 recovery, in December?
That paper really brings the GSE importance to limiting the downturn to the forefront.
I agree with CathyG, that the analysis seemed to exclude the AltA problem. It also seems to exclude HELOCs. (Auto loans, credit cards, and CRE are probably out of scope.)
They also dismissed rising unemployment as a causal factor in their model, which I think could be a major cause of walkaways over the period.
Nevertheless, I'm glad they took a rigorous look at the problem and I'm looking forward to version 1.1.
The US Housing Valuation stands at 20.1 Trillion per the Fed's 2007 Flow of funds.
Of that 9.6T is equity and 10.5T is mortgage. Pretty close, for this discussion simplify it to 50% each.
By Case Shiller national home prices are about 20% off of peak.
Now 20% of the 10T which the banking system owns is 2T.
Have they realised 2T in losses? The last figure I heard was 0.5T of realised losses so far.
I am no GAP expert, but may be Hatzius is only talking about the losses banks are willing to "realise".
Actual losses are quite higher, and will be lot higher.
Vega:
You said that
"Now 20% of the 10T which the banking system owns is 2T. Have they realised 2T in losses? The last figure I heard was 0.5T of realised losses so far."
Good calculations, but not every homeowner whose home equity is negative walks away. For example, if I bought a $500k house at the peak with a 10% down payment, which is now worth $400k, I can choose to continue to make my mortgage payments.
c'mon, another someone buying Lehman rumor?
give it up, DICK!!!!
buh-buh!!
"if I bought a $500k house at the peak with a 10% down payment, which is now worth $400k, I can choose to continue to make my mortgage payments."
That "if" is a big if.
Is that what is actually happening?
If it was indeed the case, the banks would have no losses at all.
tyaresun said: "These are 2007-2012 losses. So they include the known losses as of Q2 2008. These are extreme understatements if anyone asks me."
The statements have always been too extreme, but that's how you sell newspapers and build up your web traffic.
Even the worst-case Hatzius mentions, with predicted losses of $868 billion spread out over 5 years is only the equivalent of 5 quarters of SP500 operating earnings. And those are the most-recent quarters when earnings were already down.
A lot of money if it was coming out of my checking account, but considering how big the U.S. economy is and how much U.S. companies earn, this whole "disaster" is hugely overblown.
Reading on the other thread about the new lending guidelines, and combining that with the fact that you can still get 30-year fixed-rate mortgages around 6%, this has got to be one of the mildest financial "catastrophes" the U.S. has ever faced.
Sebastia
Isn't this estimate rather low?
"if I bought a $500k house at the peak with a 10% down payment, which is now worth $400k, I can choose to continue to make my mortgage payments."
And by the way that 100K of unrealised loss would be on the 10T Equity side of the equation.
But house holds are not required to provide a quarterly report following the "mark to market" rules
Lawyerliz said: "Isn't this estimate rather low?"
Where I live I'm still waiting for the first full year-over-year drop in housing prices, so I have to disqualify myself from answering.
S.
Vega:
Your calculations assumed that every household whose home equity is negative will walk away from the house.
Does everyone walk away from his/her trading account if the stocks he/she bought went below the cost basis?
Vega:
You said "Now 20% of the 10T which the banking system owns is 2T. Have they realised 2T in losses? The last figure I heard was 0.5T of realised losses so far."
All I am saying is that your calculations depend on how many loans would go bad. At the other extreme, if none of the underwater homeowners walked away, the banking system itself would not incur any losses.
Teich,
Yes, everyone with a -ve equity has either walked away or will walk away in the near future.
Just as you have a stop loss in ur trading account, home owners have their limit too.
But you don't have to mark to market ur trading account every quarter. U r saying the loss occurred only when u realised it.
I am talking about the disparity between mark to market realised by banks versus the actual loss.
Home owners too have taken a hit or 2T, but has it been realised? No. Because most house holds think like you. They don't count a loss until it has been realised.
Think of u and ur wife opening a joint trading account with 10K each.
A total 20K was invested.
Now the market value fell by 20%. Each of you has an unrealised loss of 2K.
Now imagine the 20T US Housing Market owned by Home Owners and the banking system with 10T each.
Now if the Housing Market drops by 20%. Then both the Home Owners and the banking system have a loss of 2T each.
How the banks "realise" that 2T loss is upto them. What I am saying is that this loss has already occurred. Part realised, part not realised.
Teich writes:
Does everyone walk away from his/her trading account if the stocks he/she bought went below the cost basis?
A truly terrible analogy!
If you could invest a million bucks, with no money down, and then walk away when you lose and let E-Trade take the hit... you bet a lot of people would do it.
I guess this doesn't account for losses in CRE and consumer credit cards.
... nor does it multiply out times leverage.
Isn't about time for a Ben Stein op-ed bemoaning overly pessimistic prognostication. Where are ye, Ben, now that we need ye?
Can any pronouncement from Goldman Sachs be trusted and taken at face value? Hatzius seems pretty credible - but is he? Didn't Goldman just call for oil to hit $200? Were they really trading for that?
Here in truly middle America it seems that there is considerably more downward movement coming. One exception is that exceptional properties seem to move faster than the normal 3/2 house. For example, a house with 4 acres and a pond recently sold within 60 days of listing. (That's in metro Atlanta, and I don't know what the price was, but it was a beautiful piece of property.)
But other very nice houses, priced at a discount to the market, are still on the market many months after listing.
Several upper income subdivisons are stymied, with not a single new house under construction for weeks, if not months. One unfortunate subdivision has spent a ton of money on a fancy new fence, a new community center, a new tennis court, and a new pool, but there's not a single new house under construction anywhere in the huge subdivision.
"if I bought a $500k house at the peak with a 10% down payment, which is now worth $400k, I can choose to continue to make my mortgage payments."
As long as you are making payments the unrealised loss is on the Home Owner side.
When you walk away, you realise ur losses as a home owner. The remainder of the loss is then realised by the banking system.
Hatzius
Does he list all his assumptions and scope somewhere. Without these it is hard to comment.
One bright spot for the banking system is that a a large proportion of these losses are now with the government.
If the US wants a more stable financial system in the future , all mortgages must be made recourse.
If someone can afford their house payments, they wont' necessarily walk just because they are negative. Some people actually planned to live in their house more than 5 years, and those people are not going to benefit by walking away if they put substantial money down. If the market dropped another 5%, are they going to buy back their house with 0% down plus effectively 3% commission tacked on? That would be more underwater than they started considering their bad credit and higher interest.
People who own homes are not betting on a further 10-20% drop. Those that do will walk, those that don't won't.
Bdiego,
Walk or not.
Loss is a loss.
Realised or unrealised.
.
Another assessment of market cycle timing:
http://www.rmic.com/productsandservices/marketanalysis/specialreports/Documents/Summer%20Economic%20Commentary.pdf