From the last thread:
Popeye writes:
ipodius,
You misread my post. Please note that I address you as an honest and intelligent person. And then, read what I said again.
Popeye | 09.10.08 - 2:54 pm | #
Popeye writes:
Ipodius writes: the issue is when you use credit to fund things you really can't afford. that's the distinction i make.
I make that distinction as well. It's timing Impodius. For how long did that mispricing take place ? Assuming, arguendo, that was the only factor at work here, I submit that it has not yet been priced in.
Popeye | 09.10.08 - 2:59 pm | #
Time to crawl into a deep dark hole and wait for the housing hurricane to blow over. Right now we just crossed a major eyewall and are in the eye. All is bright and looks better, but there is more on the other side.
Everyone should enjoy the election respite we are about to get with Lehman contained, and no big banks allowed to go until after the election.
I'm wondering how I can read something coming from LEH, no matter how well intentioned, and not laugh. I mean, if you have analysts that know this, why are you in trouble in housing?
And to think I used to like Ben Stein. That is, until I read his economic work. Seriously, the guy should stick to commercials and movie cameos. What a freaking pompous hack. His crap is so far off the mark. Lehman is going down, but at least they seem to have some decent (realistic) forecasts on housing.
California has usually been the bell weather for our societal and economic health or malaise. It's not a coincidence that it is failing the worst.
Watch carefully. The solutions or failures attempted by California will give a fairly accurate view to the future in the US. So far it's scaring the sh*t outta me.
popeye, let me give you some stats from where I come from. We've been in decline here since 8/05. As of last month, we have declined 12.64% in nominal housing price and 23.2% in inflation-adjusted price. The last housing bust took 46 months for prices to bottom out. it took 105 months for prices to recover back to where they were when the bust happened.
So we are now 37 months into this cycle, which means if it mirrors the last one (and so far it is) we have about 10 more months before we bottom out here. Apply that to where you are. Then you'll know how much pricing needs to correct. Here I expect us to drop another 5 to 8% over that time in nominal pricing.
I used to think that we might see 80% price drops in the national median from peak, but now I am thinking that might be too optimistic.
We have NEVER faced a global credit contraction and financial disaster like this before, and I don't see any easy way out. We are already seeing national price declines of 18% and a real recession hasn't really even kicked in yet! Just what will happen when most fortune 500 firms start laying people off in droves?
And that's not even counting the pessimism that will result when a few BIG banks go bust.
Lending is only going to get tighter, and with a significant economic contraction still ahead we are going to see a LOT more pressure on prices.
No one will want to borrow a lot of money to buy a house EVEN if they are gainfully employed and can qualify for the mortgage.
Okay, all real estate is local. And California is a big place. But an average 50% decline implies worse than that in some places and not quite so bad in others (or in some market segments, and not in others).
And a nationwide peak to trough decline of between a quarter and a third means the same thing on a shallower, broader scale.
So much for the 'not in my neighborhood'/'not in our price range' argument.
I'm wondering if the next market segment to get clobbered won't be the high end stuff that requires jumbo financing (or a seven figure cash commitment) to buy. With nine houses, the McCain family has done its part, but, if per the the Senator, you're middle class until you've got $5-million, there are plenty of upper middle class people who want to own, and just can't get the financing.
Wake up, Washington. Do something, fast. Gated communities across the land are in distress!
So we are now 37 months into this cycle, which means if it mirrors the last one (and so far it is) we have about 10 more months before we bottom out here.
ipodius
Ipodius: this is also the time frame I see for the national average. I think res. RE prices will fall another ~10 months on a nominal basis and then at least 1.5 years longer on a real basis.
And prices are going to deflate in general, not only RE. Other markets have just started to deflate, like oil. They have way longer to go.
O-Joe
Ok, Impodius allow me to respond with some stats. As stated I trade the market on a short term basis. However, I account for my trades on a strict calendar year. Last year, as of 12/31/07, I made a tiny bit over 30%. ( 130% for the laymen ).
So far this year, again I'm talking calendar, I'm up round about 13%.
My point Impodius is not who is smarter, or richer - my point is simple. Everyone who speaks here does so with several things in mind: (1) where they are in the market, (2) how they understand the state of the economy, (3) how honest they are about the foregoing, (4) .... if you will allow me... whether they are newbies, and are attempting to gain a clue ? It is a matter of timing my friend.
O-joe, yes. Just use the past pattern to get an idea of behavior this time. This time isn't different. It wasn't different in the run-up and it isn't in the roll back either. But we were early here. And CA and FL have much bigger problems.
And yes other prices are going to deflate too, you are correct. I think oil is going to be a lot lower than people think by November. And it isn't going to rebound because it can't without chocking off economies. Prices on other goods are also going to tumble as the credit doesn't exist to fund more expensive purchases anymore. Or people will simply do without. The auto industry is going to be crippled even more. I don't expect Chrysler to survive, frankly, and I have my doubts about the others without merger activity.
In Sonoma county Ca prices were at 12x median income at the peak.A reduction to 3.5-4x median income requires a further 50% drop in prices.And this assumes an economy that isn't in the tank.Our economy here is wine grapes,tourism,construction and pot.pot is holding up pretty well,so far.
Two rules for me popeye, investments have no pre-determined timeframe. Buys and sells are both dictated by analysis. And I never buy into anything where I either don't understand the product or the business model...no matter how much money is to be made.
And I never discuss how I'm doing. And I look at total value, NOT percentages by time period. So I can't tell you what I "made" last year, because it doesn't matter to me. What matters is portfolio wealth growth from inception. Oh, and it should also be fun.
Down 50% peak to trough in California means 1995-98 home prices. Don't know what wages were back then or how affordable housing was at those prices. However, we will see significant wage reductions in this downturn. How is that going to help affordability?
"Time to crawl into a deep dark hole and wait for the housing hurricane to blow over. Right now we just crossed a major eyewall and are in the eye. All is bright and looks better, but there is more on the other side."
And, it turns out, a hurricane can develop an inner eyewall and an outer eyewall. The next bit of unpleasantness is not necessarily the last bit of unpleasantness.
popeye, cerebus will survive. Chrysler will not. and cerebus is going to get savaged by its investment there and in GMAC. they are going to take a massive hit for their foray into the auto sector.
However, we will see significant wage reductions in this downturn.
You didn't read the memo. If wages don't go up (they are not) then prices must come down to them (in the absence of credit). This is simple math. Wages are NOT going to decrease. But prices sure the hell will. As well as asset values in all sectors.
"Down 50% peak to trough in California means 1995-98 home prices. Don't know what wages were back then or how affordable housing was at those prices. However, we will see significant wage reductions in this downturn. How is that going to help affordability?
Feckless Ness | 09.10.08 - 3:36 pm | # "
'95-'98 would have been after the trough of the early '90s housing crash, but before the worst of the dotcom boom. In my neck of the California woods, that meant you could buy a nothing-special 40-year-old tract home for $350-400K. It even then required a family income of $90-$100K.
Impodius,
Well, I have to pay the tax man every year and that's why I use that end of year measure. It also helps me keep an eye on myself, but that's just a governmental benefit. Secondly, I don't invest, I trade.
Impodius, you have demonstrated to me a profound understanding of the market. I don't agree with your take, but that is allowed.
I submit that you and I see the market from different perspectives. I find you intelligent and am well pleased to leave it at that.
.
.
Weston FL Renter writes:
I just opened a $90,000 Washington Mutual 5% for 13 month CD... smart or stupid?
Weston FL Renter | 09.10.08 - 3:24 pm | #
Your a braver man than me!
It will be "Washington Mutual Federal" before long as the FDIC will find no buyer for WaMu.
NakedShorts has this that includes a headline from American Metal Markets "Hefty output cuts said looming for US flat roll." It quoted a service center that "There is absolutely no demand." That is bad.
Steel is one industry in the US that had consolidated itself and modernized, and had gotten rid of excessive benefit packages like the ones that are killing automakers. Of course, flat roll gets sold to automakers among others, so that might explain the lack of demand.
"I just opened a $90,000 Washington Mutual 5% for 13 month CD... smart or stupid?"
I wouldn't worry as the FDIC has no choice but to back it. That is the moral hazzard of FDIC insurance and also what is going to force the FDIC to go to the treasury hat in hand to bail them out.
Bob Dobbs writes:
"Down 50% peak to trough in California means 1995-98 home prices. Don't know what wages were back then or how affordable housing was at those prices. However, we will see significant wage reductions in this downturn. How is that going to help affordability?
Feckless Ness | 09.10.08 - 3:36 pm | # "
'95-'98 would have been after the trough of the early '90s housing crash, but before the worst of the dotcom boom. In my neck of the California woods, that meant you could buy a nothing-special 40-year-old tract home for $350-400K. It even then required a family income of $90-$100K.
Bob Dobbs | Homepage | 09.10.08 - 3:41 pm | #
Bought my 1951 3/1 1071 sq. ft. crackerbox in Walnut Creek in 1997 for $241,000 (granted, it was a fixer - mostly cosmetic). Peak of bubble house across street (same floorplan) sold for $789K.
I find it hard to imagine that my house would drop back down to 300-400K. Houses (that are not WTF priced) are still selling like hotcakes in my 'hood. I suppose anything's possible.
The answer may be to what will be covered by FDIC is will your bank go under after a big one goes or a bunch of mid-size banks go under under that'll deplete the available funds by FDIC and make the insurance dependent on the government beefing up the FDIC reserves. Why risk the trouble and suspense for a lousy 5% to sweat it out for 13 months?
Weston FL Renter writes:
I just opened a $90,000 Washington Mutual 5% for 13 month CD... smart or stupid?
When WaMu fails the Treasury will need to bailout the FDIC! Then they might try to pay off your CD in T-bills -- which, at that point, won't be worth much.
SeattleSun, my thinking was that FDIC insured the principle and the interest.
"FDIC deposit insurance covers the balance of each depositor's account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank's closing." Error
And the next highest CD rate for 12/13 months was 4.35%. Even if WaMu fails soon, I got a higher interest rate for a short period of time. I may get lucky and they will honor the 5% until the CD matured 13 months from now.
But, I'm wondering if I made a mistake and missed something.
What if banks started opening that essentially were pure savings instituions? Savers have not been rewarded in the least for assuming durationa nd credit risk. This in large part due to the fact that we dont have many savers. But if you do have savings and you are getting a depo rate deiscount to Tbill/funds, why assume the credit risk of the isntituion? Indeed a new type of institution is warranted, one that leverages cost efficiencies and takes no credit risk which is what dunds the excess spread that is recapping the banks at present. Talk about a threat to the cartel...
I just opened a $90,000 Washington Mutual 5% for 13 month CD... smart or stupid?
Smart! If it fails the FDIC covers you in the worst event. And if anyone here thinks that the FDIC will ever run out of money, hey look! Here's some dot com stocks...I'll sell them to you.
"Can't you find other opps. that will pay more than 5%?....I sure can."
Grandma and granpa don't look at it that way along with a lot of other people who are loooking at the stock market and starting to see a casion just like the Japaneese did. This is what is going to bring the FDIC to it's knees. Moral hazard.
"Kansas Bankers Surety Co. confirmed Wednesday that it has ceased soliciting new clients for their "bank deposit guaranty bonds," a product that backs deposits above the $100,000 limit that is guaranteed by the Federal Deposit Insurance Corp. for many bank accounts. It also plans to cancel existing policies in coming months. "We still insure a lot of deposits in a lot of banks and that did not stop Monday," said Chuck Towle, a senior vice president of the Topeka, Kan.-based company. "We are not offering the product any more."
Towle said that existing policies would be recalled, and that eventually, "we are going to withdraw from the market."
So they've stopped issuing new policies and they are going to cancel existing ones as fast as they can. I'd bet if Buffet's insurance company sends auditors to a lot of his policy holders, they'll find material breaches that allow instant cancellation of those policies.
Anonymous, "Can't you find other opps. that will pay more than 5%?....I sure can" ... I have been waiting to buy a home and believe it will be atleast 13 more months before I do, and 13 months from now I will re-evaluate, so I need to put the money in a "safe" (now, that word was funny in this context) guaranteed return and 5% was the highest option I could think of. But I welcome any other suggestion for another CD that matures on 10/5 and I'm starting to explore what to do with the money.
Sure the central bank may print extra currency for the government 'reserves' in a deflationary crisis? How much will the dollars you get back from emergency funding with no limits be worth? 50 cents on the dollar?
"Sure the central bank may print extra currency for the government 'reserves' in a deflationary crisis? How much will the dollars you get back from emergency funding with no limits be worth?"
I can see this leak in the tire(economy) is a slow leak and if you fill it up with some air every day the tire looks full so you think it's OK to drive. Probably won't have a blowout but air needs to be added every day and we assume there will always be plenty of air available. What if the tire gets stabbed one night while you're sleeping.
The very concepts that modern banking are built on are flawed.
You should have to pay the bank to hold your money for you. It's a service that they provide for you. Paying you interest is only doable/profitable when there is active inflation occurring. Hence the inflation itself is a prerequisite for modern banking to exist at all.
Lending money is an act of increasing the total money supply, which is inflationary. It should be illegal.
A constant ratio of outstanding money to population should be established and maintained.
Tap TSLF, buy FNM notes. Earn massive carry to help restore your bank or prop shop back to health. Backed and paid for by you and I.
"Fannie Mae (FNM) sold a record $7 billion of two-year notes Wednesday.
The debt was sold at 70 basis points over comparable Treasurys, to yield 2.896%. "Spreads were very attractive for investors," said Jim Vogel, an analyst at FTN Financial."
TJ,
Since you granted me the opportunity to pump my position, allow me to add .... how many components of the R2K depend upon relatively fast financing just to survive ? Ok, I've pumped my market position.
So WAMU is now under $3.00 a share and almost at $2.50. My question is at what point, if ever, does the low or falling share price topple the Bank? Can it go to a dollar a share, zero? When does the FDIC have to act based off of the selloff alone? Never? It just seems like the market is pricing in its failure right NOW but FDIC is unwilling to act so I'm wondering if the market can force the FDIC's hand or will only an actual run on the deposits of the bank force action by the FDIC? Sorry, I'm rambling but it just seems like the market is screaming to have WAMU shutdown now and it seems like that is the last thing the FDIC wants to do right now. Or should the question be at what point does the lowering share price force WAMU itself to act and close shop regardless of the FDIC's intentions? My recollection is that IndyMac hovered at a very low share price for a long time but IndyMac was a fraction of the size of WAMU so how does the size of the bank factor in, etc.?
I'm well aware of the mentality of "investing" in the market and people's aversion to risk however why not go the hard money route as you can get 10-12% with a lot less risk then putting it in an institution that is on the verge of failure...backed by another one that speaks from both sides of it's mouth on every occasion.
And yes Ipod the FDIC does have limits....I'm sure you want to think otherwise but i know better to believe anything on face value at this point.
Ben Stein and Dennis Kneale should start a show, a trading show, stylistically not the same as a sports show, but a one of those thumbs-up movie shows.
Just make your investments the opposite of theirs.
A big event that's sudden...a geopolitical event, Iran or whatever...would cause a flat tire in the global economy. That's why so-called trading is so risky IMO...we don't know what may happen...which bank or investment bank for sure and when...what military moves are coming...it's out of the public's hands and will be whatever the invisible government hand decides for us.
In Sonoma Co I understand there is also the "estate" properties segment - the 20+ acres trophy wine estate or land to build a wine estate. Curious, if that is also correcting?
It would seem that the big developer projects and older homes on small lots are already down 40% and the high end properties not much. I have friend that purchased a 4000 sq.ft in Fountaingrove for under $1 million - he said that prices were down around 25% from peak.
"Seriously, the guy should stick to commercials and movie cameos."
Yet, how many self-proclaimed financial geniuses are just like this guy--who simply did well during an era of unprecedented credit expansion? Funny how the "unfortunate renters" could see right through this fiasco, lol.
"Fannie Mae (FNM) sold a record $7 billion of two-year notes Wednesday.
The debt was sold at 70 basis points over comparable Treasurys, to yield 2.896%. "Spreads were very attractive for investors," said Jim Vogel, an analyst at FTN Financial."
Let's start up another carry frenzy with mortgage debt.
Yea I'd love to "tap that" too. Problem is that we plebs. can't. A whole new world of opps. open up to you if you exist under the borrow short and lend long scam.
Ben Stein and Dennis Kneale should start a show, a trading show, stylistically not the same as a sports show, but a one of those thumbs-up movie shows.
Just make your investments the opposite of theirs.
I would pay good money to see a trading show with Ben Stein. At least he's not smart enough to fool anyone who doesn't deserve to be fooled.
You plebs shouldn't even be allowed on the Internet without some regulatory agency to tell you what pages are OK to look at. You're too stupid and too dangerous to make decisions on your own.
Low share prices just mean that raising significant capital in the form of equity is all but impossible.
Capital is something that Banks/IBs need at the moment. - Anonymous
So you're suggesting that when WAMU absolutely has to raise some more capital and can't the low share price will trigger it's final failure regardless of the FDIC's intentions but as long as WAMU doesn't have to go to the capital trough it can stumble along at the low share price indefinetly? But since we know that WAMU has to raise some capital ASAP they are done for and the share price will continue to sink towards zero in the interim? Under that logic (and I think it's sound) WAMU is done for but when is the only question? Which then is presumably what the FDIC is weighing right now as well?
Heck no popeye..I'm just street smart with a little country thrown in..
My smartest move-the pigmen have no debt on which to quasi own me.....
Rich is the russell expert..I can tell you this..as a ecommerce consultant to auto dealers, groups and manufacturers, the consumer I see via credit profiles around the country is looking ugly..lots of citizens became consumers and are going to have to learn how to be citizens again...
I find it hard to imagine that my house would drop back down to 300-400K.
NoCal SC | 09.10.08 - 3:50 pm | #
My particulars are similar to yours, NoCal, and that's exactly what I'm expecting. And then some.
Anonymous | 09.10.08 - 4:20 pm |
For both of you, what would a comparable house rent for? NoCal SC, I'm on the Peninsula and still seeing rent to buy ratio at 300-400 grm (e.g. renting for $2000/month -- selling for $600k+ per month).
I'm guessing that the Dawg might agree with the following: 120x to 150x grm is fair for Owner Occupied. Without crazy financing and/or appreciation, monthly rent is a good benchmark for what people are able to pay.
Weston FL Renter
If the FDIC can't insure deposits, huge lineups and total mayhem at banks will occur. All the US will want their money back. A closet full of toilet paper will probably be a lot softer.
Ed: I'm guessing that the Dawg might agree with the following: 120x to 150x grm is fair for Owner Occupied.
I always thought it was ~150x for an investor, and closer to ~200x owner occupied. An owner is willing to pay more because they don't need to make a profit on it, and they get the tax deduction.
Low share prices, and little interest in debt offering means that WAMU will start looking to sell the family jewels, the gold coasters in the board room, whatever isn't nailed down and might have some value.
If it can't sell enough to return to a viable net worth, then it will fold.
"Theoretically"
Judging when this will occur is tough because hiding or just plain refusing to recognize losses is par for the course now.
If the FDIC can't insure deposits, huge lineups and total mayhem at banks will occur.
They will back them up no matter what but if the presses get fired up and the cost added to the already enormous government debt it's only a matter of time before bond yields start spiking and the currency falls.
Soooo.... where exactly is WaMu getting that 5% to pay for the interest they're promising on those CDs? Sounds like they're trying to make it up in volume. Could be that the more CD deposits they get that they have to pay 5% on, the worse things'll get for them?
jms - FDIC is concerned with only depositors, never with shareholders. Thus, people discuss "zombie banks," in your words, staggering on indefinitely. - threetorches
Right and that is exactly why I asked my original question, can a lowering share price almost down to zero run WAMU out of business or force the FDIC to act regardless of other factors. It would appear the answer is yes as long as WAMU needs to raise capital and can't from any other source other than a common or preffered stock offering. Considering WAMU has already taken on "investors" earlier this year in a lopsided deal and is not an investment house with moveable assests like Lehman's if you will, then they would appear to be particularly vulnerable to a low stock price forcing them out of business. Plus, we now know that preffered stock offerings are now a "no go" thanks to the way the treasury has decided to treat the F&F preferred stock holders. But I still come back to timing. When is WAMU finally cornered due to capital raising constraints and is that trap no longer avoidable?
From a Bloomberg link on the FNM 2 year note sale:
Asian investors bought 12 percent of the latest issue, while European investors purchased 8 percent, down from 39 percent and 17 percent in the July sale, according to company data. Central banks bought 27 percent, down from 57 percent.
Wages are NOT going to decrease. But prices sure the hell will. As well as asset values in all sectors.
Theres going to be one heck of a spread, between the price of an existing home, and what it costs to build a new one. The new home construction price has an energy component that has not relaxed, and must be paid (unless the government is planning on subsidizing new home construction).
LAX adjacent 90066 zip 1950 1100 sqft bungalow bot in 1996 for $200k compares to same floor plan across the st sold july for $620k but others on mkt similar at $650-750 not moving. At peak 18mos back, $750 not impossible, so it looks like 50% further takes this neighborhood to about $500k or still well above last crash levels. this was a repo with a loan of $440k unloaded by a texas bank that cdnt resist the last bubble. The bank failed then even after surviving the TX blood bath of the mid 80s.
jms- I think the low share price also makes them potential buyout target, if there are still sufficient assets to make it attractive - Scotto
Right but I only consider that option in theory at this point. Seems like that is a post-FDIC takeover move or action as we're talking about a pretty big and messed up bank here so some government backing would seem needed before anybody would touch WAMU.
I'm guessing that the Dawg might agree with the following: 120x to 150x grm is fair for Owner Occupied. Without crazy financing and/or appreciation, monthly rent is a good benchmark for what people are able to pay.
Ed S.
I'd not even go to 150x. Those higher end multiples were in a competitive environment and with assurances like Prop 13 and stable costs of ownership. These days i see declining rents and increasing ownership costs. Factor that in and most places I'd rather 100x most places and 120x in California. Nota bene; investors get tax breaks as well with relatively few restrictions for the typical retail participant. The same numbers are good for buyers for occupancy.
FDIC will pay the amount and accrued deposit as long as it is under the FDIC limit. For ease, I am going to use the $100,000 FDIC limit even though there are ways to increase it over the limit.
Case A:
You put in $100,000. If WaMu goes, you only get $100,000 and none of the interest.
Case B:
You put in $50,000. If WaMu goes in 6 months, you get your $50,000 and 6 months of interest (approximately $1500). You would not get the rest of your interest for the other 7 months as I believe that your CD would be callable when WaMu is taken over.
However, you have to evaluate the risk against getting your money back. If you look at the IndyMac takeover, it did take some time before insured amounts were available to be claimed. Also, I believe that you do not earn interest after a bank is taken over.
Regardless, it is up to you to make the call which I believe that you have already done.
Wages are NOT going to decrease
First things that happen in a recession:
1. Overtime is cut
2. Premiums for contract labor are eliminated (or nearly so).
It won't be an official wage cut... but its already happening. There is a reason many people refer to their base 40 hour salary as 'the welfare check.' Its the OT that allowed them to live a comparable lifestyle.
And as was noted way up there, California is cd. CA real estate was based on continuous re-investment of principal appreciation. Between the MEW of all the appreciation and retirement demographics (not to mention the lack of sufficient retirement savings...).
The next 18 months will be fascinating in California. Not to mention California employment was heavy in REIC related industries. Oh wait... the nation was heavy in REIC employment... I still think deep recession, but if I'm wrong, we'll talk about it in the bread line.
What I am trying to figure out is where all the optimists who talk about "bottoms" in the housing market are seeing future "growth" in housing?
1) Our stunning job market? Hahaha... right! Unemployment keeps on rising, not counting the underemployed and those who just aren't counted anymore (U-6 vs. U-3 metrics and all that.)
2) More debt? Oh, wait - that isn't working too well as we learn that the only real profits in the past 10 years or so were those made by the kleptocrats even as their companies are reduced to hollow shells where a half-finished, mold-eaten subdivision in Miami is considered an "asset." Right!
3) Funny money loans? Not coming back - next!
4) Taxpayer backed funny money loans? Cute, but where are the taxpayers going to get the money for this nonsense? See point 1 - our stunning job market for an answer.
5) Inflation? Nope. Not unless somehow wages magically inflate AND we don't see hyperinflation / speculation drive up the cost of living to absurd levels.
There is no "answer" or way to return to "normal" if one keeps thinking of normal as the Bubble years.
Why should there be a "recovery." Why shouldn't housing crash and STAY crashed for years and years, slowly creeping up at the rate of wage inflation (if that even goes up) while being forced down by higher property taxes and cost of living caused by too much debt and reckless printing of money?
I think many people will be surprised just what "normal" will be in the housing market going forward from here.
Hey, it's mean to beat up on Ben Stein. I mean he's the equivalent in the world of finance of a Creationist in biology, or something of the sort. Too easy. Krugman needs to pick on somebody his own size.
This investigation is over the royalty program contract "mistake" that allowed royalty-free pumping. If they can show the mistake was a result of fraud, the contracts are null and void.
"tew writes:
I find it hard to imagine that my house would drop back down to 300-400K. Houses (that are not WTF priced) are still selling like hotcakes in my 'hood. I suppose anything's possible."
I would consider myself fortunate if it didn't drop to half that number.
"Wages are NOT going to decrease"
First things that happen in a recession:
1. Overtime is cut
2. Premiums for contract labor are eliminated (or nearly so).
- Neil
Although, it is implicitly understood that ipodius meant wage rates not total wages, wage rate downward inflexibility isn't a given anymore. Of course, the last time nominal wages generally fell was in the GD, there is more churn in the job market nowadays that didn't exist before. In the past, people tended to be laid off because of inventory accumulation and simply came back to the same job (and the same wage rate) they had before. Nowadays, people aren't just "called back to the factory" after a few months-there is an increasing tendency for jobs to be permanently destroyed, which sends the job seeker looking for a different employer and possibly a different line of work which would pay less starting out.
Ray...It is cheaper to buy one of the $700,000 plus priced homes here than it is to build. I just appraised one where the cost alone should be 600-750K for the dwelling and 200-300K for the lot. It came in at $700K because the builders are hurting so bad and inventory on that type of home is at a 36 month absorbtion rate. This crib is in one of the best areas north of the Atl. and only 20-30 min. from downtown and has the best school system in the state. This means that anything "jumbo" or above is taking a bath now and I forsee that to continue. The home prices are just disconnected from the reality of peoples paychecks. I bet this is true across the nation with higher end housing. A $700K+ house is considered an "executive" home in the metro Atl. suburbs. These WTF prices still have quite a way to fall until they start bouncing and i don't see anything giving them a good bounce when the finally do bottom. Where will these new "executives" hail from?
Thanks,
I am selecting some of those investments for a customer (his wish is my command). I am pleasantly surprised, some of those firms are actually making money, which wasn't a case couple of years ago.
Hail High Oil Prices!!!!
let's hope those firms will be able to utilize economies of scale before cheap oil nails them into the ground again.
I have seen the evidence that wages are sticky during the down cycles. While I wouldn't sign under the statement above, I would agree that AVERAGE wages do not decrease much. (might be different from industry to industry...)
I am naturally reticent to enter into any discussion featuring Ben Stein. It's like arguing evolution with a fundamentalist Christian; you realize you are talking to an idiot who is too stupid to assimilate new data.
Housing will drop until it's in line with fundamentals. That means a return to long term ratios like price-income and rental-price additionally factoring in inventories, credit availability and the overall economy. Any other predictions are simply wishful thinking or pull-out-of-the-ass numbers.
Median US house price will return to 2.5 to 3.0 times income in the longer term. Given the other factors and using simple logic and math, it seems clear that the ratio will need to go BELOW the long term average for a while to balance out. I am looking for a bottom around 2.3 to 2.5 times median income.
Anything else is just more bubble. As long as China, Japan, and OPEC are willing to finance this, it's possible but getting more and more unlikely.
A further thought to housing prices. Many perma-bulls argue that houses are bigger and better now than they were in the past. It is true that the average American house had ballooned in size and that there are more amenities (necessities?) like marble countertops and DeepFreezes.
But, so what? Who cares? If every frickin' stupid American went out and bought a Bugatti Veyron, would it be justified because it's the fastest production car in the world? How about flying first class? Shouldn't everyone fly first class because it's so much better than economy?
Huh? Too expensive? WTF does that mean? Oh, they can't afford Bugatti's and flying first class because they don't have enough money.
But the argument is fine for houses because, dammit, Lord Jesus came down from Heaven and declared that all Americans must have houses.
Lord Jesus came down from Heaven and declared that all Americans must have houses.
Close, but that was Congressman Frank.
I'm waiting for Lord Oprah to come down from on high and hand to the Shnapster the keys to a new Bugatti Veyron. Because? "Im good enough, Im smart enough, and dog-gone it, I deserve a ultra-exclusive sports car."
"ModestoMary writes:
"tew writes:
I find it hard to imagine that my house would drop back down to 300-400K. Houses (that are not WTF priced) are still selling like hotcakes in my 'hood. I suppose anything's possible."
I would consider myself fortunate if it didn't drop to half that number.
ModestoMary | 09.10.08 - 7:33 pm | # "
Fat chance. This house sold for $190K in 1988. If it dropped to 150-200K, what's left of humanity is all living in caves.
I personally don't care much if it drops to 300-400, as long as myself and my partner are still employed. Just means the move-up houses that we've been priced out of are finally in our reach. We are the rare non-Koolaid drinking, never cashed out equity homeowners who can easily absorb a 50% or more drop in market value (again, assuming we've got some income coming in. If everyone's out of work for 7 years, then we've got problems).
At the peak, landside Malibu home prices (yes, not including beachfront) were 28x median income for Malibu. The longer term average was 5-6x. Malibu prices have been dropping at about the same rate as LA County. Like many high end areas, fewer desperate sellers has meant a market at a standstill. Almost a 3 year supply of homes, and that is at summer sales rates. Malibu sales have even more seasonality than most places.
In a town of about 13,000 people the market value drop will be several billion $. The equity drop will equate to $300-500,000 per resident, $1 million per single family home.
In case you missed this over a year ago, here's the disturbing attitude that is a root cause of our current problems. Let's extend this -- you borrowed $100k to get that college degree but found out you aren't that smart...walk away. You borrowed $50k for that nice ride and discovered it was worth only $35k one year later but you still owe $48k...walk away. You borrowed $400k for that house and it's worth $500k one year later...oh yeah, that's mine.
Mortgage trouble? Walk away.
Good morning. I'm splitting the Jim Cramer post in two, because the trashing of the Inland Empire (he says it's such a housing disaster it needs to be plowed over) is overshadowing his advice to upside-down homeowners: just walk away from the house and the mortgage.
Cramer on walking away: "When your house drops 20% in value, then it doesn't matter whether you're prime or subprime. It's better to walk away, even if you're wealthy. Because you don't want to lose your credit card, and you don't want to lose your car. Your house is the one thing that's fungible. It's smart to walk away... It's actually a good thing. I know that sounds a little counter intuitive. But if your home declines 20% in value, it's really important to sell it, or walk away from it."
Strong stuff considering this guy is probably the most prominent investment advisor on television today.
Your thoughts? Comments? Play investment advisor for a second: what do you advise someone who paid $500,000 for a house, still owes all the principal, and the house is now worth $400,000?
Posted by LATimes on July 31, 2007 in Mortgages | Permalink
ModestoMary writes:
"No Cal SC writes:
Fat chance. This house sold for $190K in 1988. If it dropped to 150-200K, what's left of humanity is all living in caves."
So it sold at the peak of the previous bubble for 190k... Your point is???
ModestoMary | 09.11.08 - 7:20 am | #
That if prices drop to 150-200K here in Walnut Creek, that represents something like a 30 year roll back of pricing? As I said, that is an Armageddon-like scenario. What about the fact that this house brought 241K in 1997, very nearly the bottom of the last bust?
It was just last December that Ben Stein argued Goldman's projection of a 15% peak-to-trough decline in national home prices was implausible (Goldman is projecting another 10% decline now).
Nice blog CR.
OT - Is this today's reversal in progress...?!
From the last thread:
Popeye writes:
ipodius,
You misread my post. Please note that I address you as an honest and intelligent person. And then, read what I said again.
Popeye | 09.10.08 - 2:54 pm | #
Popeye writes:
Ipodius writes: the issue is when you use credit to fund things you really can't afford. that's the distinction i make.
I make that distinction as well. It's timing Impodius. For how long did that mispricing take place ? Assuming, arguendo, that was the only factor at work here, I submit that it has not yet been priced in.
Popeye | 09.10.08 - 2:59 pm | #
And so it begins on LA's westside --
WestsideREmeltdown
Time to crawl into a deep dark hole and wait for the housing hurricane to blow over. Right now we just crossed a major eyewall and are in the eye. All is bright and looks better, but there is more on the other side.
Everyone should enjoy the election respite we are about to get with Lehman contained, and no big banks allowed to go until after the election.
Someday this war's gonna end...
Bueller? Bueller?
California is so **kd.
Why would be believe any projection from a company that will be gone before hockey season?
I'm wondering how I can read something coming from LEH, no matter how well intentioned, and not laugh. I mean, if you have analysts that know this, why are you in trouble in housing?
And to think I used to like Ben Stein. That is, until I read his economic work. Seriously, the guy should stick to commercials and movie cameos. What a freaking pompous hack. His crap is so far off the mark. Lehman is going down, but at least they seem to have some decent (realistic) forecasts on housing.
His father was a good economist.
For the last couple of years, I suspect the market has been playing Win Ben Stein's Money.
FNM/FRE bailout = bailout for FL,CA & DC (politico's homes) at expense of everyone else.
50% decline in CA means goodbye and goodnight FirstFed, Downey, etc..
Impodius,
Hey, I made an attempt to connect with your theory. If I missed.. I missed. Trade well.
Speaking of "hacks" there is NOTHING on TBP regarding LEH today.
Ritholz too busy applying make-up to care??
Fast money "feature" is the jump the shark moment.
Ciao
MS
As goes California goes the nation.
California has usually been the bell weather for our societal and economic health or malaise. It's not a coincidence that it is failing the worst.
Watch carefully. The solutions or failures attempted by California will give a fairly accurate view to the future in the US. So far it's scaring the sh*t outta me.
popeye, let me give you some stats from where I come from. We've been in decline here since 8/05. As of last month, we have declined 12.64% in nominal housing price and 23.2% in inflation-adjusted price. The last housing bust took 46 months for prices to bottom out. it took 105 months for prices to recover back to where they were when the bust happened.
So we are now 37 months into this cycle, which means if it mirrors the last one (and so far it is) we have about 10 more months before we bottom out here. Apply that to where you are. Then you'll know how much pricing needs to correct. Here I expect us to drop another 5 to 8% over that time in nominal pricing.
I used to think that we might see 80% price drops in the national median from peak, but now I am thinking that might be too optimistic.
We have NEVER faced a global credit contraction and financial disaster like this before, and I don't see any easy way out. We are already seeing national price declines of 18% and a real recession hasn't really even kicked in yet! Just what will happen when most fortune 500 firms start laying people off in droves?
And that's not even counting the pessimism that will result when a few BIG banks go bust.
Lending is only going to get tighter, and with a significant economic contraction still ahead we are going to see a LOT more pressure on prices.
No one will want to borrow a lot of money to buy a house EVEN if they are gainfully employed and can qualify for the mortgage.
In the Netherlands house price to income is (median) 30K-250K Euro = 8+.
Reduction to the long term average of 4 will not be pretty.
Okay, all real estate is local. And California is a big place. But an average 50% decline implies worse than that in some places and not quite so bad in others (or in some market segments, and not in others).
And a nationwide peak to trough decline of between a quarter and a third means the same thing on a shallower, broader scale.
So much for the 'not in my neighborhood'/'not in our price range' argument.
I'm wondering if the next market segment to get clobbered won't be the high end stuff that requires jumbo financing (or a seven figure cash commitment) to buy. With nine houses, the McCain family has done its part, but, if per the the Senator, you're middle class until you've got $5-million, there are plenty of upper middle class people who want to own, and just can't get the financing.
Wake up, Washington. Do something, fast. Gated communities across the land are in distress!
As far as house values are concerned I believe the US Navy has an
expression to cover that.
"Man Overboard"
We all going to drown in the economic waters where Congress by their lack of professionalism have created the Housing crisis whirlpool.
So we are now 37 months into this cycle, which means if it mirrors the last one (and so far it is) we have about 10 more months before we bottom out here.
ipodius
Ipodius: this is also the time frame I see for the national average. I think res. RE prices will fall another ~10 months on a nominal basis and then at least 1.5 years longer on a real basis.
And prices are going to deflate in general, not only RE. Other markets have just started to deflate, like oil. They have way longer to go.
O-Joe
I just opened a $90,000 Washington Mutual 5% for 13 month CD... smart or stupid?
Vermont Trader.. writes:
California is so **kd.
Hey its still better than VT!
(jk, I use to live in West Dover)
.............
Ok, Impodius allow me to respond with some stats. As stated I trade the market on a short term basis. However, I account for my trades on a strict calendar year. Last year, as of 12/31/07, I made a tiny bit over 30%. ( 130% for the laymen ).
So far this year, again I'm talking calendar, I'm up round about 13%.
My point Impodius is not who is smarter, or richer - my point is simple. Everyone who speaks here does so with several things in mind: (1) where they are in the market, (2) how they understand the state of the economy, (3) how honest they are about the foregoing, (4) .... if you will allow me... whether they are newbies, and are attempting to gain a clue ? It is a matter of timing my friend.
o way.
O-joe, yes. Just use the past pattern to get an idea of behavior this time. This time isn't different. It wasn't different in the run-up and it isn't in the roll back either. But we were early here. And CA and FL have much bigger problems.
And yes other prices are going to deflate too, you are correct. I think oil is going to be a lot lower than people think by November. And it isn't going to rebound because it can't without chocking off economies. Prices on other goods are also going to tumble as the credit doesn't exist to fund more expensive purchases anymore. Or people will simply do without. The auto industry is going to be crippled even more. I don't expect Chrysler to survive, frankly, and I have my doubts about the others without merger activity.
In Sonoma county Ca prices were at 12x median income at the peak.A reduction to 3.5-4x median income requires a further 50% drop in prices.And this assumes an economy that isn't in the tank.Our economy here is wine grapes,tourism,construction and pot.pot is holding up pretty well,so far.
west dover vt = northern mass.
Meanwhile... Houston, we have a problem.
http://moe.met.fsu.edu/cgi-bin/gfdltc2.cgi?time=2008091012-ike09l&field=Sea+Level+Pressure&hour=Animatio
OT: Sarbanes is being quietly dismantled. Here's one story.
Accounting Cleanup Board Is Facing a Gutting: Jane Bryant Quinn - Bloomberg.com
Not included is the offshoring and scope reductions of SOX that's been happening for 2 years or so.
Two rules for me popeye, investments have no pre-determined timeframe. Buys and sells are both dictated by analysis. And I never buy into anything where I either don't understand the product or the business model...no matter how much money is to be made.
And I never discuss how I'm doing. And I look at total value, NOT percentages by time period. So I can't tell you what I "made" last year, because it doesn't matter to me. What matters is portfolio wealth growth from inception. Oh, and it should also be fun.
Half down to a bottom we can't see?
Sounds reasonable.
Party on Wayne.
treating California as a single market is nuts.The variation in climate and economies between the 9 sf bay area counties alone is immense.
Vermont Trader.. writes:
west dover vt = northern mass.
Wicked pissah.
Cerberus - who owns Chrystler will survive - it's a simple political fact. If you doubt that, you are simply behind the curve. In my humble opinion.
Yahoo! 404 - Page Not Found
Warren Buffet is longer insuring any deposits over FDIC limits.
Either WB is senile or there's a lot of bank shutdowns coming.
Marcel writes: In the Netherlands house price to income is (median) 30K-250K
Remind me again...what's the homeownership rate in the in the Netherlands, Marcel?
<a href="http://www.photius.com/rankings/homeownership_rates.html>Oh, yeah.
Kudos to Lehman for the realistic projection of housing prices. How accurately was it applied to their assets?
Down 50% peak to trough in California means 1995-98 home prices. Don't know what wages were back then or how affordable housing was at those prices. However, we will see significant wage reductions in this downturn. How is that going to help affordability?
lama, SOX has we have all known is probably going to be killed off as we progress through the economic stages of grief.
Dismantling SOX helps hide the turds under the rug a bit longer as we are still slogging through stage 1(Denial).
"Time to crawl into a deep dark hole and wait for the housing hurricane to blow over. Right now we just crossed a major eyewall and are in the eye. All is bright and looks better, but there is more on the other side."
And, it turns out, a hurricane can develop an inner eyewall and an outer eyewall. The next bit of unpleasantness is not necessarily the last bit of unpleasantness.
popeye, cerebus will survive. Chrysler will not. and cerebus is going to get savaged by its investment there and in GMAC. they are going to take a massive hit for their foray into the auto sector.
Geez Dobbs,cut us some slack!
However, we will see significant wage reductions in this downturn.
You didn't read the memo. If wages don't go up (they are not) then prices must come down to them (in the absence of credit). This is simple math. Wages are NOT going to decrease. But prices sure the hell will. As well as asset values in all sectors.
I mean, if you have analysts that know this, why are you in trouble in housing?
When the music stops, in terms of liquidity, things will be complicated.
Chuck Prince, Financial Times, July 10 2007
They all knew it, risk management was ignored. It's called greed.
Frack, Warren is pulling the plug on the good parts of the banking system.
Yahoo! 404 - Page Not Found
This news just leaves me cold.
Have cash, will not risk it, Warren's new mantra. I wonder if BH is going to turn into a bank next?
Large amounts of deposits soon to be available for 1% or less, along with branches galore.
That news, more than everything else should send shivers folks.
Someday this war's gonna end...
"Down 50% peak to trough in California means 1995-98 home prices. Don't know what wages were back then or how affordable housing was at those prices. However, we will see significant wage reductions in this downturn. How is that going to help affordability?
Feckless Ness | 09.10.08 - 3:36 pm | # "
'95-'98 would have been after the trough of the early '90s housing crash, but before the worst of the dotcom boom. In my neck of the California woods, that meant you could buy a nothing-special 40-year-old tract home for $350-400K. It even then required a family income of $90-$100K.
ipodius - we have a rapidly growing labor surplus. How is it wages are not going to decrease?
30% to 13%. What's the 'profit' after taxes?
Impodius,
Well, I have to pay the tax man every year and that's why I use that end of year measure. It also helps me keep an eye on myself, but that's just a governmental benefit. Secondly, I don't invest, I trade.
Impodius, you have demonstrated to me a profound understanding of the market. I don't agree with your take, but that is allowed.
I submit that you and I see the market from different perspectives. I find you intelligent and am well pleased to leave it at that.
.
.
Weston FL Renter writes:
I just opened a $90,000 Washington Mutual 5% for 13 month CD... smart or stupid?
Weston FL Renter | 09.10.08 - 3:24 pm | #
Your a braver man than me!
It will be "Washington Mutual Federal" before long as the FDIC will find no buyer for WaMu.
Good luck with your interest.
SeattleSun
.
.
.
Corporations will be getting government checks like welfare recipents get government cheeze....MM
In the Court of the Crimson King. You are dismissed sir.
NakedShorts has this that includes a headline from American Metal Markets "Hefty output cuts said looming for US flat roll." It quoted a service center that "There is absolutely no demand." That is bad.
Steel is one industry in the US that had consolidated itself and modernized, and had gotten rid of excessive benefit packages like the ones that are killing automakers. Of course, flat roll gets sold to automakers among others, so that might explain the lack of demand.
"I just opened a $90,000 Washington Mutual 5% for 13 month CD... smart or stupid?"
I wouldn't worry as the FDIC has no choice but to back it. That is the moral hazzard of FDIC insurance and also what is going to force the FDIC to go to the treasury hat in hand to bail them out.
Bob Dobbs writes:
Bob Dobbs writes:
"Down 50% peak to trough in California means 1995-98 home prices. Don't know what wages were back then or how affordable housing was at those prices. However, we will see significant wage reductions in this downturn. How is that going to help affordability?
Feckless Ness | 09.10.08 - 3:36 pm | # "
'95-'98 would have been after the trough of the early '90s housing crash, but before the worst of the dotcom boom. In my neck of the California woods, that meant you could buy a nothing-special 40-year-old tract home for $350-400K. It even then required a family income of $90-$100K.
Bob Dobbs | Homepage | 09.10.08 - 3:41 pm | #
Bought my 1951 3/1 1071 sq. ft. crackerbox in Walnut Creek in 1997 for $241,000 (granted, it was a fixer - mostly cosmetic). Peak of bubble house across street (same floorplan) sold for $789K.
I find it hard to imagine that my house would drop back down to 300-400K. Houses (that are not WTF priced) are still selling like hotcakes in my 'hood. I suppose anything's possible.
I find it funny that people will invest in a CD with the thought that the FDIC is a bottomless pit.
Sure they have no choice but to say they will back it however saying and doing, as we've seen this movie before, is an entirely different thing.
Can't you find other opps. that will pay more than 5%?....I sure can.
Ciao
MS
The answer may be to what will be covered by FDIC is will your bank go under after a big one goes or a bunch of mid-size banks go under under that'll deplete the available funds by FDIC and make the insurance dependent on the government beefing up the FDIC reserves. Why risk the trouble and suspense for a lousy 5% to sweat it out for 13 months?
Weston FL Renter writes:
I just opened a $90,000 Washington Mutual 5% for 13 month CD... smart or stupid?
When WaMu fails the Treasury will need to bailout the FDIC! Then they might try to pay off your CD in T-bills -- which, at that point, won't be worth much.
SeattleSun, my thinking was that FDIC insured the principle and the interest.
"FDIC deposit insurance covers the balance of each depositor's account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank's closing."
Error
And the next highest CD rate for 12/13 months was 4.35%. Even if WaMu fails soon, I got a higher interest rate for a short period of time. I may get lucky and they will honor the 5% until the CD matured 13 months from now.
But, I'm wondering if I made a mistake and missed something.
What if banks started opening that essentially were pure savings instituions? Savers have not been rewarded in the least for assuming durationa nd credit risk. This in large part due to the fact that we dont have many savers. But if you do have savings and you are getting a depo rate deiscount to Tbill/funds, why assume the credit risk of the isntituion? Indeed a new type of institution is warranted, one that leverages cost efficiencies and takes no credit risk which is what dunds the excess spread that is recapping the banks at present. Talk about a threat to the cartel...
I just opened a $90,000 Washington Mutual 5% for 13 month CD... smart or stupid?
Smart! If it fails the FDIC covers you in the worst event. And if anyone here thinks that the FDIC will ever run out of money, hey look! Here's some dot com stocks...I'll sell them to you.
"Can't you find other opps. that will pay more than 5%?....I sure can."
Grandma and granpa don't look at it that way along with a lot of other people who are loooking at the stock market and starting to see a casion just like the Japaneese did. This is what is going to bring the FDIC to it's knees. Moral hazard.
FDIC = all of us.. we are self insured!
AllenM...thanks for the link...here is a snippet:
"Kansas Bankers Surety Co. confirmed Wednesday that it has ceased soliciting new clients for their "bank deposit guaranty bonds," a product that backs deposits above the $100,000 limit that is guaranteed by the Federal Deposit Insurance Corp. for many bank accounts. It also plans to cancel existing policies in coming months. "We still insure a lot of deposits in a lot of banks and that did not stop Monday," said Chuck Towle, a senior vice president of the Topeka, Kan.-based company. "We are not offering the product any more."
Towle said that existing policies would be recalled, and that eventually, "we are going to withdraw from the market."
So they've stopped issuing new policies and they are going to cancel existing ones as fast as they can. I'd bet if Buffet's insurance company sends auditors to a lot of his policy holders, they'll find material breaches that allow instant cancellation of those policies.
Vermont Trader.. writes:
FDIC = all of us.. we are self insured!
Yup, I gotta agree with that. I yam what I yam.... and you are too.
Anonymous, "Can't you find other opps. that will pay more than 5%?....I sure can" ... I have been waiting to buy a home and believe it will be atleast 13 more months before I do, and 13 months from now I will re-evaluate, so I need to put the money in a "safe" (now, that word was funny in this context) guaranteed return and 5% was the highest option I could think of. But I welcome any other suggestion for another CD that matures on 10/5 and I'm starting to explore what to do with the money.
west dover, vt = northern Manhatta
Hmmmm...Looks like I came out of the bunker a tad early...
Cheers,
MS,
The sardines stink, but there's still trading value.
Sure the central bank may print extra currency for the government 'reserves' in a deflationary crisis? How much will the dollars you get back from emergency funding with no limits be worth? 50 cents on the dollar?
"Sure the central bank may print extra currency for the government 'reserves' in a deflationary crisis? How much will the dollars you get back from emergency funding with no limits be worth?"
See the Japanese model for the answers you seek.
How many regional banks will be left standing after the 50% house price decline?
It can put the most prudent banks on the edge.
I can see this leak in the tire(economy) is a slow leak and if you fill it up with some air every day the tire looks full so you think it's OK to drive. Probably won't have a blowout but air needs to be added every day and we assume there will always be plenty of air available. What if the tire gets stabbed one night while you're sleeping.
TJ,
A slightly off kilter take on that. How many small banks are there in the R2K which, as an index has outperformed ?
Careful, I hold the TWM
De-risking
I love the word!
The very concepts that modern banking are built on are flawed.
You should have to pay the bank to hold your money for you. It's a service that they provide for you. Paying you interest is only doable/profitable when there is active inflation occurring. Hence the inflation itself is a prerequisite for modern banking to exist at all.
Lending money is an act of increasing the total money supply, which is inflationary. It should be illegal.
A constant ratio of outstanding money to population should be established and maintained.
Tap TSLF, buy FNM notes. Earn massive carry to help restore your bank or prop shop back to health. Backed and paid for by you and I.
"Fannie Mae (FNM) sold a record $7 billion of two-year notes Wednesday.
The debt was sold at 70 basis points over comparable Treasurys, to yield 2.896%. "Spreads were very attractive for investors," said Jim Vogel, an analyst at FTN Financial."
TJ,
Since you granted me the opportunity to pump my position, allow me to add .... how many components of the R2K depend upon relatively fast financing just to survive ? Ok, I've pumped my market position.
So WAMU is now under $3.00 a share and almost at $2.50. My question is at what point, if ever, does the low or falling share price topple the Bank? Can it go to a dollar a share, zero? When does the FDIC have to act based off of the selloff alone? Never? It just seems like the market is pricing in its failure right NOW but FDIC is unwilling to act so I'm wondering if the market can force the FDIC's hand or will only an actual run on the deposits of the bank force action by the FDIC? Sorry, I'm rambling but it just seems like the market is screaming to have WAMU shutdown now and it seems like that is the last thing the FDIC wants to do right now. Or should the question be at what point does the lowering share price force WAMU itself to act and close shop regardless of the FDIC's intentions? My recollection is that IndyMac hovered at a very low share price for a long time but IndyMac was a fraction of the size of WAMU so how does the size of the bank factor in, etc.?
did I leave out the condition of small and regional banks; given the F -F change, I just assumed you all knew that.
I'm well aware of the mentality of "investing" in the market and people's aversion to risk however why not go the hard money route as you can get 10-12% with a lot less risk then putting it in an institution that is on the verge of failure...backed by another one that speaks from both sides of it's mouth on every occasion.
And yes Ipod the FDIC does have limits....I'm sure you want to think otherwise but i know better to believe anything on face value at this point.
I know you know that.....or may be you don't.
Ciao
MS
Ben Stein and Dennis Kneale should start a show, a trading show, stylistically not the same as a sports show, but a one of those thumbs-up movie shows.
Just make your investments the opposite of theirs.
Popeye-it will pay, what's your price target..I'm lking at 85 and out...
Vermont trader-spot on..
These taf, tallf, gsetaf etc..are really making it hard to find direction in trading...
A big event that's sudden...a geopolitical event, Iran or whatever...would cause a flat tire in the global economy. That's why so-called trading is so risky IMO...we don't know what may happen...which bank or investment bank for sure and when...what military moves are coming...it's out of the public's hands and will be whatever the invisible government hand decides for us.
I find it hard to imagine that my house would drop back down to 300-400K.
NoCal SC | 09.10.08 - 3:50 pm | #
My particulars are similar to yours, NoCal, and that's exactly what I'm expecting. And then some.
JMS
Low share prices just mean that raising significant capital in the form of equity is all but impossible.
Capital is something that Banks/IBs need at the moment.
Tom Stone
In Sonoma Co I understand there is also the "estate" properties segment - the 20+ acres trophy wine estate or land to build a wine estate. Curious, if that is also correcting?
It would seem that the big developer projects and older homes on small lots are already down 40% and the high end properties not much. I have friend that purchased a 4000 sq.ft in Fountaingrove for under $1 million - he said that prices were down around 25% from peak.
85 will do me fine, hmmm - are you smarter than me ?
Popeye writes:
how many components of the R2K depend upon relatively fast financing just to survive ?
Wasn't R2K 20% financials? Never counted, but my first guess is around 200.
What's the correct answer?
"Seriously, the guy should stick to commercials and movie cameos."
Yet, how many self-proclaimed financial geniuses are just like this guy--who simply did well during an era of unprecedented credit expansion? Funny how the "unfortunate renters" could see right through this fiasco, lol.
"Fannie Mae (FNM) sold a record $7 billion of two-year notes Wednesday.
The debt was sold at 70 basis points over comparable Treasurys, to yield 2.896%. "Spreads were very attractive for investors," said Jim Vogel, an analyst at FTN Financial."
Let's start up another carry frenzy with mortgage debt.
More of what got us here to begin with...
Anybody buying Freddie or Fannie shares? Would that pay more than 5% in 13 months or will those 'shares' go to a penny?
NATIONAL HOTLINE 888-GA-HELPS (888-424-3577)
VT-
Yea I'd love to "tap that" too. Problem is that we plebs. can't. A whole new world of opps. open up to you if you exist under the borrow short and lend long scam.
But I hear you...
Ciao
MS
If there was to be a sustained F&F induced rally, R2K might pop into the 800s making it + for the year. Free money shorting that.
Ben Stein and Dennis Kneale should start a show, a trading show, stylistically not the same as a sports show, but a one of those thumbs-up movie shows.
Just make your investments the opposite of theirs.
I would pay good money to see a trading show with Ben Stein. At least he's not smart enough to fool anyone who doesn't deserve to be fooled.
It would be a lot of fun.
The FDIC has statutory guidelines on capital. Or if there is a run and the bank has no liquidity; and/or a fire sale of assets wipes out capital..
"Can't you find other opps. that will pay more than 5%?....I sure can."
Savings is by definition with zero risk.
Anything over 5% at the moment comes with a risk premium and is an investment, eg. my SRS which has "made" 6.95% over the past two days.
Problem is that we plebs. can't.
You plebs shouldn't even be allowed on the Internet without some regulatory agency to tell you what pages are OK to look at. You're too stupid and too dangerous to make decisions on your own.
I spy with my little eye ...
a 6 handle on Lehman.
JMS
Low share prices just mean that raising significant capital in the form of equity is all but impossible.
Capital is something that Banks/IBs need at the moment. - Anonymous
So you're suggesting that when WAMU absolutely has to raise some more capital and can't the low share price will trigger it's final failure regardless of the FDIC's intentions but as long as WAMU doesn't have to go to the capital trough it can stumble along at the low share price indefinetly? But since we know that WAMU has to raise some capital ASAP they are done for and the share price will continue to sink towards zero in the interim? Under that logic (and I think it's sound) WAMU is done for but when is the only question? Which then is presumably what the FDIC is weighing right now as well?
Heck no popeye..I'm just street smart with a little country thrown in..
My smartest move-the pigmen have no debt on which to quasi own me.....
Rich is the russell expert..I can tell you this..as a ecommerce consultant to auto dealers, groups and manufacturers, the consumer I see via credit profiles around the country is looking ugly..lots of citizens became consumers and are going to have to learn how to be citizens again...
**Rant on the word consumer off
I find it hard to imagine that my house would drop back down to 300-400K.
NoCal SC | 09.10.08 - 3:50 pm | #
My particulars are similar to yours, NoCal, and that's exactly what I'm expecting. And then some.
Anonymous | 09.10.08 - 4:20 pm |
For both of you, what would a comparable house rent for? NoCal SC, I'm on the Peninsula and still seeing rent to buy ratio at 300-400 grm (e.g. renting for $2000/month -- selling for $600k+ per month).
I'm guessing that the Dawg might agree with the following: 120x to 150x grm is fair for Owner Occupied. Without crazy financing and/or appreciation, monthly rent is a good benchmark for what people are able to pay.
Weston FL Renter
If the FDIC can't insure deposits, huge lineups and total mayhem at banks will occur. All the US will want their money back. A closet full of toilet paper will probably be a lot softer.
Wages are NOT going to decrease
Perhaps, but less people will be getting them.
gee AC I thought we were all the same...
LEH opens up tomorrow under 6??? unless, of course, we get the rate cut early.
Ciao
MS
Ed: I'm guessing that the Dawg might agree with the following: 120x to 150x grm is fair for Owner Occupied.
I always thought it was ~150x for an investor, and closer to ~200x owner occupied. An owner is willing to pay more because they don't need to make a profit on it, and they get the tax deduction.
JMS
Sources of capital include:
-Equity Sales
-Debt
-Sales of Assets
Low share prices, and little interest in debt offering means that WAMU will start looking to sell the family jewels, the gold coasters in the board room, whatever isn't nailed down and might have some value.
If it can't sell enough to return to a viable net worth, then it will fold.
"Theoretically"
Judging when this will occur is tough because hiding or just plain refusing to recognize losses is par for the course now.
I guess it fails when TPTB decide it fails.
If the FDIC can't insure deposits, huge lineups and total mayhem at banks will occur.
They will back them up no matter what but if the presses get fired up and the cost added to the already enormous government debt it's only a matter of time before bond yields start spiking and the currency falls.
Who fails first, Wamu or Lehman?
The bond and preferred are voting for Wamu right now, but Lehman can probably make up the ground if it really tries.
jms - FDIC is concerned with only depositors, never with shareholders. Thus, people discuss "zombie banks," in your words, staggering on indefinitely.
skeptictank, exactly.
Soooo.... where exactly is WaMu getting that 5% to pay for the interest they're promising on those CDs? Sounds like they're trying to make it up in volume. Could be that the more CD deposits they get that they have to pay 5% on, the worse things'll get for them?
"Soooo.... where exactly is WaMu getting that 5% to pay for the interest they're promising on those CDs?"
From the principal deposited on those same CD's?
jms - FDIC is concerned with only depositors, never with shareholders. Thus, people discuss "zombie banks," in your words, staggering on indefinitely. - threetorches
Right and that is exactly why I asked my original question, can a lowering share price almost down to zero run WAMU out of business or force the FDIC to act regardless of other factors. It would appear the answer is yes as long as WAMU needs to raise capital and can't from any other source other than a common or preffered stock offering. Considering WAMU has already taken on "investors" earlier this year in a lopsided deal and is not an investment house with moveable assests like Lehman's if you will, then they would appear to be particularly vulnerable to a low stock price forcing them out of business. Plus, we now know that preffered stock offerings are now a "no go" thanks to the way the treasury has decided to treat the F&F preferred stock holders. But I still come back to timing. When is WAMU finally cornered due to capital raising constraints and is that trap no longer avoidable?
What would be the economic warning signs of an impending dollar collapse?
Anyone?
Soooo.... where exactly is WaMu getting that 5% to pay for the interest they're promising on those CDs?
They'll get the 5% from the next crop of folks, to whom they'll offer 5.5%.
And so on, and so on...
Let's all pray REAL hard to the Great God Mammon and everything will be great!
jms- I think the low share price also makes them potential buyout target, if there are still sufficient assets to make it attractive
ac writes:
"Fannie Mae (FNM) sold a record $7 billion of two-year notes Wednesday.
Was the sale in cash? Self financed? Or, just a sweep?
Or, modest buying by the Fed, using third party channels?
Tin Foil Hat Off
gee AC I thought we were all the same...
You get one vote for every digit past 6 you have in your trading account. That's just how it works in the new world.
No, digits past the decimal don't count.
Barley,
From a Bloomberg link on the FNM 2 year note sale:
Asian investors bought 12 percent of the latest issue, while European investors purchased 8 percent, down from 39 percent and 17 percent in the July sale, according to company data. Central banks bought 27 percent, down from 57 percent.
Wages are NOT going to decrease. But prices sure the hell will. As well as asset values in all sectors.
Theres going to be one heck of a spread, between the price of an existing home, and what it costs to build a new one. The new home construction price has an energy component that has not relaxed, and must be paid (unless the government is planning on subsidizing new home construction).
MW - -29% on the day.
I guess there will be an announcement of a conference call any minute now.
Sure worked for LEH (-6% on the day)
LAX adjacent 90066 zip 1950 1100 sqft bungalow bot in 1996 for $200k compares to same floor plan across the st sold july for $620k but others on mkt similar at $650-750 not moving. At peak 18mos back, $750 not impossible, so it looks like 50% further takes this neighborhood to about $500k or still well above last crash levels. this was a repo with a loan of $440k unloaded by a texas bank that cdnt resist the last bubble. The bank failed then even after surviving the TX blood bath of the mid 80s.
jms- I think the low share price also makes them potential buyout target, if there are still sufficient assets to make it attractive - Scotto
Right but I only consider that option in theory at this point. Seems like that is a post-FDIC takeover move or action as we're talking about a pretty big and messed up bank here so some government backing would seem needed before anybody would touch WAMU.
Was the sale in cash? Self financed? Or, just a sweep?
Or, modest buying by the Fed, using third party channels?
Monopoly money and a nice scented floral-embossed toilet paper.
...Other markets have just started to deflate, like oil. They have way longer to go...
Damn.was it me? Forgive me for a moment of deviation. Things should perk up by mid 2009.
O-Joe
What's up with Halo??
Telling me I've already posted something that's not there.
Oh well....nap time.
Ciao
MS
I located Sebastian...he was at a Wa Mu branch withdrawing his money.
I don't know if WaMu has enough wind to catch that 1 handle before the AH market closes, but, but golly, it won't be for lack of effort.
Thursday on Mandatory UP day...check the calendar
I'm guessing that the Dawg might agree with the following: 120x to 150x grm is fair for Owner Occupied. Without crazy financing and/or appreciation, monthly rent is a good benchmark for what people are able to pay.
Ed S.
I'd not even go to 150x. Those higher end multiples were in a competitive environment and with assurances like Prop 13 and stable costs of ownership. These days i see declining rents and increasing ownership costs. Factor that in and most places I'd rather 100x most places and 120x in California. Nota bene; investors get tax breaks as well with relatively few restrictions for the typical retail participant. The same numbers are good for buyers for occupancy.
Does anyone know a good, professionally edited blog on Alternative Energy and Green/Social investments?
Edited by VC pro would be nice.
Thankies in advance!!!
Sex, drugs and oil
Business, financial, personal finance news - CNNMoney.com
FDIC will pay the amount and accrued deposit as long as it is under the FDIC limit. For ease, I am going to use the $100,000 FDIC limit even though there are ways to increase it over the limit.
Case A:
You put in $100,000. If WaMu goes, you only get $100,000 and none of the interest.
Case B:
You put in $50,000. If WaMu goes in 6 months, you get your $50,000 and 6 months of interest (approximately $1500). You would not get the rest of your interest for the other 7 months as I believe that your CD would be callable when WaMu is taken over.
However, you have to evaluate the risk against getting your money back. If you look at the IndyMac takeover, it did take some time before insured amounts were available to be claimed. Also, I believe that you do not earn interest after a bank is taken over.
Regardless, it is up to you to make the call which I believe that you have already done.
"Wages are NOT going to decrease"
but people have been spending more than they earned:
Now a budget reduction is in order = no more credit expansion + paying back existing debt
plus some might feel the need to save in case they become unemployed...
factors that would provide a relief:
- reduction in health care costs,
child care costs, tuition,
- new better paying jobs
Wages are NOT going to decrease
First things that happen in a recession:
1. Overtime is cut
2. Premiums for contract labor are eliminated (or nearly so).
It won't be an official wage cut... but its already happening. There is a reason many people refer to their base 40 hour salary as 'the welfare check.' Its the OT that allowed them to live a comparable lifestyle.
And as was noted way up there, California is cd. CA real estate was based on continuous re-investment of principal appreciation. Between the MEW of all the appreciation and retirement demographics (not to mention the lack of sufficient retirement savings...).
The next 18 months will be fascinating in California. Not to mention California employment was heavy in REIC related industries. Oh wait... the nation was heavy in REIC employment... I still think deep recession, but if I'm wrong, we'll talk about it in the bread line.
Got Popcorn?
Neil
Anyone watching LEH AH?
Down to 6.82, ouch.
What I am trying to figure out is where all the optimists who talk about "bottoms" in the housing market are seeing future "growth" in housing?
1) Our stunning job market? Hahaha... right! Unemployment keeps on rising, not counting the underemployed and those who just aren't counted anymore (U-6 vs. U-3 metrics and all that.)
2) More debt? Oh, wait - that isn't working too well as we learn that the only real profits in the past 10 years or so were those made by the kleptocrats even as their companies are reduced to hollow shells where a half-finished, mold-eaten subdivision in Miami is considered an "asset." Right!
3) Funny money loans? Not coming back - next!
4) Taxpayer backed funny money loans? Cute, but where are the taxpayers going to get the money for this nonsense? See point 1 - our stunning job market for an answer.
5) Inflation? Nope. Not unless somehow wages magically inflate AND we don't see hyperinflation / speculation drive up the cost of living to absurd levels.
There is no "answer" or way to return to "normal" if one keeps thinking of normal as the Bubble years.
Why should there be a "recovery." Why shouldn't housing crash and STAY crashed for years and years, slowly creeping up at the rate of wage inflation (if that even goes up) while being forced down by higher property taxes and cost of living caused by too much debt and reckless printing of money?
I think many people will be surprised just what "normal" will be in the housing market going forward from here.
Geopolitics
Pakistan orders end to foreign incursions
Pakistan orders end to foreign incursions - CNN.com
U.S. accuses Russia of waffling on cease-fire
U.S. accuses Russia of waffling on cease-fire - CNN.com
Politics
Why rednecks may rule the world
BBC - Today
120x to 150x grm is fair for Owner Occupied.
In many parts of the country, 80x is considered "normal".
At the end of the last bust, 120x grm was normal on the SF Peninsula.
Right now, the South San Jose area is at 175x grm. Down from 400x. A combo of rising rents and dropping prices - with a lot of both.
But the tech layoffs have only just started. In the last bust in '99, rents dropped by 40%.
Lesson: Don't count on the grm to figure prices too closely.
Hey, it's mean to beat up on Ben Stein. I mean he's the equivalent in the world of finance of a Creationist in biology, or something of the sort. Too easy. Krugman needs to pick on somebody his own size.
RE: Sex, drugs and oil
This investigation is over the royalty program contract "mistake" that allowed royalty-free pumping. If they can show the mistake was a result of fraud, the contracts are null and void.
Billions of dollars are at stake here.
DrChaos writes:
"Does anyone know a good, professionally edited blog on Alternative Energy and Green/Social investments?"
"Union of concerned scientist"
Homepage | Union of Concerned Scientists
is a good discussion of the issues
(not investment orientated though)
The events of the past week have convinced me we're in one hell of a deflationary situation.
Truly deflationary:
(first 2 minutes)
YouTube - 2010 - Peter Hyams - The Birth Scene
Jupiter = the US financial system.
"royalty-free pumping"
Max, this is a family blog.
Why rednecks may rule the world
because of
royalty-free pumping ?
"It just seems like the market is pricing in its failure right NOW but FDIC is unwilling to act"
Thats because the FDIC is waiting till Friday to take it over.
California has usually been the bell weather for our societal and economic health or malaise. It's not a coincidence that it is failing the worst.
WRONG! Upstate New York is, according to some Californian experts, the leading indicator in economic putridity.
Prices are down 30% in Arlington County, VA, I've had NO sales in 6 months and inventory is blowing up like a mushroom cloud.
I located Sebastian...he was at a Wa Mu branch withdrawing his money.
crispy&cole
LOL
Vermont=relocated NYC/NJ scum.
Is Lehman talking nominal or real???
"tew writes:
I find it hard to imagine that my house would drop back down to 300-400K. Houses (that are not WTF priced) are still selling like hotcakes in my 'hood. I suppose anything's possible."
I would consider myself fortunate if it didn't drop to half that number.
"Wages are NOT going to decrease"
First things that happen in a recession:
1. Overtime is cut
2. Premiums for contract labor are eliminated (or nearly so).
- Neil
Although, it is implicitly understood that ipodius meant wage rates not total wages, wage rate downward inflexibility isn't a given anymore. Of course, the last time nominal wages generally fell was in the GD, there is more churn in the job market nowadays that didn't exist before. In the past, people tended to be laid off because of inventory accumulation and simply came back to the same job (and the same wage rate) they had before. Nowadays, people aren't just "called back to the factory" after a few months-there is an increasing tendency for jobs to be permanently destroyed, which sends the job seeker looking for a different employer and possibly a different line of work which would pay less starting out.
Ray...It is cheaper to buy one of the $700,000 plus priced homes here than it is to build. I just appraised one where the cost alone should be 600-750K for the dwelling and 200-300K for the lot. It came in at $700K because the builders are hurting so bad and inventory on that type of home is at a 36 month absorbtion rate. This crib is in one of the best areas north of the Atl. and only 20-30 min. from downtown and has the best school system in the state. This means that anything "jumbo" or above is taking a bath now and I forsee that to continue. The home prices are just disconnected from the reality of peoples paychecks. I bet this is true across the nation with higher end housing. A $700K+ house is considered an "executive" home in the metro Atl. suburbs. These WTF prices still have quite a way to fall until they start bouncing and i don't see anything giving them a good bounce when the finally do bottom. Where will these new "executives" hail from?
some simple mathematics proves that house prices are still bloated and overpriced by wide margin vs incomes and rents.
Let the plunge continue!
"NC writes:
(not investment orientated though)"
Thanks,
I am selecting some of those investments for a customer (his wish is my command). I am pleasantly surprised, some of those firms are actually making money, which wasn't a case couple of years ago.
Hail High Oil Prices!!!!
let's hope those firms will be able to utilize economies of scale before cheap oil nails them into the ground again.
Crash baby crash.
What new scheme will realwhores come up with?
"Wages are NOT going to decrease "
I have seen the evidence that wages are sticky during the down cycles. While I wouldn't sign under the statement above, I would agree that AVERAGE wages do not decrease much. (might be different from industry to industry...)
I am naturally reticent to enter into any discussion featuring Ben Stein. It's like arguing evolution with a fundamentalist Christian; you realize you are talking to an idiot who is too stupid to assimilate new data.
Housing will drop until it's in line with fundamentals. That means a return to long term ratios like price-income and rental-price additionally factoring in inventories, credit availability and the overall economy. Any other predictions are simply wishful thinking or pull-out-of-the-ass numbers.
Median US house price will return to 2.5 to 3.0 times income in the longer term. Given the other factors and using simple logic and math, it seems clear that the ratio will need to go BELOW the long term average for a while to balance out. I am looking for a bottom around 2.3 to 2.5 times median income.
Anything else is just more bubble. As long as China, Japan, and OPEC are willing to finance this, it's possible but getting more and more unlikely.
A further thought to housing prices. Many perma-bulls argue that houses are bigger and better now than they were in the past. It is true that the average American house had ballooned in size and that there are more amenities (necessities?) like marble countertops and DeepFreezes.
But, so what? Who cares? If every frickin' stupid American went out and bought a Bugatti Veyron, would it be justified because it's the fastest production car in the world? How about flying first class? Shouldn't everyone fly first class because it's so much better than economy?
Huh? Too expensive? WTF does that mean? Oh, they can't afford Bugatti's and flying first class because they don't have enough money.
But the argument is fine for houses because, dammit, Lord Jesus came down from Heaven and declared that all Americans must have houses.
Lord Jesus came down from Heaven and declared that all Americans must have houses.
Close, but that was Congressman Frank.
I'm waiting for Lord Oprah to come down from on high and hand to the Shnapster the keys to a new Bugatti Veyron. Because? "Im good enough, Im smart enough, and dog-gone it, I deserve a ultra-exclusive sports car."
Don't know. But here's the sector breakdown of R2000 after the 2008 reconstitution. First number is companies second is % market cap.
Consumer Disc. 305 13.24%
Consumer Staples 61 3.18%
Energy 109 8.61
Financials 409 19.51
Health care 258 12.66
Industrials 267 15.22
IT 355 17.08
Materials 77 6.21
Telecom 29 1.19
Utilities 35 3.11
Compared to Russell 1000, R2000 had 19.51% in financials vs. 15.79% for R1000. Yeah, I would guess a lot of the overweight is in regional banks.
"ModestoMary writes:
"tew writes:
I find it hard to imagine that my house would drop back down to 300-400K. Houses (that are not WTF priced) are still selling like hotcakes in my 'hood. I suppose anything's possible."
I would consider myself fortunate if it didn't drop to half that number.
ModestoMary | 09.10.08 - 7:33 pm | # "
Fat chance. This house sold for $190K in 1988. If it dropped to 150-200K, what's left of humanity is all living in caves.
I personally don't care much if it drops to 300-400, as long as myself and my partner are still employed. Just means the move-up houses that we've been priced out of are finally in our reach. We are the rare non-Koolaid drinking, never cashed out equity homeowners who can easily absorb a 50% or more drop in market value (again, assuming we've got some income coming in. If everyone's out of work for 7 years, then we've got problems).
At the peak, landside Malibu home prices (yes, not including beachfront) were 28x median income for Malibu. The longer term average was 5-6x. Malibu prices have been dropping at about the same rate as LA County. Like many high end areas, fewer desperate sellers has meant a market at a standstill. Almost a 3 year supply of homes, and that is at summer sales rates. Malibu sales have even more seasonality than most places.
In a town of about 13,000 people the market value drop will be several billion $. The equity drop will equate to $300-500,000 per resident, $1 million per single family home.
In case you missed this over a year ago, here's the disturbing attitude that is a root cause of our current problems. Let's extend this -- you borrowed $100k to get that college degree but found out you aren't that smart...walk away. You borrowed $50k for that nice ride and discovered it was worth only $35k one year later but you still owe $48k...walk away. You borrowed $400k for that house and it's worth $500k one year later...oh yeah, that's mine.
Mortgage trouble? Walk away.
Good morning. I'm splitting the Jim Cramer post in two, because the trashing of the Inland Empire (he says it's such a housing disaster it needs to be plowed over) is overshadowing his advice to upside-down homeowners: just walk away from the house and the mortgage.
Cramer on walking away: "When your house drops 20% in value, then it doesn't matter whether you're prime or subprime. It's better to walk away, even if you're wealthy. Because you don't want to lose your credit card, and you don't want to lose your car. Your house is the one thing that's fungible. It's smart to walk away... It's actually a good thing. I know that sounds a little counter intuitive. But if your home declines 20% in value, it's really important to sell it, or walk away from it."
Strong stuff considering this guy is probably the most prominent investment advisor on television today.
Your thoughts? Comments? Play investment advisor for a second: what do you advise someone who paid $500,000 for a house, still owes all the principal, and the house is now worth $400,000?
Posted by LATimes on July 31, 2007 in Mortgages | Permalink
"No Cal SC writes:
Fat chance. This house sold for $190K in 1988. If it dropped to 150-200K, what's left of humanity is all living in caves."
So it sold at the peak of the previous bubble for 190k... Your point is???
Are you sure Ben Stein didn't use the word "inconceivable"?
Westside of Los Angeles is just starting to feel the effects. 31-69% drops in Total Sales Volume last August (YOY).
Biggest Losers in order:
1)Beverly Hills
2)West Hollywood
3)West LA
4)Culver City
5)Pacific Palisades
6)Santa Monica
WestsideREmeltdown
6)
Almost forgot Marina del Rey and Venice.
Corrected list of "Biggest Losers"
in order:
1) Beverly Hills (-69%)
2) Marina del Rey
3) Venice
4) West Hollywood
5) West LA
6) Culver City
7) Pacific Palisades
8) Santa Monica (-31%)
WestsideREmeltdown
ModestoMary writes:
"No Cal SC writes:
Fat chance. This house sold for $190K in 1988. If it dropped to 150-200K, what's left of humanity is all living in caves."
So it sold at the peak of the previous bubble for 190k... Your point is???
ModestoMary | 09.11.08 - 7:20 am | #
That if prices drop to 150-200K here in Walnut Creek, that represents something like a 30 year roll back of pricing? As I said, that is an Armageddon-like scenario. What about the fact that this house brought 241K in 1997, very nearly the bottom of the last bust?
It was just last December that Ben Stein argued Goldman's projection of a 15% peak-to-trough decline in national home prices was implausible (Goldman is projecting another 10% decline now).
Ben Stein is full of shit... hoocoodanode?