Submitted by waiting hawk on August 4, 2007 - 11:28am.
"And, of course, all bubbles, in every commodity, whether it is land or stock or gold on tulips, always end some time. No matter how sure people are that their particular rocket will always go up and never come down, it always happens. A word to the wise. --------------------------------------------------------------------- "
Submitted by bsrsharma on August 4, 2007 - 11:37am.
There is a difference. 1970s were a period of hyperinflation in US (due in part to Vietnam war & energy crisis). Compared to that, recent bubble is easy money driven speculation. After the coming bust, there may be another hyperinflation driven bubble as $ devalues and US assets become cheap for foreigners. Also, the rich will like to shelter their wealth in real estate.
Submitted by waiting hawk on August 4, 2007 - 11:54am.
You might re-read it a few more times. A ton of it is the same. With cheap credit and other crap that happened in this period and we did have hyperinflation...In RE
Submitted by temeculaguy on August 4, 2007 - 12:07pm.
I wonder what Ben would say today if you showed him this article? That article was great and from an interesting guy. He hosted a game show "win Ben Stein's Money" was in a bunch of movies most memorable line still used today while as a teacher calling roll "Bueller, Bueller," wrote nixon's speaches, was valedictorian at Yale Law. In 1981 he was a different guy, a younger guy and I am afraid today he has become one of the "there's nothing to worry about guys."
Here he is on Katie Couric telling us in March of 2007 reacting to the new century failure saying that this is just a subprime problem and this will all blow over and won't affect the economy, "Bueller, Bueller".
Submitted by one_muggle on August 4, 2007 - 12:24pm.
bsrsharma,
You said Also, the rich will like to shelter their wealth in real estate.
The very wealthy people that I know have gotten out of RE almost entirely, with the exception of properties they use personally, and even some of those have been dumped.
Some have fled to commercial RE and others have gone foreign. South America has some nice bargains, such as Uruguay, as well as some areas of Europe. Though that isn't as good as it was due to the dollar's fall--but if you bought over the last two years, the recent currency differential would actually have been in your favor. I guess the take-away is, there are always places to make money, if you have money, but I don't think US RE will be that place for at least a decade.
Submitted by bsrsharma on August 4, 2007 - 12:35pm.
One Muggle,
The "Rich" are smart in capital preservation. They (I mean their investment advisors) can sense when the market has bottomed out vis a vis the start of hyperinflation cycle and shelter their wealth. US RE may not be that attractive, price wise, at present, but it has some good features like title security (someone, private or public, can't just steal or nationalize as in Russia/Venezuela/South Africa etc.), US is a very livable place and has good legal & financial system, at least compared to many other "attractive" investment venues.
Ben Stein was on KNX news radio's business hour last week and said that there is no sense to the negative reactions on Wall St. for the subprime and credit implosions. He stated figures that didn't make sense to me, such as the percentage of defaulted loans was only 0.7 percent of all mortages. Like 1 in 147. That's a far cry from what I've been reading. He also claimed that the money lost in just one bad (-300 pt.) day in the stock market was more than all the bad loans put together. So, he was saying why the fuss? I think he should stick to acting.
Submitted by temeculaguy on August 4, 2007 - 9:43pm.
Actually he's right and 1 in 147 sounds high for a national number. Foreclosures in the first six months jumped 170% in California, there were 104,572 unique properties in foreclosure which lead the nation and Florida was #2 with 64,250. The rub is that those foreclosures in CA and FLA are the most expensive homes in the country, the helocs and the spending are a huge part of every retailer in those two areas and probably every producer/manufacturer in the country, lose those and it all falls a few notches. It's not the foreclosure itself that causes the loss, one or two on the street might lose a 100k for the bank each but the value of the other twenty houses just lost 50k each, 200k loss for the lender, a million loss for the neighborhood. Those people won't or can't pull the 50k out that some might have and don't spend it and it ripples through the economy. Then in a few months some couple gets divorced and has to sell, they can't because they are upside down and their odds of foreclosing increases, furthering the cycle. Then the company that sells widgets has 5% lower sales of their product and lays off 5% of their workforce who also end up foreclosed on. So yes, it's not the actual number of foreclosures, it's the effect it has on the broader market and that is by no means insignificant.
Submitted by one_muggle on August 4, 2007 - 10:00pm.
bsrsharma,
It's a bit xenophobic to think that only the US will protect your private property.
True there are lousy countries to buy RE, but that doesn't mean all foreign countries are a significant risk of nationalization, as your comment implies. With a few minor exceptions, like Texas, US RE as a whole is a lousy investment right now even for capitol preservation.
RE is dropping nationwide, as is the dollar, how on earth can you possibly make the case that US RE investment preserves capitol!? One commercial example: I suggest you avoids investing in Argentinian oil fields, but Canada fields have some great prospects. Do you think Canada is about to grab private holdings? It all depends on location, just like in the US.
The big money I know are keeping their homes and prime vacation holdings, like Park City, Keys, Hawaii, but have dumped INVESTMENT properties over the last several years. The places I know they have dumped are NC coast, Keys (again investment, not personal), Long Island, Boulder, and Vermont. BTW, these are the same people who were selling their equities and buying RE in 2000.
My point is simply that investment grade opportunities in US RE right now are mostly dead for now, with a few exceptions for the experienced foreclosure vultures. The only people I know that are hoping for investment properties (not owner-occupied SFH) in the US, such as San Diego, are the monied-middle, who have enough cash to purchase a second or third home, but don't have the real money and contacts to go global.
If you know of big money buying in the US, I would love to know. It's a great harbinger. I'll do the same if I hear anything--no specifics of course.
Temeculaguy: Take that one step further. All of this is built upon an insane amount of debt. Real wages have been stagnant since the mid-1970s, and American households have been sustaining the illusion of prosperity through ever increasing amounts of debt.
A great many of those soon to be foreclosed upon properties were financed with 100% LTV loans. Add in those HELOCs you spoke of, as well as all of the commercial revolving debt and the picture becomes even grimmer.
Add in the coming credit crunch, add tightening lending standards and the fact that most banks have not hit the market with their REO portfolios yet and you start to get the sense of something really ugly. Then what happens during the next wave of mortgage resets? And the next?
That's around 800 percent increase, which is in-line with the recent report on LA county's 799% increase, but the RealtyTrac number is national. I know SoCal is the center of the universe, but the numbers seem a bit suspicious--must be Haliburton.
-one muggle
PS. what makes this CDO mess worse than the stock market blip (so far) is the concentration of the losses and the wicked leverage, two things which made the '29 bust as bad as it was. I can't see how this will end well.
The overall number of bad loans relative to the number of loans made isn't that high, but the dollar amounts stemming from those losses are sizable. How many good loans does a lender have to make in order to pay off the losses stemming from the one foreclosure where they lose $75k or $100k? What happens when those principle losses start exceeding $150k per foreclosure, AS IS ALREADY HAPPENING in some Riverside County neighborhoods? There's profit in making a loan and selling it off to the secondary market but that margin isn't THAT big. These lenders aren't being driven under by a lack of demand, they're going down because of the margin calls.
I think the big story here really is going to turn out to be the credit contraction and it's results.
If you hold the notion that prices locally were driven that high by speculators and marginal buyers who were enabled by easy credit, it would follow that a credit contraction will have the opposing effect. Many of the banks are losing money right now, many of the secondary market investors are losing money right now. Eventually the only way they'll continue to participate is if the reward justifies their perceived risks. More negative press contributes to more negative perceptions above and beyond those that would already be justified by these losses.
All indications going forward are that credit is going to be both much more difficult to obtain and much more expensive. A 10% mortgage interest rate may not be outside the realm of possibilities in our near future.
At street level that means more downpayment requirements, more underwriting of credit and income requirements, more scrutiny of the collateral valuations (appraisals and automated valuation products) and higher interest rates. If the investors were hyper agressive before the opposing corollary will be hyper conservatism, which will be reflected by higher interest rates.
The $800k house may end up costing the $575k price just because of financing, but that won't change the amount of the payment or the ability of the borrowers to make that payment.
Poof, the previous buyers in that neighborhood are now down $225k. That's just the effects of financing, alone and apart from any other factors.
Because there will be less room for monkey business, only those borrowers who really are able to pay will be getting those loans. That doesn't even touch the underlying dynamics of a regional economy that has been largely subsidized - if not driven - by the real estate industrial complex. Fewer RE-related jobs = fewer buyers who can make the high-dollar house payments. The combination speaks to the "effective" half of the term "effective demand".
More buyers will be reluctant to commit, more buyers will reduce their maximum housing expenditures and will decline to pay the 50+% of their income for housing in lieu of other alternatives. That speaks to the "demand" half of the term "effective demand".
I think we're moving past the point of talking about bumby rides.
Submitted by PerryChase on August 5, 2007 - 10:42am.
Good post bugs. Yeah, poof, 28% of the value of homes can disappear just because of financing alone -- just like that. Add in the confluence of other factors and greater declines are possible.
Where's powayseller? Everything she predicted is coming true.
I remember about 1 1/2 years ago posting that borrowers lied on their applications. I was accused of being dishonest. Where are all the pollyannas now?
Submitted by temeculaguy on August 5, 2007 - 11:41am.
Yes, good post Bugs, the small margin that the lender makes explains why it doesn't take that many forclosures for them to feel the pain plus the dollar value of the loans made from 2003-2006 that are going bad has to be much higher than the loans that were made 10 or 20 years ago and those loans aren't going bad but are used to get the stat about what percentage is going bad. If I were to say that 1 of my 100 stocks went worthless it doesn't sound too bad but if I had a third of my money in that stock it is an entirely different scenario.
I'm reading some of your posts this morning Bugs. You are really expressing your points well and they are good strong points, as always.
I look at all this sweat equity, granite & hardwood as near freebies for future Piggington buyers. I just hope the improved stock doesn't get too abused by vandals and destructive renters before it is time to buy.
EDIT , OOPs should have posted on the UT foreclosure thread.
Submitted by barnaby33 on August 5, 2007 - 1:47pm.
Bugs, there is a huge disconnect here, but you still arrive at what I feel is the right conclusion. Banks made money by selling loans, in essence they became brokers, hence the moral hazard. Once they sold the loan the only way for them to be held responsible would be re-assignment of those loans based on fraud, usually a FPD or something like it. Will these re-assignments be enough to sink banks is the question, or will the CDO investors who bought them take the lions share of the losses?
At the tail end of the boom when credit quality was at its lowest, the banks began to be unable to pass these mortgages onto the secondary market. Those loans they still hold and will become toxic on their balance sheets.
I think what will end up burning the banks is that they shifted to a broker business model and when that goes away, shifting back to making loans that they actually hold the paper on will be very painful and far less profitable.
After seeing what happened this week to the credit markets, I too feel its far past the point of bumby rides.
"And, of course, all bubbles, in every commodity, whether it is land or stock or gold on tulips, always end some time. No matter how sure people are that their particular rocket will always go up and never come down, it always happens. A word to the wise. --------------------------------------------------------------------- "
There is a difference. 1970s were a period of hyperinflation in US (due in part to Vietnam war & energy crisis). Compared to that, recent bubble is easy money driven speculation. After the coming bust, there may be another hyperinflation driven bubble as $ devalues and US assets become cheap for foreigners. Also, the rich will like to shelter their wealth in real estate.
You might re-read it a few more times. A ton of it is the same. With cheap credit and other crap that happened in this period and we did have hyperinflation...In RE
The author of the article was Benjamin Stein. Anyone know if that was 'the' Ben Stein?
I wonder what Ben would say today if you showed him this article? That article was great and from an interesting guy. He hosted a game show "win Ben Stein's Money" was in a bunch of movies most memorable line still used today while as a teacher calling roll "Bueller, Bueller," wrote nixon's speaches, was valedictorian at Yale Law. In 1981 he was a different guy, a younger guy and I am afraid today he has become one of the "there's nothing to worry about guys."
Here he is on Katie Couric telling us in March of 2007 reacting to the new century failure saying that this is just a subprime problem and this will all blow over and won't affect the economy, "Bueller, Bueller".
http://www.cbsnews.com/stories/2007/03/1...
What happened Ben?
Yes it is.
http://www.benstein.com/bio.html
bsrsharma,
You said Also, the rich will like to shelter their wealth in real estate.
The very wealthy people that I know have gotten out of RE almost entirely, with the exception of properties they use personally, and even some of those have been dumped.
Some have fled to commercial RE and others have gone foreign. South America has some nice bargains, such as Uruguay, as well as some areas of Europe. Though that isn't as good as it was due to the dollar's fall--but if you bought over the last two years, the recent currency differential would actually have been in your favor. I guess the take-away is, there are always places to make money, if you have money, but I don't think US RE will be that place for at least a decade.
-one muggle
One Muggle,
The "Rich" are smart in capital preservation. They (I mean their investment advisors) can sense when the market has bottomed out vis a vis the start of hyperinflation cycle and shelter their wealth. US RE may not be that attractive, price wise, at present, but it has some good features like title security (someone, private or public, can't just steal or nationalize as in Russia/Venezuela/South Africa etc.), US is a very livable place and has good legal & financial system, at least compared to many other "attractive" investment venues.
And how many folks will read this article and then tell you that it's different now?
Ben Stein was on KNX news radio's business hour last week and said that there is no sense to the negative reactions on Wall St. for the subprime and credit implosions. He stated figures that didn't make sense to me, such as the percentage of defaulted loans was only 0.7 percent of all mortages. Like 1 in 147. That's a far cry from what I've been reading. He also claimed that the money lost in just one bad (-300 pt.) day in the stock market was more than all the bad loans put together. So, he was saying why the fuss? I think he should stick to acting.
Actually he's right and 1 in 147 sounds high for a national number. Foreclosures in the first six months jumped 170% in California, there were 104,572 unique properties in foreclosure which lead the nation and Florida was #2 with 64,250. The rub is that those foreclosures in CA and FLA are the most expensive homes in the country, the helocs and the spending are a huge part of every retailer in those two areas and probably every producer/manufacturer in the country, lose those and it all falls a few notches. It's not the foreclosure itself that causes the loss, one or two on the street might lose a 100k for the bank each but the value of the other twenty houses just lost 50k each, 200k loss for the lender, a million loss for the neighborhood. Those people won't or can't pull the 50k out that some might have and don't spend it and it ripples through the economy. Then in a few months some couple gets divorced and has to sell, they can't because they are upside down and their odds of foreclosing increases, furthering the cycle. Then the company that sells widgets has 5% lower sales of their product and lays off 5% of their workforce who also end up foreclosed on. So yes, it's not the actual number of foreclosures, it's the effect it has on the broader market and that is by no means insignificant.
bsrsharma,
It's a bit xenophobic to think that only the US will protect your private property.
True there are lousy countries to buy RE, but that doesn't mean all foreign countries are a significant risk of nationalization, as your comment implies. With a few minor exceptions, like Texas, US RE as a whole is a lousy investment right now even for capitol preservation.
RE is dropping nationwide, as is the dollar, how on earth can you possibly make the case that US RE investment preserves capitol!? One commercial example: I suggest you avoids investing in Argentinian oil fields, but Canada fields have some great prospects. Do you think Canada is about to grab private holdings? It all depends on location, just like in the US.
The big money I know are keeping their homes and prime vacation holdings, like Park City, Keys, Hawaii, but have dumped INVESTMENT properties over the last several years. The places I know they have dumped are NC coast, Keys (again investment, not personal), Long Island, Boulder, and Vermont. BTW, these are the same people who were selling their equities and buying RE in 2000.
My point is simply that investment grade opportunities in US RE right now are mostly dead for now, with a few exceptions for the experienced foreclosure vultures. The only people I know that are hoping for investment properties (not owner-occupied SFH) in the US, such as San Diego, are the monied-middle, who have enough cash to purchase a second or third home, but don't have the real money and contacts to go global.
If you know of big money buying in the US, I would love to know. It's a great harbinger. I'll do the same if I hear anything--no specifics of course.
-one muggle
Temeculaguy: Take that one step further. All of this is built upon an insane amount of debt. Real wages have been stagnant since the mid-1970s, and American households have been sustaining the illusion of prosperity through ever increasing amounts of debt.
A great many of those soon to be foreclosed upon properties were financed with 100% LTV loans. Add in those HELOCs you spoke of, as well as all of the commercial revolving debt and the picture becomes even grimmer.
Add in the coming credit crunch, add tightening lending standards and the fact that most banks have not hit the market with their REO portfolios yet and you start to get the sense of something really ugly. Then what happens during the next wave of mortgage resets? And the next?
Wow.
temeculaguy et al.,
I'd just been reading RealtyTrac and they put the national rate at 1/134
http://www.realtytrac.com/ContentManagem...
Unless it is a typo, what is really astounding is the comparison to last year's national ratio of 1/1117
http://www.realtytrac.com/news/press/pre...
That's around 800 percent increase, which is in-line with the recent report on LA county's 799% increase, but the RealtyTrac number is national. I know SoCal is the center of the universe, but the numbers seem a bit suspicious--must be Haliburton.
-one muggle
PS. what makes this CDO mess worse than the stock market blip (so far) is the concentration of the losses and the wicked leverage, two things which made the '29 bust as bad as it was. I can't see how this will end well.
one muggle: You're right about the CDO leverage. Most of that leverage was in the 10x to 20x range. That's gonna hurt coming back the other way.
The overall number of bad loans relative to the number of loans made isn't that high, but the dollar amounts stemming from those losses are sizable. How many good loans does a lender have to make in order to pay off the losses stemming from the one foreclosure where they lose $75k or $100k? What happens when those principle losses start exceeding $150k per foreclosure, AS IS ALREADY HAPPENING in some Riverside County neighborhoods? There's profit in making a loan and selling it off to the secondary market but that margin isn't THAT big. These lenders aren't being driven under by a lack of demand, they're going down because of the margin calls.
I think the big story here really is going to turn out to be the credit contraction and it's results.
If you hold the notion that prices locally were driven that high by speculators and marginal buyers who were enabled by easy credit, it would follow that a credit contraction will have the opposing effect. Many of the banks are losing money right now, many of the secondary market investors are losing money right now. Eventually the only way they'll continue to participate is if the reward justifies their perceived risks. More negative press contributes to more negative perceptions above and beyond those that would already be justified by these losses.
All indications going forward are that credit is going to be both much more difficult to obtain and much more expensive. A 10% mortgage interest rate may not be outside the realm of possibilities in our near future.
At street level that means more downpayment requirements, more underwriting of credit and income requirements, more scrutiny of the collateral valuations (appraisals and automated valuation products) and higher interest rates. If the investors were hyper agressive before the opposing corollary will be hyper conservatism, which will be reflected by higher interest rates.
The $800k house may end up costing the $575k price just because of financing, but that won't change the amount of the payment or the ability of the borrowers to make that payment.
$800,000 @ 6.5% = $5,030/month
$575,000 @ 10.% = $5,004/month
Poof, the previous buyers in that neighborhood are now down $225k. That's just the effects of financing, alone and apart from any other factors.
Because there will be less room for monkey business, only those borrowers who really are able to pay will be getting those loans. That doesn't even touch the underlying dynamics of a regional economy that has been largely subsidized - if not driven - by the real estate industrial complex. Fewer RE-related jobs = fewer buyers who can make the high-dollar house payments. The combination speaks to the "effective" half of the term "effective demand".
More buyers will be reluctant to commit, more buyers will reduce their maximum housing expenditures and will decline to pay the 50+% of their income for housing in lieu of other alternatives. That speaks to the "demand" half of the term "effective demand".
I think we're moving past the point of talking about bumby rides.
Good post bugs. Yeah, poof, 28% of the value of homes can disappear just because of financing alone -- just like that. Add in the confluence of other factors and greater declines are possible.
Where's powayseller? Everything she predicted is coming true.
I remember about 1 1/2 years ago posting that borrowers lied on their applications. I was accused of being dishonest. Where are all the pollyannas now?
"I think we're moving past the point of talking about BUMPY rides."
I type faster than I spell.
Yes, good post Bugs, the small margin that the lender makes explains why it doesn't take that many forclosures for them to feel the pain plus the dollar value of the loans made from 2003-2006 that are going bad has to be much higher than the loans that were made 10 or 20 years ago and those loans aren't going bad but are used to get the stat about what percentage is going bad. If I were to say that 1 of my 100 stocks went worthless it doesn't sound too bad but if I had a third of my money in that stock it is an entirely different scenario.
I'm reading some of your posts this morning Bugs. You are really expressing your points well and they are good strong points, as always.
I look at all this sweat equity, granite & hardwood as near freebies for future Piggington buyers. I just hope the improved stock doesn't get too abused by vandals and destructive renters before it is time to buy.
EDIT , OOPs should have posted on the UT foreclosure thread.
Bugs, there is a huge disconnect here, but you still arrive at what I feel is the right conclusion. Banks made money by selling loans, in essence they became brokers, hence the moral hazard. Once they sold the loan the only way for them to be held responsible would be re-assignment of those loans based on fraud, usually a FPD or something like it. Will these re-assignments be enough to sink banks is the question, or will the CDO investors who bought them take the lions share of the losses?
At the tail end of the boom when credit quality was at its lowest, the banks began to be unable to pass these mortgages onto the secondary market. Those loans they still hold and will become toxic on their balance sheets.
I think what will end up burning the banks is that they shifted to a broker business model and when that goes away, shifting back to making loans that they actually hold the paper on will be very painful and far less profitable.
After seeing what happened this week to the credit markets, I too feel its far past the point of bumby rides.
Josh