San Diego Housing Bubble News and Analysis

I think everything you posted is pretty accurate.

Hard to say whether we will have a recession or depression, though. Especially since I don't think there is a textbook definition for depression other than 'long recession' (which is exactly what I think this will be, anyway).

There is likely to be unemployment on a large scale, probably not 25% like the 30's though. Maybe more like 10-15%. I think new construction is going to stop and the economy will lose two other jobs for every one lost RE gig.

Those that still have jobs will face lower salaries, fewer raises and a reduced standard of living brought about by inflation and the destruction of consumer credit. Additionally, many that were planning an early retirement will find they will have to keep working, due to lost 401k and home equity.

The end result is everyone is going to have to learn to live within their means. I'm sure for many that is going to seem like a depression indeed!

Regardless, I saw this coming a few years ago and planned accordingly. It's somewhat comforting that the sacrifices I've made over the past few years were worth it.

I agree with your observations....I just didn't understand
what are : Jingle mail and "taking the inside out" type walk-aways....

"Jingle mail" was a term that was probably coined in the 80s or earlier. During that housing downturn, underwater homeowners (with negative equity) would just put their in the mail to the bank and move out.

We are seeing a significant rise in owners just walking away.

This has huge implications on the housing downturn.

http://money.cnn.com/2008/02/06/real_est...

"taking the inside out" is former owners trashing the house on the way out of their foreclosed house

put their Keys in their mail.....

Recheck your figures on "flight to safety" on US Bonds, I think you got it backwards......it is indicating that the smart money is INDEED going for the safety of the US Bonds, did you happen to catch the 90% failure of the Feds last auction ?.....Nobody wants the US debt at low interestes rates (4.69%) because of these silly assed politico scams like the "stimulus plan".....So they didnt buy the bonds...will they eventually ?..You bet, but not until the govt offers 10-15% .....Paul Volcker-esque....anybody ? Or how about 25% ?

I am a long time private trader, and here is my take on it. This is shared collectively by the entire smart money trading world. I just happened to be one of them. Here's a little peek for you to mull over. Here we go.......

 The catch that is VERY serious, in my opinion, for the purposes of this forum.....and were talking about rioting/revolt serious here.....The pensions and 401K money from the collective retirement of the workers of the entire US  is NECK DEEP into the sub prime CDO's and MBS's....the banks are loaded with them also. Hence no credible collateral possessed by the banks is suitable for possible investment, they WILL not even loan to each other and the Fed usually wont take sub prime as collateral for overnight loans either thru POMO or TOMO,  but he's changing his tune lately, so the only way to keep BofA and WM and many others solvent and within their mandated capital reserve requirements by law is the scam Bernanke is "allowing" by ""23A agreement letters" (hidden auction recipients) and thru the TAF short term loans made to these banks to keep them "appearing" to be solvent...they are NOT solvent.

MM funds, like banks are also neck deep into this jive. NOBODY knows the extent of their sub prime holdings...and they are NOT telling either, so NO ONE will loan them a nickel UNTIL its known what the risks are. No transparency ?....No actual risk assessment, then no loan for you....Check the performance of Equities in the market just since Jan 1....yeah....pretty sad eh ?  Foreign money buoying them up ? You bet,  on a few ...Like Citi Group among others....but at a SERIOUS premium, like 10 Plus % loans.....THAT is untenable to maintain a banks profitability. Like I said, they are ALREADY INSOLVENT.

When will it all come crashing down ?....I used to think when the monoline bond insurers (MBI ABK, etc) actually had to make their public notification of the loss of the AAA rating for this debt....but the govt is ALWAYS getting involved and trying to game the system with fake news releases and such, AND this is an Election Year..so it hasnt occurred as of yet, however Cuomo (NY-AG) is handing out  indictments for fraud on Wall street and wanting to take a peek at their books...Uh  Ohhh...THAT cant be good for these guys.......CRIMINAL FRAUD...."What did you know...and WHEN did you know it" type questions from the AG....which could mean jail time for the officers of these corps..Anyone remember Sarbanes-Oxley ?....Maybe THIS will force the ratings agencies to honestly re-state the quality of that debt...and if they do....LOOK OUT BELOW !....By charter and Federal SEC Mandate the pensions AND the 401K's MUST sell them immediately (liquidate) to comply, they are not allowed to own so much  NON AAA rated debt....THEN the CDO/MBS toxic waste will be FORCED to be  "Marked to Market" ... the REAL market, not the fictitious. "fairy tale value" they are currently at. So you ask:..Whats the real mark of the value of these COD's and MBS's ?.....simple......almost ZERO....

These Are Enormous loans on DEPRECIATING valued assets ! Honestly Worth almost ZERO!....WANT PROOF ?....Okay...Then WHAT would YOU as investor pay to buy a loan from an originator that was made on a DEPRECIATING asset such as a residential house? lets just say a 820K loan on a typical newer SD tract home ? Seen what the value of Real Estate has been doing lately?....AND dont forget, those loans in the portfolio youre thinking of buying now dont come with a AAA debt rating either, hence no INSURANCE for your risk will be available...Yeah, you know, like theres a damned good chance those loans will CONTINUE to default ? YEP, definitely, Look who they were made to ?......So what would YOU pay to be the bag holder on this previously supposed AAA debt ?.....Yeah thought so.....Well, The rest of the world agree's with you, its not worth a DIME !! Hence...a Global Credit Freeze...Which just so happens to be EXACTLY what were experiencing now.  

So back the WHOLE scenario up and figure out what will happen to the 401K's and the private, state, federal Pensions that are a large part of the proud owners of that toxic garbage? ......Yeah, youre seeing it.....the retirement funds will EXPLODE and be worth MAYBE 10% maybe of their supposed value today....BOOOM....Working Americans just got their ENTIRE retirements GRENADED!! Think yours is safe ?...Hahahhaaa....just call your fund manager and DEMAND him to tell you EXACTLY how much of your portfolio is exposed to CDO/MBS toxic waste....Make sure you have a few Advil standing by for when he tells you....Which he will...He's required to by law.

You think Survivor Island and American Idol will be watched so much after that ?...No..me either, the people of this country will finally wake up, but its too late....I think were staring down the barrel of a full on global depression and economic collapse. This is the end of the "Millionaire Mentality" of todays homeowner....or more correctly stated:.. "Loan Owner"

So maybe the US Govt will then step in and back stop the bond insurers so the defaults wont cause them to go out of business of insuring debt on defaults?....Really ?....not a CHANCE !....Were talking in the HUNDREDS OF TRILLIONS OF DOLLARS exposed risk here....there isnt a govt in the WORLD that can take on that type of debt, NONE...and in fact, collectively the ENTIRE world's govts couldnt step in front of that bus !  Think about the significance of 600 TRILLION DOLLARS here.....I have even heard MORE being bandied about in investment circles.

Lets not forget also, the commercial real estate has been JUST AS  STUPID !...they have LOADS of CDO's and MBS's type crap loaded into those ABCP instruments too, that were always looked at at safe investments...and THAT hasnt even been discussed yet. Let alone Option Arm loans....they dont explode until the 09 summer. It promises to be even BIGGER !!

Kondratieff cycles and many other economic analysis depict this scenario as a "Reset".....Yeah, just like what your kid  does when the Video Game he is playing is NOT going the way he likes it....he just reaches over and hits the "Reset" button and BAM... He starts over with a clean slate......Thats what going to happen.

Can it be avoided ?....Not in my opinion it cannot. Hell the Fed can cut rates to zero, its irrelevant what he does, the MARKET sets rates...not the Fed. He can cut rates to zero like the Bank Of Japan has done for 20 plus yrs if he wants,  but he CANNOT force people to borrow, besides, Americans are TAPPED out anyway, they cannot take on anymore debt, hell, they cant even service the debt they have now.......Lets not forget either, the Fed is a PRIVATE BANK and their PRIMARY directive is PROFIT, so no return on their investments while underwriting the federal debt is NOT part of their plan. This goofy assed "stimulus plan" is the govt's attempt at FORCING people to borrow, they just wont pay it back until 09 taxes, but the average citizens haven't figured that part out yet, but they will...Cute huh ?

I also fully expect to see the 10 and 30 yr bonds SKYROCKET up to 20% interests rates also, THAT will be the price required for risk  from people with REAL money to buy the debt....Bam.....THAT will finally KILL whats left of the RE industry.

If your NOT debt free now, forget it, your sunk. If you can become debt free quickly...then DO IT immediately, otherwise plug your ears, the loud BOOM your gonna be hearing will be the WORLDS ECONOMY..If you got CASH (NOT GOLD) you will be in the drivers seat in the coming depressed economy.....

This crunch is on the credit/supply side....make no mistake, the US Govt CANNOT inflate its way out of this, oh they might try, I FULLY expect them to but the bond market will teach them rather harshly like it did last time Bernanke tried to cut rates by jacking up the 10 and 30yr rates.... in 10 minutes, after his last .50 BPS rate cut got swallowed up by int. increase on the 10yr.....Hahaha...SPANKED him hard ! Look at the chart if you don't believe it. This information is available to the public domain. Takes a little looking, but nothing secret here.

Got treasuries ?....if you want to make a little money and be somewhat relaxed in it being a safe investment....for now anyway...Thats where the "Smart Money" is right now, hiding in safety, NOT invested in the market for potential returns. Check out TreasuryDirect.gov......google it up. its pretty simple.

Cash Dollars will become incredibly more valuable, not worth less, like so many tend to think.... When No One will loan money, IE: "No NEW money", or more correctly, no "new debt origination".... then the existing cash money becomes worth even more. That IS DEFLATIONARY

Good luck to all. 

....the retirement funds will EXPLODE and be worth MAYBE 10% maybe of their supposed value today..

You lost me here. Wouldn't 90% of the debt out there have to default for this to happen? How likely is that?

LookoutBelow,
I like your well thought out insightful financial analysis. You must have extensive experience in financial services industry. Were you once a Wall Street investment banker or analyst?

Tell me more!

What should I do with all my money. Should I liquidate everything and put it in gold coins and put it under my mattress?

You got me thinking, maybe that cabin in rural idaho with bomb shelter is not such a bad idea now! I can stash the gold, perhaps build a 100% self sufficient water/power and hunt for food.

...gotta rrrruuunnn...Panic attack is settiing in now.....no no RUNNNNNNNN

Lookbelow said?....

Nobody wants the US debt at low interestes rates (4.69%) because of these silly assed politico scams like the "stimulus plan".....So they didnt buy the bonds..

Got treasuries ?....if you want to make a little money and be somewhat relaxed in it being a safe investment....for now anyway...Thats where the "Smart Money" is right now, hiding in safety, NOT invested in the market for potential returns. Check out TreasuryDirect.gov......google it up. its pretty simple.
________________________________________________________

It appears that you recommend purchasing US bonds thru TreasuryDirect as a safe investment, but you also said nobody wanted the US bonds at 4.69%.

Could you please explain this, I am confused.

Sly

Really hard to tell where this is going. As far as I can see, the only way out, short of 'reset', is inflation. But reset may be what occurs. It would be deflationary. Economic collapse raises the specter of destabilization and war.

In the meantime, I'm trying to run a business. That's my day job. The uncertainty factor makes it more challenging. We have long-term contracts with annual increases, for example. None of this is good for business, to say the least.

As a fellow long time private trader who generally disagrees with doomsdayers, here is my two cents on this. It is possible you are right, but these arbitrarily emotional views on things have never led me to profitable trades. There are certainly negative cross currents in these turbulent times, and I am no goldilocks blind man. However, every time in history we have had sharply declining interest rates with sharply declining stock prices, major rallies have occurred, and I expect it to be no different this time. You can single out Japan as an instance where lower interest rates did not save the day, but I look at our history here, not other countries with completely different political systems and monetary structures.

There are very bullish historical tendencies to stock prices in election years, so I do not believe it will be different this time. March buys during these years have been very lucrative.

Of course I am speaking of stock prices. I do have significant fire power and defenses on my ranch, in case you are right and the world ends in the next 12 months.

I would assume you are heavily short most things, it will be interesting to see come March how those positions fare going forward. So far you have been right, but timing is everything as a trader which you obviously know as well as I do.

Forget about our economy hitting the depression. I think we'll hit the Dark Ages. Is that more dramatic?
Yep, its more dramatic...............

This new depression, which I call The Long Emergency, will play out against the background of a society that has pissed away its oil endowment, bulldozed its factories, arbitraged its productive labor, destroyed both family farms and the commercial infrastructure of main street, and trained its population to become overfed diabetic TV zombie "consumers" of other peoples' productivity, paid for by "money" they haven't earned.

http://jameshowardkunstler.typepad.com/c...

while you're at James Kunstler's site (arraya provided the link above) follow the link to the South African's editorial - very interesting article to think about the next time you bounce through one of our local potholes

Some people define a recession as when your neighbor is out of work and a depression as when you are out of work. Even the on line dictionary does not want to describe a depression. It must be a form of wish fulfillment, if you do not say the word, it will not come about.... otherwise known as denial.

Everybody should go read Mish's Credit Default Swap Tsunami Approaches article, posted today.

This clarified much of the mess for me. Yes, trillions of dollars of paper equity is going to be wiped out. There is nothing anyone can do about that now and the economic fallout will be severe.

However, its not going to be the end of the world. The key is that the vast majority of the phantom equity that is destroyed is going to be in hedge funds. For those that don't know what a hedge fund is, its basically a mutual fund for rich people thats allowed to use dirty tricks. For example, the greatest hedge fund returns in history were generated this year by shorting mortgage back securities. Basically betting that poor people were going to lose alot of their homes.

Thousands of other funds, however, are simply leveraged to the hilt betting *with* junk debt. I'm sure many have been borrowing and trading amongst themselves. These are going to blow up en masse'.

So, whats the fallout? Lots and lots of millionaires and billionaires are going to watch much of their phantom equity vanish into ether. And this is going to be largely meaningless on a macroeconomic scale. If I had 100 million dollars in a dozen hedge funds and half of them blow up, then I still have 50 million. Is this going to have any effect on my spending habits or lifestyle? Not really. And therefore the effect on the economy should be somewhat contained.

kewp -

You may want to study up on who has invested in the vehicles you mentioned. If you think it is only rich people then you are quite mistaken. Perhaps you ought to look into various pensions, municipalities, county and state funds, and many other entities which form the basic fabric of alot of our society.

SD Realtor

Spillover hitting the Student Loan Markets. what's up next.

Auction-Bond Failures Spread to Student Loan Debt (Update2)

By Michael Quint and Martin Z. Braun

Feb. 11 (Bloomberg) -- College Loan Corp., a San Diego- based lender, said some bonds it issued with rates determined through periodic auctions failed to attract enough bids.

The company wouldn't say which specific issues failed or identify the banks that managed the auctions.

Demand for bonds in the $360 billion auction-rate securities market is waning on investor concern that dealers who collect fees for managing the bidding on the bonds won't commit their own capital to prevent failures. Reduced appetite for auction-rate debt in the municipal market also reflects expectations that the credit strength of insurers backing the securities may deteriorate.

``It is unfortunate that certain auctions did not clear,'' said John Falb, chief financial officer at College Loan in an e- mailed statement Feb. 8. Falb said investors couldn't have been concerned about the quality of the College Loan Corp. bonds, which are backed by government-guaranteed student loans.

Auction bonds issued by Sallie Mae, the largest student loan lender, also failed to attract enough bidders last week, according to a report today by Keefe, Bruyette & Woods, a New York-based securities firm. The report said weak demand for auction securities may not extend to other debt backed by the same pool of student loans.

Thomas Joyce, a spokesman for Reston, Virginia-based Sallie Mae, couldn't be reached for comment on the status of the company's auction securities.

Failure Consequences

Auction bonds have interest rates that are determined by bidding that typically occurs every seven, 28 or 35 days. When there aren't enough buyers, as has occurred in recent months on some securities, the auction fails and bondholders who wanted to sell are left holding the securities. Rates at failed auctions are set at a level spelled out in bond documents.

Fitch Ratings in a Dec. 19 report said some issuers of student-loan backed securities ``have been faced with the possibility of failed auctions.'' Ratings on the debt may be cut as rising rates at auctions shrink the gap between what the student loan companies pay on their bonds and what they collect on the student loans they hold, Fitch said.

``It seems that the dealers are no longer willing to bid in large amounts for these issues,'' said Lee Epstein, chief executive at Money Market One, San Francisco-based securities firm specializing in short-term securities.

Dealer Support

Bidding by dealers is essential to the smooth functioning of auction securities and banks are now wary of loading their balance sheets with the bonds, Epstein said. Failures are concentrated in securities that were privately sold, he added.

Officials at Sallie Mae, the largest student loan lender, couldn't be reached for comment on the status of their auction securities.

In the municipal market, at least two auctions run by Lehman Brothers Holdings Inc. failed on Jan. 22, the first day the bond investors could react to a ratings downgrade of Ambac Financial Group Inc.'s main insurance units.

Debt issued by electric utility Nevada Power reset at 6.757 percent, the maximum proscribed under the terms of the bonds, while securities from Georgetown University reset at 6.604 percent. Ambac insures Nevada Power's debt, while MBIA Inc.'s MBIA Insurance Corp. guarantees Georgetown's debt.

Failed auctions have hurt companies that bought those variable-rate securities as short-term investments with excess cash, and are unable to sell their holdings. Bristol-Myers Squibb announced Jan. 31 a $275 million write-off of its holdings, which totaled $811 million at the end of 2007.

About a third of 449 companies polled in a survey last May for the Association for Finance Professionals said they had investments in auction-rate bonds.

To contact the reporters on this story: Michael Quint in Albany, New York, at mquint [at] bloomberg [dot] net ; Martin Z. Braun in New York at mbraun6 [at] bloomberg [dot] net .

Last Updated: February 11, 2008 17:38 EST

Aside from home loans, there are significant problems with car loans, credit card loans, and student loans.

Essentially what happened is that over the last decade or so, as the Fed followed a policy of keeping interest rates low, lenders gave money to people who, in retrospect, weren't the best credit risks. Housing was the most visible sector where this happened, but it happened in other sectors as well.

Now the solution that is being proposed (and followed by the current Fed) is...more cheap money. It's as though the hangover is just starting, so we've got to get a few drinks under our belt in order to "take the edge off" so to speak.

I don't know what the solution is, but I don't think more cheap money is a good idea.

SD Realtor,

I'm very well aware of that. Which is why I'm not participating in my employers pension fund until this is over and taking care of my investments personally. Luckily I'm young enough (barely) and my expenses low enough to get away with this.

I'll also comment that I don't understand how people are getting the idea that the paper has no value. Some of us (like myself) pay our debts. Most people do. I suspect whats going to happen is they will take a big haircut (maybe 50%) before the vultures pick them up at a discount.

One solution might be for the Fed to start lending money directly to consumers with good credit (above 700 FICO) at the current interest rates. The problem we are going through now isn't so much a problem of cheap money, but of bad borrowers. If we restrict credit to people that manage their money it will get the country back on track much faster.

Please tell me I am wrong...

It is (basically) over:

1.) Investors are getting scared about inflation, pressuring the Fed to raise rates.
2.) Investors are beginning to doubt that previous easing was enough to keep us out of recession, pressuring the Fed to lower rates.

If the Fed lowers rates, Treasuries will be massacred. If the Fed raises rates, this is tantamount to admitting defeat re the recession, Securities will be massacred.

I had thought this might last a bit longer, until it was obvious that the Fed was out of ammunition, but it turns out that they are like the British regulars at Isandlwana. Bad ammo. Here comes the assegai in the chest!

"Lets not forget either, the Fed is a PRIVATE BANK and their PRIMARY directive is PROFIT, so no return on their investments while underwriting the federal debt is NOT part of their plan."

It is my understanding that the profits earned by the Fed are returned to the US Treasury. So unless their "profits" are hidden as operating expenses, it would seem to me that their primary motivation would be power, not money.

Do I misunderstand?

Rational expert: The problem at Isandlwana was not bad ammo, but rather a lack of ammo. The British quartermasters were refusing to release additional ammo until their officers ordered it. As a result, the British riflemen were overrun by the Zulus when their ammo ran out, and their bayonets proved no match for the Zulus' assegais.

The Martini-Henry rifle was extremely effective against indigenous forces, as was the Maxim machine gun, but both are worthless without ammunition.

The 150 man contingent at Rorke's Drift held off 4,000 Zulus and attributed their success to the Martini-Henry rifle "with some guts behind it".

I might now add a new one:

10. Loan to income ratios will NEVER, EVER get as high as they are now, or in the recent past. Up until about 2006 ratios were over 12:1. A person with $100,000 could assume a mortgage loan of $1.2M. Even with this recent bust things are still coming out to 11:1 on average. No bank in the world will give out a loan at that ratio, and likely won't in the foreseeable future.

With this in mind, how can CA support such high prices? Aliso Viejo, where I rent an apartment, has a median income of around $90K/year, with homes running close to $900K+. San Clemente, where I'd like to buy is even worse with median incomes at about $110K, and homes running well over a $1M. Who can afford to buy a home in this market? And, conversely, what bank would make that loan without a HUGE downpayment of 10-20%?

Maybe things are looking up for buying a home afterall?

- Doug

If a couple brings in roughly 200k/year, you get a 5:1 income ratio for a $1M home.

There is a controversy about the reasons for the disaster. I was being expedient and the accuracy of my historical metaphor may be less important for the economic issues today. Nevertheless:

The quartermasters are the standard foil. However, the more accepted version today, I think, is that the trap-door breech mechanism on the Martini-Henry does not work well with the standard thin-walled brass cartridge when it gets hot. This can be fixed with modifications to the ammo. At Isandlwana there appears to have been plenty of ammo at forward positions.

Regards,

Rat. expectations

Rational expectations: Interesting. This is a new twist to me. Is there a new book out on the Anglo-Zulu War that discusses this? I'd be very interested in reading it, as the older versions of events (most notably the book "The Washing of the Spears") tend to place the blame squarely on the quartermasters.

The Martini-Henry appeared to function well at Rorke's Drift, and there is scant mention of any malfunctions among that contingent (2nd Warwickshire Regiment) during the siege there.

Allan, the ammo problem was on a public TV program. I saw it within the last 2-3 years. Don't know if that helps you. Hopefully rat exp has more info.

Patient renter in OC

patientrenter: Thanks. I will track that program down. I'm a history buff, and have always been interested in the Anglo-Zulu War and the Boer War.

Great thread. This is very telling.

http://tinyurl.com/2mnzmg

Allan, here's a reference for you on the ammo design problem (as distinct from the ammo supply problem) at Isandlwana, just in case you hadn't found one yet.

http://en.wikipedia.org/wiki/Martini-Henry

"The weapon is partly blamed for the defeat of British troops at Isandlwana prior to Rorke's Drift (in addition to poor tactics and numerical inferiority) - while the Martini-Henry was state of the art, in the African climate the action tended to overheat and foul after heavy use. It would eventually become difficult to move the breech block and reload the rifle. After investigating the matter, the British Army Ordnance Department determined the fragile construction of the rolled brass cartridge and fouling due to the black powder propellant were the main causes of this problem. To correct this, the cartridge was switched from weak rolled brass to stronger drawn brass, and a longer loading lever was incorporated to apply greater torque to operate the mechanism when fouled. These later variants were highly reliable in battle."

Patient renter in OC