Getting that 2006 feeling again …….

[Jazzman]

^^^That misses the point that CAR is making, but it was more than just interest rates and lax lending. The chronology might go something like this:

Recession and loss of manufacturing
Deregulation of financial markets
Creation of complex financial products
Dot.com bubble
Monetary easing
Collateralizing risk and risk transfer
Lax lending due to risk transfer
Lax regulatory scrutiny (due in part to misplaced loyalties)
Denial followed by collapse

Banks used to lend your money to borrowers. That risk was transferred to investors. Consumer driven economies enjoyed huge increases in lending and the apparent guarantees offered by risk transfer. What was not to like about it? Well, we are puny humans and give in easily to our irrational side.

[NotCranky]

The ARM’s with all the different options, Like teaser rate for X years and/or interest only , these things were effectively creating a low interest rate environment until they were foreclosed or modified or refinanced into current low rates. With that in mind I think CaRenter is Correct to some degree. We have effectively had a low interest rate environment for a very long time.

[The-Shoveler]

I Think some missed the point xbox was making,

It was not the interest rates that caused the last housing bust, it was the CRAZY loans that were being made from about 2003-2007 that are NOT being made now (especially the ones in 2005-6).

Sure home prices are crazy but the loans are not for the most part. what that means IMO is if you do finally get some builder to start building and selling at a lower home prices (which I think will happen at some point), it will not necessarily lead to the foreclosure wave we had from 2008-20011 or so.

Sorry that was a once in a life time.

[Jazzman]

The “crazy” loans were in part crazy because of the low rates. The laxness of lending didn’t help either, but we need to be clear about what we are referring to: high house prices, credit crunch, or economic downturn. What is significant is that we’ve had a fairly brisk pace of home price appreciation from 2012-14 tighter lending standards notwithstanding. That begs the questions of what is the overriding driver of home prices. It might be that it depends on when we talking about. Currently, we have a significant shortage of supply which has been shown to track price increases.

[The-Shoveler]

The Crazy part was if you wanted to buy 10 homes with nothing down and no collateral other than the house you were buying, there was not much to stop you.

Not seeing anything like that now.

Something like that only happens once.

[Jazzman]

[quote=The-Shoveler]The Crazy part was if you wanted to buy 10 homes with nothing down and no collateral other than the house you were buying, there was not much to stop you.

Not seeing anything like that now.

Something like that only happens once.[/quote]
You don’t have the crazy lending, at least not quite on the same scale. You do have plenty of government sponsored schemes that took up the reins, and the net result is the same; over-valued RE. Some would say, yes, but the risk is different this time. Let’s wait and see. They may also say prices are not at the same levels. Do they need to be? Is less than crazy not crazy by virtue of being less?

[CA renter]

[quote=Jazzman]^^^That misses the point that CAR is making, but it was more than just interest rates and lax lending. The chronology might go something like this:

Recession and loss of manufacturing
Deregulation of financial markets
Creation of complex financial products
Dot.com bubble
Monetary easing
Collateralizing risk and risk transfer
Lax lending due to risk transfer
Lax regulatory scrutiny (due in part to misplaced loyalties)
Denial followed by collapse

Banks used to lend your money to borrowers. That risk was transferred to investors. Consumer driven economies enjoyed huge increases in lending and the apparent guarantees offered by risk transfer. What was not to like about it? Well, we are puny humans and give in easily to our irrational side.[/quote]

Exactly, Jazzman. The low interest rates caused investors of all stripes to move further out on the risk curve in order to reach certain return targets. This, along with financial instruments that appear to shift risk (thanks to deregulation), is what causes lax lending standards.

The lax lending standards are the effect, the low interest rates are the cause.

[CA renter]

[quote=The-Shoveler]The Crazy part was if you wanted to buy 10 homes with nothing down and no collateral other than the house you were buying, there was not much to stop you.

Not seeing anything like that now.

Something like that only happens once.[/quote]

A lot of the money coming into the post-crisis housing market is coming from overseas. We don’t really know what’s going on over there WRT their lending and where this money is really coming from. Was it borrowed or leveraged in some way? Is it the result of a bubble overseas or in other markets? Bubbles cause bubbles, especially when you can use bubble money from one asset class to leverage purchases in another asset class. If one of the bubbles pops, they might all collapse, much like we saw in 2008.

Just because we aren’t seeing as much of the crazy stuff in our domestic mortgage market doesn’t mean it’s not happening in another market. What we do know is that a lot of money has been flowing from central banks around the world, and all of that money has to go somewhere. Where is it going?

……………..

“The outstanding balance of margin loans on the Shanghai and Shenzhen bourses climbed to 4.4 percent of overall market capitalization on July 2 from 3.6 percent on June 12, before the rout began, as the attached chart shows. The data doesn’t include unregulated borrowing, which Bocom International Holdings Co. estimates at around $322 billion. That would increase the debt to market cap ratio to more than 9 percent.

Higher leverage may undermine government measures to stem the steepest three-week rout in the nation’s equities in a quarter-century. Margin traders reduced positions for nine days through Thursday, the longest stretch of declines on record, even as the central bank cut interest rates and the securities regulator eased margin-trading rules.”

http://www.bloomberg.com/news/articles/2015-07-05/china-stock-plunge-leaves-market-more-leveraged-than-ever-before

……….

Just when investor fears over plunging Chinese stocks appear to be calming down, the country’s frothy corporate bond market is stirring concerns it could be the next domino to fall.

Investment funds have flowed rapidly into corporate bonds since the stock market collapsed in June, triggering a surge of debt issuance. Demand has compressed corporate and sovereign bond spreads to their narrowest in four years – an oddity, when industrial profits are falling and credit risks are rising.

While bond investors say corporate bond prices are not at unreasonable levels, they are wary a sharp correction could be sparked by a bond default from major state-owned companies or a change in monetary policy.

“What concerns us is the narrowing credit spread between corporate bonds and government bonds, despite shrinking corporate profits,” said Zhou Hao, senior emerging markets economist at Commerzbank in Singapore. “In addition, we are also worried about the rising leverage ratio in bond positions.”‘

http://www.reuters.com/article/2015/10/27/us-china-debt-idUSKCN0SL2YF20151027

[CA renter]

And these investors may, or may not, be the types of investors who have the ability or desire to stick around during a housing market crash.

…………

“Foreign Persons Receiving Rental Income From U.S. Real Property

U.S. real estate professionals and rental agents/property managers are encountering an increasing number of situations that involve foreign persons’ acquiring U.S. real estate as a part-time residence, for investment or in some cases to conduct a U.S. business.”

https://www.irs.gov/Individuals/International-Taxpayers/Foreign-Persons-Receiving-Rental-Income-From-U.S.-Real-Property

………….

“The latest data from the National Association of Realtors, which was released last summer, showed that foreign buyers had scooped up $68.2 billion of single-family homes in the U.S. in the year ended March 2013. That’s about 7 percent of the total U.S. market. That was down slightly from the $82.5 billion invested during the same period of 2012, but up from 2011. The fastest growth in foreign buyers was from China and Canada.”

http://www.cnbc.com/2014/01/07/us-dominates-list-for-foreign-real-estate-investors.html

[sjk]

I remember distinctly Ben Bernanke testifying before Congress that there was no housing bubble I think it was 2006. I don’t recall if the FRBSF release research saying the same at the time, however they are now !

What’s Different about the Latest Housing Boom?

It’s unknown to me exactly what the trigger will be but I do suspect we’re very close to finding out ….

Happy Thanksgiving to all !!

Regards,

[afx114]

Uber, but for Piggington.com traffic trends as a function for predicting the next crash.

[Author]

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