So goes Subprime, So goes Housing

[PerryChase]

Very good point, csr_sd. People don’t realize how much money they are “loosing” every year holding on to depreciating real estate investments.

The investors out there will be hammered if the downturn lasts a long time. The staying power of investors is not indefinite. There will be a point when they give up and that will be the real turning point for this market.

The investors make this market and they’ll be the ones to break it. (By investors I mean the investor landlords as well as the gambling on appreciation, over-extended homeowners).

[bob007]

Whether there is a sharp decline or small decline or no decline one point I like to make is that that housing won’t appreciate for 10+ years until 2015.

[Cow_tipping]

2015 … no if we dont see the bottom in 08 and start seeing appreciation by 2010-11 then forget it till 2040. Baby boomers retiring baby … they will dump their built in the 70’s and filled with lead paint and asbestos crap boxes on the market like it was … going out of style … wowee … that tired old cliche even fits …
Anyway, we may see a bottom in 2008 and start a small rebound in 2011 and turn negative through 2040 or see slow drop till 2011 and continue to see the drop till 2040. There is going to be pain … and I aint talking about what can be cured by prep H either.
Cool.
cow_tipping.

[LA_Renter]

Boy, the mainstream media found a new story here didn’t they. Here is another link

http://money.cnn.com/2007/03/05/news/economy/subprime/index.htm?postversion=2007030516

The NAR and CAR can’t spin their way out of this one. This will hit hard!

[Duck]

Thanks for the advice, Cow. I’m going to sell and rent until 2040. I’ll be 95 then and have spent $2,300,000 on rent but I’m sure I’ll be happy buying at your bottom.

Thanks again.

[PerryChase]

Seems like an implosion in Subprime lending. The new lending guidelines are here. I didn’t expect it to happen this fast. Looks like powayseller was right.

[LA_Renter]

I’m with you Perry. I knew this was off in the horizon, I did not expect this to come down like a sledgehammer.

[Bugs]

I realize some will interpret this as me being a wise guy, but as far as I’m concerned this is all according to the script. It’s 1991 all over again, only worse. The only thing that surprises me was how long they were able to hold out. By stalling for so long they have only pressurized the situation. That’s why it now appears to be unwinding so rapidly.

I think the pace of sub-prime’s collapse will increase in the next few weeks, and the manner in which the survivors underwrite their loans will swing like a pendulum to the other extreme. We will end up going back to 10% downpayments and higher interest rates because these lenders have to undewrite the additional risks that go with a declining market and reduced investor participation.

Think about what this is going to do to the general market psychology, and hence to both volumes and pricing. It will become the corrolary to irrational exuberance.

[PerryChase]

Bernanke calls for stronger regulation of Fannie Mae and Freddie Mac

By Jeannine Aversa
ASSOCIATED PRESS

11:10 a.m. March 6, 2007

WASHINGTON – Federal Reserve Chairman Ben Bernanke urged Congress on Tuesday to bolster regulation of mortgage giants Fannie Mae and Freddie Mac, and suggested limiting their massive holdings to guard against any danger their debt poses to the overall economy.

http://www.signonsandiego.com/news/business/20070306-1110-bernanke.html

[kewp]

Any idea how the scale of the sub-prime meltdown compares to the savings and loan fiasco of the 80’s?

[sddreaming]

Kewp – you took the words right out of my mouth. I’m glad to see a tightening on loan standards. I hope this sets the tone for the current crisis as opposed to a massive bail-out of the banks as in days of S&L. The near future should be very interesting.

[Bugs]

In order to compare the magnitude of losses between the last spike and the potential losses from the current one you’d have to be able to figure out what’s at risk here. Every time someone tries to take a tenative swing at quantifying the number of at-risk borrowers the figures seem to be so high that nobody can take them seriously.

In short, it’s so high it can’t be real.

I had to laugh the other day. I was reading a thread over on BrokerOutpost.coms’s Mortgage Grapevine. A couple of these mortgage brokers were speculating that the federal government would step in and prevent the collapse of the housing market. NOT. Even if the feds wanted to they don’t have near enough money to do it.

[PerryChase]

The savings and loan crisis of the 1980s and early
1990s produced the greatest collapse of U.S. financial
institutions since the Great Depression. Over the
1986–1995 period, 1,043 thrifts with total assets of over
$500 billion failed. The large number of failures overwhelmed
the resources of the FSLIC, so U.S. taxpayers
were required to back up the commitment
extended to insured depositors of the failed institutions.
As of December 31, 1999, the thrift crisis had
cost taxpayers approximately $124 billion and the
thrift industry another $29 billion, for an estimated
total loss of approximately $153 billion. The losses
were higher than those predicted in the late 1980s,
when the RTC was established, but below those forecasted
during the early to mid-1990s, at the height of
the crisis.

Plus 1.16 billions in judgments against the US government, not counting the untold wealth lost in the early 1990s real estate crash. Remember the Japanese lost their asses on such assets as Pebble Beach, First Interstate Building in LA and Rockerfeller center in NYC, not to forget La Costa Spa and the Emerald tower in Downtown San Diego. Remember the 4-seasons in La Costa? The Japanese stopped funding it so it stood as a shell in the landscape for years.

http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf

The S&L crisis began and 1986 and concluded in 1999, or 13 years for clean up. Perhaps the Subprime lending mess will take just as long or longer.

Things change but really remain the same. It’s like prime time TV. The script is the same, the characters are different.

[PerryChase]

“The extraordinary cost of the S&L crisis is astounding to every taxpayer, depositor, and policymaker. The estimated present value cost of the bailout of the Federal Savings and Loan Insurance Corporation (FSLIC) is $175 billion or more.

http://www.econlib.org/library/enc/SavingsandLoanCrisis.html

10 years from now, we’ll be reading papers such as these on the Subprime Meltdown.

[jztz]

Here is a detailed analysis of the potential subprime loan foreclosures (lots of good data), and the potential loss to home equity owners is estimated to be about $156 billion.
http://www.responsiblelending.org/pdfs/CRL-foreclosure-rprt-1-8.pdf

The the authors probably didn’t do, it seems to me, is to estimate the impact of a downward spiral — foreclosure leads to lower price, then leads to more foreclosure. So I believe that it’ll be worse than the authors estimated. How fast will it happen? It seems that sub-prime loans enter problematic period fast, about a year. Then if refinancing is shutdown due to tighter lending, we’ll likely see real damage later this year and all of 2008.

As far as cost — the fortunate part is that they’re more dispersed among investors of securitized mortgages, plus a few direct actors like NEW. I don’t think that the cost of debt default will be a direct hit to taxpayers. But the cost of asset (housing) deflation to the economy is another matter.

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