Why we aren’t at a housing bottom

[Running Bear]

Watch the 10yr.

I understand why you guys are looking at the 10yr and picking a bottom to try and get the best refi or loan you can but I think you need to also consider something else.

I watch this rate very closely and think it will be a very strong indicator of the future of the economy. What I think we will see in the near term…next 3-6 months, is the understanding that the Fed is getting close to the floor in their rate cutting and that the US is going to try and bailout every Ponzi borrower in this country.

Why would you put money in a long bond for 10-30 yrs that will pay you 3.5-4.5% return with a currency falling at over 10% a year and inflation above the lvl of return you are getting? Investors will either move to short term bonds or try to find another place to make money. (ie outside the US) Right now people are there out of fear. Things will either get worse…bad for housing and the economy or things will easy and credit markets will leave this fear play for more profitable returns.

Alan Greenspan admitted recently that the Fed lost control of the long bond when they were raising rates to try and slow down the bubble. However, they have no direct control over these rates. The rest of the world kept them low by providing cheap easy money. This same thing will happen again but in reverse. The Fed will keep its target low hoping to keep the long rate at a lvl to stimulate growth but this only works if people are willing to jump into long bonds and take losses. The only way this works is if the rest of the world looks like a worse place to invest then the US. Eventually this may occur but I am afraid it will be too late to save us from a lot more pain.

What will happen when the rates to get a 30yr morg goes up by 1%…2%…and so on. We have all seen the numbers associated with what the value of a house is relative to rates, income, ect. Right now we still have very low rates, how much more pain will we see if long rates go up significantly?

I believe we are close to the point where we see the next leg pulled out from under housing because long rates go up. What I believe we will see is a flight out of long bonds and people will either put their money somewhere else or move to the short side. Again, the only thing that will keep these rates from going up is more doom and gloom in the market place and people investing there out of fear.

Both scenarios will will have a very negative effect on all borrowing and the ability of companies and borrowers to take on new debt. If you think home prices are at a bottom and are looking to buy, I would recommend you be more patient. We have significant downside risk with very little upside potential.

My2cents

[gdcox]

Worth at least 2 Euro cents Rich!

So true. Take the 3.5% yield on a ten year, take off tax and then inflation and see how much you have left….negative income ….and the possibility of capital loss if the yield does start moving up and you want to sell.

However, if the whole economy extends the recession right though the second half of 08, I suppose there is a chance that fright will drive big investors temporarily again into Treasuries (double dip)and inflation is so far relatively quiescent as suppliers absorb high input inflation in the face of wakening demand.

The big threat comes when recovery does start. Inflation will probably rise and investors will be out of those ten year bonds chasing opportunities; carpet bag style.

[gdcox]

Worth at least 2 Euro cents Rich!

So true. Take the 3.5% yield on a ten year, take off tax and then inflation and see how much you have left….negative income ….and the possibility of capital loss if the yield does start moving up and you want to sell.

However, if the whole economy extends the recession right though the second half of 08, I suppose there is a chance that fright will drive big investors temporarily again into Treasuries (double dip)and inflation is so far relatively quiescent as suppliers absorb high input inflation in the face of wakening demand.

The big threat comes when recovery does start. Inflation will probably rise and investors will be out of those ten year bonds chasing opportunities; carpet bag style.

[gdcox]

Worth at least 2 Euro cents Rich!

So true. Take the 3.5% yield on a ten year, take off tax and then inflation and see how much you have left….negative income ….and the possibility of capital loss if the yield does start moving up and you want to sell.

However, if the whole economy extends the recession right though the second half of 08, I suppose there is a chance that fright will drive big investors temporarily again into Treasuries (double dip)and inflation is so far relatively quiescent as suppliers absorb high input inflation in the face of wakening demand.

The big threat comes when recovery does start. Inflation will probably rise and investors will be out of those ten year bonds chasing opportunities; carpet bag style.

[gdcox]

Worth at least 2 Euro cents Rich!

So true. Take the 3.5% yield on a ten year, take off tax and then inflation and see how much you have left….negative income ….and the possibility of capital loss if the yield does start moving up and you want to sell.

However, if the whole economy extends the recession right though the second half of 08, I suppose there is a chance that fright will drive big investors temporarily again into Treasuries (double dip)and inflation is so far relatively quiescent as suppliers absorb high input inflation in the face of wakening demand.

The big threat comes when recovery does start. Inflation will probably rise and investors will be out of those ten year bonds chasing opportunities; carpet bag style.

[gdcox]

Worth at least 2 Euro cents Rich!

So true. Take the 3.5% yield on a ten year, take off tax and then inflation and see how much you have left….negative income ….and the possibility of capital loss if the yield does start moving up and you want to sell.

However, if the whole economy extends the recession right though the second half of 08, I suppose there is a chance that fright will drive big investors temporarily again into Treasuries (double dip)and inflation is so far relatively quiescent as suppliers absorb high input inflation in the face of wakening demand.

The big threat comes when recovery does start. Inflation will probably rise and investors will be out of those ten year bonds chasing opportunities; carpet bag style.

[Anonymous]

Spot on.

A different way to say the same thing is that fixed rate mortages, along with bonds, track inflation expectations and the opportunity cost of the same investment.

Since everything looks bad right now, the opportunity cost of bonds is low. Since inflation is (reportedly) low, bonds are cheap.

Yep. When bonds edge higher….lets face it, they aint goin much lower…..30 year fixed will edge higher. Ever stricter lending standards will glue more fence sitters to the fence. The current glut of bank owned inventory continues to grow every month. In March 300ish sold and 1000ish added….looking at NODs this number will only grow and grow and grow.

The math isnt far off from banks owning 1 full year of inventory (15k homes) on top of private sales. Sure, they dont own it yet….but we’re looking at adding 700+ homes to bank owned inventory every month, and that number is accelerating. If banks add 1500 homes/mo, interest rates rise, and sales fall by another 15-20%….presto. Heck, it doesnt even have to make it to 1 year of inventory…as Gary would say 6 months is ‘in the bag’.

This first 20% drop has been fun to watch……if the perfect storm hits in the form of job loss + higher interest rates coupled with the inevitable bank owned real estate…..wowsa!!! buckle up…..

Jasper

[Anonymous]

Spot on.

A different way to say the same thing is that fixed rate mortages, along with bonds, track inflation expectations and the opportunity cost of the same investment.

Since everything looks bad right now, the opportunity cost of bonds is low. Since inflation is (reportedly) low, bonds are cheap.

Yep. When bonds edge higher….lets face it, they aint goin much lower…..30 year fixed will edge higher. Ever stricter lending standards will glue more fence sitters to the fence. The current glut of bank owned inventory continues to grow every month. In March 300ish sold and 1000ish added….looking at NODs this number will only grow and grow and grow.

The math isnt far off from banks owning 1 full year of inventory (15k homes) on top of private sales. Sure, they dont own it yet….but we’re looking at adding 700+ homes to bank owned inventory every month, and that number is accelerating. If banks add 1500 homes/mo, interest rates rise, and sales fall by another 15-20%….presto. Heck, it doesnt even have to make it to 1 year of inventory…as Gary would say 6 months is ‘in the bag’.

This first 20% drop has been fun to watch……if the perfect storm hits in the form of job loss + higher interest rates coupled with the inevitable bank owned real estate…..wowsa!!! buckle up…..

Jasper

[Anonymous]

Spot on.

A different way to say the same thing is that fixed rate mortages, along with bonds, track inflation expectations and the opportunity cost of the same investment.

Since everything looks bad right now, the opportunity cost of bonds is low. Since inflation is (reportedly) low, bonds are cheap.

Yep. When bonds edge higher….lets face it, they aint goin much lower…..30 year fixed will edge higher. Ever stricter lending standards will glue more fence sitters to the fence. The current glut of bank owned inventory continues to grow every month. In March 300ish sold and 1000ish added….looking at NODs this number will only grow and grow and grow.

The math isnt far off from banks owning 1 full year of inventory (15k homes) on top of private sales. Sure, they dont own it yet….but we’re looking at adding 700+ homes to bank owned inventory every month, and that number is accelerating. If banks add 1500 homes/mo, interest rates rise, and sales fall by another 15-20%….presto. Heck, it doesnt even have to make it to 1 year of inventory…as Gary would say 6 months is ‘in the bag’.

This first 20% drop has been fun to watch……if the perfect storm hits in the form of job loss + higher interest rates coupled with the inevitable bank owned real estate…..wowsa!!! buckle up…..

Jasper

[Anonymous]

Spot on.

A different way to say the same thing is that fixed rate mortages, along with bonds, track inflation expectations and the opportunity cost of the same investment.

Since everything looks bad right now, the opportunity cost of bonds is low. Since inflation is (reportedly) low, bonds are cheap.

Yep. When bonds edge higher….lets face it, they aint goin much lower…..30 year fixed will edge higher. Ever stricter lending standards will glue more fence sitters to the fence. The current glut of bank owned inventory continues to grow every month. In March 300ish sold and 1000ish added….looking at NODs this number will only grow and grow and grow.

The math isnt far off from banks owning 1 full year of inventory (15k homes) on top of private sales. Sure, they dont own it yet….but we’re looking at adding 700+ homes to bank owned inventory every month, and that number is accelerating. If banks add 1500 homes/mo, interest rates rise, and sales fall by another 15-20%….presto. Heck, it doesnt even have to make it to 1 year of inventory…as Gary would say 6 months is ‘in the bag’.

This first 20% drop has been fun to watch……if the perfect storm hits in the form of job loss + higher interest rates coupled with the inevitable bank owned real estate…..wowsa!!! buckle up…..

Jasper

[Anonymous]

Spot on.

A different way to say the same thing is that fixed rate mortages, along with bonds, track inflation expectations and the opportunity cost of the same investment.

Since everything looks bad right now, the opportunity cost of bonds is low. Since inflation is (reportedly) low, bonds are cheap.

Yep. When bonds edge higher….lets face it, they aint goin much lower…..30 year fixed will edge higher. Ever stricter lending standards will glue more fence sitters to the fence. The current glut of bank owned inventory continues to grow every month. In March 300ish sold and 1000ish added….looking at NODs this number will only grow and grow and grow.

The math isnt far off from banks owning 1 full year of inventory (15k homes) on top of private sales. Sure, they dont own it yet….but we’re looking at adding 700+ homes to bank owned inventory every month, and that number is accelerating. If banks add 1500 homes/mo, interest rates rise, and sales fall by another 15-20%….presto. Heck, it doesnt even have to make it to 1 year of inventory…as Gary would say 6 months is ‘in the bag’.

This first 20% drop has been fun to watch……if the perfect storm hits in the form of job loss + higher interest rates coupled with the inevitable bank owned real estate…..wowsa!!! buckle up…..

Jasper

[JWM in SD]

The bottom will only occur after the solvent banks begin lending to each other again and the insolvent banks either go away or bring out their dead and mark to market.

Basically, when the credit crunch is done, and sane lending standards have truly returned, then the bottom will be in sight. Prior to that, forget it. The problem for a lot of people including some of those in this forum, don’t want to admit what that really means…and that is over correction of home prices in SoCal. I will happen…I had my doubts a year ago, but now it is pretty clear that nothing can stop it.

[JWM in SD]

The bottom will only occur after the solvent banks begin lending to each other again and the insolvent banks either go away or bring out their dead and mark to market.

Basically, when the credit crunch is done, and sane lending standards have truly returned, then the bottom will be in sight. Prior to that, forget it. The problem for a lot of people including some of those in this forum, don’t want to admit what that really means…and that is over correction of home prices in SoCal. I will happen…I had my doubts a year ago, but now it is pretty clear that nothing can stop it.

[JWM in SD]

The bottom will only occur after the solvent banks begin lending to each other again and the insolvent banks either go away or bring out their dead and mark to market.

Basically, when the credit crunch is done, and sane lending standards have truly returned, then the bottom will be in sight. Prior to that, forget it. The problem for a lot of people including some of those in this forum, don’t want to admit what that really means…and that is over correction of home prices in SoCal. I will happen…I had my doubts a year ago, but now it is pretty clear that nothing can stop it.

[JWM in SD]

The bottom will only occur after the solvent banks begin lending to each other again and the insolvent banks either go away or bring out their dead and mark to market.

Basically, when the credit crunch is done, and sane lending standards have truly returned, then the bottom will be in sight. Prior to that, forget it. The problem for a lot of people including some of those in this forum, don’t want to admit what that really means…and that is over correction of home prices in SoCal. I will happen…I had my doubts a year ago, but now it is pretty clear that nothing can stop it.

[Author]

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