[LA_Renter]

“There is no question that there are a growing number of people who eventually plan on buying a SFH in San Diego but are waiting for the right time.”

Yes that is true….but that number is not that great compared to the number of people that jumped into the market before they should have. One of the effects of the extreme lax lending is that it pulled future demand into the market. I used to work in an industry where the company that I worked for would put together huge year end deals to meet the revenue and profit targets it communicated to the street. It’s a horrible way of doing business. We would offer my distributors money off and 180 days dating if they took in our product in December. So the distributors would calculate how much floor space they had available and if they need some type of temporary storage, they would calculate their projected sales through the first 180 days of the year and order that amount. It was GREAT seeing that December number of shipments. The only problem is that by the end of the first quarter of the following year Mgmt would be on the phone…..Where are the orders?? Well we pulled the first half of the years demand into Dec so there’s hardly anything above and beyond that we can ship now……I hated working for that company. The same thing has happened in housing, yes there is demand accumulating on the sidelines but the easy credit of 2003 – 06 pulled in a whole lot of future demand.

[LA_Renter]

I agree with your assessment. Great tool thanks for the link. The interesting thing I noticed is that the last California housing boom occurred with much higher interest rates, like you I don’t know what the actual mortgage rates were back then but I imagine they were much higher than the 2001 to 2006 boom. The Fed funds rate dropping from 7.5% to 2.5% shows how much more room the FED had to maneuver verses today. There isn’t a whole lot the FED can do buffer this other than dropping the FED Funds rate back to 1%. If we see the FED do that then it will only be a response to a severe recession.

[LA_Renter]

h82rent,

I guess the pop I’m referring to is the underlying credit bubble of which the housing bubble was made possible. The credit markets went from stable with large amounts of cheap credit to a panic stricken credit crunch within days. That’s a pop. You are correct housing kind of just hisses its way down much to everybody’s frustration and it will continue at a much faster pace now. The housing bubble was the body of the snake, the credit bubble was the head, the head has been severed and the body still has some last twitches to it but its dead with no chance of revitalization. I have pointed this out many times before this is a $5 to $10 Trillion dollar problem in the global CDO derivatives market. All of that stuff has to be re-priced. That is going to take a long time and with much pain that transcends even the political season. Bush and congress in actuality don’t have much in the way they offer at tax payers expense. This the FED’s problem and even they have limited ability to deal with this. If the FED takes big bold steps due to political pressures and the credit markets remain locked up, they run the the risk of creating an even bigger panic…..IF THAT DIDN”T WORK THEN…THEN…NOTHING WILL….OMG RUN AWAY, RUN AWAY! (remember Monty Python’s Killer Rabbit). If the politicians could re-inflate the bubble and could pressure the FED to their will….you are right they WOULD. The reality is that they CAN’T. Can they make things worse by trying…YEP!

[LA_Renter]

“At first, I was convinced that this bubble is going to pop. Very loudly and very quickly. But given the political ramifications of this issue, I’m not so sure anymore.”

“I just think that politics could very easily keep this bubble fully inflated for a long time.’

I have to respectively disagree in this regard….The bubble Popped!…..very loudly and very clearly. I say this because in light of the wall to wall coverage of bad mortgages (if hear subprime one more time I am going to scream) and resulting credit and liquidity crunch, plus the entire global financial markets being obsessed with Ben Bernanke’s words and how he said them, and the President of the United States holding a press conference on the emerging housing crisis, that pretty much means the horses are out of the stable. There is no way they can keep the bubble inflated at this time, we have passed a point of no return. The primary objective right now is not to save housing and keep the bubble inflated, the primary objective is to pry the credit crunch’s grip on the market and it ain’t budging. In all the hoopla today the secondary market for mortgages are in effect still Closed with no sign of opening anytime soon. Commercial paper is still falling off a cliff. The credit crunch remains in tact. In my mind the Bear Stearns hedge fund disaster was the shot heard around the world. Investors did not take a loss in these funds……they took a total loss. Since then FEAR has gripped the markets. Bubble over. Are we going into a recession or a depression is the real question here…and no that is not hyperbole. If the Fed begins firing ammo at this and those credit markets stay locked up……the consequences will be severe.

[LA_Renter]

I am watching the Bush speech and he’s talking about changing the tax code so people are not penalized when……..what??………their home price FALLS!! LOL

Bush jut told the United States their home prices are falling!!

You have to look at the bright side of things every once in a while. I guess that debate is over.

[LA_Renter]

My take is we are heading straight into the political season of 2008. Millions of people going into foreclosure in an election year is jut too juicy for politicians not to grand stand on the issue. Bush threw this out there to give the GOP candidates cover. Hillary, Shumer and Dodd have been on the war path on this issue not so much out of the kindness of their hearts but they know a big club they can use when they see it. Fortunately most polls I have seen indicated that most Americans are against a large Government bailout……right now. That may change when people start losing their jobs as a result of this mess which is starting to happen right about now. We are going to have to face that the chance of a large Government bailout increase during an election year.

With that said I think we have to put into proper context that much of the rhetoric around the issue will equate to the “mouse that roared”. Much like the rhetoric around all of the other issues. All politicians want is to create the perception that they are “aware of your pain” and fighting for the cause. The same will hold true for the Fed Governors. You have a popping of a severe national bubble with the potential of severe consequences. Those in power are frantically mobilizing a “Manage the message” program. Who holds the power of this country are the stakes.

It is still my opinion that the FED and our fearless politicians cannot undo this mess. You have $5 to $10 Trillion of the CDO derivatives market that have been contaminated with toxic waste that no one knows how to find. These institutions can posture all they want but they cannot force banks to lend.

[LA_Renter]

“This is causing a drought in private sector debt.”

That is the genesis of the recession IMHO.

[LA_Renter]

I guess the 3 mo is showing a flight to safety to say the least. I know people are using this to justify a rate cut but I don’t think a Fed Funds rate cut will solve the current crisis. I saw Kudlow today, probably the most vocal proponent of a rate cut, and somebody pinned him down on this, he basically agreed that a rate cut won’t fix this current crisis but would be a confidence builder for the market. So its only value is symbolic in nature much as the 50 bps cut in the discount rate. I’m beginning to think Ben won’t cut at all but will try something else. The crumbs coming out of the FED right now indicate Ben is very cognizant of moral hazard and is eager to break away from the fabled Greenspan Put. But in a market like this Sept 18 might as well be a year away, there is a whole lot that can happen and most of it is probably bad.

[LA_Renter]

Thanks for the post SHILOH. Those numbers provide a good context of where we are. Everybody is obsessed with the FED and congress over how they will handle / bailout the housing situation. The truth of the matter is that all of these ideas being bandied about from increasing limits on FHA loans to slashing the Fed Funds Rate will amount to the “Mouse that Roared” if they are enacted. You basically have approximately $150 to $200 Billion in actual credit losses that have contaminated between $5 to $10 TRILLION dollars of CDO derivatives. We have to keep some since of proportionality here, the busting of the credit bubble and the resulting credit and liquidity crunch is like an angry male buffalo beginning to charge, the FED has been charged to stop its stampede armed with a B B gun (no pun intended).

The new paradigm in modern finance of spreading risk throughout the derivatives markets so as to not be too concentrated in one area has hit a major snag. Instead of spreading risk these new vehicles have contaminated the global financial market with toxic waste that no one wants to touch. So who were the freaking geniuses that thought this up?? What were you f*#king thinking?? If the end result of the new paradigm in modern global finance results in a lender giving somebody with no job, no income and no assets a $500K loan then maybe its time go back to the drawing board. I mean these people sounded pretty good on the way up, now they just look Stupid.

[LA_Renter]

The market is hanging on to every gesture made by the FED right now and like my earlier post pointed out a Fed Funds Rate cut is not going to solve the problem of trillions of dollars of opaque CDO tranches that need to be re-priced. The entire problem with the credit markets is simply not knowing how much bad paper is out there and who holds it. A 25 to 50 basis point drop followed by several drops will merely be symbolic much as the 50 basis pt drop in the discount window is symbolic. Lou Barnes put out a suggestion the other day that I though made alot of sense

“Some how, some way, these tranches, all five or ten trillion dollars-worth, must be re-underwritten, re-rated, or evaluated and guaranteed in some form. Until then, the owners and the owners’ bankers are impaired or imperiled, and worse — much worse — cannot buy new IOUs, the cause of our current mortgage starvation.

Big talk, huh? How are you gonna do that? A bailout?

It’s been done before. In my ill-spent youth, I and many others were sent to S&Ls 1985-87 by regulators to value loan portfolios. One senior consultant, two staff, a billion-dollar S&L, no great precision, just “get close” — in three weeks, we knew.

Before deploying a new army like that one, we have to find the deals. All of them: their hidden and scattered status is part of this problem. To do that, wake up the Fed. I don’t know if we need electrodes or explosives to get Mr. Bernanke into the real world, but once he’s here this job is a snap. In the old days, one of the most feared events on Wall Street was an “information call” from the Fed.
Don’t want to talk? Stonewall with privacy concerns and legalisms? This was the logjam breaker: “If you will not assist us, we will advise our member banks that your firm presents a hazard to the system, and your access to the system will close. Today.”
The investment banks and rating agencies have the records of the derivatives. They are not the White House, after all. Google has the phone numbers. This credit crunch is a flat-out emergency, and it’s time the authorities acted accordingly.”

It sounds to me like the FED has the power to call out the hedge funds and force them to show their hands. Once we identify the amount of the bad debt and where it is the credit market will stabilize. Once the info becomes known there may be a bloodletting in the market but it will be swift and we can rebuild much like the 1987 crash. This way we avoid a moral hazard of a multiple rate cuts and future bubble, the holders of the bad debt will be punished not bailed out, the housing market will correct accordingly and we free the good credit from the bad credit. That makes sense to me.

[LA_Renter]

I moved to Washington State from Texas and then to So Cal. I like Texas especially San Antonio and Austin. Dallas is a little too pseudo snobby for me and Houston a little too Good Ole Boy Ool (oil) country for me. People wise I guess you could say Texas is the west coast of the south. They don’t seem to have the social regimentation that you find east of there. It’s a little wilder. I love the outdoors and once you make the move west it is very difficult to go back. You do pay a quality of life premium out here (within reason).

[LA_Renter]

Oh yea…..the run on the banks thing too!

[LA_Renter]

Continuing with the theme of this thread, here is another article on the front page of Finance Yahoo saying subprime is hitting the high end of the market

“Subprime Mortgage Crisis Spreading to High-End Housing Market”

http://biz.yahoo.com/ap/070829/expensive_homes.html?.v=2

This part of the article is what I found interesting and important

“But aside from the financial impact of higher rates, in certain high-priced real estate markets, the effect of the suddenly tighter lending environment is more psychological, mortgage bankers and real estate agents say, as buyers and sellers alike don’t want to plunge into an uncertain future.

“Showings are down, contracts written are down, and sellers are just as backed away as buyers are,” said Lou Barnes, a partner in mortgage bank and brokerage Boulder West Financial Services in Boulder, Colo. The company arranges for financing on many higher-priced condominiums and houses in the state.

“I think the psychological damage is worse than the financial damage” which is already bad enough, he said. Even for buyers who have plenty of cash or can easily afford higher mortgage rates, the sudden change in the financing environment reduces “the ardor to buy a house unless you have to,” he adds.

With numerous buyers and sellers sidelined, the higher cost of big mortgages is bound to put downward pressure on home prices should the lending environment stay tight for a long period of time, said Ellen Bitton, president of Park Avenue Mortgage, a mortgage bank and brokerage that does business in several states, including New York, Florida and Utah.”

Will August 2007 be the moment of this bubble where Psychology truly shifted?? I have people that I know (friends, family, work) that were skeptics of the housing bubble and me for the past 2 years that are literally going out of there way to ask me my opinion on what is going on. That speaks volumes to me. Evidence to support a profound shift is right here in the South Bay of LA and the almighty Manhattan Beach where pendings in the super high end have come to a trickle

“Question: Is anyone even looking in the $2m+ range?

A quick glance shows a total of 10 new escrows/pending sales in August (SFRs, west of Sep.), most of those in the first week of the month. That’s about half the monthly volume for Spring and Summer this year, but the dropoff after Week 1 is the part that startles.

Meantime, we see hints of one late-stage escrow in trouble, but let’s wait till that’s news.”

When Manhattan Beach is hitting a brick wall, we are all hitting a brick wall. I am making a call that on the human psychological level August 2007 is when we heard the bubble go “POP”.

[LA_Renter]

I guess it depends if we go into a true recession. The historical record shows that the average decline in the S&P 500 is 34 percent and the average duration is 37 weeks. Using that as a metric, what is 34% off of 14000……….9200. I mean we really can go into a recession here (they do happen)….they usually do start out of some kind of turmoil in the credit markets. And buddy have we got some turmoil in the credit markets.

This is an interesting read about how nuttered our FED really is in this mess

http://www.atimes.com/atimes/Global_Economy/IH29Dj01.html

“Banks are slashing lines of credit, paring back trading positions and refusing to roll over commercial-paper obligations because they must husband their cash. That is why a 50-basis-point cut or a 400-basis-point reduction in Fed Funds will not do anything to restore confidence. It is also the reason the markets will panic the day after the Fed’s hand is forced on September 18, when they realize that financial institutions will still be unable to move the collateralized derivative structures off their books.”

I happen to agree with that statement. There is going to be a huge build up to a Fed Funds Rate Cut and it will do absolutely nothing to unfreeze the derivatives market. The market will react to the fact that our FED really has very limited power over this situation. Time will tell.

[LA_Renter]

OK, I just watched Larry Kudlow on CNBC. He indicated that the Supply Side view of slashing of the Fed Funds rate will actually strengthen the US Dollar. That seems to be the mantra coming from Wall Street. Talk about addiction and rationalization. I am open to hearing views on this because as much as these guys come across to me as cartoon characters they have a tendency to always get their way. They are basically lobbying for a major Central Bank bailout. Of course we are having these problems right now because of the Central Bank bailouts of the past pioneered by Greenspan. Moral Hazard.

This is really starting to drive me crazy. The only way the US can sustain it’s GDP is if people continue to spend more than they make. A major central bank bailout will pump money into the next bubble….consumer credit. So the party goes on for a little while longer. I am relatively moderate in most of my views but this is becoming clear to me that these people are going to take this country into a nightmare. Of course we may already be there. Am I missing something here??

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