[LA_Renter]

I thought this was good article from Barrons. This little crisis will put BB to the test and allow him to show his true colors. Right now the Fed Funds Futures are putting .25 rate by the end of this year at 100%.

Will Bernanke Bail Out This Credit Meltdown?
“THE TURNING POINT IN LEVERAGED FINANCE HAS BEEN reached,” junk-bond guru Martin Fridson declared four weeks ago in the print version of Up and Down Wall Street (“Dear Lord!” July 2). Any doubters of that prophesy were disabused by Thursday’s rout in the stock market that had the Dow Jones Industrial Average down by more than 400 points at its low.

Since then, the cost of credit has skyrocketed, imperiling the raft of corporate buyouts that have fueled the bull market. And Business Week’s cover story of Feb. 19 — “It’s a Low, Low, Low-Rate World: Money is cheap. And some experts say it could stay that way for years” — is looking like a worthy successor to its infamous “Death of Equities” cover of 1979.

The entire spectrum of credit was being repriced, with far greater premiums to compensate for risk that had been cavalierly accepted by lenders and investors just a few short weeks ago. The notorious ABX.HE — the index of credit default swaps on asset-backed securities, the main hedging vehicle for subprime risk — not surprisingly took another tumble amid unrelenting bad news from home builders and in home sales data. And junk bonds had their worst day since the collapse of WorldCom in 2002, according to KDP Investment Advisors.

But the more important indicator has been the widening of spreads on corporate loans, the lifeblood of the deal business, evident in a further deterioration in the LCDX, an index which reflects credit default swaps (derivatives based on the cost of insuring against default on loans.) The LCDX hit another new low in its young life, resulting in the cost of default insurance rising to 325.5 basis points (3.255 percentage points).

That represents a doubling in the risk premium on corporate loans since Fridson made his prescient statement at the end of June, and triple where it started in May. Wall Street firms and banks that made commitments to lend to private-equity firms at the previously narrow spreads may now be holding the bag.

As a result, the cost of insuring Wall Street firms’ credit soared Thursday, Dow Jones Newswires reports. For instance, the cost of insuring $10 million of Bear Stearns debt soared to $105,000 from $83,500, a huge increase in a single day. Indeed, the credit derivatives market is pricing Bear and Lehman Brothers investment-grade debt as junk, the DJ story adds.

That’s set off a chain reaction throughout the markets. “Large banks, choking on LBO bridge debt that they cannot distribute, have likely tapped all their traders and risk takers to lower any and all risk positions and refrain from taking on any more, regardless of level,” writes William Cunningham, head of global fixed-income research for State Street Global Markets.

[LA_Renter]

Scruffy,

This is a quote from Rich’s last article

“The early-1990s recession and housing bust have both been universally blamed on declining employment in the defense and aerospace manufacturing industries. In truth, that recession saw more job losses in real estate and construction than in manufacturing. The housing-related job losses that resulted from an unsustainable real estate boom had a big impact on the early-90s economy. They are doing so today as well.”

LA will not escape this. Here is a quote from David Streitfeld in the LA Times a while back;

“San Diego had the wildest run-up among major California cities, with prices tripling since the mid-1990s. … The market also began to fade first in San Diego. …

Whatever happens here, optimists and pessimists agree, will happen later in the rest of the state.”

IMO you are mistaking LA’s lag in the current cycle with market strength. It’s about year behind San Diego, that’s all. Orange County is taking the big hit right now in regards to volume.

[LA_Renter]

Scruffy,

This is a quote from Rich’s last article

“The early-1990s recession and housing bust have both been universally blamed on declining employment in the defense and aerospace manufacturing industries. In truth, that recession saw more job losses in real estate and construction than in manufacturing. The housing-related job losses that resulted from an unsustainable real estate boom had a big impact on the early-90s economy. They are doing so today as well.”

LA will not escape this. Here is a quote from David Streitfeld in the LA Times a while back;

“San Diego had the wildest run-up among major California cities, with prices tripling since the mid-1990s. … The market also began to fade first in San Diego. …

Whatever happens here, optimists and pessimists agree, will happen later in the rest of the state.”

IMO you are mistaking LA’s lag in the current cycle with market strength. It’s about year behind San Diego, that’s all. Orange County is taking the big hit right now in regards to volume.

[LA_Renter]

Arraya,

It’s no fun eating peanut butter sandwiches every night for dinner in your new house. I think one of the things we have to keep in context here is that as SD Realtor pointed out prices are in the process of falling. The Case Shiller index is a much more accurate measure of this and it shows prices are actually falling from the peak. In some cases they are falling as fast as they can in RE. The affordability issue is not going to go away. Without lax lending these home prices can’t work. Even if we are at full employment the entry level and move up buyer still cannot afford those homes. We don’t have an underlying recession, yet. So basically we have a bunch of homes for sale that employed people can’t buy with today’s ever tightening credit. The people that own homes and did not HELOC themselves to death don’t have to move because they still have a job. The primary pricing pressure is at the bottom of the market due to foreclosures. What we are seeing is the resulting drop in sales volume. And that is where the true danger lies. The lower the volume the harder it is on the local economy for everyone. The best thing that could happen to San Diego’s economy right now is if home sellers adjusted their home prices to the prevailing wage and credit realities. That ain’t going to happen and we are going full sail into a recession as a result IMO.

[LA_Renter]

Arraya,

It’s no fun eating peanut butter sandwiches every night for dinner in your new house. I think one of the things we have to keep in context here is that as SD Realtor pointed out prices are in the process of falling. The Case Shiller index is a much more accurate measure of this and it shows prices are actually falling from the peak. In some cases they are falling as fast as they can in RE. The affordability issue is not going to go away. Without lax lending these home prices can’t work. Even if we are at full employment the entry level and move up buyer still cannot afford those homes. We don’t have an underlying recession, yet. So basically we have a bunch of homes for sale that employed people can’t buy with today’s ever tightening credit. The people that own homes and did not HELOC themselves to death don’t have to move because they still have a job. The primary pricing pressure is at the bottom of the market due to foreclosures. What we are seeing is the resulting drop in sales volume. And that is where the true danger lies. The lower the volume the harder it is on the local economy for everyone. The best thing that could happen to San Diego’s economy right now is if home sellers adjusted their home prices to the prevailing wage and credit realities. That ain’t going to happen and we are going full sail into a recession as a result IMO.

[LA_Renter]

I think what you are seeing is the bottom half of the market in San Diego and much of Southern California basically becoming an unmitigated disaster. The top half of the market not as much. I like reading this blog for the regular updates from the resident SDRealtors and how the more desirable areas are performing. This housing correction is different than any other housing correction in California primarily due to it not stemming from a recession. This downturn stemmed from a credit bubble, a really really big credit bubble. That’s what makes it so interesting, we have no historical context to gauge where this thing is going and how each segment of the market will perform.

The thing that has been lacking in this correction is a profound shift in psychology. People in the top half of the market obviously don’t see the inherent risk in the market so they keep paying those prices. I think we are at a point right now where the market is becoming so bad and the news so prevalent that we actually crack through denial in all segments. People understand “Record High Foreclosures in California”. That’s not confusing. We are now entering a phase where Mr Sunny Happy Face Realtor (no offense to any realtors on this board) can no longer hide and spin the disaster that is unfolding right now. I would like to see how the top half of the market will perform once we get through this inevitable shift in psychology. I would also like to add that I don’t think that California will escape recession which would take this market to the next level in the correction.

[LA_Renter]

I think what you are seeing is the bottom half of the market in San Diego and much of Southern California basically becoming an unmitigated disaster. The top half of the market not as much. I like reading this blog for the regular updates from the resident SDRealtors and how the more desirable areas are performing. This housing correction is different than any other housing correction in California primarily due to it not stemming from a recession. This downturn stemmed from a credit bubble, a really really big credit bubble. That’s what makes it so interesting, we have no historical context to gauge where this thing is going and how each segment of the market will perform.

The thing that has been lacking in this correction is a profound shift in psychology. People in the top half of the market obviously don’t see the inherent risk in the market so they keep paying those prices. I think we are at a point right now where the market is becoming so bad and the news so prevalent that we actually crack through denial in all segments. People understand “Record High Foreclosures in California”. That’s not confusing. We are now entering a phase where Mr Sunny Happy Face Realtor (no offense to any realtors on this board) can no longer hide and spin the disaster that is unfolding right now. I would like to see how the top half of the market will perform once we get through this inevitable shift in psychology. I would also like to add that I don’t think that California will escape recession which would take this market to the next level in the correction.

[LA_Renter]

Speaking of the dollar I found this on Forbes

“CMC Markets’ chief analyst Ashraf Laidi said the US dollar’s latest decline should now be raising alarm for the US Treasury and the Federal Reserve as the greenback’s trade-weighted index (as measured against six currencies) has now fallen to below the 80.40 level, its lowest level since 1992.

He said previously, the yen’s continued weakening had acted as a major stabilizer of the US dollar when the US currency hit all-time lows against the euro and multi-decade lows against the Australian dollar, Canadian dollar, sterling and New Zealand dollar.

‘But as the periodic revelations of sub-prime troubles boost the yen on falling risk appetite, the US dollar’s decline becomes increasingly pervasive,’ Laidi said.”

I could be wrong but to me this looks dangerous. I would give anything to be a fly on the wall sitting in those meetings at the US Treasury and the Federal Reserve. This subprme thing is really turning out to be something don’t you think!

[LA_Renter]

Speaking of the dollar I found this on Forbes

“CMC Markets’ chief analyst Ashraf Laidi said the US dollar’s latest decline should now be raising alarm for the US Treasury and the Federal Reserve as the greenback’s trade-weighted index (as measured against six currencies) has now fallen to below the 80.40 level, its lowest level since 1992.

He said previously, the yen’s continued weakening had acted as a major stabilizer of the US dollar when the US currency hit all-time lows against the euro and multi-decade lows against the Australian dollar, Canadian dollar, sterling and New Zealand dollar.

‘But as the periodic revelations of sub-prime troubles boost the yen on falling risk appetite, the US dollar’s decline becomes increasingly pervasive,’ Laidi said.”

I could be wrong but to me this looks dangerous. I would give anything to be a fly on the wall sitting in those meetings at the US Treasury and the Federal Reserve. This subprme thing is really turning out to be something don’t you think!

[LA_Renter]

I think somebody mentioned that public officials have to carefully craft their language so as to not inspire panic. I have a feeling the dollar is a main concern behind those doors. BB did come across as “dollar……..what dollar?…….oh you mean our dollar…….got me!” I find it odd that the dollar is sitting this low and under pressure but no one seems to care or talk about it much. The negative impact of a weakening dollar is expensive oil, high interest rates and inflation. Does anybody care about those things anymore?? If our economy is heading into recession or just a slow down which the latest job numbers from California seem to attest to, how can the FED lower interest rates in this environment? It seems like everybody else in the world is doing fine except us. Wouldn’t lowering interest rates yield the opposite effect of stimulation?? It seems to me they have absolutely no room to maneuver if the economy starts heading south. Am I missing something here?

[LA_Renter]

I think somebody mentioned that public officials have to carefully craft their language so as to not inspire panic. I have a feeling the dollar is a main concern behind those doors. BB did come across as “dollar……..what dollar?…….oh you mean our dollar…….got me!” I find it odd that the dollar is sitting this low and under pressure but no one seems to care or talk about it much. The negative impact of a weakening dollar is expensive oil, high interest rates and inflation. Does anybody care about those things anymore?? If our economy is heading into recession or just a slow down which the latest job numbers from California seem to attest to, how can the FED lower interest rates in this environment? It seems like everybody else in the world is doing fine except us. Wouldn’t lowering interest rates yield the opposite effect of stimulation?? It seems to me they have absolutely no room to maneuver if the economy starts heading south. Am I missing something here?

[LA_Renter]

“Cunningham added that if the number of real estate foreclosures begins to increase substantially – which he doesn’t think will happen – a recession could be more severe.”

I guess this guy has never seen Rich’s chart on NOD’s and NOT’s. We all see the data, you can see where this thing is going. We still have the worst portion of the ARM resets to hit. I am going to go out on a limb here and say “Put a fork in it” California, at least, is going into a housing led recession. There is one thing I’m curious about and maybe somebody can shed some light on. In the face of a weak dollar what is it that Southern California makes that we can see an increase in exports that would help buffer this? It would be nice to have aerospace back. American made airplanes are on sale right now.

[LA_Renter]

“Cunningham added that if the number of real estate foreclosures begins to increase substantially – which he doesn’t think will happen – a recession could be more severe.”

I guess this guy has never seen Rich’s chart on NOD’s and NOT’s. We all see the data, you can see where this thing is going. We still have the worst portion of the ARM resets to hit. I am going to go out on a limb here and say “Put a fork in it” California, at least, is going into a housing led recession. There is one thing I’m curious about and maybe somebody can shed some light on. In the face of a weak dollar what is it that Southern California makes that we can see an increase in exports that would help buffer this? It would be nice to have aerospace back. American made airplanes are on sale right now.

[LA_Renter]

For the past year, Cunningham and Gin have been predicting that San Diego would be able to survive the real estate slowdown without falling into a recession. Now they say they are not sure.

http://www.signonsandiego.com/news/business/20070721-9999-1n21jobs.html

I’m totally shocked!

[LA_Renter]

For the past year, Cunningham and Gin have been predicting that San Diego would be able to survive the real estate slowdown without falling into a recession. Now they say they are not sure.

http://www.signonsandiego.com/news/business/20070721-9999-1n21jobs.html

I’m totally shocked!

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