[LA_Renter]

ucodegen,

Many good points. I believe Greenspan lowering to 1% gave rise to the ARM phenomena, the teaser rates were tied to short term rates. They only raised .25 at a time, so the time frame between 2003 through much of 2005 those ARMS were still really low. You mentioned the carry trade and i think that is what really caught the FED off guard. I remember especially in late 2004 and 2005 that the fed was raising and mortgage rates on 30 year mortgages (which are tied to the 10 yr note) were going down. Usually as the fed tightens the long bonds reflect that tightening. But thats not the case when Japan interest rates are zero and they are cranking out liquidity that is not sticking in Japan and is looking for some place to go like U S Treasuries and I’m sure it found its way into the “Wall Street” financing you pointed out. Basically they turned a money faucet on and it turned into an unstoppable fire hydrant and it found its way into the asset of the day….Real Estate. Now we are sitting here with property values sitting at 10 to 12 times incomes in bubble markets and loans that are coming due that people have no way of paying back. What a tangled web the Fed can weave.

Regarding destroying the dollar, that scares me to death and I don’t think it will work. If the dollar craters, then US Treasuries are less appealing and fall in value sending interest rates up higher. I can tell you one thing I wouldn’t want to be Bernanke right now.

[LA_Renter]

Inflation is a lagging indicator. Thats why the fed is in a tight spot. They raised .25 17 times to 5.25 and inflation looks more problematic now than it did during the last meeting. The problem is that inflation could be problematic well into the middle stages of a pronounced recession. But the risk of ignoring it and letting it get out of control are even more dire. The Fed took a slightly softer stance on more tightening to leave the option open to cut in order to head off a recession. Now here is something that bugs me. It’s the mentality to avoid a recession at all cost. Thats what got us into the mess we are in today. Greenspan lowered the Fed funds rate to 1% to head off the recession from the nasdaq implosion and the aftermath of 9/11. As a result we created a huge housing bubble. Now we are looking at $1.7 trillion of ARMS resetting and alarming rate of NOD’s and foreclosures. Lets just be honest we are going to have a recession, we actually need a recession as crazy as that sounds. Recessions correct the excesses of the previous boom. Notice the word CORRECT. Lets just take our medicine and get it over with. There are no shortcuts here. My fear is that they are going to inflate another bubble to ease the pain of this last bubble. The end result of this path wont be a recession but an all out Depression. IMO

[LA_Renter]

I hope people weren’t short on any HB’s today, the squeeze is on. It appears the Fed took away any language about further tightening which the market interprets as a stepping stone to a rate cut. Those swing trades can be brutal.

It appears to me the FED is stuck. This has the appearance of Stagflation. They know this “adjustment in the housing sector is ongoing” i.e. bottom is falling out, and they know this is going to impact the economy but you have this stubborn bout of inflation hanging on and a grave risk to the dollar if they cut. These upcoming ARM resets will be pretty brutal this year with not much in they way of help. I know there is quite a bit of pressure on the FED to start cutting right now. IMO the days of reinflating this housing bubble are coming to a close. By the time the FED can ease the housing downturn will be at a point of no return. In all honesty I think we have passed that point anyway.

[LA_Renter]

“But the financing didn’t come cheap. Farallon will receive a 13 percent interest rate on the loan, making it the corporate equivalent of a subprime residential mortgage.”

To me that is hilarious!

[LA_Renter]

Here is the Arm Reset Schedule from Credit Suisse again

http://www.irvinehousingblog.com/wp-content/uploads/2007/03/reset.PNG

We are in month three……there have been 30 subprime lenders go under to date……look at the amount of loans resetting moving forward……Oct of this year will see $50 Billion+ reset in that month alone.

We are now officially entering totally unchartered waters. The US property market has never experienced anything like this in its history at least on this scale. I am very thankful we have straight forward realtors like SD Realtor and others on this board. If there were ever a time to pay attention to what is actually happening on the front line it is right now. IMO everything we know or think we know is about to change.

[LA_Renter]

SD Realtor,

Just curious, when talking to other agents what is their take on the recent headlines on the subprime problems? There has been a substantial amount of media recently which can only be viewed as negative for RE. Are you hearing any anecdotal evidence if the last few weeks has put some potential buyers on the sidelines. It seems to me that even the qualified high end buyer would wait a portion of the year out to see if they can get a better deal.

[LA_Renter]

This is great info!

[LA_Renter]

That chart tells the tale. Lets see we are in month three and we have already seen 30 subprime companies go belly up. October of this year will see $50 Billion reset in that month alone. The storm has arrived.

[LA_Renter]

Interesting Forbes article. It will be difficult for many of these subprime companies to come out and say “everything is OK…..No problems here” without the risk of making criminal false statements. This article also illustrates how much all lenders are operating under a microscope right now. It makes one wonder how many transactions will be falling out of escrow.

http://www.forbes.com/2007/03/16/dewey-subprime-crimes-oped-cx_tjc_0316dewey.html?partner=yahootix

[LA_Renter]

The lenders will not go down without a fight but IMO the jeanie is out of the bottle. This is a recent question / answer forum with Paul McCulley at Pimco.

Q: Following PIMCO’s December Forum, you noted that the U.S. housing market continued to slow but that employment was holding up relatively well. Has anything changed in terms of the housing market or the potential for a housing spillover into employment and consumption?

McCulley: The new information we reviewed at the March Forum was the fact that the sub-prime mortgage market has been revealed to be a cesspool of irrational underwriting standards. We’ve long known this, but now the world knows, and lenders are tightening the underwriting terms for sub-prime borrowers as a result.

As Bill Powers noted at the Forum, there are three key factors in gauging troubled waters in the property market: long-term interest rates, the state of the job market, and the availability of credit. Right now, two of the three are very, very positive, while the third is turning very, very nasty.

What is the net effect? First-time homebuyers have driven the home ownership rate to record highs and fueled accelerating home price appreciation in the process. So I believe that reduced availability of credit for first-time homebuyers and other sub-prime borrowers will, in the fullness of time, dominate. But when will time be full? We don’t know.

What we do know is that job creation will be the key variable influencing the Fed’s rate decisions. We also know that no rational person can conclude anything other than that the popping of the property market bubble will ultimately have a negative impact on job creation, both directly and indirectly.

Q: Why is the tightening in mortgage lending standards such a dominant factor in the cyclical outlook if the tightening is confined to those with the weakest credit?

McCulley: From an investment perspective, the decisive question for the cyclical outlook is whether the recognition of risk in the sub-prime market will lead to a repricing of risk elsewhere. If you have one asset class that is infected with irrational exuberance, you could very well have others, so you have got to think in terms of the contagion effect from the investment side and then you have to think about what that means for the real economy. And from a macroeconomic perspective, the key question is whether the repricing of risk elsewhere, if it happens, will have a material effect on global aggregate demand, and therefore the real economy. From a monetary policy standpoint, the Fed and other central banks are not that worried about a repricing of mispriced risk, but they will become concerned if the repricing has a profound effect on the macroeconomic outlook. The Fed does not want to respond to a repricing of risk unless they have to due to contagion in the real economy.

Q: Why might the tightening of credit in the sub-prime market have a contagion effect?

McCulley: A tightening of underwriting terms is an intensely corrosive factor to leverage-fueled asset appreciation. Levered animal spirits are the stuff of boom, and when bankers tighten lending standards to levered speculators, liquidity becomes a mirage.

At the end of the day, liquidity isn’t about money stock growth, but a risk-seeking state of mind. In other words, liquidity isn’t about money on the sidelines per se, but rather about the risk appetite of those on the sidelines. And when risk appetite turns, no amount of liquidity on the sidelines matters, particularly when a crowd gathers there. This is the essence of modern day finance. The human condition is, in the end, momentum-driven, not value-driven.

[LA_Renter]

Wow, that is a sober account from the UT. This subprime meltdown is only two weeks old. I don’t think you will really see it in the numbers until later this Spring. Regarding a pick up in activity I anticipate many of these transactions to fall out of escrow. I like this quote from the John Mauldin article;

“Last week I highlighted the excellent piece by Paul McCully of Pimco. His thesis is that subprime buyers are the plankton of the housing ocean. Without a healthy supply of plankton, the rest of the ocean’s denizens do not live well. (You can read the essay, and you should, at http://www.pimco.com ).”

[LA_Renter]

Right now there is a net out migration from the state. Much of this is due to housing costs. IMO the housing correction is happening and will get much worse before it gets better. This will be a drag on the economy which can sustain the net out migration we are currently seeing. Once this correction plays out, California will go back to being California. Population growth will resume and businesses will want to be based here again. So can California add 15 million by 2030, sure its possible. Th next 5 to 7 years will not see much growth though. Of course this is my opinion.

[LA_Renter]

I agree that this last round in the housing bubble drama has gotten people’s attention. I used to be happy when the MSM even mentioned the possibility that this is a housing bubble. The narrative has now turned into “crisis” reporting. The media loves that stuff. I have a feeling we will be hearing alot from the “it’s not that bad” crowd. I found this quote on socalbubble regarding the opposite camps argument;

“The subprime sector is too small to have such a big impact, according to Robert Froehlich, who is chairman of the investor-strategy committee at DWS Scudder, a division of Deutsche Bank AG.
“For all this to occur, the subprime-mortgage collapse has to be big enough and important enough to set the wheels in motion. And the fact is that it isn’t,” he wrote in a market commentary Monday. “It will be the most hyped disaster that never occurred since Y2K.”
Froehlich said Monday that, like Y2K, investors are worrying too much about a subprime-fueled disaster that probably won’t happen.
“The subprime-mortgage market is big, but it’s not big enough to push the U.S. economy into a recession by causing a credit crunch,” he added.
During the peak of the industry’s growth in 2004 and 2005, about 3.2 million homes were purchased with a subprime loan, Froehlich estimated. That’s about 2.8% of total U.S. households, he wrote.
If 30% of those subprime homeowners fail to make their payments, fewer than 1 million households would be “out of luck and out on the street,” Froehlich projected.”

Personally I like to call this the “It’s only a flesh wound” argument. But I’m sure you will be hearing a chorus sing (spin) this tune. IMO they will not be able to spin their way out of this. The last series of events are hitting like a freight train. As I mentioned this has Joe Sxipack’s attention. This could be a critical turning point in market psychology. I agree with Bill Fleckenstein and anticipate a market freeze over the next three to six months. it’s definitely getting interesting.

[LA_Renter]

It sounds to me like downtown LA will get hit pretty hard with the tighter lending standards. I like what Bill Fleckenstein said about the next step being the housing freeze

“This credit collapse is an unequivocally important event. Because, as I’ve been writing, the ability of anybody with a pulse to get a loan for any amount is what drove the real estate market, and the real estate market is what drove the economy. Sometime in the next three to six months, the real-estate market will basically just freeze up. Of course, inventories are going to explode and prices will eventually drop rather dramatically as a vicious cycle feeds on itself.”

The L A Times article touched on this

“Downtown broker Perabo says he’s busier than ever answering queries from potential homeowners. But he also is more worried because fewer first-time buyers will be able to qualify now.”

“”The days of 100% financing are over,” he said, adding that about 20% to 30% of the first-time buyers he meets with would be unable to buy without improving their credit standing and coming up with a down payment.”

IMO any remaining remnant that fueled the housing boom has basically evaporated. This is a totally different ball game.

[LA_Renter]

I found this quote and it rings oh so true

“What happened next seems all too familiar to investors who bought technology stocks in 2000 at the breathless urging of Wall Street analysts. Last week, New Century said it would stop making loans and needed emergency financing to survive. The stock collapsed to $3.21.

The analyst’s untimely call, coupled with a failure among other Wall Street institutions to identify problems in the home mortgage market, isn’t the only familiar ring to investors who watched the technology stock bubble burst precisely seven years ago.

Now, as then, Wall Street firms and entrepreneurs made fortunes issuing questionable securities, in this case pools of home loans taken out by risky borrowers. Now, as then, bullish stock and credit analysts for some of those same Wall Street firms, which profited in the underwriting and rating of those investments, lulled investors with upbeat pronouncements even as loan defaults ballooned. Now, as then, regulators stood by as the mania churned, fed by lax standards and anything-goes lending.”

[Author]

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