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PerryChase
ParticipantLet’s consider liquidity and there’s still plenty of it around. When the system is awash in cash, the financiers have to find a somewhere , anywhere to place it.
The big news this week is Blackstone buying Office Equity.
http://money.cnn.com/2007/02/07/news/companies/equity_office/index.htmNow where do the private equity firms (LBOs) get all the money to play with?
Easy money from the Fed, and foreigners, made it easy for the LBOs to generate spectacular returns in the last few years.
Now pensions funds that are mostly underfunded are chasing returns and pumping the LBOs full of cash. In order to justify their existence the private equity firms have no choice to but take on more risk to produce the desired returns.
Problem is spectacular returns are becoming harder and harder to come by. My guess is that some LBOs will begin to fail. That combined with the losses in the MBS, as households walk away from their houses, will drag down the pension funds and companies will start dumping their pension obligations onto the government.
How will the bailouts occurs?
1. Even more liquidity.
2. Shifting of pension obligations to the government
3. Shifting of health care obligations to the government. Businesses are now beginning to embrace universal health care because they realize it will save them millions.
4. Outright takeover and receivership for some financial institutions.
5. The War and the national debt will prevent the Federal government from providing too much fiscal stimulus.This will happen over time, under the radar of the public who will be too busy blaming the immigrants for crime and job losses. Maybe we’ll have 2-strikes and you’re out. Politicians will blame economic hardship on the mismanagement of the war. Life will go on and 15 years from now, we’ll be entering another business cycle.
Like Chris Johnson said, there’s nothing to be scared of if you take the emotion out of it. Watch the market like an ongoing soap. Life is fascinating… you just have to examine it.
ParticipantAccording to the LA Times, some lenders actually relaxed standards in 2006. Could it be that lending is still loose with many 2nd and 3rd tier lenders who need origination volume to stay in business? Just throwing some possibilities out there for consideration.
The shakeout in the sub-prime industry began last year as housing prices leveled off and interest rates rose, curbing demand for loans. At first, some companies loosened lending standards to keep loan volume high, a tactic that has produced a wave of early loan defaults. More recently, companies such as New Century have tightened their loan policies to reduce their exposure to mortgages that could go sour.
http://www.latimes.com/business/la-fi-subprime9feb09,0,2419088.story?coll=la-home-headlines
ParticipantThat is true, but when you landlord sells the home on you, and you have to relocate, your children will have to make new friends and go to a new school. They will never feel at home.
School friends are way overrated. Children are resilient and adapt better than you think. As a child I moved frequently as my dad worked in different countries. I learned so much thanks to that and I wouldn't trade that experience for anything. I became stronger and more capable.
Children are growing beings and they need support and stimulation to satisfy their curiosity. That's, IMO, much more important than familiar friends.
ParticipantChris, I think that you’re quite right. Life is like a river and your need to go with the flow. A good river-rafter learns to nagivate the obstacles to arrive at destination first.
As far are RE goes, friendly monetary policy is one thing. But we could also see an S&L type bailout. Personally, I think that FDIC and other types of government insurance should be limited to $100k total. More liquidity will just cause us to take on more risk knowing that we’ll be made whole.
The flow in RE is now downward. Going with the flow means waiting it out.
The problem with housing is that, lately, buyers have been looking at their houses as investments. However, they are unable to remove the emotions from it.
Personally, I think that psychology is the main driver of life. Rationale is only a small part.
ParticipantI don’t believe that there’ll be a catastrophe either. As I said before the general economy will be OK.
If there major shocks to the economy, we’ll have bailouts because our “way of life” depends on a growing economy. Most importantly, homeowners tend to vote.
Economically, I believe that bailouts/government intervention do work in smoothing out the bumps. For example, Argentina and Malaysia intervened in their crisis and were able to engineer good recoveries. Thailand and Russia, on the other followed IMF prescriptions causing more hardship for their populations. In the long term however, it’s better to let the markets self-correct. If you’re going to intervene, the key is knowing when to remove the government support.
Personally, I would hate to see a bailout because that amounts to welfare for the middle class and the rich. And I think that some tough economic love is sorely needed.
Real estate, however will be in the slumps for a long time and won’t return to the peak for another 15 years.
ParticipantThanks for posting. I had a good read with my mid-afternoon snack.
ParticipantWells Fargo has both prime and subprime units. They place the loans accordingly.
To me, if $1 million property buyers don’t have at least 15% downpayments, it means that they can’t afford those homes. A 10% correction will hurt a whole lot of owners.
If upper middle class buyers are doing no-docs loans, there’s something amiss. If they are so “upstanding” why don’t they do full doc loans to save on interest? Actually, why wouldn’t anyone want to do full-doc to get the best possible deal?
Only time will tell.
It’s not extremist to say that rent vs. buy should be in equilibrium. That’s rational to me.
In my view, it’s extremist to say that the market will reach bottom in 2007.
ParticipantDaCounselor will be fine. If the market drops as we expect, he’ll still be able to make his payments. However, he won’t feel as prosporeous anymore. He won’t be in trouble like others who went exotic to get a house.
You bought in 2001 and you only have 15% equity? Sounds low to me.
ParticipantHere’s the HSBC paper if anyone is interested. The operations guys at HSBC were too driven by greed to listen to their own economists. It’s the mentality of “the competition is doing it, we can do it better.”
It’s also like a family running out to buy because all the friends were getting “rich” in real estate. If the Jones are buying at $700k house, we can be even richer if we buy a $900k house.
http://neweconomist.blogs.com/new_economist/2006/01/detecting_us_ho.html
http://neweconomist.blogs.com/new_economist/files/HSBC_frothfindingmission.pdf
ParticipantJosh, I would agree that the lenders are beginning to tighten credit. It’s a slow process and the easy financing market hasn’t seized up yet.
As the related postings on the woes of HSBC and NEW show, buyers aren’t very aware of the loans they take on so long as they can “afford” the houses. If a buyer today want to “afford” a house, the broker still has an array of lenders with initial teaser rates or incentives to shop his loan to.
All the loans are the same, but it’s all about marketing with the right “teaser rates” to get buyers to sign up.
I would say that Real Estate industry is all about finding ways to “reel” buyers in. So far, there are still buyers willing to be “reeled in.”
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Jordan Ash, the director of community activist group ACORN’s Financial Justice Center in Minneapolis, blames the mortgage industry for aggressively marketing expensive loans that only the savviest consumers can understand to people with little money and flawed credit. “In the mortgage world, it’s not a competition of who can give you the best rate — they’re all offering basically the same loans,” Ash says. “It’s who gets to you first and reels you in first. It’s who has the best sales pitch.”http://articles.moneycentral.msn.com/Banking/HomeFinancing/OuchYourHousePaymentJustDoubled.aspx
ParticipantIt’s interesting that HSBC has a widely circulated paper on froth in housing. That paper was also previously discussed on Piggington. So much for their ability to detect froth.
I think that that HSBC deserves what it’s getting. Foreign companies should know that they can expect to take a bath when they acquire American units at the top of the market. It happens everytime — from the Japanese aquisitions of the 1980s to Chrysler, to Voicestream, to Household Finance.
February 8, 2007 at 9:58 AM in reply to: Considering Buying in Temecula – Can’t afford OC – ??? #44957ParticipantI think that the “insiders” know that something is going awry; and I’m sure they are wrecking their brains out trying come up with something to avert massive defaults.
But what can the insiders do? How can they stretch interest-only and negative amortization loans? They are already at infinity. People are sinking into more debt everyday just to “own” their homes.
ParticipantI'm not sure why buying is necessary to provide your kids with a "nice environment". In this market, you can afford to rent a much nicer home than you can afford to buy.
John, you make a very good point. Say a solidly middle class family could stretch to buy in Mira Mesa, or Clairemont. They could easily rent in Carmel Valley, La Costa or Rancho Bernardo to provide better schools for their children — if good schools are the consideration.
ParticipantQ: Can the assessed value of my property be decreased?
A: Yes. The assessed value of property can be decreased when ever damage occurs such as fire, or when structures are removed. State law (Proposition 8, Temporary Reduction of Assessed Value For Property Tax Purposes, passed in 1979) also allows property values to be reduced if there is a decline in market values below the current assessed value. Click here for APPLICATION FOR REVIEW OF ASSESSMENT. This document is in Acrobat PDF format.
http://www.sdarcc.com/arcc/services/reassessment_prop13.aspx#prop8
http://www.sdarcc.com/arcc/docs/calrev.pdf
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