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powayseller
Participantjg, I’m sorry I’m having such a hard time explaining this to you.
The money that came here is invested AND SPENT. It is not sitting in a vault in China. THe money is spent on buying Treasuries, ABS, MBS, equities, and so on. So the money has been spent, and the effect was to drive up asset prices and push down yields on government bonds. The money was used to buy overpriced homes, fund your neighbor’s Visa purchases, IBM’s corporate bonds, derivatives, and so on.
Where do you think all that money came from to create this housing bubble? Who is lending subprime borrowers 500K on stated income? It’s the FCB money!!! THere is no such thing as money on ice. This money has created the credit bubble!
Furthermore, foreign central banks (FCBs) that wish to keep their currency from appreciating against the dollar, are printing their own currency in equal amounts to what is coming into the country from their exports, so there is a double whammy of liquidity. First we send them dollars which they have to print to convert, and then they send those dollars back and create asset bubbles.
So the question is, as I said before, what will happen when those dollars are removed from Treasuries, equities, collateralized mortgage obligations, mortgage backed securities, asset backed securities, government and corporate bonds, and divested into euros, yen, gold, etc?
Nothing is “on ice”. Money always has an effect, and the effect is to inflate assets and create more liquidity.
The effect of that money is already here: the long end of the yield curve is low, despite Fed attempts to raise interest rates. They cannot control the end of the yield curve because of the large sums of dollars sent here by FCBs.
You should read the Flow of FUnd reports. I think the MBS market is bigger even than the Treasury market, or right behind it. THe Chinese and Saudis have been using the money that you claim is “on ice” to buy all those exotic loans!
ParticipantDuncan continues, and explains that reducing our deficit is actually bad, because it wouldn’t allow the FCBs to buy all the Treasuries they need to buy with their dollars, and that would cause even more asset bubbles and push interest rates even lower. The Fed has lost control of the long end of the yield curve, so they are talking down the dollar to regain control and bring up the yield.
“Soon, foreigners will own all US debt. At present, foreign investors own approximately 50% of the $4 trillion in US government debt that is held by the public. Under the circumstances just described, within four years, foreign investors could end up owing all outstanding US government debt.
After that, they would have no choice but to invest their annual surpluses into other dollar-denominated assets, such as agency debt, corporate debt, equities, property, bank loans, etc. Such a scenario would cause extraordinary asset price inflation, directly as foreign investors bought
more and more US assets, and indirectly as their acquisition of bonds drove down interest rates, providing still more unwanted stimulus to the US economy.Regardless, then, of whether the US government reduces its budget deficit or not, it would appear that the rapidly expanding US current account deficit has begun to undermine the ability of the Fed to determine the level, or even the direction, of interest rates in the United States.
Moreover, if the present trend in the current account deficit is left unchecked, the investment of ever larger amounts of dollar surpluses by foreign central banks into US dollar-denominated assets threatens to produce asset price bubbles and economic overheating in the Untied States over which the Fed would have no power to control.
Seen from this perspective, there is little wonder that the Fed has begun to talk down the dollar. These fears may also explain why the United States has recently launched an aggressive campaign to force China to revalue the Yuan.
Their best hope of regaining control over the situation is for the United States to force a sharp devaluation of the dollar relative to all the Asian currencies in order to reduce the US current account deficit; the European economies are simply too weak for the Euro to bear any more of the burden of adjustment. The United States has now adopted – and begun to enforce – a Weak Dollar Policy. Asia must come to terms with this fact and recognize that this policy shift poses a grave threat to its export-led model of economic growth.
“ParticipantOk, let me make sure I get it right this time. I’m kind of dense, you know. You hope that your own home loses more than 50% of its value. You’ve got 2-3x as much money as I do, even though you don’t even know how much my assets are, since I never told you. Your mortgage is almost paid off, and you have enough cash to pay it outright today. When the market crashes, you will buy lots of cheap real estate. But that’s not all. Despite a gloomy sales environment, your sales are actually up. But don’t bother checking because it is not recorded anywhere. All your sales are off the MLS, so nobody can verify them.
Your lender friends have different insights than SoCalMtgGuy, but we’re not told what those insights are. However, your list of friends who have option ARMs but pay off the principal includes a guy who gets $1 mil commission checks. That’s very impressive, and in your mind, proves that if there is one guy like that, there must be hundreds like him, even thousands.
Although the majority of businesses fail in their first year and don’t turn a profit for many months, yours is booming and profitable from day one. Although the economy is slowing, and capital spending is declining and companies are cutting back, your businesses are booming from day one.
It sounds like a charmed life, sdr. Peace to you too.
Participantjg, the money is already in circulation. It’s responsible for the big bubbles in assets, and for funding all our consumer spending. It’s the money used by Visa and MasterCArd, by private equity financing, buying flaky exotic mortgages, and government debt, US equities, etc.
So the question is *not* what happens when the money goes in circulation, because it already is (in assets though) but rather what happens when the money is moved out of US assets?
Where will it go, and how much will long term interest rates climb when the demand for US Treasuries declines? Something like 50% of our US Treasuries are held by foreigners.
When the foreigners sell off dollars, the demand for dollars goes down, lowering their value. That means our exports will be cheaper and our export trade will improve, possibly. It also means our imports will be more expensive. I believe our inflation is held low by cheap imports from other countries, but with a lower dollar, that would no longer be the case.
This is a question that I wish Roubini would address, but I guess nobody really knows. If not gold, then what?
Participantsdr, you are at heart a guy who hopes that prices will not fall too much, and I am at heart a gal who believes we are headed for a great housing crash leading to big recession, possibly a recession. So we are wearing different colored glasses, that’s for sure. I believe that in 2008, 3/4 of all realtors will be in the unemployment line, and their homes will be on the foreclosure block. Yours possibly included.
You say you know people with neg-am loans who are paying off their principal. Give me some examples, and explain why they got a neg-am loan, how much interest they pay, and how much principal. Why did they get a neg-am loan if they plan on paying principal. Why pay principal and not all the interest? And here’s the biggie question: Why are those people not refinancing into a fixed rate loan right about now?
SoCalMtgGuy was a witness to this big credit bubble, and to dismiss him is an an “inexperienced professional” just because you don’t like what he says, is unprofessional of you. As a realtor, you’ve got a fiduciary duty to understand this market, whether you like it or not. I like to align myself with intelligent, insightful, honest people, and I don’t care if they’ve worked in their industry for 3 years or 25. I learned more from Bob Casagrand about real estate earlier this year, than I ever learned from you. I’ve also learned a lot from Jim Klinge. Recently, I had the honor of meeting a realtor at the piggington meet-up, who’s been in the business since the 1970’s, who is very smart, a go-getter, intuitive, and very interesting. A savvy investor too. Her stories from the last downturn make me shudder. When I showed her my graph projecting the bottom for this market, she said I was too optimistic. When someone who’s been through 3 market cycles says this is going to be the worst downturn ever, I sit up and listen.
As far as bringing data, that is Rich’s quote, not mine. In context, his intent was to leave out the RE spin, and to focus on the truth about this market. His use of data strips away the BS that real estate only goes up, that our economy is diverse, etc. As we know, the data can also be misleading. Who actually believes the latest OFHEO index which shows prices in SD are down less than 1%, or the median was still rising until a few months ago, or that inflation is under 3%? The data often lags, or is tortured.
As far as my website, I am not holding myself out to be an economist, but you are welcome to come and visit. And if you pay the subscription fee, you can see my data and forecast and question it, and have another outlet for your “doggie doo doo” juvenile jokes.
What’s your new business? Something related to foreclosures, would be a smart move!
ParticipantWhat did you buy with Citibank?
ParticipantHere’s a great article from SoCalMtgGuy explaining why the I/O borrower won’t be able to refinance. Read his blog for his view on why this housing market is going to utterly collapse and implode when the biggest credit bubble in history pops. If anyone disagrees with me on the extent to which savvy borrowers were able to buy with no money down, (sdr, I mean you), then just read this guy’s blog. Why would anybody put any money down when effective interest rates were negative, when you could lie about your income, and you could buy a house at 10x your salary with exotic loans? Of course people were doing that, and just because Fannie Mae won’t release the numbers to prove it, means nothing!
Back to refinancing. The key point is that they can’t pay the lender costs to refinance: “…So unless this borrower (which can’t afford a higher monthly payment) has several thousand in savings to pay the fees, they will need to use the equity to pay for the refinance.”
Other problems: don’t meet lender’s qualification of “benefit to the borrower”, negative equity, LTV too high, potential new debt lowering income ratio or credit score.
He concludes, “All and all, on paper it looks like there is going to be a massive refi-boom coming again in 2007 for sure. The problem is that many of those borrowers don’t intent to refi, they intend to sell. They knew they couldn’t make those payment for more than the introductory time period…but they wanted to make the money on appreciation, and then cash out. Even if only 15-20% of the people had that idea, that is still a ton of inventory that will be dumped on the market. Nobody knows for sure what will happen…as there is no precedent for the way money has been lent out these past few years.”
ParticipantYou’re the realtor, you should be the one who knows this stuff. By your gut, as you like to say…
As for me, I am going on the information reported by GSEs, NAR, and private companies like First American Real Estate Solutions. None are forthcoming in looking at the data in the form I would like to see. They have a vested interest in downplaying the problem, so they report partial statistics, like the number of first time buyers who put zero down, or the number of all buyers who have less than 15% equity if home prices decline more than x%, etc.
In your defense, not even the mortgage broker interviewed by Kelly Bennett has a clue about how many people put zero down . So I don’t blame you for not knowing either. And frankly, I don’t know either. If I had a source, I would quote it, as I always do. But if you understand the larger picture of our economy and the negative savings rate, the conclusion I draw is obvious.
Last year, 68% of all home loans in San Diego were negative amortization or interest only. 68% of all loans made are not even paying principal! All loans means purchases and refinances. So you’ve got people who bought before 2005, in 1980 or 1990, who refinanced, and out of that group 68% refinanced into a loan where they are paying only interest or only part of the interest.
Fannie Mae reported that 88% of their refinancings are at a higher interest rate, so people are refinancing just to pull money out of their homes. The only time my family refinanced, was to lower the interest rate. If 88% of conventional loans are refinancing at a higher rate, then they need the cash out more than they want the lower interest rate. What conclusion can you draw from such desperate behavior?
Back to our San Diego borrowers from last year. Even if they put 10% down, they could easily be at zero equity. If people were financially capable and responsible, they wouldn’t be buying a home at negative amortization and increasing their principal.
“There are two categories of people who take out these loans said, Craig Bramlett, president of Cal Pacific Mortgage in San Diego. The first is those who could feasibly make higher payments, but choose interest-only for a while to invest their money in other ways. The other category: those who can afford only interest-only or negative-amortization payments, and who rely on the “promise” of home appreciation to help them when the reset comes. Those are the people Bramlett and others worry about, and there aren’t just a few of them.
“From what we hear, there’s a lot of people in that boat,” Bramlett said. “They’ve chosen to do those loans, and they can’t afford them.” – VoiceofSanDiego
ParticipantThis topic is worth some research. I believe the boomers are in for a rude awakening, as their #1 retirement fund (their home) will not fund their retirement after all. No more reverse mortgages when the credit bubble contracts. The recession will wipe out 1/3 or more of their stock portfolios (and who knows when that portfolio will recover?) Part-time work and scrimping will replace the cozy union pension lifestyle. So will some of those folks consider moving someplace cheaper? I think the decision will be a pull between being close to kids/grandkids/friends and living someplace they can afford to live comfortably. Maybe you can do some research on this (google) and report back. Interesting possibility.
ParticipantLet’s add to that the 30% of all sales which were to investors. How much did those investors put down? They could buy one or more investment properties with no money down, so why would they put anything down? Those who put money down probably used their home equity from their other home. That’s not money down, if it’s just debt moved from one place to another. Money down is money you earn and save.
I remember reading a voice of san diego article that said 68% of buyers in San Diego in 2004-2006 used ARMs and I/Os. Now if you are that desperate and priced out that you have to resort to funny money loans while interest rates are at 5% (!), then you probably couldn’t scrape up $10K – $50K to put 1-5% down.
Mostly I say this because our savings rate is negative, and people have moved from earning and saving to living paycheck to paycheck, using debt from foreigners to fund the excess that the paycheck cannot cover. Stupid people!
Participantsdr,
“According to a recent survey by the National Association of Realtors, in fact, 25 percent of all buyers financed 100 percent of the purchase price, and 42 percent of first-time home buyers bought with no money down.” link
This is nationwide data, and I know the figures are much higher in San Diego. After all, the prices are much higher here. Did you know that 25% of all loan in Wyoming are adjustable? Now why would people in Wyoming need to get into such a loan while we have the lowest interest rates in decades?
Keep in mind this is a survey done at purchase, and not updated when those same buyers refinance or take on a HELOC.
ParticipantI like his posts too. Thanks for the links, jg, good stuff. But I need somethign more, something that explains why gold will do well when the credit bubble pops.
Participantsdr, I know that a 20% rise combined with a 20% drop gives you a lower price than you started with. But I made a mistake in assuming prices were lower, because they were not.
I took Calc I – Calc V, Linear Programming, and calculus level Physics in college, and got A’s in all of them. So I don’t need any help in something as basic as percentages.
I read once that men who have no power at home bully their employees and people on internet forums. A real man knows he is in control, and treats others with respect. When he feels belittled by his family or boss, he takes it out on others. Does any of this ring true for you?
Participantjg, which gold mining stocks do you own? Nemont Mining? Zeal recommended several in their most recent newsletters, and I could forward you a copy for review (I’m sure they won’t mind if you could be a potential client).
I’m not very good at explaining this gold stuff to my husband. He is reluctant to invest more than a few grand in gold, and is more interested in inverse stock market funds. Do any of you have any compelling arguments or articles I can show him? He says gold can fall in value again, just as in the 1980’s, and that the dollar’s fall wouldn’t really matter that much. And honestly, I don’t know how to answer either question.
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