Housing Bubble Bursting?

[moh malekpour]

http://money.cnn.com/2006/10/23/real_estate/buyers_market.moneymag/index.htm?postversion=2006102310

Builders to buyers: Take this house, please!
The once-hot housing market's about-face has created amazing incentives for buyers. What are you waiting for?

 

[Austin]

I Had An Epiphany Recently

I had an epiphany a few weeks ago that opened my eyes to a new light on things. I went on vacation a few weeks ago and on the way stopped at a large flee market. I found some old historic books and for $5 I purchased a copy of “John C. Calhoun, Nullifier.” This was a history of politics around 1830 when Andrew Jackson was president. If you think the American Civil War began in 1861, you are wrong; it started in 1830-the actual shooting didn’t start until 1861. We can think Andrew Jackson for that war.

One of the biggest issues at the time was control of the National Bank. The political parties were at war over control of the bank because the bank could be used to finance large public projects like canals in certain industrial Yankee states. He who controlled the National Bank controlled who got the money. That is what the Civil War was about friends. Every since that time banking has been used for political purposes such as playing games with the national economy for political purposes. If you can control credit policy you can set the economic pace for a while at lease. In my mind the number one political issue is “he who controls the credit policy of our bank industry has real political power.” If you play foot loose and fancy free with it, it will come back and bite you in the arse as the present situation clearly demonstrates.
Nothing is new under the Sun. If you think we are divided over Iraq, the big division at the time was that President Andrew Jackson’s sec of state married a local Washington slut that had slept with many Washingtonians. All of the Senator’s wives refuse to associate with the slut woman which angered Jackson. The entire government nearly collapsed as a result. Washington was more divided over that issue than we are over the War In Iraq.
What was my “epiphany”? I have always felt the South was right and the north was in the wrong from a constitutional standpoint. This book makes it clear that everyone at the time agreed but here is where the rub came in: “We could make more money by ignoring the constitution and having a supreme central government and a National Bank.” It is not about being in the right, it is all about making money. John C. Calhoun was one of the great minds of the ages. The reason I purchased his book is because I usually visit his grave on vacation. He was so controversial, he died about 1853, that during the Civil War they had to move his body to keep the Yanks from digging him up and hanging the corpse from a tree. He knew where we were headed and he was a rock in the path we eventually took which brings us back to the point at hand-the banking system should not be in control of the federal politicians. Banks should be state controlled.

 

[Randolph Kinney]

Interesting blog on economy and housing.

http://globaleconomicanalysis.blogspot.com/2006/10/kool-aid-krispy-kremes.html

Do you remember my analogy of housing to donuts? A year ago I said this was like the room of 1,000 donuts. Even if they are warm Krispy Kremes, how many can you eat? Three? Maybe four? And even if you come back the next day, and the donuts are now half price, how many can you eat? Same thing with housing. We only have so many people in the US. But builders built houses like donuts. They sold houses to non-users. They sold houses to the greedy masses that bought multiple houses to flip. Now we have the inventory, but there are not enough people to occupy these homes. Moreover, with interest rates rising and mortgages becoming tougher to obtain, we have less and less people that can buy these homes, even if they want to.

I laughed when I read the above. It really rings true for what has happened.

Homeowner - This one really hurts, and this is the next wave of the massive tidal wave hitting this industry. As surfers know, the third set is the biggest. This homeowner purchased her home for $390,000 plus $15,000 in closing costs. It is now worth maybe $300,000. Their interest only ARM is scheduled for refinancing. The bank told them they need to come up with additional cash to cover the drop in equity. But they don’t have the $75,000 the bank wants. And even if they sell for $300,000 and clear $280,000, they can’t pay off their $390,000 mortgage balance. You see, their mortgage was 100% and it was interest only. They are going to walk away from the house and give it to the bank. The bank, if they are lucky, will sell the house for $300,000 less commissions and expenses. Maybe they will net out at $280,000. The math is simple. The bank, at best, will lose at least $110,000 on a $390,000 mortgage. That’s a 28% loss . . . IF they can sell at $300,000. Back to the donuts. Maybe they can sell a few of these homes at market prices, but as foreclosures mount, prices will drop further.

Again, that rings true here in San Diego.

The Third Wave - This massive tidal wave will effect all aspects of our economy. Some banks will fail. Other banks will suffer the worst liquidity crisis since the Depression. And there is no way to stop this wave.

I don't know if the depression will come with bank failings. But there are going to be some investors who bought those mortgages from lenders who are going to suffer.

Good blog, enjoyed it.

 

[Randolph Kinney]

Rising Rents Bites 30% Or More Of Income

http://www.nytimes.com/2006/10/23/us/23olathe.html?_r=1&th&emc=th&oref=slogin

Rent’s Bite Is Big in Kansas, Too

By SUSAN SAULNY
Published: October 23, 2006

OLATHE, Kan. — New census data shows that people are paying more of their income for housing in almost every part of the country. And it is hardly surprising that places like Southern California and Manhattan are high on the list.

Olathe (pronounced oh-LAY-thuh), 20 miles southwest of Kansas City, showed the biggest jump in the percentage of people paying at least 30 percent of their income on rent, as well as in those paying at least 50 percent on rent.

 

[Steve Owen]

I had an epiphany a few weeks ago that opened my eyes to a new light on things. I went on vacation a few weeks ago and on the way stopped at a large flee market. I found some old historic books and for $5 I purchased a copy of “John C. Calhoun, Nullifier.” This was a history of politics around 1830 when Andrew Jackson was president. If you think the American Civil War began in 1861, you are wrong; it started in 1830-the actual shooting didn’t start until 1861. We can think Andrew Jackson for that war.

One of the biggest issues at the time was control of the National Bank. The political parties were at war over control of the bank because the bank could be used to finance large public projects like canals in certain industrial Yankee states. He who controlled the National Bank controlled who got the money. That is what the Civil War was about friends. Every since that time banking has been used for political purposes such as playing games with the national economy for political purposes. If you can control credit policy you can set the economic pace for a while at lease. In my mind the number one political issue is “he who controls the credit policy of our bank industry has real political power.” If you play foot loose and fancy free with it, it will come back and bite you in the arse as the present situation clearly demonstrates.
Nothing is new under the Sun. If you think we are divided over Iraq, the big division at the time was that President Andrew Jackson’s sec of state married a local Washington slut that had slept with many Washingtonians. All of the Senator’s wives refuse to associate with the slut woman which angered Jackson. The entire government nearly collapsed as a result. Washington was more divided over that issue than we are over the War In Iraq.
What was my “epiphany”? I have always felt the South was right and the north was in the wrong from a constitutional standpoint. This book makes it clear that everyone at the time agreed but here is where the rub came in: “We could make more money by ignoring the constitution and having a supreme central government and a National Bank.” It is not about being in the right, it is all about making money. John C. Calhoun was one of the great minds of the ages. The reason I purchased his book is because I usually visit his grave on vacation. He was so controversial, he died about 1853, that during the Civil War they had to move his body to keep the Yanks from digging him up and hanging the corpse from a tree. He knew where we were headed and he was a rock in the path we eventually took which brings us back to the point at hand-the banking system should not be in control of the federal politicians. Banks should be state controlled.

Interesting. Of course, they didn't tell me any of that when I visited the Hermitage a couple of years ago (except for the part about the slut).

 

[Couch Potato]

Banks should be state controlled.

You are so right about that. The move to interstate banking, mergers and the concentration of money that has resulted is a great risk to our economy. Many of the problems we face as appraisers are related to the movement of control of banks from local to national offices. When on of these large national banks fails, the reality of the problem will be apparent to all.

 

[moh malekpour]

http://www.bloomberg.com/apps/news?pid=20601109&sid=adWThBDZaBMY&refer=home
Housing in U.S. Poised to Worsen, Derivatives Show (Update2)

By Darrell Hassler and Hamish Risk

Oct. 23 (Bloomberg) -- The slumping U.S. housing market is about to get a lot worse, according to traders of mortgage-backed securities and the so-called derivatives on which they are based.

The ABX index, which measures the risk of owning bonds backed by home-loans to people with poor credit, rose 30 percent since Aug. 9 to the highest since January. There are more than $500 billion of such notes outstanding.

The increase in the index shows traders expect mortgage delinquencies and foreclosures to increase at a time when the number of homes for sale as measured by the National Association of Realtors is at a 13-year high. The percentage of home-loan payments more than 60 days delinquent rose to 7.23 percent in July from 5.9 percent a year earlier, the fastest rate of increase since 1998, Moody's Investors Service said Oct. 17.

``Delinquency trends and home prices'' show a weakening real estate market, said Scott Eichel, head of credit trading for New York-based Bear Stearns & Co., the biggest underwriter of bonds backed by mortgages. ``A lot of investors that have concerns about the housing market'' are using the ABX index to speculate on a continued drop, he said.

Sales of new and existing homes probably will drop 9.4 percent to 6.76 million in 2006 from a record last year, McLean, Virginia-based mortgage buyer Freddie Mac said Oct. 10. Home sales have risen the past five years.

ABX Index

The ABX index, created by London-based Markit Group Ltd., measures the cost, or spread, of credit-default swaps based on the $565 billion of bonds secured by so-called subprime mortgages and home-equity loans. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on the ability of borrowers to repay debt. An increase in the spread indicates deterioration in the perception of credit quality; a decline suggests improvement.

The index tracks 20 asset-backed securities that contain loans rated BBB-, the lowest level of investment grade debt. Based on the index, it costs an investor $267,000 to protect $10 million of bonds against default for five years, up from $205,000 in August. The investor would get face value for the bonds in exchange for the securities should a borrower fail to adhere to the debt agreements.

`Unequivocally Bad'

``The unequivocally bad housing data we've seen'' is prompting investors to seek to profit from potential declines in mortgage-backed securities, said Greg Lippmann, the head of asset-backed trading at Deutsche Bank AG in New York who helped create the ABX indexes in January.

Contracts covering $5 billion of home-loan debt change hands daily, he said. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or the weather.

The housing boom spawned new types of mortgages that allowed consumers to buy homes they may not have been able to afford otherwise.

About 18 percent of all mortgages issued in the first half of the year were to borrowers considered most likely to default, such as those with high credit-card balances, up from 2.4 percent in 1998, based on data from the Mortgage Bankers Association. The Washington-based trade group's 2,700 members represent 70 percent of the home-loan business.

The amount of bonds backed by subprime loans more than doubled since 2001, according to the Bond Market Association, a New York-based trade group of more than 200 securities firms.

Worst Month

A Merrill Lynch & Co. index of debt securities derived from home-equity loans rated AA to BBB is having its worst month this year, falling 0.01 percent. They have returned 4.54 percent since the end of December. Banks and lenders such as Countrywide Financial Corp. in Calabasas, California, and Washington Mutual Inc. of Seattle typically take mortgages and package them into bonds for sale to investors. The bonds are then divided into pieces of varying risk.

All asset-backed securities, which also includes loans packaged from credit-card and student debt, have returned 4.27 percent this year on average.

More borrowers are finding it harder to meet interest payments following 17 interest-rate increases by the Federal Reserve since mid-2004.

The default rate for subprime loans rose to 7.35 percent in July from 5.51 percent a year earlier, according to investment bank Friedman Billings Ramsey Group Inc. in Arlington Virginia.

Nine percent of all subprime loans made in 2006 may default within five years, the worst performance since at least 1998, Glenn Schultz, head of asset-backed securities at Charlotte, North Carolina-based Wachovia Corp., said in an Oct. 17 report.

`More Visibility'

``People have a little more visibility on the slowdown than they did two or three months ago,'' said Andrew Chow, who manages $5.5 billion of asset-backed securities and credit-default swaps at Seneca Capital Management in San Francisco.

Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, forecasts the housing slump will cause the economy to slow and force the Fed to lower interest rates to 4.5 percent next year. The central bank's target for overnight loans between banks is 5.25 percent. Pimco is a unit of Munich-based Allianz SE.

The National Association of Home Builders/Wells Fargo said on Oct. 17 that its index of builder confidence this month rose to 31 from 30 in September, the first increase in a year.

Housing starts in September rose to an annual rate of 1.772 million from a 1.674 million pace in August, the Commerce Department in Washington said Oct. 18. The median estimate of 61 economists surveyed by Bloomberg News was for a decline to an annual rate of 1.64 million.

Falling Prices

Even with the gains, the National Association of Realtors this month predicted prices of new homes may fall for the first time in 15 years. The trade group on Oct. 11 estimates that the median price of a new U.S. home probably will drop 0.2 percent to $240,500. The inventory of homes on the market rose to a record 3.92 million, the group said Sept. 25.

Most credit-default swap trading is in securities rated BBB or BBB- because they are the most volatile and have the greatest chance to be profitable, said Jack McCleary, head of asset-backed trading for UBS AG in New York.

Subprime mortgages with those credit ratings historically have had losses of about 5 percent of the loan value, McCleary said. Some investors are betting that losses may increase to 12 to 14 percent in the next three years, which could exponentially increase value of credit-default swaps, he said.

``In effect, it's a lottery ticket,'' he said.

 

[The Bob]

Housing Auction is a Flop

http://www.signonsandiego.com/uniontrib/20061022/news_1mi22auction.html



Low bids curtail auction of homes

Model houses draw shoppers, no buyers

By Lola Sherman
STAFF WRITER

October 22, 2006



EDUARDO CONTRERAS / Union-Tribune
Mario Piatelli tried to encourage a bid for a model home in the Bressi Ranch development yesterday.

CARLSBAD – Twenty people went to an auction of new model homes yesterday looking for a bargain.

They were joined by about 80 “looky-loos.”

In the end, the potential buyers wanted too much of a good thing, and the auctioneer's hammer never fell.

 

[Randolph Kinney]

http://www.signonsandiego.com/uniontrib/20061022/news_1mi22auction.html



Low bids curtail auction of homes

Model houses draw shoppers, no buyers

By Lola Sherman
STAFF WRITER

October 22, 2006



EDUARDO CONTRERAS / Union-Tribune
Mario Piatelli tried to encourage a bid for a model home in the Bressi Ranch development yesterday.

CARLSBAD – Twenty people went to an auction of new model homes yesterday looking for a bargain.

They were joined by about 80 “looky-loos.”

In the end, the potential buyers wanted too much of a good thing, and the auctioneer's hammer never fell.

These homes are just down the street from me. There are many new homes under construction in the Bressi Ranch development too.

 

[moh malekpour]

He told those offering bids in the low range that their offers probably could not be considered.

The bad news is that the next offering bids might be even less. What can they do then? The longer they wait, the less they get and that is the name of the game.