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Housing Bubble Bursting?

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Every picture tells a story

http://globaleconomicanalysis.blogspot.com/2007/02/every-picture-tells-story.html

These are some charts for those who agree with David Lereah and Greenspan about the housing market bottom

In the past few months we have seen repeated bottom calls by David Lereah at the NAR. We have also heard Robert Toll proclaim to be "dancing above the bottom", and just this past week Greenspan himself said "The housing slump was all but over."

Following is a a graphical presentation to see if we can determine just how likely those statements are to be true. The pictures speak for themselves
 
Just thinking ... real estate cycle vs credit cycle

I was reading a blog and it pointed out that the real estate cycle normally turns down before the credit cycle does. For example, weakness in housing would be preceded by large job losses, lower income generation, higher unemployment - all to come first. That did not happen. We have the Goldilocks economy; an economy with still high growth, still high job creation, still very low unemployment rate, still high income generation.

Instead, we have home prices falling and along with it a pronounced down turn in the credit cycle; we are observing massive increases in sub-prime defaults and foreclosures, 20 sub-prime lenders going out of business in two months, the ABX going into free fall and the cost of insuring against the BBB- tranche of the ABX index going to a spread relative to LIBOR of over 1000bps.

The fact that the downward credit cycle has emerged so fast and so sharply in a still strong economy is the most important signal that this sub-prime mess cannot be easily dismissed as a niche problem that will have no contagious effects on the rest of the economy and on financial markets in general.

Regular lenders also suffer when banks get into their territory. Companies like Countrywide have been forced to price loans lower since investment banks started buying up sub-prime loans and pricing them aggressively. Banks assumed they were covered from potential losses by the revenue streams from their myriad other businesses. To guard against credit problems in general, lenders are beginning tighten credit standards across the board. This credit tightening is having its impact with mortgage brokers going out of business; as much as "40 or 50 a day throughout the country going down in one form or another," Angelo Mozilo, chief executive of Countrywide Financial Corp. said. "Sub-prime was a business (where) you take inferior credit, but you'd require superior equity. That all disappeared in the last couple of years and you get a 100 percent loan with marginal credit and that doesn't work."

Investors will drive the rest of the credit cycle for housing. The liquidity is drying up for sub-prime debt. All it will take to have a spillover effect is for a significant hedge fund or two to have losses on their holdings of CDOs and/or RMBSs. When hedge funds report loses, investors will scramble to pull their money out. Mortgage debt of any kind (usually the most liquid) will be dumped to satisfy redemptions. Panic will follow as paper loses mount as measured with the ABX.

I am watching the housing market with great anticipation. Sooner or later, job losses will follow and that will start a negative feed back loop increasing the defaults and foreclosures, causing less liquidity, etc.
 
Moh,

Thanks for the laugh- and it was a big one!

The blogger, Mish, lives in a maket I know very wel. It is where you go in Chicago's near northern suburbs when you cannot afford to live anywhere else in the area!

Looks like he does not make all that much money- even after having 80 of his photos published!:rof: :rof: :rof:

Brad
 
Brad,
I don’t care where Mish lives and how much he makes. That is his personal business but I didn’t see you challenging his charts? Each chart was direct challenge to Lereah and Greenspan who are the only source of acceptable information to you. I was expecting you to defend Lereah and Greenspan

And how about this article? Your favorite Greenspan is alerting mortgage investors to watch out for those CDO ratings.
These are some excerpts:
http://www.iht.com/articles/2007/02/18/yourmoney/morgenson.php
Worried?
Last week, Standard & Poor's Rating Services put 18 classes of securities from 11 residential mortgage pools on watch for a downgrade. Alt-A loans were among those on the watch list, but S&P said its move to credit watch status on these mortgages would have no impact on outstanding CDO ratings.
Relying on rating agencies to analyze the risk in collateralized debt obligations may be unwise, however. Back in May 2005, Alan Greenspan noted the complexity of collateralized debt obligations and the challenges they pose to "even the most sophisticated market participants." He warned investors not to rely solely on rating agencies to identify the risks in these securities.
That is also the view of Joshua Rosner, a managing director at Graham & Fisher & Co., and Joseph Mason, associate professor of finance at Drexel University's LeBow College of Business. The two published a paper last week, "How Resilient Are Mortgage- Backed Securities to Collateralized Debt Obligation Market Disruptions?" analyzing CDOs. The Hudson Institute, a nonpartisan policy research organization in Washington, financed their research.
Mason and Rosner find that insufficient transparency in the CDO market, significant changes in asset composition, and a credit rating industry ill- equipped to assess market risk and operational weaknesses could result in a broad financial decline. That ball could start rolling as the housing industry weakens, the authors contend.
"The danger in these products is that in changing hands so many times, no one knows their true makeup, and thus who is holding the risk," Rosner said in a statement. Recent revelations of problem loans at some institutions, he added, "have finally confirmed that these risks are much more significant than the broader markets had anticipated."
Mason and Rosner say it is only a matter of time before defaults in mortgage pools hit returns in collateralized debt obligation pools. Of greater concern, they say, will be the effect on the mortgage market when investors, unhappy with poorly performing CDOs, sell them and move on to other forms of collateral. They cite the manufactured housing market as a disturbing precedent; after that market collapsed in 2002, managers of collateralized debt obligations avoided the sector.
A similar shrinkage could occur in the residential mortgage sector as defaults mount.
"Decreased funding for residential mortgage-backed securities could set off a downward spiral in credit availability that can deprive individuals of home ownership and substantially hurt the U.S. economy," the Mason/ Rosner paper said.
So far, the pain from subprime defaults has been muted. Market participants are cheered that lenders are finally tightening their loan standards, albeit a bit late. Unfortunately, the damage of the mortgage mania has been done and its effects will be felt. It is only a matter of when.
According to this article, unhappy investors of those bad loans are going to pull out from residential mortgage market and cause a shortage of funding for residential homes that could cause a real demage to the economy. This is in addition to mass foreclosures that are going to be in market but since these are not from Lehear or Greenspan, you possibly don't agree with them
 
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Moh,

Thanks for the laugh- and it was a big one!

The blogger, Mish, lives in a maket I know very wel. It is where you go in Chicago's near northern suburbs when you cannot afford to live anywhere else in the area!

Looks like he does not make all that much money- even after having 80 of his photos published!:rof: :rof: :rof:

Brad

Perhaps we could all include photos of our cars and houses to see who is most credible. How very SoCal.
 
David Lereah, the association's chief economist, called 2006 "the year of contraction," and predicted a spring 2007 upturn.
What prediction has Lereah got right in the past 18 months? Watch the pressure build this year.
This week 2 more local builders are being sued for past due accounts from suppliers. This has a lot more to work out. One of those builders is a small one sitting on 7 homes totalling nearly $2 million in retail and has his home on the market for $700,000. He vowed to let the bank take it back rather than sell out below cost...Watch some creative financing by bankers to keep these guys afloat a little while longer. They are simply pushing the problem further down the road and doing neither the builder nor themselves a real service.
we could all include photos of our cars and houses to see who is most credible
The 92' pickup with the paint missing, or the Lexus?...we know who drives what where. :)
 
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Signs that subprime mortgage market has borrowed trouble

http://www.latimes.com/business/la-re-harney18feb18,1,1828076.story?coll=la-headlines-business
NATION'S HOUSING
Signs that subprime mortgage market has borrowed trouble
By Kenneth R. Harney, Washington Post Writers Group
February 18, 2007


WASHINGTON — Is a blowout taking shape in the impaired-credit mortgage market? Could lax underwriting standards during the boom years — no verification of applicants' incomes or assets, low or no down payments, and big mortgages to people already saddled with heavy debts — finally be coming home to roost?

The omens are unmistakable:

Delinquencies — failure to make a mortgage payment when due — in the $1.3-trillion impaired-credit mortgage market hit 12.6% in the latest quarter, up from 11.7%. Delinquencies exceeded 13% among borrowers with so-called subprime adjustable-rate loans.

Growing numbers of the companies that make or invest in subprime mortgages are themselves facing financial distress, and some have shut their doors or filed for bankruptcy protection. HSBC Holdings PLC, Europe's largest bank and a major subprime lender in this country, shocked Wall Street recently by announcing that home loan delinquencies have gotten so bad that it has set aside $10.6 billion to cover potential losses.

New Century Financial Corp., a California-based subprime lender, saw its stock plunge 36% in a single day when it announced that "buybacks" of delinquent loans had been more numerous and more costly than anticipated. Subprime lenders are required by Wall Street bond investors to repurchase loans that go into serious default early, suggesting poor underwriting, bad appraisals or other issues.

Ownit Mortgage Solutions, another California subprime mortgage lender, abruptly went out of business when buyback demands reached a reported $100 million. Ownit's chief executive, William D. Dallas, acknowledged problems in underwriting, but also blamed bond investors' demands for high-yielding no-income verification loans.

Angelo R. Mozilo, chief executive of Countrywide Financial, was quoted as saying "there's probably 40 or 50 [subprime loan originators] a day throughout the country going down in one form or another. And I expect that to continue throughout the year."

What's going on here? At a recent Senate hearing, a leading consumer-protection advocate, Martin Eakes, chief executive of the Center for Responsible Lending, called the subprime market "a quiet but devastating disaster."

Eakes' group published a study last month that estimated that 2.2 million overextended subprime mortgage borrowers would lose their homes to foreclosure — a projection hotly disputed by the mortgage industry. Eakes told the Senate banking and housing committee that subprime lenders have "virtually guaranteed" high levels of delinquency and foreclosures by offering borrowers excessively risky loans with teaser rates and low payments for the initial two or three years that later explode into sharply higher payments.

Lenders also have allowed unqualified borrowers to merely state — not verify or document — their incomes, putting large numbers of them into loans they should never have been granted, Eakes said. He quoted industry research that found that 90% of stated-income mortgage applicants "had inflated incomes compared to IRS documents," and that 60% of them exaggerated incomes by 50% or more.

Representatives of the lending industry challenged Eakes' analysis of rising subprime defaults and told the Senate committee that the real reasons for homeowner defaults are unanticipated economic difficulties such as job loss.

Douglas G. Duncan, chief economist of the Mortgage Bankers Assn., challenged the idea that "delinquencies are at crisis levels," or that unusually high numbers of borrowers — subprime or otherwise — are losing their houses to foreclosure. In mid-2002, for instance, subprime delinquencies exceeded 14%, then fell to just above 10% in 2004 and 2005, and have risen since, he said.

Whichever perspective you prefer, this much you can be certain about: The entire subprime industry is likely to tighten underwriting standards and throttle back on the highest-risk loans. And buyers with marginal or poor credit are likely to be quoted even higher rates and fees than they would otherwise.

this is me adding to the conclusion of the article: and will eliminate 25% of potential homebuyers from the purchase market and the same number from the refinancing market and will adds a massive foreclosures to the market.
 
Moh,

I read all those articles as well- and as I have so often said you have never once posted anything except an article that seems to support your position- and you apparently do not care about the author's credibility.

So on one side we have Greenspan, Bernanke, Lereah and Doug Duncan- Former and current Fed chiefs, NAR chief economist and MBA chief economist. Others support this view as well- and as many credible folks as you could round up against the view.

On the other side you have Mish and a few others.

Brad
 
Scott,

Sounds like fun. I own drive and love my Chrysler 300C. BUT, I am not the one who is offering financial advice here- it is alll those economists- and now bloggers who think they know the score.

But just for the record, if I am going to base my financial actions and expectations on advice from someone, is sure will not be a guy who has not demonstrated his acumen by actually going out and making a lot of money.

Brad
 
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