Housing Bubble Bursting?

[Mr Rex]

'cause bubbles are soft.:new_all_coholic:

 

[Randolph Kinney]

Fed heads into the unknown

WASHINGTON (MarketWatch) -- Ben Bernanke, the Federal Reserve chairman who's made a career out following the rules, may have to throw the rule book out this year.

"About twenty years ago, the question that clients asked was how the economy was going to affect the stock market," wrote David Rosenberg, chief North American economist for Merrill Lynch, in his weekly note to clients. "Not anymore. Now it's about how the stock market and the housing market move the economy."

But as Rosenberg points out: "On average, the 'consensus' has predicted 2.5% real growth just prior to the onset of recession and not once did it come close.

Bernanke got a small glimpse of what might happen this past week when the financial markets gasped, wheezed, choked and hacked up something that used go down smoothly -- Chinese stocks, or maybe subprime mortgages -- but which suddenly turned sour. The appetite for those risky assets was gone faster than you can say "no-documentation, reverse-amortization mortgage."

Easy credit wasn't just Fed policy; it was the policy of every lender, every realtor, every automaker. It kept the economy afloat in late 2001 when it really mattered, and it provided most of that extra cash consumers needed to spend when their wages were flat in 2003 through 2005. It was easy credit that put millions of SUVs on the road, it was easy credit that inflated the housing bubble and it was easy credit that boosted the earnings of financial companies.

So far, it's only a segment of consumer borrowers who can't find credit.

But the contraction in credit in the mortgage market is significant. Last year, as many as 40% of all mortgages were in the subprime or Alt-A market, which caters to borrowers who can't qualify for the best terms.

Many of those borrowers have now been effectively shut out of the market as lenders tighten their standards. On Friday, federal regulators finally released tougher "guidance" for lenders that suggests they should evaluate "the borrower's ability to repay the debt" before offering a loan. What a quaint notion!

Already, originations of the riskiest loans have fallen 50% in the past two months.

Kicking as many as half the potential buyers out of the market will hurt sales.

"The risks of a recession are not trivial," Dhawan said. That's what Greenspan was saying when he warned this week that a recession was possible. "The economy is more fragile."

 

[Velocity]

I sell new homes in Sacramento and have been around RE/construction my whole life. From what I see, last year was rough...really rough, but the downturn actually started in summer/fall of '05. Now we're seeing some stabilization. Builders finally adjusted their prices to the market and are well on their way to clearing out inventory (completed homes that have not been sold). Most are limiting "spec" releases and only spot building once they have a buyer lined up. And sellers of resale homes have finally gotten realistic with their pricing while the listings that weren't serious anyway pulled out of the market. Realtors are saying that people who have been on the fence (cause the newspaper told them to wait for a better "deal") are getting tired of waiting to acheive their dream of owning a new home.

If a typical downturn is 2 years long and the beginning of "the end" was summer '05, then we should see stabilization by this summer/fall. It may take a few years for things to heat up again, but with restrictions on development what they are, in CA at least, it won't be more than 2 - 3 years before things get turned around again.

Good to hear some of you in NorCal are still busy - I'm getting the itch to get out of sales and go back into Appraisal - I miss it (and being able to take an occasional weekend off if I want to).

I like the Balloon analogy. Much more accurate. Bubble implies that it pops and all the equity goes away. A Balloon can get a leak - but it's not irreparable.

Besides, usually by the time everyone (I mean everyone) realizes any extreme of the market and everyone is a watercooler expert - the extreme has past and we're on our way back to normalcy.

 

[Randolph Kinney]

Lenders cut the flow of risky home loans

http://online.wsj.com/public/article/SB117245665740318975-vZcJs5vU2OnI4bpPkxOtQj_nhBQ_20070304.html?mod=mktw

Fears about defaults are slowing the gusher of investor funds going to riskier segments of the mortgage market. That means less money available for "subprime" loans to riskier borrowers, forcing lenders to focus more on borrowers who can afford down payments and have well documented finances. With fewer lower-income Americans able to buy homes, downward pressure on prices will probably increase.

The cost of insuring mortgage-bond holders against default risk, as measured by the so-called ABX index, has soared, deepening the concerns of investors in collateralized debt obligations, among the biggest holders of riskier mortgage bonds. Managers of some CDOs are delaying new offerings to "wait for the dust to settle," a process that could take weeks or months, says Chris Flanagan, head of CDO research at J.P. Morgan Chase & Co.

Investors' loss of confidence is reordering the mortgage business. "A lot of loan programs that have been available for the past several years...are going away," says Jack Pevey, president of Integrated Mortgage Services Inc. in Denver. "It's going to keep a lot of people out" of the market.

The impact of the tightening likely will be bigger in markets that were more dependent on subprime loans.

About 20% of the loans in the subprime market "cause more than half the losses," says Goldman Sachs Group Inc. fixed-income strategist Michael Marschoun. "My prediction is these loans will simply not be originated going forward."

 

[Velocity]

Good point Randolph. True, it is getting much more difficult to find loans for a certain segment of society. Mainly the salaried employee - stated income deals which most lenders won't touch now. That was our bread and butter for the last 3 years!
Part of me wants to cling to the idea that humans are an ingenious bunch - always seeming to be able to find a way to get what they want. What's to stop many of these folks from starting businesses on the side so they can be "self-employed"?

I blame the loose lending guidelines for getting us in this predicament to begin with. Call me ethical, but I had times a year or two ago where I actually tried to talk people OUT of buying a home from me because I knew it was too much and the loan they qualified with was too risky. Now, those types of buyers will have to settle for a home/payment they can actually afford without relying on increased equity to help them out.
It kills me when these 20 year olds come into my office and expect their first home to be 2500+ square feet!!
If the lending industry would just maintain some constancy and enforce minimum guidelines whatever "the market" is doing, we wouldn't have these huge market fluctuations borne out of false demand.

 

[Randolph Kinney]

Velocity, just curious, where exactly are you located in California?

What are the number of short sales and foreclosure sales on the market where you are?

I am seeing more distressed listings come onto the market. I believe when April - May time frame comes, there will be a surge of new listings to come on the market. Many people in my neighborhood took their houses off market last fall and are waiting for spring to re-list their houses.

Reduced credit availability is going to reduce demand for housing.

I am going to do an appraisal in Chula Vista tomorrow, a development called Eastlake Vistas. Lots of empty or vacant homes. Builder shows closed sales on the MLS but they are no where to be found as recorded sales with the county.

 

[Randolph Kinney]

Hard Landing Recession Ahead

Here are many reasons to support the notion that the economy will enter into a recession later this year.

• The Q4 GDP growth estimate was revised from 3.5% to 2.2%
• Based on the Q4 growth revision all of the four components of investment fell in Q4: residential investment, business investment in software and equipment, non-residential investment in structures, inventories investment
• Inventory to sales ratios remain high – in spite of the Q4 inventory adjustment – so that further cutbacks of production to reduce inventories will be necessary in Q1 and Q2.
• Durable goods orders were sharply down in January including, most importantly, capital goods orders and shipments, good proxies for current and future investment. At current rates, real investment in software and equipment could be down 10% in Q1 alone. The sharp and unexpected fall in durable goods orders was a crucial trigger for the US stock market sell-off on Tuesday.
• New home sales collapsed 16.6% in January. On the heels of a 14.4% fall in housing starts in January it is clear that the housing recession is worsening.
• Cancellation rates – as reported by major home builders - are now in the 30 to 40% range
• The stock of new and existing unsold homes is still rising in absolute and relative terms; so the glut of empty housing is increasing.
• Home prices fell in December according to the S&P/Case-Shiller Index; and home prices are unchanged on a year over year basis. The OFHEO price index – out this week – showed still some price appreciation in Q4 relative to Q3 (1.1%). But even that index shows that the rate of price increase deceleration has been massive in 2006. And even the NAR data on home prices show a price fall in 2006 and in the last month.
• Construction spending fell more than expected in January (-0.8%). More importantly, not only was residential spending down, but non-residential construction was flat (0% change) in January. That is consistent with Q4 GDP figures showing falling real non residential investment.
• Initial claims for unemployment benefits rose to 338K in the last reporting week. Also, the 4-week moving average of new claims, a more stable measure of unemployment conditions, rose for the fourth week in a row. Worse, continuing claims for unemployment benefits surged by a large134K to 2.640 million. The four-week average rose to 2.547 million. The sharp increase in continuing claims is another clear sign of weakness in the labor market.
• As reported by Reuters: “Planned U.S. layoffs rose 33 percent to a five-month high in February, as weakness in the housing market and auto industry seemed to spread into other sectors, an independent report showed on Thursday. Announced layoffs totaled 84,014 in February, up from 62,975 in January but 4 percent fewer than the 87,437 announced a year earlier, according to Challenger, Gray & Christmas Inc., an employment consulting firm.”
• Analysts at Citi, UBS and Morgan Stanley significantly reduced their forecasts for the February jobs growth due next week after the initial claims report.
• The Chinese, US and global market sell-off was an ugly episode that bears a lot of attention and concern. The sell-off is continuing in Europe, Asia and emerging markets while the US markets also remain very volatile.
• Re-pricing of risk finally occurred as the period of market complacency and under-pricing of risk may be ending: both market and implied volatility sharply increased. And various measure of investors’ risk aversion – such as the VIX - went sharply up.
• The sub-prime meltdown and carnage continued in earnest with default and foreclosure rising and 25 subprime lenders having closed shop in the last three months.
• The ABX indices went into a free fall. Not only the lower rated BBB- tranches but increasingly also the A and AA tranches, a sure signal that the sub-prime carnage is spreading to higher rated mortgages.
• Also, near-prime mortgages such as the Alt-A ones are now showing sharply increasing rates of defaults.
• The subprime credit risk shock is now having contagious effects for other financial institutions credit spreads. For example, Goldman Sachs' 5yr CDS spread that was in the low 19-22 range between September 2006 and January 2007 has now shot up to the 32-35 range in the last week, a stunning increase. This is the beginning of a serious contagion from subprime to other major credit spreads. As Bloomberg is reporting today: Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds. Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody's Investors Service. For Goldman, Morgan Stanley and Merrill that's five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk.
• Oil prices went up again above $60 a barrel on rising tensions between the US and Iran, reaching a week high of over $62.
• Consumer confidence fell in February. The Reuters/University of Michigan's final reading for consumer sentiment fell to 91.3 last month from the initial reading of 93.3.
• Greenspan talked twice this week about a possible recession. That the usually Delphic Greenspan even dared to utter the R-word is an important signal of his worries, in spite of his latest caveat on possible rather than likely recession. The Maestro carefully chooses his words and uttering the R-word – however caveatted – is not something that even Bernanke can ignore.

More and more respected analysts are now discussing the timing of the US recession rather than trying to defend the soft landing case.

 

[Greg Bell]

Credit restriction= Recession.See 1989...

 

[Terrel L. Shields]

the extreme has past and we're on our way back to normalcy.

I'll buy that

I blame the loose lending guidelines for getting us in this predicament to begin with

true. When the good times roll, its awful easy to forget that when you put the horses in the wagon, it can be down hill without any brakes. Tighter lending restrictions and less pressure on appraisers would have dampened the dizzy heights achieved. When speculators (a.k.a. "investors") start buying everything in sight and hoping for someone to buy them out at a profit, then the market is overheated.
William Bonners "Financial Day of Reckoning" describes his view of the "soft depression", published in 2003.
Chancellor described "momentum investing" and the inevitable excess in 1999 and has been decried as crying wolf way early. But what would have happened if his caution had been acted upon. I think the bull in RE would still be going on without the irrational speculation of 04-05 which saw the market way overheat.
There is a natural progression. The market firms, grows, and once profits are seen made, banks make credit available in ever larger, easier to obtain amounts. Once easy credit is made available, the course is set. Investors will continue to roll the dice double or nothing with no institutional memory of the dot com crisis, the S & L crisis before it, or the energy bust crisis before that. It has been a full generation since 1987's mirror of last week and the failure of Long Term Capital Managment, which if you recall was the hedge created by two math geniuse who received a Noble prize for economics.. And how the banks had to close ranks and suck up the 'problem ' to prevent a huge banking crisis. Once speculation takes over, then the market stops...cold, awaits hoping to catch its breath, but usually begins a slow slide, as it goes down the investors don't quit buying, but keep buying to 'dilute' their holdings and thinking each day that the actual 'low' has been hit, until the banks realize they have a problem and suddenly liquidity drys up..at which point the market will tank. How much it tanks will be a function of the quickness to which the Fed will step in and restore liquidity, at least enough liquidity to stop the bleeding or at least slow it..Then market normalcy will return.
Until the foreclosure issues related to subprime and related loose lending works out, those houses are absorbed, the new housing sector will languish. Sales will be harder to make and it will be a buyers market for some time to come, imho.

 

[moh malekpour]

http://www.marketwatch.com/news/sto...4435-83CC-4A9C63A8BC9A}&siteid=yhoo&dist=yhoo

LONDON (MarketWatch) -- U.S. stock market futures were pointing to another tumultuous session on Monday, with gains for the Japanese yen potentially hurting hedge funds and others that borrow in the currency and with mounting doubts over the health of the nation's second-largest subprime lender, New Century Financial.