Housing Bubble Bursting?

[moh malekpour]

I am sorry but I don't get it! I just checked the headlines over on the Drudge report and here are the featured headlines:

Economy grows at 4.0 or 4% for last quarter.

Massive Condo Melt down in Miami. 23,000 excess units with 40,000 more on the drawing board with no sales.

What I get out of this is that a bubble crash and liquidity crisis is good for economic growth. Why didn't I think of that.

Austin,
When they are talking about the US economic growth, they are including the growth of overseas corporations. Those corporations that either doing business in foreign lands or outsourcing their works to other countries and pay a fraction of what they were paying here to US workers should have a big growth.
I don't think it is a secret that big corporations are growing big time. They get overseas tax loopholes , less operational costs and more consumers, however they are going to lose US consumer spending very soon which is going to show in coming quarters.
How many times have you heard in the news that although we have a housing recession and a mortgage mess at home but the global econmy is doing fine so we are not going to get a recession. They are relying on global economy to save the US economy because most US profitable corporations are globalized.

 

[Randolph Kinney]

I am sorry but I don't get it! I just checked the headlines over on the Drudge report and here are the featured headlines:

Economy grows at 4.0 or 4% for last quarter.

Massive Condo Melt down in Miami. 23,000 excess units with 40,000 more on the drawing board with no sales.

What I get out of this is that a bubble crash and liquidity crisis is good for economic growth. Why didn't I think of that.

Austin,

You do notice that the GDP number is for second quarter and is a revised number? That is driving your car forward looking in the rear view mirror.

One aspect of the GDP, it is a wide measure, the total economy. You have to look at individual segments to see what is contributing to positive growth and what was negative growth.

 

[Steve Owen]

When they are talking about the US economic growth, they are including the growth of overseas corporations.

But, then there is that darned, persistently low, U.S. Unemployment rate. And, have you seen the latest stats on US income growth?

 

[Greg Bell]

Employment is the last to go.It's a lagging indicator just like home prices will take years to settle.GDP also includes government spending so if the government spends some cash it shows up in the GDP.Besides , no one cooks books better than the US Governmnet..

 

[moh malekpour]

U.S. Jobless Claims Rise for a Fifth Straight Week

But, then there is that darned, persistently low, U.S. Unemployment rate.

You should update your information abut the unemloyment rate: http://www.bloomberg.com/apps/news?pid=20601068&sid=azos4l3x1ttQ&refer=economy

Aug. 30 (Bloomberg) -- First-time applications for jobless benefits unexpectedly increased for a fifth week, the longest streak since May last year, suggesting the housing recession and related turmoil in credit markets are costing jobs.

Initial unemployment claims climbed by 9,000 to 334,000 in the week that ended Aug. 25, the highest level since April, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, rose to 324,500 from 318,250.

The deepest housing slump in 16 years is prompting builders and mortgage-lending companies such as American Home Mortgage Investment Corp. to fire workers. That may weigh on consumer spending, which accounts for more than two-thirds of the economy.

``We'll probably see job growth remaining below trend for the next six months,'' said Sal Guatieri, senior economist at BMO Capital Markets Inc. in Toronto. ``That means less support for consumers.''

The unemployment rate among people eligible for benefits, which tends to track the U.S. jobless rate, increased to 2 percent, from 1.9 percent. The data are reported with a one-week lag.

Fifteen states and territories reported an increase in new claims, while 38 reported a decrease, the Labor Department said.

 

[Austin]

Here Comes The Bailout

http://www.newsday.com/business/nationworld/ats-ap_business10aug31,0,5042138.story

Bush to Outline Aid to Mortgage Holders

By DEB RIECHMANN | Associated Press Writer3:43 AM EDT, August 31, 2007 Article tools

WASHINGTON - Offering federal help for strapped mortgage holders, President Bush is proposing to aid hundreds of thousands of borrowers hard hit by the housing slump.
Bush also planned to:

* Urge Congress to pass Federal Housing Administration overhaul legislation that would give the FHA more flexibility in assisting mortgage holders with subprime mortgages. (Wasn't this Hillary's idea)

* Pledge to work with Congress to reform the tax code to help troubled borrowers rework their loans. (I can hear it now. Another Bush tax cut.)

* Call for rigorously enforcing predatory lending laws and strengthening lending practices. (There go the campaign contributions.)

This is the government bailout we have been looking for. Looks like the tax payers will eat another one. Heads we win-tails you lose. Stay tuned today for details.

 

[Randolph Kinney]

Commercial paper behind liquidity crisis

Asset-backed commercial paper crunch is spreading - and leaking like a SIV

Bloomberg this week had a list of 23 Canadian corporations with cash parked in non-bank ABCP, with a total of $330.8-million in missed payments so far, and possible redemption delays on another $1.18-billion worth.

Global DIGIT announced that, since it couldn't roll over its maturing MMAI commercial paper, it was halting redemption of its units. State Street Corp. admitted it has off-balance-sheet exposure to $28.8-billion (U.S.) worth of ABCP conduits. The hits keep on coming, and every day there's another hedge fund, collateralized debt obligation (CDO) or ABCP conduit carried off the market field on a stretcher.

Briefly, an ABCP conduit goes out and buys a pool of income-producing assets - like car loans, equipment leases, credit card receivables or mortgages - and pays for it by borrowing money through the issuance of short-dated paper secured by that pool of assets, or ABCP. Generally, the credit quality of the ABCP is enhanced with a liquidity guarantee from a foreign or domestic bank.

Bear in mind that there has been no real change in the value of the underlying assets, just in the mark-to-market price. But when you're financing a five- or 10-year asset with 30- or 60-day ABCP, it makes it darned hard to refinance when the asset is nominally not worth nearly as much as it is supposed to be.

Down in the United States, they've had an even better idea, the structured investment vehicle, or SIV. Like an ABCP conduit, a SIV buys income-producing financial assets (mortgages, etc.) and pays for it by issuing short- and medium-term debt. Unlike ABCP, however, SIVs seldom have any kind of bank liquidity guarantee.

And, not surprisingly, SIVs have suddenly started leaking like, er, sieves. This week, Standard & Poor's announced that an SIV run by Cheyne Capital Management Ltd., which has $20-billion (U.S.) in assets, has breached debt covenants because of losses and may have to be liquidated. S&P then promptly slashed the senior debt ratings on the program - Cheyne Finance LLC, with $3-billion of commercial paper and $6.4-billion (in medium-term notes) - by a stunning six notches, from triple-A to A-, cut the commercial paper by two notches, from A-1-plus to A-2, and placed both on negative watch for more downgrades. As recently as Aug. 15, S&P had said: "SIV ratings are weathering the current market disruptions." Yeah, right. Around 23 per cent of all SIV assets are mortgages or CDOs containing mortgages, some of it of the noxious subprime variety.

 

[Terrel L. Shields]

they are including the growth of overseas corporations

true enough...there will be a lag..wait about 2 years.

the tax payers will eat another one

amen.

The press, imho, is saying one thing, but read between the lines. Bernanke is saying the 'right' public thing, but what will cutting the interest rate do except drive the value of the dollar down down and down...meaning overseas 'stuff' like good old OIL and GASOLINE go thru the roof some more. Has anyone thought of the implications if OIL was sold in Euros and not dollars???
The Fed knows a rate cut is expected but deep down, i think they realize they do not have a lot of 'space' to play with and they may need those cuts a year from now to revive the economy after a season of doom and gloom politicking "its the economy stupid" "republicans got us into this mess" etc. After all, you cannot cut the Fed rate below zero can you? You have to pay people to take your money??? Japan almost did that and it stagnated their economy for a decade plus.
Frankly, the stock market is up 900 points since the first YET, so screw wall street, let the market glide on down and save those cuts for later.

 

[moh malekpour]

Can the Mortgage Crisis Swallow a Town?

http://www.nytimes.com/2007/09/02/b...tml?_r=2&ref=business&oref=slogin&oref=slogin

TAMMI and Charles Eggleston never took out a risky mortgage, never borrowed more than they could afford and never missed a monthly payment on their neat, three-bedroom colonial in the Cleveland suburbs. But that hasn’t prevented them from getting caught in the undertow of the subprime mortgage mess now submerging this town.

Over the last 18 months, the Egglestons have watched one house after another on their street, Gardenview Drive, end up foreclosed and vacant. Although lawns are still tidy and empty homes are not boarded up and stripped as they are in inner-city Cleveland, the Egglestons say Maple Heights no longer feels safe after dark. Nor do they have the confidence they had when they moved in a decade ago that this is the ideal place to raise their 6-year-old twin girls, Sydney and Shelby. So, in May 2006, they put their home on the market in order to move closer to Mrs. Eggleston’s parents in another middle-class Cleveland suburb, Richmond Heights.

They have had no takers. Although they lowered the asking price to $99,000 from $109,000, no one has even come to look at it in more than six weeks. “My heart panics every time I drive down the street and I see another for-sale sign,” says Mrs. Eggleston, pointing past the placards in front of her porch to others that dot surrounding yards like lawn furniture. “Some people on the street couldn’t pay, so they just left. The competition to sell is just ridiculous.”

 

[Randolph Kinney]

[FONT=Arial,Helvetica,Verdana]WHY THE FED WILL NOT STOP DEFLATION[/FONT]

Good article, worth reading.

[FONT=Arial,Helvetica,Verdana]Every hour or so one can read or hear another comment along these lines: "the Fed will provide liquidity," "the Fed is injecting money into the system," "the Fed will be forced to bail out homeowners, homebuilders, mortgage companies and banks," "the Fed has no choice but to inflate," "the government cannot allow deflation," "the Fed will print money to stave off deflation" and any number of like statements.

[/FONT][FONT=Arial,Helvetica,Verdana]None of them is true.[/FONT]
[FONT=Arial,Helvetica,Verdana]
[/FONT][FONT=Arial,Helvetica,Verdana]The Fed is not forced to do anything; the Fed has not been injecting money; the Fed does have choices; the government does not control deflationary forces; and the Fed will not print money unless and until it changes its long-standing policies and decides to destroy itself.[/FONT]

[FONT=Arial,Helvetica,Verdana]Observe three important things:[/FONT]

1. [FONT=Arial,Helvetica,Verdana]The Fed did not give out money; it offered a temporary, collateralized loan.[/FONT]
2. [FONT=Arial,Helvetica,Verdana]The Fed did not inject liquidity; it offered it.[/FONT]
3. [FONT=Arial,Helvetica,Verdana]The Fed did not lend against worthless sub-prime mortgages; it lent against valuable mortgages issued by Fannie Mae (the Federal National Mortgage Association), Ginnie Mae (the Government National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation). The New York Fed is also accepting "investment quality" commercial paper, which means highly liquid, valuable IOUs, not junk[/FONT]

[FONT=Arial,Helvetica,Verdana]As a result:[/FONT]

1. [FONT=Arial,Helvetica,Verdana]The Fed took almost no risk in the transactions.[/FONT]
2. [FONT=Arial,Helvetica,Verdana]The net liquidity it provided -- after the repo agreements close -- is zero.[/FONT]
3. [FONT=Arial,Helvetica,Verdana]The financial system is still choking on bad loans.[/FONT]
4. [FONT=Arial,Helvetica,Verdana]Banks and other lending institutions must sell other assets to raise cash to buy back their mortgages from the Fed.[/FONT]

[FONT=Arial,Helvetica,Verdana]What must the banks do with their "grace period" of a few days that the Fed's repo agreements provide? They have to raise the cash to buy back the IOUs that the Fed agreed to hold for them. How does a bank raise money? By selling assets. Thus begins the downward spiral: Contracting credit causes asset sales, which cause collateral values to fall, which causes lenders to curtail lending, thus contracting overall credit, which causes assets sales, and so it goes. Thus, the Fed is not staving off deflation; at best, it may have helped -- momentarily -- to make it more orderly. But the selling of assets has begun regardless.[/FONT]

As the argument goes, the FED is going to have to shift gears and "print" money but it may be too late for the "junk" debt and debt held by foreign investors.