Housing Bubble Bursting?

[Randolph Kinney]

Leaving Las Vegas following the recent A.I. convention, the bellman who was wheeling our luggage to the valet stand asked whether, as appraisers, we felt that the properies (multiple) that he had purchased last year were a continued good investment...

Sure, real estate is always a good investment if you wait long enough. Of course, if you live in Hesperia, CA you may know that is not exactly true. I believe they are still waiting.:new_all_coholic:

 

[Randolph Kinney]

Off balance sheet financing at the big banks - what does it mean?

I have been reading about SIV (structured investment vehicles) and conduit financing. These are the underpinning in the commercial paper market. It is also where major banks have an unknown exposure in that they loan, guarantee, or buy asset backed securities with short term financing arrangements that go unreported on their balance sheets. It is called, "Enron Accounting." The problem occurs when something goes wrong with some of the assets and the liability is transferred to the balance sheet.

The FED has reacted to some of the big banks playing this game that could not meet reserve requirements by lowering the discount rate followed by lowering the FED Funds rate. What went unreported is that 4 major banks were granted special relief in the form of reserve requirements. The FED waived the 10% affiliated capital limits. Why? One can assume that their affiliated entities, which are the "trading" or "securities" arms of these organizations, were on the verge of collapse when the market for asset backed and derivative type securities evaporated.

The problem is how much of the commercial paper world has mortgages and derivatives in them? No one really knows. No one wants to have anything to do with that crap. There is simply no way to package up mortgages and related products like there use to be. The result? Housing financing has collapsed. The financing for mortgages has become mostly conforming loans backed with a government guarantee of sorts.

So what's next? Economically, we've still got a wreck. $6.5 trillion (estimated) was withdrawn from home equity appreciation in the last four years via HELOCs, cash-out refinances and other such schemes. This has contributed about $1.5 trillion a year to consumer spending. Conservatively, at least half of that has now disappeared. We have a $13 trillion economy, roughly, in terms of GDP. If we remove $750 billion from that, about 5.8% of it disappears. The real GDP growth was in the 4% range during the "boom" years and is now claimed to be in the 2-3% range.

Remove 5.8% of spending from GDP and we have a negative GDP growth rate. We see that negativity materialize in retail sales that are beginning to fall and falling home values that are accelerating their declines from the knock-on effect.

As a rising tide lifts all boats analogy with rising GDP, a receding tide exposes the rocks, the garbage and boats that have sunk due to the hazards not visible at high tide. It hasn't really become ugly, yet. The economic bubble is going to really deflate and we will see that show up in Q1 or Q2 of 2008 GDP statistics.

 

[Randolph Kinney]

Be happy, don't worry - Jumbo market set to take off!

White House sees improvements in jumbo loan market

But housing market problems haven't hit bottom, Bush adviser says.

"We expect [the jumbo loan market] to take off in the near future," Lazear said.

 

[Randolph Kinney]

What good is the FED rate cut for housing?

Fed's Rate Reduction May Give Little Relief to U.S. Homeowners


"Mortgage rates won't stimulate demand," said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. "The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages."

 

[hastalavista]

Fed's Rate Reduction May Give Little Relief to U.S. Homeowners


"Mortgage rates won't stimulate demand," said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. "The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages."

That's like saying my sore hand caused my broken wrist.

The high prices were caused by cheap money. "Cheap" is not only reflected in interest rates, but in the ability to get a loan; a high interest rate with effectively no qualifying tests is "cheap" because anyone can get a loan.
From 2004-2006+, we had low interest rates, a below-market starting rate, and below-prudent qualifying standards; money doesn't get any "cheaper" than that!
If you start pumping out money, to buy a loaf of bread you'll have to go to the market with a wheelbarrow full of money.
If you start providing cheap (almost free- when in history can a buyer purchase a multi-$100k house with no money down?) money, what is the effect going to be on prices?

If Wells Fargo is relying on this guy's analysis, it's time to go short on the stagecoach!

 

[moh malekpour]

That's like saying my sore hand caused my broken wrist.

The high prices were caused by cheap money. "Cheap" is not only reflected in interest rates, but in the ability to get a loan; a high interest rate with effectively no qualifying tests is "cheap" because anyone can get a loan.
From 2004-2006+, we had low interest rates, a below-market starting rate, and below-prudent qualifying standards; money doesn't get any "cheaper" than that!
If you start pumping out money, to buy a loaf of bread you'll have to go to the market with a wheelbarrow full of money.
If you start providing cheap (almost free- when in history can a buyer purchase a multi-$100k house with no money down?) money, what is the effect going to be on prices?

If Wells Fargo is relying on this guy's analysis, it's time to go short on the stagecoach!

Denis, I agree with the cheap money causing the housing bubble but it was not only the cheap money. It was the availability and out of control of that cheap money that was the cause of over imflated housing. The cheap money was availble to corporations too but they didn't abuse it. They invested it and hired more peopl and that is why the Fed is throwing cheap money back into the market again hoping to prevent recession. Problem is that it may go back to abusive lenders, speculators and home buyers again.

 

[murray stroupe]

Wonder if those SIV are in addition to some huge positions in unregulated derivatives

Fed's Rate Reduction May Give Little Relief to U.S. Homeowners


"Mortgage rates won't stimulate demand," said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis. "The Fed may be a little impotent here because what caused this housing crash was overpriced housing, not mortgages."

=============
Actually have a pretty good opinion of Wells Fargo/doing business with them;
but thats a prediction [crash prediction- about the future & may or may not be true]Perhaps he is speaking for WF only but sounds more broad brushed

No way have a i seen a crash unless you used insane leverage;
& that would simply be insane leverage,not a crash unless you were in Pams market.50-70% land drop could be a crash.

 

[Randolph Kinney]

E*Trade and others under reserving loan losses - banks in mucho pain

Guess Who’s Feeling the Mortgage Pain

In the most recent quarter, which ended in June, E*Trade held $47 billion in mortgage securities, home equity loans and loans receivable, or three-quarters of its total assets. So the charges and loan loss provisions recently taken by the company total less than 1 percent of those loans.

Not enough, Mr. Egan argued. “They are still marking to model, not to market,” he said.

“A 4 percent hit would not be unreasonable at E*Trade,” Mr. Egan said, “which would probably cost them five years or more of normalized earnings.”

To be sure, E*Trade is not alone in valuing its holdings via a computer model rather than the fire-sale prices that characterize the current market.

 

[Randolph Kinney]

How bad is it going to get?

Plenty of troubling signs on U.S. horizon

Yale economist and housing expert Robert Shiller warned that "the collapse of home prices might turn out to be the most severe since the Great Depression." Shiller was the economist who predicted the bursting of the dot-com bubble earlier this decade.

Shiller has warned that "we could see much more than the 15 per cent real drop in national home price indices that we saw the last time." That was between 1989 and 1996.

 

[Randolph Kinney]

The smell of blood in the water

Second Curve reports 5 pct IndyMac Bancorp stake

In a U.S. Securities and Exchange Commission filing, New York-based Second Curve said that on Friday it controlled 3.69 million IndyMac shares valued at about $86.3 million. Second Curve said it was not investing with an intent to change or influence IndyMac's business.

Second Curve's portfolio has included, among other companies, Accredited Home Lenders Holding Co, a subprime lender that stopped most lending before last week accepting a reduced buyout offer from private equity firm Lone Star Funds. Its shares have fallen about two-thirds in the last year.

IndyMac shares fell $1.17, or 5 percent, to $22.23 in afternoon trading on the New York Stock Exchange. Through Friday, they had fallen 48 percent this year. (Reporting by Jonathan Stempel)