Housing Bubble Bursting?

[Riick]

There is a discussion going on HERE about walking away from a house and the mortgage debt... increasing frequency.

One poster had the following to say, and I find it very interesting, especially the idea of a lack of moral authority on part of Lenders.
(( empahsis added ))

'Reputional impact (qua credit rating) is important, and probably does still act as a brake - but I think there's been a fundamental shift in popular understanding of credit and risk.
Crucially, people now understand that many financial transactions are basically agreements to take the opposing sides of a bet.
Thus, people don't see banks as institutions imbued with moral authority any more: they seem them as risk-taking businesses that are just taking the other side of a bet on long-term house prices and on the ability of the borrower to repay.
When you look at a mortgage that way, walking away from negative equity doesn't seem like an unethical thing to do at all - it's the rational economic course of action.
It's not as if the banks would show much flexibility if the borrower had difficulty repaying (given that securitising the debt means that the originators' hands are tied), so it's not as if the bank is operating to a superior moral standard either."
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[Riick]

They were blinded by ideology

Here's another tidbit that puts an ideological spin on the whole situation

http://economistsview.typepad.com/economistsview/2007/12/paul-krugman-bl.html

(( used that link since the WSJ article is liable to diappear in a few weeks ))

 

[Randolph Kinney]

Crucially, people now understand that many financial transactions are basically agreements to take the opposing sides of a bet.

Thus, people don't see banks as institutions imbued with moral authority any more: they seem them as risk-taking businesses that are just taking the other side of a bet on long-term house prices and on the ability of the borrower to repay.

Riick,

That is a stunning discovery of what is really occurring now. It is not like when banks represented individual depositors with their life-savings loaned out to them. They know that the lender or mortgage broker who originated the loan has no skin in the game. It is a faceless foreigner that took a bet and lost. You can't trust the lender, you can't trust the borrower and investors are beginning to think you can't trust the U.S. government after announcing an interest rate freeze.

This crisis may yet become worse than any one can imagine.

 

[MARK JOLLIFF]

I am still commited to my short position. i bought more today on the up market. the market today is up big on unexpected rise in consumer spending. I just can't believe it. everyone I know is cutting back big. I just got back from Sun Valley Mall which is a couple blocks from my house. They have a HUGE parking lot. last year at this time you had to drive around to look for parking. Fights broke out over parking spaces. The lot was HALF empty. Are sales strong in other states and just weak in the hard hit states like Cali, FL etc? I just don't believe those numbers. I'm am a practical person who does not usually believe in conspiracies but I really question these consumer spending numbers. So tell me what is going on?

 

[Randolph Kinney]

I am still commited to my short position. i bought more today on the up market. the market today is up big on unexpected rise in consumer spending. I just can't believe it. everyone I know is cutting back big. I just got back from Sun Valley Mall which is a couple blocks from my house. They have a HUGE parking lot. last year at this time you had to drive around to look for parking. Fights broke out over parking spaces. The lot was HALF empty. Are sales strong in other states and just weak in the hard hit states like Cali, FL etc? I just don't believe those numbers. I'm am a practical person who does not usually believe in conspiracies but I really question these consumer spending numbers. So tell me what is going on?

Mark,

The consumer spending numbers were for November. That's looking into the rear view mirror.

Circuit City reported their numbers and it looks like bankruptcy. Best Buy reported great numbers.

It won't be until after January 1, 2008 that retail sales for December 2007 can be assessed. You might see some down days next week however, that week is very slow trading and usually up.

I expect a mixed market going forward until it becomes clear that retail sales are declining significantly.

 

[Randolph Kinney]

Insurance? What insurance? Credit swaps unravel

Big banks seek ways to shore up the bond insurer ACA Capital

Officials from Merrill Lynch, Bear Stearns and other major banks are in talks to bail out a struggling bond insurance company that has guaranteed $26 billion in mortgage securities, according to two people briefed on the situation, because the insurer's woes could force the banks to take on billions in losses they had insured against.

The insurer, ACA Capital Holdings, which lost $1 billion in the most recent quarter, has been warned by Standard & Poor's that its financial guarantor subsidiary may soon lose its crucial A rating. If it did, the major banks that insured their securities with ACA Financial Guaranty would have to take back billions in losses from the insurer under the terms of the credit protection they bought from the company.

The troubles at ACA could also serve as the first real test for credit default swaps, the tradable insurance contracts used by investors to protect, or hedge, against default on bonds. In June, the value of bonds underlying credit default swaps rose to $42.6 trillion, up from just $6.4 trillion at the end of 2004, according to the Bank for International Settlements.

"The hedge is only as good as the counterparty, or the other party, to the hedge," said Joseph Mason, a finance professor at Drexel University and the Wharton School of the University of Pennsylvania. "This is part and parcel of the financial innovation that has grown very rapidly in recent years."

 

[Greg Bell]

All this news makes the stock market rally.So many pre 1929 investors ready to throw money in the market while the financials are crashing , brilliant...

 

[Randolph Kinney]

Commercial property crisis = freeze withdrawals or forced liquidation

No exit for Friends property fund

Investors must now hold off for six months before being able to take cash. The BBC's business editor Robert Peston said there has been a "collapse of confidence in commercial property". "The flight from property is a pronounced trend," he explained.

"Friends is the first fund to prevent retail investors cashing in, but other fund managers, including Schroders and UBS, have put a block on withdrawals by institutional clients," he added.

It has been reported that the fund's cash buffer of 14% in July had been reduced to 5% by departing customers.

"Unless investors' demands for redemptions are stemmed, there would be forced sales of substantial properties," Mr Peston continued. "And such forced sales would precipitate a vicious, self-reinforcing downward spiral in property prices."

"For banks and other financial institutions, the next wave of losses after sub-prime is likely to come from direct and indirect lending to commercial property," Mr Peston said.

Looks like the UK is ahead of the US putting a run on equity funds investing in real estate. I suppose what is coming next in the US is a loss of confidence in the commercial real estate market.

Mark Jolliff - just wait for this shoe to drop in the US market. Market up, market down. Banks, insurers, brokerage houses and anything touched by real estate is going down.

Sharpen your focus on the down side to include as much as you can in the "touched by real estate" ETF.

 

[Cigar]

Christopher Thornberg, the superstar economist who has been right on since the beginning of the housing bubble, says we have another 20 to 25% drop in Bay Area values:

Economist Christopher Thornberg said he wasn't convinced the credit crisis was gone or prices have bottomed out.
``Unfortunately, that's not the case. Prices still have probably 20 (percent) to 25 percent to fall,'' he said.
Thornberg, principal of Beacon Economics, based in San Rafael and Los Angeles, said people aren't buying because they're afraid to buy when housing prices are headed downward.*

I've seen about a 30% drop in properties so far that I know about, so it looks like the total drop will be a little over 50% from peak values. I don't see how appraisers can continue to appraise properties based upon comparables with these kinds of forecasts all over the newspapers, and on television and radio. Bubble-Hhgh comparable sales are either not reflective of what really went on in that sale, or were sales made to really stupid people and should be excluded, with the press out there nobody should be that stupid anymore, inflated appraisals notwithstanding.


* http://www.contracostatimes.com/search/ci_7777687?IADID=Search-www.contracostatimes.com-www.contracostatimes.com

 

[Riick]

"Figures don't lie, but Liars figure"

Out of pure curiosity I ran MLS Market SOLD Stats for my entire County.
Despite the fact that I know some sub-markets have been hit (minimally)
in the 10%-15% range, the Averages show little change here;
even Days on Mkt still currently averaging well under 90 days,
and volume is fairly stable with MLS calculating 5 mos of inventory.

(( Periods: 6/06-11/06 -vs.- 6/07-11/07 ))

~~Price Range~~~Avg Change ~% Change
~~~$100-250k~~~+$3,804~~~-2.04%
~~~$251-400k~~~-$1,381~~~-.44%
~~~$401-550k~~~-$4,916~~~-1.08%
~~~$551-750k~~+$11,374~~~+1.78%

On the other hand, we never exactly saw bubble appreciation here,
my take is that prices rose 4 yrs from late 2002 to late 2006 by about 50% -- or about 10.7%/yr compounded.
~~~
The Stats look good, the reality is less good - ask any local Broker.
~~~
NAR:~~~"All Real Estate is Local"
ME:~~~"Figures don't lie, but Liars figure"
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