Housing Bubble Bursting?

[Greg Bell]

Does this sound familiar???

For the most part, economists now know that the stock market did not cause the 1929 crash. It was itself a symptom of wildly erratic shifts in the nation's money supply. The Federal Reserve System was the primary culprit, having stimulated a boom with dirt-cheap interest rates and easy money in the early ' 20s. By 1929, the central bank had jacked up rates so high that it choked off the boom and forced a reduction in the money supply by one-third between 1929 and 1933.

 

[Riick]

1 Billion should get them about two square blocks in L.A , What about the rest of the country???

The rest of the country? ....THAT"S On Sale.

More seriously, that group is the smallest -only $1 Billion- discussed in the article.
If private market can come up with the $$$ to fund all those mortgages in 1st place, you can be sure there's enough $$$
floating around to buy up 5-10-15% of all the paper issued since '02 --- at under 50% of face.

There was a ton of money made by Wall Street on Junk Bonds in the late 80's, and more later when people bought them
-- at very heavy discounts in the 90's.

"After the 1990 crash of the junk-bond market, investors bold enough to buy into high-yield corporate funds
earned fat profits as total returns for the sector leaped to 36.83 percent in 1991, 17.66 percent in 1992 and
18.93 percent 1993, according to Morningstar data." http://www.iht.com/articles/1995/04/01/bb.php

BTW.... Talking about Junk Bonds ---
does the following sound somewhat familiar? ---

"Buyers poured $18 billion into the junk bond market from 1986 through 1988. However weaker and weaker bond offerings were being underwritten.

Interest coverage, the ratio of operating earnings to interest payments, is one measure of the riskiness of debt financing.
Before the junk bond era a ratio of 6 to 1 was considered normal.
At the beginning of the junk bond era a ratio in range of 2 to 1 was considered risky.
Near the end the market was buying bonds of firms with interest coverage ratios in the range of 0.75.
This means the firm could not possible meet its debt payments out of earnings. (( See some of the ARMs issued in last several years ))
The ratio of cash flow, which includes depreciation allowances as well as current earnings, to interest payments was in range of 1.25 to 1.
The junk bond offerings began to rely upon interest payments in bonds rather than cash. This is just a disguised way of deferring interest payments.
Ultimately, the junk bond market collapsed and investors realized that often the higher interest rates were not enough considering the higher risk the junk bonds entailed.

Taken FROM: http://www.sjsu.edu/faculty/watkins/kkr.htm

 

[moh malekpour]

Top economist says America could plunge into recession

Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: “American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.”

He said that US futures markets had priced in further declines in house prices in the short term, with contracts on the S&P Shiller index pointing to decreases of up to 14 per cent
Over the next five years, the futures contracts are pointing to losses of around 35 per cent in some areas, such as Florida, California and Las Vegas. There is a good chance that this housing recession will go on for years,” he said.

 

[Lloyd Bonafide]

Persky’s firm, Dalton Investments, is raising as much as $1 billion from wealthy individuals and institutions to buy delinquent mortgages in troubled markets like Phoenix, Las Vegas and southern California. Persky figures he can pick up the distressed paper for 50 cents on the dollar.

Buying distressed mortgages at $.50 on the dollar isn't necessarily a good idea. I have seen some homes and condos recently that are currently listed at half of what they either sold for, or half of their loan amount on a refi from a couple of years ago. Add in a neg. am. loan, and some properties are worth less than half of their previous loan amounts.

 

[Restrain]

In today's paper: A grade ARMs (1% rates, reasonable appraisals, good credit, etc) are going bad at accelerating rates. They were going to stay in the home for just a short time, or their income was going to increase, or they were going to flip the home in 2-3 years. Now, the bills are coming due, the values are declining, and they just can't afford the note.

No longer just the subprimes.

 

[Randolph Kinney]

Oh those naysayers - it can't happen

Chronology Of Things That Can't Happen

• One of the reasons the Fed was created was to manage the economy and prevent further depressions. Guess What? The biggest deflation in history, the great depression, happened 17 years later.
• At one time economists thought that inflation and recession could not happen at the same time. It happened anyway. A new term was coined for it “Stagflation”.
• Deflation supposedly couldn't happen in a fiat regime. Japan proved otherwise.
• If you asked anyone in Japan if housing prices could fall for 18 straight years, they would have said "It can't happen". It did happen.
• For 30 years people have said US housing prices would never again decline on a national scale. They were wrong. It happened.

It is the very nature of the market that it takes the convincing of nearly everyone to believe that something cannot happen, to actually cause it to happen. Consider housing. Everyone became convinced that housing was a one way ticket north, that all housing was local, and housing would not decline nationally.

This mass belief in a faulty housing premise in spite of evidence to the contrary in Japan is what helped form the US housing top. Greater fools everywhere who came to believe that faulty theory eventually rushed in to speculate in housing. That made the top. Even the rating agencies got into the act.

As amazing as it might seem now, Fitch disclosed as recently as March 2007 that their model for rating CDOs assumed low to single digit home price appreciation forever into the future. They even admitted their model would break down if home prices were flat for an extended period of time.

Fitch placed so much faith in their models (as did Moody's and the S&P) that the biggest financial speculation in housing history took place. Greenspan and the Fed cheered the miracle of derivatives most of the way. Such foolishness has already cost Citigroup (C) and Merrill Lynch (MER) their CEOs. It may cost Citigroup its entire company.

Housing speculation is likely to cost both Ambac (ABK) and MBIA (MBI) their companies.

All of the above are casualties of the bursting of a housing bubble, a bubble that until last year people denied even existed. Instead of looking at Japan for what was about to happen, all we heard was "It's Different Here. The US is Not Japan".

Much more to read on the following link: http://globaleconomicanalysis.blogspot.com/

 

[Riick]

^^^
I've been reading Mish for about a year now, he's not a Doom & Gloom guy, just a Realist.
Even John Mauldin ... who always sees a "muddle-through" economy talked about the recession of 2008 a few weeks ago.

 

[moh malekpour]

^^^
I've been reading Mish for about a year now, he's not a Doom & Gloom guy, just a Realist.
Even John Mauldin ... who always sees a "muddle-through" economy talked about the recession of 2008 a few weeks ago.

Both Mish and Muddle are good but watch out for job market coming up next thursday and friday.

 

[murray stroupe]

Re; Property,SAKS sector & Uncle Abe proved don't have to be good @ math

There is a story to this moral: This morning as I was leaving for work the wife wanted me to try on the clothes she gave me for Christmas. All came came from Coscovs. Two pair pants, half price. One insulated parket with hood $65, but about $90 at Tractor supply; two pair of $80 shoes at 45% + 10% off. Then a super nice GPS unit. I asked what that cost and she said regular $350 but early birds paid $175.
In summary: Prices were reduced over 50% on average. Had they not been the wife would have gone else where. She pays generally 20 cents on the dollar for what she buys. So, what does that say about increased retail sales activity and profits?

===================
Sounds like your wife is good with math also;
Uncle Abe proved volume can be important .LOL

SAKS must practice some things that Sears Holdings or JCP[james cash penny] does not do.

I am going to put in a good word for the small businessman like Uncle Abe;
got some brand name gunstock oil from Meyers Pioneer Outdoor Sports.
Perhaps i did not get the math reductions your wife did Austin, she sounds better with math. Cool

However when i used enough of the gun stock oil finish, asked the manager of Pioneer Outdoor Sports, if he would give me $5 for the rest of the used oil ,about /half full, not half empty. He did, so its win win,again.

So even a good customer return can be win /win again.

 

[Greg Bell]

This article states it's just the poor folks that are loosing homes.What an idiot...

Recession risks
Published: January 1 2008 20:21 | Last updated: January 1 2008 20:21

Whatever the inflationary risks lurking in the US economy, recession is the fear that is keeping policymakers up at night. Rightly so. The long-resilient US faces a series of blows that will cut into growth. The residential housing market is dealing with an almost unprecedented nationwide fall in prices. Meanwhile, unstable credit markets, roiled by the subprime crisis, could have a significant impact on the availability, and price, of credit.

How big will the impact be? US growth will certainly slow. But a house price correction in itself should be manageable, unless it turns into a freefall. After all, the pain so far has been concentrated among poorer, subprime borrowers, whose spending is very small in the context of the overall economy.