Our conversation yesterday — and the weak Existing Home Sales data — lead us to an inevitable question: Is a Housing Crisis Approaching?

For some insight into this issue, let’s pull some data from a fascinating discussion in Barron’s this past weekend. Lon Witter puts forth a different and intriguing notion. Witter observes that we don’t have a Housing bubble, what the U.S. has is a lending bubble. His evidence is how loose the lending standards have become, and why not? The banks ultimately just flip the loans to the Fannie Mae (Federal National Mortgage Association, on the NYSE: FNM), where foreclosures and defaults become the headache of buyers looking for greater risk and return. 

Witter claims his careful look at the reasons for the rise in housing give a good
indication of the impact housing may have on the stock market. He observes the causes (in chronological order) of the rise and ultimate fall of Housing:  "The collapse of the Internet bubble, which chased hot
money out of the stock market; rock-bottom interest rates; 50 years of economic
history that suggested housing never goes down, and creative financing."

More specifically, Witter’s expectations are colored by rather disturbing data: 

32.6% of new mortgages and
home-equity loans in 2005 were interest only, up from 0.6% in 2000;
 
43% of
first-time home buyers in 2005 put no money down;
 
15.2% of 2005
buyers owe at least 10% more than their home is worth (negative equity);
 
10% of all home
owners with mortgages have no equity in their homes (zero equity);
 
$2.7 trillion
dollars in loans will adjust to higher rates in 2006 and 2007. 

Traditionally, Mortgages have been low risk lending, as the loan is
securitized by the underlying property. When banks were lending less
than the value of the property (LTV), to people with good credit, who also
were invested in the property (substantial down payments) you had the makings of a
very good business: low risk, moderate, predictable returns, minimal defaults.

That model seems to have been forgotten.  THIS IS REMINSCENT OF THE S&L
CRISIS — where lenders did not have any repercussions for their bad loans!

As bad as the above numbers look, the thinking behind them is worse:

"Lenders have encouraged people to use the appreciation in value of
their houses as collateral for an unaffordable loan, an idea similar to the junk
bonds being pushed in the late 1980s. The concept was to use the company you
were taking over as collateral for the loan you needed to take over the company
in the first place. The implosion of that idea caused the 1989 mini-crash.

Now the house is the bank’s collateral for the questionable
loan. But what happens if the value of the house starts to drop?"

A good example of how this is unfolding at lending institutions comes from Washington Mutual: You may recall Washington Mutual laid off 2500 employees in their mortgage broker department earlier this year. As LTV went above 100%, and then as property values decayed from recent peaks, the collateralized aspect of these mortgages suddenly is at risk.

Here’s how this has played out over the past few years via WaMu’s ARM loans (data via Washington Mutual’s annual report):

- 2003 year end, 1% of WaMu’s option ARMS were in negative amortization (payments
were not covering interest charges, so the shortfall was added to principal).

- 2004, the percentage jumped to 21%.

- 2005, the
percentage jumped again to 47%. By value of the loans, the percentage was
55%.

So each month, the borrowers’ debt increases; Note there is no strict disclosure requirement for negative
amortization — Banks do not have an affirmative obligation to disclose this to mortgagees.

Thus, a large part of our housing system have become credit cards.
And according to Witter, "WaMu’s situation is the norm, not the exception."

Even worse, Witter notes that negative
amortization is booked by the banks as earnings
. "In Q1 2005, WaMu booked $25 million of
negative amortization as earnings; in the same period for 2006 the number was
$203 million."

This situation is unsustainable. Witter’s housing and market forecast is rather bearish:

"Negative amortization and other short-term loans on long-term
assets don’t work because eventually too many borrowers are unable to pay the
loans down — or unwilling to keep paying for an asset that has declined in
value relative to their outstanding balance. Even a relatively brief period of
rising mortgage payments, rising debt and falling home values will collapse the
system. And when the housing-finance system goes, the rest of the economy will
go with it.

By the release of the August housing numbers, it should become
clear that the housing market is beginning a significant decline. When this
realization hits home, investors will finally have to confront the fact that
they are gambling on people who took out no-money-down, interest-only,
adjustable-rate mortgages at the top of the market and the financial
institutions that made those loans. The stock market should then begin a 25%-30%
decline. If the market ignores the warning signs until fall, the decline could
occur in a single week."

As we saw yesterday, the housing data has begin that downside surprise. We have yet to see if July’s downard acceleration was a one off or the start of something much more ominous.

Anecdotally, a friend who is a Real Estate attorney in Virginia emailed the following after yesterday’s discussion:

‘We’re seeing substantial increases in foreclosure volume, with more loans going to sale and being bought back by noteholders. Most are loans which have originated since 1/1/05.  many are conventional ARM loans. Foreclosure investors are now sitting on the sidelines.

Huge increases in available real estate up and down the i-95 corridor  with stuff sitting for extended periods, even in resort areas."

Thus, our Housing driven Economy has now moved into the next phase: the long glide downwards in prices, sales volume, and foreclosures.

And, we have new Home Sales today at 10am

More on this later . . .

Source:
The No-Money-Down Disaster
LON WITTER
Barrons, MONDAY, AUGUST 21, 2006   
http://online.barrons.com/article/SB115594208047539900.html

Category: Consumer Spending, Economy, Federal Reserve, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

79 Responses to “Is a Housing Crisis Approaching?”

  1. Jim says:

    The crisis is already here and Sarasota County and it has just begun. Panic will set in shortly.

    http://heraldtribune.com/apps/pbcs.dll/article?AID=/20060824/BUSINESS/608240352

  2. Blissex says:

    «Thus, our Housing driven Economy has now moved into the next phase: the long glide downwards in prices, sales volume, and foreclosures.»

    Or the long glide up in ”inflation” because of the political necessity to bail out real estate investors with low interest rates and rising prices. Does the Greenspan Put apply to housing too? Are real estate investors less economically or politically important than stock investors?

  3. tman says:

    Wouldn’t an attempt at a housing put
    cause long-term rates to skyrocket??

  4. financialrx says:

    For those of us that have lived thru a real estate “crash” (Houston/Dallas/other oil towns in the late ’80s), the current episode has been very disturbing.

    There is a subtle problem mentioned in Barry’s missive that is simply not understood by the majority of homeowners and investors (nor lenders??):

    people that have bought those homes with very little down, let alone zero down (and don’t forget, there were some 105% loans that even paid for closing costs), have nothing to lose. they bought a cheapie call. they’re renting.

    in the late 80′s, when oil went to $12/bbl, the oil towns saw their leveraged real estate bubbles pop in unison. there was a large group of homeowners in those oil towns that learned about “non-judicial foreclosures” by word of mouth.

    in extreme cases of people who were upside down, they began to feel each month’s mortgage payment was the equivalent of flushing money down the toilet. when they stopped making payments they found out you can live “rent free” for up to a year before the overwhelmed banks can apparently get to your file and kick you out.

    During the past few years I’ve heard the mantra re: homes are different than stocks because you *have* to live somewhere. but that phrase is long forgotten when you’re upside down to the tune of 30-40% of your loan balance. home sweet home becomes a daily reminder of a horribly sick sinking feeling. puts stress on a marriage. you feel like the sucker that you are for buying at the top.

    thus, the natural human reaction– the rationale choice- is to throw the keys at the bank and move on. you think inventories are high now?…

  5. Wendell says:

    First, to comment on your last Linkfest: GO SEE Little Miss Sunshine! You will love it based on your taste in movies/music, etc. This should be your 1st priority.

    Second, this real estate commentary echoes comments on the Minyanville site by Jeff Saut of Raymond James.

  6. T says:

    I’m going to post a brief excerpt from a good page on mortages and the bubble here: http://patrick.net/housing/crash.html

    (I’m not connected with the author, I just found it when researching the non-recourse loan issue via google.)

    “If you have a single loan with just the house as collateral, it may be a “non-recourse” loan, meaning you could indeed walk and not lose anything other than your house and any equity in it (along with your credit record). But if you refinance or take a “home equity loan”, the new loan is probably a recourse loan, and the bank can get very aggressive, not to mention what the IRS can do. A reader who lived through the 1989 housing crash in LA pointed out the following nasty situation that can happen:

    • Let’s say you buy a house for $600,000, with a $500,000 mortgage.
    • Then the house drops in value to $400,000, you lose your job, or otherwise must move.
    • If you can’t make your payments, the bank forecloses on you and nets $350,000 on the sale of your house.
    • The bank’s $150,000 loss on the mortgage is “forgiveness of debt” in the eyes of the IRS, and effectively becomes $150,000 of reportable income you must pay tax on.

    It is true that buyers who put zero down and have nothing invested in the house are much more likely to walk away. The large number of new uninvested buyers increases the risk of a horrifying crash in prices rather than a “soft landing”. “

  7. Craig H says:

    Good morning. The recession has started.

    Have a nice day! ;-)

  8. Mike M says:

    How can this not end badly? The market seems to shrug this off. Shouldn’t it be obvious that most economic growth in the last few years has been through leveraging homes (which is incredibly stupid) and that this is not sustainable? Seems obvious to me anyway.

  9. fred hooper says:

    Some food for thought:
    1. At least 30-50% of ALL loans applications in the last five years have some sort of not-so-little white lies or involve outright fraud. I’ll bet ya.
    2. The current inventory of new and used homes for sale provided by NAR and local MLS’s, as well has home builders, does not include a huge number of vacant properties with no sign, FSBO’s and flips in process or remodels.
    3. Returning the keys and walking? See tax laws regarding mortgage relief after foreclosure and subsequent REO sales by lenders. Your 1099 will be in the mail. That’s a fact jack.
    4. In areas such as Phoenix, prices increased by 150% since 2001. Prices will drop by 60-80% from their 2005 peaks in the next 4 years. My expert opinion!
    5. Massive layoffs in the real estate, mortgage and construction industry are already occuring, and many of these lost jobs are not reflected in official employment statistics, e.g. real estate agents and illegals.

  10. Wendell,

    1) I saw Little Miss Sunshine — and Miami VIce — this weekend. (Liked ‘em both);

    2) Jeff and I have had several long conversations about RE — most recently, at Minyans in the Mountains.

    While he is very cautious, I am more bearish then he is on the implications of this long term.

  11. wnsrfr says:

    I can’t count how many newsletter spam emails I’ve received predicting the meltdown of R.E.

    Almost without variance, each has pushed gold as the place to be once it happens.

    Anyone have an opinion on the inflationary/deflationary prospects going forward?

    If you really believe this is going to play-out as a disaster, is it equal parts CASH and GLD, or WHAT???

  12. fred hooper says:

    Financialrx. You reminded me of something I’ve been pondering regarding the “you have to live somewhere” argument used by housing bulls. A large percentage of single women were buyers of housing over the last five years. They will be hard hit in this recession. In addition, many people in their 20′s and 30′s are still living with their parents. I’m guessing here, but I’d bet the occupants per bedroom ratio (OBR) is currently at a historic low. More youngsters will move back home and singles will start shacking-up for economic reasons. Finally, many boomers are taking-in their elderly family members. I’m single, and depending on how things play out, will do the shack-up thing and/or move in and take care of my elderly mom. If both happen, add 2 townhouses to the vacant category.

    Yet again, Craig H wins first prize today. The recession has started.

  13. ch says:

    In regards to the I-95 corridor comment from Barry’s friend: this isn’t happening in Connecticut (Fairfield County at least). We’re seeing softening prices, but the bottom line is that there is not that much room to develop here, plus some of these towns have fairly snotty zoning limits for building. Money keeps flowing from NYC, and the hedgies in Greenwich and Stamford, which will prop up the markets. The impending real estate bust/soft landing will be more of a localized issue.

  14. me says:

    “We have yet to see if July’s downard acceleration was a one off or the start of something much more ominous.”

    Uh, something more ominous!

  15. edhopper says:

    “Witter observes that we don’t have a Housing bubble, what the U.S. has is a lending bubble”

    What nonsense. Almost no one buys a house for cash. Houses are bought with loans. A lending crisis IS a housing crisis.
    We are already in a housing crisis. It is unfolding as a classic bubble collapse. Prof Shiller is proven right, again.

  16. me says:

    And we can add this fro Daily Reckoning:

    “Anyway, the thing I wanted to highlight, as proof that the U.S. economy is going south quickly, was this observation by Dr. Richebacher, “Over the three months April-June, the BLS reported the creation of 329,000 non-farm jobs. But this has come about with a stunning contribution of 657,000 from the net birth/death model, accounting thus for about 200% of the total job creation. Without this adjustment, reported employment would have slumped. Please note that these net birth/death jobs would, if annualized, add up to more than 2.6 million new jobs.”"121

  17. financialrx says:

    Don’t want to wander too far off the reservation here, but two comments posted above reference nasty IRS issues due to forgiveness of debt.

    It is true that forgiveness of debt = income. It is also true that in some cases that person could receive a 1099 (or if it were rental properties held in a partnership that “phantom income” would show up on the K1).

    But there is an arcane place in the tax code that provides relief: if you have income from forgiveness of debt you may be able to exclude it, either whole or in part, if you are technically insolvent.

    think of it in the context of someone that files bankruptcy. you can’t squeeze blood out that turnip, since by definition a bankrupt person does not have the means to pay a tax if they can’t even pay their bills. thus, most walk away with a clean slate.

    like it or not that is the purpose of tax and bankruptcy policy as it stands (to provide a clean fresh start so that person can recover and once again become a productive taxpaying citizen).

    I’ve intentionally skipped the usual caveats and exceptions our tax and bankruptcy laws are famous for, thus, individual results may vary. and I’m not your tax attorney, nor do I play one on TV (although I did stay at a Holiday Inn last night).

  18. Bob_in_MA says:

    Witter observes that we don’t have a Housing bubble, what the U.S. has is a lending bubble. His evidence is how loose the lending standards have become, and why not?

    Barry,

    I think this is right on, to focus on the lending. There are just way to many bits of negative data that individually get dismissed, but inevitably add up to a real problem.

    Since 2001 subprimes have gone from less than 10% of the market to +25% and option mortgages went from next to nothing to +25%, and up to 75% of those people are paying the minimum, negative amortizing rate.

    Here’s something I’ve never seen really looked at: Are people being approved based on their ability to pay teaser and/or neg amortization rates? I have seen allusions to this that lead me to believe they are.

    There is a lot of room bull$hit in the way mortgages are handled now. A study looking at no-doc mortgages found that 50% of applicants exaggerated their income by at least 60%.

    Mortgage brokers and assessors are wholly disconnected from any risks and rewarded for volume over prudence. The lenders are insulated from risk by securitizing their portfolios.

    The people holding the risk–i.e., non-agency, mortgage backed securities bonds–are basing the pricing on data that is, at best, highly suspect.

    I think these bonds are going to head down the tubes and I try to avoid any investment that may have a connection to these (the whole financial sector) and have Jan 2008 puts on CFC, FED and LEND. About half of FED’s profits are attributable to the negative amortizations created from people making the minimum payment on their option ARMs. Their profits are holding up merely because their customers can’t afford the mortgages they gave them! ;-)

  19. KirkH says:

    The one thing that really bothers me is that at the peak, July 2005, nobody was saying this would end. Even Greenspan wouldn’t admit it. But when you looked at the fundamentals 4 standard deviations out of whack it was blindingly obvious this was coming. I don’t trust the “economists” at the NAR or the media that quotes them anymore.

    The title of David Lereah’s (head NAR ‘economist’) book is
    “Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade – And How to Profit From Them”

    And the papers are still asking this guy for his forecast!!

  20. Thom H says:

    Won’t the new bankruptcy laws have an effect here? Sure, before you could walk away, and the repercussions were minimal. What about now? won’t these folks have to pay something back forever, on their long gone dreamhouse? won’t that encourage them to do anything to say put?

  21. edhopper says:

    How do you “stay put” when the ARM on your dreamhouse readjust and your monthly mortgage triples?

  22. albiegf13 says:

    economist.com posted a story on this type of a scenario about a year ago… It was a basic story of the impact that a housing slow down would have on the economy in terms of the consumer…. I know that I sound like a scrached record. If anyone has any Idea of what anyone can do to prevent this impending disaster, I would like to hear about it. It really looks, sounds, smells and feels bad.

  23. Brian says:

    Time to go long cardboard boxes, cat food, and STZ, maker of the finest bum wines.

  24. crack says:

    At least the note here needs to be bolded, if not the whole thing. How many people have neg-ams and don’t know?

    Note there is no strict disclosure requirement for negative amortization — Banks do not have an affirmative obligation to disclose this to mortgagees.

  25. Predicted Slowdown in Housing Arrives

    The housing boom has finally come to a halt as the interest rates rise and the number of prospective buyers dwindle and they refuse to pay the listed price. In the latest and strongest indication that the home buying and…

  26. KirkH says:

    Careful Brian. You might want to short Fancy Feast.

  27. DenverKen says:

    Lax lending standards combined with ‘downpayment assistance’ and fraud has been the source of many home sales in Colorado. Now the foreclosures are piling up. Big trouble ahead.

    Today’s Denver post has a revealing article on the problem.

    http://www.denverpost.com/business/ci_4228048

  28. Rusty says:

    And here’s an article about how the exotic loans are starting to put the squeeze on homeowners:

    http://www.realestatejournal.com/buysell/mortgages/20060811-simon.html

  29. Housing Crisis?

    Never mind the air beginning to come out of the housing bubble – are we headed for a housing crisis? Barry Ritholtz tackles that question at The Big Picture today, with help from a Barrons article by Lon Witter:
    Witter claims his …

  30. LA Pete says:

    Fascinating stuff, but what really/selfishly matters to me (since, like I imagine most readers and posters here, I have plenty of equity in my house and will still do so even if prices here in SoCal come down by 25%) is where interest rates are going to be in mid-2008 when my 5:1 mortgage reprices. Do the housing crash and resulting recession lead to much lower rates, or does a financial system collapse and resulting dollar crisis force the Fed to keep rates high?

  31. Alaskan Pete says:

    The ability to “walk away” in large part depends on the state laws. My understanding is that many of them allow the lender to seek the difference between outstanding loan value and liquidation.

    It is correct to call it a “lending bubble” or more accurately a “credit bubble” (see: Noland, Doug and his weekly Credit Bubble Bulletin). While the housing/mortgage securitization scheme is the most visible aspect, it is certainly not the only area where credit growth has exploded.

    BTW, how common is it for you folks to get “call ins” on a short position. (not margin calls, but “you’re gonna have to cover by noon because we don’t have the shares to lend anymore”). In five years with this particular broker, it’s the first time they’ve done it. It’s also frustrating to have stat arb pairs ideas and not be able to execute them due to a lack of shares available to short in a particular instrument.

    Yeah, I know “just buy the puts”, but I don’t enjoy adding the extra layer of analysis of delta/gamma etc.

  32. crack says:

    Penn Square Bank and participations anyone?

  33. K-Dawg says:

    Back in the 80′s the S&L’s were deregulated that left them to skim the till. Unsuspecting Ma & Pa Kettle thought their life savings were in conservative areas. When the S&L’s blew up, some of these senior citizens savings went along with it, at least those that weren’t FDIC insured. Being good voters that they are announced a call to arms and reformed the S&L’s costing the country billions in reparations.

    So here we are today with a somewhat similar situation. But who gets burned this time ? Foreign investment banks ? Japan, China, India, & some mid-east countries. If we renege on our paper I wonder what these guys will do…..

    Get ready for the ugly…….

  34. The lending bubble

    I’ve been concerned about the U.S. housing bubble for a couple of years now. The Big Picture blog has a post that explains the U.S. housing situation quite thoroughly yet in a way that an economic layman like me can…

  35. zeropointzero says:

    Along with the “refinance at 1.25%” junk mail I get daily are the continuing avalanche of “no payments until May 2007″ (or whenever) credit card solicitations. I’ll bet a lot of folks who refinanced in the last couple years paid off 5-10K credit card balances (as they well should have) as part of the equation. But, as they get stretched, they’ll tap the plastic again, as well.

    It’ll just be another brick to a lot of people’s loads – along with higher energy costs (home and auto), and insurance. Great stuff to all have hitting as the economy slows down.

    “Perfect storm” is such a cliche, I know – but, man, does it ever fit.

  36. Robert Cote says:

    Someone going by “ca” wrote:
    …isn’t happening in Connecticut (Fairfield County at least). …not that much room to develop here, plus some of these towns have fairly snotty zoning limits for building. Money keeps flowing from NYC, and the hedgies in Greenwich and Stamford, which will prop up the markets.

    Let’s just put an end to this nonsense right now. I declare a moratorium on “it’s different here” and “running out of land” and “strict growth controls” and “continuing influx of money.” So many disproven cliches at first I thought the post was sarcasm.

    As to WaMu; not only are the loan balance increases on NegAm mortgages booked as income introductory “teaser” rate payments are booked as if being amortized at the full rate.

    Last I checked lax lending standards were nationwide. What may prove to be the real shocker is the distinct possibility that all the flyover country only held its real estate value because of the credit bubble and the natural deflationary curve was merely delayed. All those midwestern mortgages may be in as much trouble as the coastal bubble zones.

  37. JoshK says:

    But I spoke w/a RE broker and he assured me that housing only goes up.

    Seriously, I think the only question is which of the two scenarios come to pass:

    1. Real and nominal housing px declines with economic stresses following readjustment.

    2. The fed quickly “discovers” that productivity is so incredibly high that we are not seeing inflation (hedonic adjustments), and pumps out enough money to inflate people out of this debt.

    Or what combination of the two?

  38. The J Man says:

    I think after this week “hope” has officially become part of the housing market. Inventories are sky high, sales are down dramatically but people still “hope” that someone will buy at or around the asking price. “Hope” never ends well when it comes to markets.

  39. doh! says:

    Amen. Hope is a bad four-letter word for traders and home sellers alike.

  40. sandiegoinvestor says:

    regarding the comment:

    “3. Returning the keys and walking? See tax laws regarding mortgage relief after foreclosure and subsequent REO sales by lenders. Your 1099 will be in the mail. That’s a fact jack.”

    If it’s an investment property, I think you can claim it as a LOSS, and therefore offset a 1099 you may get. You need to check your facts jack! So rent out the place for 6 months and THEN WALK or try for a shortsale.

  41. Econbrowser says:

    New home sales continue to fall

    No question about it, the housing downturn is here now, and it’s big.

  42. fred hooper says:

    SD, I had owner occupied in mind. I suppose an investor may be able to take a tax loss, but shouldn’t ignore the implications of “relief on excess of mortgage over basis”, active .vs passive ownership (no loss offset against ordinary income) and recourse vs. non-recourse debt. You weren’t aware of those little details? Probably not, as you sound like the type that would rent a property to a tenant on a year lease and then walk with the deposit AND rents after 6 months.

  43. Bob_in_MA says:

    Alaskan Pete,

    I decided to go the put route because of all the hassles and risks in shorting.

    I decided the way to go is to buy Leaps expiring more than a year out, and then I buy a put with a high strike price, where the ask on the pout plus the share price is within a couple percent of the strike price. For instance, I just bought CFC Jan 2008 45 puts, for $12, the stock is at $33. For every 1% the share price falls, I make 2.75%. And if I hold it 12 months, it’s a long-term gain.

    I made about 90% on my KBH puts I bought last June and sold just over a year later (stupidly.)

    I only do short-term, near-the-money stuff in retirement accounts because for some unknown reason Massachusetts taxes short-term gains an extra 7% more than LT gains and income. I have no idea what the rationale is for that.

  44. Joel says:

    FinancialRx,

    In order to qualify for a Neg Am loan the borrower has to have their DTI caluclated using the fully indexed rate, also it is generally very hard to write a second behind these unless the LTV of the Neg Am Loan in 1st position is really low.

  45. Skoobz says:

    I have no idea what Massachusetts is doing taxing ANY stock-sale profit in the first place, other than blatantly sticking its hand in your pocket and robbing you. I can see the point of the fed gov exacting a tax on US security profits, but a state gov? pretty ridiculous. seems beyond MA’s jurisdiction.

  46. ch says:

    Robert,
    You seem to be implying that real estate prices will decline x% across the board in this country. Regardless of the underlying maco themes driving this bubble to crumble, there are and will be pockets in this country which will not be affected nearly as much as others (irregardless of my own bias). Local demographics DO have significant influence on price stability. Simply attempting to explain or predict movements based on evidence collected on a national or even state-wide level is not sufficient.

  47. Chibi says:

    I’ve been thinking for some time that eventually when this thng unravels it would lead to deflation like in Japan, but you really can’t forget about Big Ben’s helicopter fleet, which should be getting fueled up right about now.

  48. Lord says:

    The really wealthy enclaves catering to the upper 1% will probably do well.

  49. Predicted Slowdown in Housing Arrives

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  51. Robert Cote says:

    National lending abuses == national housing crisis. For a glimpse of the future of the rust belt I present Buffalo, NY. Got to realtor.com and see how many sfrs are available for $20,000-$30,000: 122 homes. 30-40K: 153. Do the same for Detriot (note; fix the spelling).

  52. aaron says:

    a couple of points:

    People arent just ‘walking away’ from their real estate. They live there. Its their homes and dreams. they tend to hang on to the bitter end.

    Real estate prices wont drop suddenly. The owners literally can not reduce the price becouse they cant afford to make up the difference to the bank.

  53. Blissex says:

    «Wouldn’t an attempt at a housing put cause long-term rates to skyrocket??»

    In a normal world perhaps, but the biggest stock rescue has happened with gigantic effects, and long-term rates have not been affected.

    And in any case if the pain among the republican voter base becomes high enough, who cares even if long-term rates go up? What matter is preventing house prices from falling.

    Anyhow from my usually quoted PIMCO paper about the Greenspan Put, from Sep. 2005, nearly a year ago, a fantastic quote about Greenspan and the housing market:

    http://www.pimco.com/LeftNav/Late+Breaking+Commentary/FF/2005/FF+September+2005.htm

    «What the Fed wants most right now, in my view, is a bear market in intermediate and long-term bond prices, so as to undermine the on-going bull market in property prices. Mr. Greenspan hasn’t put it exactly that way, of course, waxing on and on about his conundrum, the putative “failure” of intermediate and long-dated bond prices to fall, lifting their yields, as the Fed has hiked the Fed funds rate 250 basis points. But make no mistake, Mr. Greenspan is more than a little ticked off at both the level and term structure of market-determined interest rates: he would like the yield curve to be both higher and steeper, so as to deflate speculative fervor in property markets. Put more technically, he’d like the “term risk premium” embedded in the level and slope of the yield curve to be higher, inducing an immaculate correction in property prices, rather than a bear market bearing his name.
    This ain’t just me talking, but Greenspan himself on July 202 (my emphasis, not his): [ ... famous ''signs of froth'' speech ... ]»

    «Irrational exhuberance»? «signs of froth»? Who knows what’s going on? :-)

  54. Alex says:

    Regarding the previous point, you don’t need everyone selling to drastically decrease prices, all you need are a few distressed sales. Then everyone feels it, since the new comps are much lower, and refinancing becomes unviable. In some markets, that is exactly what is going to happen; just like SoCal in the early 90′s.

    I have heard the argument that we only have a housing bust if incomes go down. My argument is that it is not necessarily income, but sources of liquidity that drive real estate prices. If this accomodative financing dries up, what does that do to the market? It pole-axes it, as much or more than a drop in average incomes. We are in new territory here, so no one can predict how bad it will affect the market. But I would think it will be pretty bad, if liberal financing got prices to go up this much in the first place.

  55. Blissex says:

    «I have heard the argument that we only have a housing bust if incomes go down. My argument is that it is not necessarily income, but sources of liquidity that drive real estate prices.»

    Well, this is closer to reasonable. But really it is not incomes or liquidity, but profitability that drives real estate prices, at least during bubbles (and in normal times it is mostly demographics).

    And to state the obvious busts are really mean to profitability…

  56. Sam says:

    This is news?

    I’ve been reading “credit bubble” for a long time. Some of the commentators who’ve written those exact words (IIRC)

    Marc Faber

    Prudentbear.com (Doug Noland)

    Lew Rockwell / Gary North / Mogambo

    Richenbacher (whose public writings have concentrated a lot on the ratio “dollars of debt required to produce a dollar of GDP” )

    Edward Chancellor’s book Devil Take the Hindmost makes it very clear that all “bubbles” (that he studied) are trace-able to loose credit.

    And Chancellor himself released a warning report just before UK housing stalled out.

  57. Scary data on the housing bubble

    Here is some scary stuff on the housing bubble.:
    This is starting to look like the makings of the perfect storm. Lending institutions are pushing more and more dangerous loans that aren’t secured, which buyers can’t pay back. Buyers in turn load up on de

  58. S says:

    How could anyone have the confidence to buy real estate today?

    CNBC runs 10 stories a day about the pending housing bust/recessioin. Barron’s and the WSJ are good for a couple of stories a week.

    I quickly counted 7 negative real estate related stories in the link DenverKen provided above to the Denver Post. 7 stories in one issue!!

    And yet the DJIA and S&P500 are within a couple of percent of their 52 week highs. What do we make of that? What does that say about the attitude of the largest investors, the mutual funds and hedgies who set stock prices, regarding the issue?

  59. The truth is yes we have a massive debt fueled lending bubble. That lending created a housing bubble of immense magnitude.

    To say we do not have a housing bubble because it was caused by stupid lending is nuts. We have a housing bubble. Do we have a debt bubble too? Sure. It is actually even bigger than the housing bubble but it will be the bursting of the housing bubble that takes it all down.

    Mish

  60. HARM says:

    a couple of points:

    People arent just ‘walking away’ from their real estate. They live there. Its their homes and dreams. they tend to hang on to the bitter end.

    Real estate prices wont drop suddenly. The owners literally can not reduce the price becouse they cant afford to make up the difference to the bank.

    Say whaaa?

    Supply and demand set the price of real estate, not some over-leveraged f@cked borrower’s “needs-based” pricing.

    I have no doubt that a lot of so-called “owners” (who are in fact owned by their mortgages, not the other way around) will try to list their sinking-like-a-rock homes for some absurd fantasy price. And they will sit. And sit. And sit.

    Until one day –when Mr. howmuchamonth can no longer make the payments on his “alligator”, or the loan resets to an ARM, or he absolutely HAS to sell (divorce, illness, layoff, transfer, etc.). Then he will have to face the music and either lower the price to what someone else will pay, negotiate a short sale with his lender (partial loan forgiveness), or walk away and hand the keys to the bank.

    Regardless, trying to “hang on to the bitter end” will not save him or anyone else. The market can be a cruel master.

  61. EclectEcon says:

    Housing Bubble to Deflate;Recession to Follow

    (I posted this a year ago this coming weekend):

    That [headline is] the prognostication of economist Ed Leamer:

  62. donna says:

    To be honest, the $17 billion in hedge funds is scaring me a lot more than the housing bubble. When that sucker pops, it’s gonna get nasty.

  63. Bob A says:

    A lot of people in 2000-2003 did ‘hang on’ to their tech stocks too. Many who sang that tune finally gave in and sold at or near the bottom. It doesn’t all have to happen today or tomorrow or next month.

  64. Steven says:

    And housing doesn’t have to fall 90% like tech stocks did for it to do as much damage to peoples bottom line. You can get in just as much trouble with 10yr bonds if you leverage excessively.

    These are 500k elephants in the portfolio, and inflation isnt at 10% as in the late 70s bust or 4.5% as in the late 80′s bust which allowed nominal prices to stay flat as real prices declined. With 2.5% inflation today we’re going to have a highly visible NOMINAL decline, that should add a new twist to the panic. And make the price declines much more visible on peoples radar.

    Also interesting: Check out Shillers real estate futures for market based predictions

    http://housingrdc.cme.com/

    The registration is not verified so its fast

  65. Dave says:

    In response to Lord and his comment about Buffalo. You are off the mark, man. I live in Buffalo and I am a real estate attorney. Yes, there are plenty of cheap $30-$40,000.00 homes, but what city doesn’t have its ghettos. The fact is, that within a defined area (and its a maxim of real estate that it is all about location) Buffalo’s houseing is somewhat undervalued for its quality compared to the rest of the country.

    Further, while Buffalo has had houseing price swings, they are not as great as other parts of the country.

    And I’ll let you all in on a secret, the quality of life in Buffalo is superb. The weather is great, most of the time. No killer heat, no hurricanes, no tornadoes. There is alot to do from sailing to skiing. Best of all, you aren’t working your ass off just to pay the mortgage, which leaves money for alot of other things, like travel.

  66. Bushnomics bubble watching: mortgage deliquencies

    This surprisingly bearish post is suggesting that we are in the credit bubble rather than housing bubble, which is just a side-effect.
    Traditionally, Mortgages have been low risk lending, as the loan is securitized by the underlying property. When bank…

  67. theroxylandr says:

    My answer to Barry’s question above about Gold:

    I think, unfortunately, the movements of the price of golds are absolutely unpredictable.

    The reason is, by itself, gold has NO fundamental value. It’s used to make wedding rings. It’s used just a little bit in electronics. That’s it, it’s pretty useless metal, comparing to pretty much any metal out there.

    The only real thing you can do with gold is to sell it for money. And the buyer will have eventually sell it, too, as there is nothing else he can do with gold unless he is making wedding rings.

    The price of gold is 100% speculation that has 5,000 years of history and is not going to fade anytime soon. Most central banks prefer to keep some amount of gold. We absolutely can’t predict if those central banks will decide to load up more gold or unwind what they have.

    The gold can go to $2000. Or to $300. And NOBODY knows that.

  68. jkw says:

    AP -

    If you don’t want to analyze the options, you can buy the put and sell the call. It is a synthetic single-stock future. The bid/ask spreads are wide, but the delta is -1 and theta just accounts for interest rates. Alternatively, you can buy deep in the money puts. The delta is nearly 1. The cost is higher, but there is a limited downside.

  69. Mike says:

    Steve,

    I have lived near Buffalo. People die there from shoveling snow.

  70. Tom in Indy says:

    Barry,
    This is the first article I have read that makes sense to me about the’ why’ and the ‘who’ part of the housing bubble. When I read about a S&L booking profits based on negative amortization of risky loans that was the one pece of the puzzle I couldn’t figure out. Why would any bank participate in such a shameful and deceptive practice. There will be hell to pay when the Senate gets ahold of this. Tom in Indy

  71. jkw says:

    Why are you surprised that a bank would book negative amortization as profits? They count loans as assets. If the value of the loan goes up, they have an increase in their assets. For good bookkeeping, they have to count it as a profit. The only other option would be to assume that the borrower is going to default. But if the bank is going to assume that you will default if you go into negative amortization, they would raise the minimum and not allow it at all. That way they can start the foreclosure process sooner, to reduce the time value of sitting on a house.

    The Senate is not going to do anything to the banks because of this. Unless we elect a very different Senate from the one we have now. Even switching control to the Democrats wouldn’t be enough of a change. It would probably take the socialist party to punish banks for this mess. The worst the Senate might do is refuse to bail out the banks. In which case the investors get screwed. My sense of fairness makes me hope the government will laugh at MBS investors when they ask for a bailout. But I’m a bit scared of how bad the repurcussions of that might be, so I’m not actually sure what I want to have happen.

  72. bellanson says:

    I, too, think that this is more of a mortgage bubble than a real estate bubble.
    To illustrate what I mean, it might be good to examine the suggestion (earlier in the thread) that real estate prices might drop by 80%

    Assumptions: inflation and unemployment will remain where they currently are (plus or minus 50% of current level)

    Unlike stocks and bonds that have no other use but as investments, housing serves a basic need — That is to say, we are only arguing about the proper price, not whether or not you need somewhere to live.

    There is a fairly simple way to calculate the floor price for housing, since when someone defaults on their mortgage, the property gets sold and someone else moves into it (i.e. you rarely destroy it, since we live in a country with a growing population. Even if it doesn’t get sold the bank will attempt to rent it out)

    So just look at current prevailing rents. The “floor” price for a particular house can be calculated by taking the rent you could get for it, and the cost of the loan needed to purchase it, and work backwards (adjusting for tax effects and inflation) and figure out a maximum price at which it makes sense to purchase this property.

    Imagine a house, purchased for $1,000,000, which could be rented out for $2,200 / month
    The “cost” of that 1 million dollar home at let’s say 6% interest, for someone in the 30% tax bracket, ends up being something like: 1,000,000 * 0.06 * 0.7 = $42000 per year => $3500/month
    The difference between these two numbers: (3500 & 2200) is 37% (these are realistic numbers for Silicon Valley – other regions have different numbers, but the principle is the same)

    The real floor is probably a lot higher, because there is (currently) an inflation that is between 3% and 5%, so that you can expect to be able to raise rent by a similar amount every year. Of course if interest is higher then the floor is lower (giving you a greater potential real estate market drop).
    These numbers are fairly realistic in Silicon Valley, so I think it is reasonable to say that a 35% “correction” is the maximum that you can expect. However, that doesn’t mean that you can’t see a greater drop than that in the values of loan portfolios for certain lending institutions. Hence – we have a Mortgage crisis more than we have a real estate bubble.
    I would also like to point out how important inflation is for this calculation – with a hypothetical inflation of 5% this property (or the income stream from its rental) will increase by 40% by year 7. Thus totally reversing this 37% drop after 7 years.

    Sure enough, in California, there has never been a 7 year period with lower property values at the end than at the beginning.
    Note, this is fairly foolproof, since higher interest rates are almost always caused by high inflation, thus high interest rates are balanced by high inflation in this equation.

    Also note: this is very dependent on the property really being in a area where there are jobs, so that renters can afford to pay anything.

  73. Matrix says:

    Confusing A Housing Bubble For A Lending Bubble

    Much of the housing boom can be attributed to the current lending environment. over housing prices as an indicator of where things are going. But its tough to do since the stats are few and far between. In other words: the cart before the horse. …

  74. Econbrowser says:

    House prices still climbing

    The Office of Federal Housing Enterprise Oversight (OFHEO) today released its house price indexes for 2006:Q2, which continue to show house prices climbing in all but five states, though with …

  75. mike says:

    I see Construction Workers loosing their jobs every day Because of the Housing Market. What will this do to the economy in the near future.

  76. I think that the answer to your question set in the title would be: Yes, the housing crisis is approaching and it’s even inevitable. Bankers expected house prices to keep increasing, that’s why they were giving more loans, even to people who did not have enough credit rating. And this excessive buying helped keep house prices up. But now house prices stopped growing. Just take a look at e.g. real estate in Toronto. I believe that what they have in U.S. is also a “lending bubble” but you have to take into consideration that these things are connected.

  77. D Coffey says:

    There is no housing crisis.

    The crisis is now over.

    The crisis was back in 2003, 2004,
    2005 and 2006 when the bubble bloated
    prices way too high and too many
    lenders were writing interest only
    and other poorly planned loans.

    Now, the market is simpy correcting
    itself and has fixed the crisis and
    prices are nearly back to where they
    should have been if the bubble hadn’t
    taken place at all.

    Where were all the rocket scientists
    who should have figured all these issues
    were inevitable back a few years ago?

    I saw it coming a mile away.