That question may be the key to the future actions of the Federal Reserve. One estimate of "How Low Will Housing Go?" comes from Jan Hatzius, Chief Economist of Goldman Sachs:

"Our working assumption has been that US home prices are about 15% overvalued. This relies on a simple "affordability" measure which essentially adjusts the home price/income ratio by the level of (nominal) mortgage rates. Depending on one’s assumption about income growth, the likelihood of overshooting on the downside, and the length of the adjustment process, this suggests cumulative nominal home price declines of 5-15% in the next few years.

However, affordability is becoming an increasingly problematic concept because it ignores changes in credit availability and changes in nonconforming mortgage rates. Hence, it may be better to look at simpler price/income or price/rent ratios to get a sense of house price valuation. These paint a more dire picture.

Even if we assume that the long-term trend for price/income and price/rent is higher now than the average of the 1975-2000 period (because interest rates are likely to stay lower), cumulative nominal price declines of 15%-30% are possible."

That’s not so different from what HSBC HomePulse wrote back in January 2006:

"We suggest that about half of the US housing market is frothy and that this ‘bubble zone’ may be overvalued by as much as 35-40%, after taking into account low interest rates and tax advantages.

Current valuations imply a large permanent reduction in the risk premium and/or a sizable step up in future capital gains, not all of which, we think, is justified. The ‘bubble zone’ accounts for 50% of US GDP, or over USD, nearly the size of the German, French, and UK economies put together. In other words, it’s big. Therefore, when these housing bubbles begin to deflate, it is likely to have substantial macroeconomic consequences.

What’s troubling is that even a perfect ‘soft landing’ in the form of flat national house prices would be consistent with a 35-40% collapse in existing home sales. The gush of liquidity from mortgage equity withdrawal would dry up, resulting in a growth drag worth over 3% of GDP. If this adjustment can be managed over many years (and hopefully it will), the economy can avoid recession and get away with soft growth.

If the process is squeezed into a shorter time frame instead, then recession is probable, forcing the Fed to once again consider unconventional policy options – a probability that would only rise if the money supply were to decline at the same time the ‘bubble zone’ deflates."

Whenever I hear anyone suggest that these events were totally unforeseeable, I know that person is full of $%#*.


A Froth-Finding Mission:  Detecting US housing bubbles
HSBC Macro US Economics, January 2006

Category: Economy, Psychology, 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.

71 Responses to “How Low Will Housing Go?”

  1. Ken M. says:

    In today’s paper:

    More Las Vegas homes head to auction block

  2. km4 says:

    > this suggests cumulative nominal home price declines of 5-15% in the next few years

    I believe 15-30% declines over next few yrs.

  3. michael schumacher says:

    Limbo lower now………….limbo lower
    how low can you go?

    Alot lower if the inventory is still where it’s at. Oh add in the restrictive (and getting worse) lending issuers and you have the perfect set-up for private equity having some provision written to allow them to loan to individuals under a gov’t sponsored umbrella. As was posted yesterday get the name “america” into the program and you now have an instant ticket to get whoever the GOP wants elected as all of there friends (hedgies) will have saved the world form credit oblivion (and make even more money)while taking those irresponsible lenders out of the system because they have proven that they can’t handle it.

    Sounds far-fetched???? Not really when you consider how many lenders are removed from the system each day.

    March/April 08 is when this happens.


  4. jds says:

    Especially if a nasty recession hits. So many homeowners and investors have never seen a real ugly recession. The 70′s were brutal, to say the least.

  5. Mr. Beach says:

    As cccrazzy credit is being pulled by banks and as mortgage brokers go belly up, it is going to continue to get ugly fast.

    Consider that you get a subprime mortgage a few years ago for about 1/2 the rate you get this week, this in effect has *DOUBLED* the cost for a monthly-payment shopper. Or it has *HALVED* the amount of house they can buy. This is a 50% drop.

    Here is a great summary of Countrywide’s recent mortgage lending standard changes:

  6. SPECTRE of Deflation says:

    When rents to housing prices make sense, then we are at a bottom, but that is so far off that there is no telling how low it goes. Knowing that assets pricing can overshoot the mean by a substantial amount, we all must be aware that it can undershoot the mean by just as much. It will be ugly, and it will last far longer than the talking heads are willing to admit. I’m looking for a bottom sometime in 2009 to 2010 timeframe. IMHO.

  7. techy2468 says:

    too much negative talk….let me lighten it up.

    i expect inflation to go up due to all the liquidity injections all over the world.

    which means wages will go up, which means asset prices (including houses) will be sustained around the current level…which means MBS will not lose more than 20% of their value.

    of course for all this to happen…we have to survive the next 30-120 days without a crash…..if investors panic….i am not sure $2 trillion of cash can save this economy from going into recession.

    BTW i am bearish by nature….but i dont want to bet on the short side.

  8. michael schumacher says:

    we’ve had plenty of “injections” over the past year so these, by all means, are not new operations. Yet wages have been stagnant throughout those operations….why do you think they will rise now? Especially with all these financial “professionals” being shown the door…….


  9. SPECTRE of Deflation says:

    Barry, I just found this regarding FL which is one of the bubble states. Not a pretty picture, and it adds color to what know is happening in all areas of the US. From Housing Bubble Blog:

    Just The Beginning Of The Declines In Florida

    The Dow Jones Newswires report on Florida. “One Bal Harbour may look like just another sign of excess in Miami’s oversaturated condo market, but to developer WCI Communities the luxury tower represents crucial cash. WCI launched the project during the housing boom, when developers rushed to fill what seemed to be an insatiable demand for housing, particularly condominiums.”

    “In the time it took to earn approvals for and build the condos, the housing bubble popped. That has left Florida awash in a record number of condos. South Florida alone has about 65,000 listed for sale.”

    “There’s been an 80% drop in new condo sales in the last year and tens of thousands of more units should flood the market in the next 24 months, leaving ‘many years’ worth of inventory,’ according to broker Mike Morgan. ‘From here on out, it’s just all downhill,’ he said.”

    “Warned Alex Barron, an analyst with Agency Trading Group: ‘It’s going to be a bloodbath.’”

    “Industry watchers wonder if the building, which has already been delayed, will actually open on time. After touring One Bal Harbour Saturday, Morgan said a lot of work remains. ‘I did not see enough activity to demonstrate they are even trying to hit a September closing,’ he wrote in an email to clients. ‘With the overall market imploding, this is not a good sign for WCI.’”

    The Naples News. “In a conference call, Jerry Starkey, WCI’s president and CEO, called it a ‘tough quarter,’ saying the company continues to focus on generating cash flow, reducing costs and moving inventory. ‘It continues to be a tough environment for homebuilders throughout the country and for WCI particularly in Florida — and more specifically in the tower business,’ he said.”

    “In the quarter, WCI recorded impairments and write-offs of $36 million before taxes. New orders declined more than 50 percent. Over the past 16 months, WCI has reduced its work force by more than 33 percent, shedding 1,300 employees. More cuts are coming, Starkey said.”

    “(An) upturn may not come for another four or five quarters, he said. The company has also ‘put the skids’ on land spending, Starkey said.”

    “In the tower division, revenues declined 99 percent to $2.1 million from $214.4 million a year ago, in large part due to defaults. There were 68 defaults, far outnumbering the 11 new orders.”

    The Orlando Sentinel. “A prominent South Florida developer with more than a dozen big condo projects under way in the Miami and Fort Lauderdale areas is pressing ahead with plans for a condo-hotel in Celebration near Walt Disney World, despite a slowdown in condo sales and projects statewide.”

    “The Related Group will open a sales office this fall for the Icon Celebration, a 441-unit condo-hotel with hotel services, Chairman Jorge Perez said this week. The Related Group has more than 11,000 condo units under construction or in the final stages of preparation for development in South Florida, mainly from West Palm Beach south to Miami.”

    “‘We have slowed down, but we are continuing to move forward,’ Perez said.”

    “He said he will begin construction on the first of two buildings for Icon Celebration as soon as he has firm commitments for about 130 units, about 50 percent of the first phase. He said he could not predict how long it would take to sell that many units in today’s market, plagued by slumping demand and falling prices.”

    “‘That’s the million-dollar question,’ Perez said.”

    “One downtown project, the Lexington at CityPlace, recently filed for bankruptcy protection, while others have been put on hold as they compete for investors and buyers of conventional condos. ‘There’s just a lot of them out there,’ Anne Rogers, broker in Orlando, said of the condos now for sale.”

    “Florida’s soaring home-foreclosure rate was still 78 percent higher last month than it was a year ago.”

    “‘I don’t think the worst is here yet,’ said Dan Dowling, president of a mortgage brokerage in Altamonte Springs. ‘For many of them, there’s just no escape, no remedy,’ he said, other than to let the home revert to the lender through foreclosure.”

    “Dowling said the level of frustration among those trying to sell their homes month after month in the face of record gluts of properties for sale is rising even in Central Florida.”

    “The ‘credit crunch’ scare of recent weeks has made people even more fearful, he said, and some are beginning to sell their homes for 50 percent to 60 percent below the appraised value, in desperation, if they find a buyer willing and able to close quickly.”

    “‘These are people with equity, and options, but they just need the money. There’s just a general sense of depression among a lot of sellers out there,’ Dowling said.”

    From TC Palm. “Frank Lodico’s business has more than doubled in just a year. ‘We’re seeing more than five times the amount of foreclosures here,’ said Lodico, VP of (a firm) which serves foreclosure papers on Treasure Coast homes. ‘I just had (served) six this morning…and I’ve never seen it like this before in my whole 12 years here.’”

    “‘On July 30, I surpassed what I processed during the entire year of 2006,’ said Nancy Bennett, supervisor of the civil division for the St. Lucie County Clerk of the Courts. ‘Now we’re having to come in on Saturdays to process them — last Friday alone 60 (foreclosure) cases went up before a judge.’”

    “‘The biggest resets of (adjusted rate mortgages) will work its way through October and March,’ said Brad Hunter, director of the housing research firm Metrostudy in West Palm Beach.”

    The Miami Herald. “If you’re in the market for a mortgage these days, you’d better have good credit and be willing to come up with a substantial down payment on your dream home.”

    “‘Lenders are definitely demanding better credit scores, and they’re stricter with appraisers’ to avoid inflated home values, said Ines Hegedus-Garcia, a Realtor in Miami Shores.”

    “Lenders have pulled back from these large loans if they exceed the threshold for purchases set by the government-sponsored entities Fannie Mae and Freddie Mac. ‘We are seeing a rolling credit crunch,’ said Kenneth Thomas, a Miami-based economist and banking analyst. ‘Money is still out there, but [banks are] going to be requiring a lot more’ to get loans done.”

    “Carlos Fernandez-Guzman, senior executive VP of Neighborhood Banking for BankUnited, said the bank has reacted to the changing lending environment by requiring 20 percent down payments as well as escrow accounts.”

    “‘We have tweaked the credit lines further,’ said Fernandez-Guzman, who noted the bank isn’t in the subprime business. ‘That’s not to say that there isn’t room always for tightening a little bit more.’”

    The Associated Press. “The National Association of Realtors expects membership rolls to decline this year for the first time in a decade. The Florida Association of Realtors currently has about 154,000 members compared with more than 161,000 last year at this time, but expects flat membership by year-end.”

    “Nancy Riley, president of the Florida Association of Realtors, said membership more than doubled since 2001 and stood at 169,434 last year.”

    “‘Most people getting out got in just to make a quick buck,’ Riley said, blaming tax issues, insurance costs and the media for the perception that Florida’s real estate market continues to falter. ‘It’s not doom and gloom,’ Riley says, insisting the state is gearing up for another population boom.”

    The Palm Beach Post. “Palm Beach County’s property appraiser on Tuesday mailed more than 620,000 property tax notices, and the preliminary bills show two things homeowners haven’t seen in years: Falling values and falling tax bills.”

    “Of the 620,647 residential and commercial properties in Palm Beach County, fully 364,835, or 59 percent, are worth less this year than last, said John Thomas, assistant director of residential appraisal services at the property appraiser’s office.”

    “Palm Beach County home prices have been in a slump since late 2005, as a speculative frenzy ended and the number of homes for sale continues to grow.”

    “Thomas couldn’t say how much the average decline was, but some homeowners saw drops of 10 percent or more. Because the property appraiser’s values are based on the price on Jan. 1, Thomas predicted another drop in values on next year’s tax bills.”

    “‘At least in my opinion, that’s just the beginning of the declines,’ Thomas said. ‘Unless things change radically, you’ll probably see it go down again next year.’”

  10. Mr. Beach says:

    Another point: will the dramatic drop in housing credit availability effect consumer spending?

    As credit tightens and as prices drop, it is inevitable that cash-out-refis will drop dramatically in volume and amount.

    With less spending cash, aren’t we finally on the edge of a consumer slowdown?

  11. karen says:

    Now I’ve heard EVERYTHING. The pot calling the kettle black:

    “Mozilo also accused a Merrill Lynch & Co. analyst of “irresponsible behavior” in suggesting in a research report this month that Countrywide might face a possible bankruptcy if market conditions worsen.”

  12. MarkTX says:

    I do not know how low housing will go,

    but my best guess is 30% lower in the next 5 yrs and 50% in some areas.

    For the seller-price/expectations have to drop, the buyers are also going to have to realize that ultra cheap money is gone (for now)

    and until then all bets really are off.

  13. techy2468 says:

    I am with you on this MS….but keep in mind…in the past the injections were very small volume just to keep the liquid in play.

    but now its do or die situation for the whole world. and the root of the problem is around $2 trillions worth of papers, right? (i am just guessing, correct me if i am wrong).

    what if all the countries got together….and lent money keeping those papers as collateral…..not for 30 days….but something like 2-3 years….so that credi market can be managed in a orderly fashion….do you think they wont do it??

    look at it this way. if usa goes into recession.
    * all the exporters including oil producers will be badly hit…..they dont want that to happen
    * dollar will tank…that means their current holdings will shrink, so why not put that into play to prop it up for a while

  14. michael schumacher says:


    I am well versed in what has transpired at WCI. I have made some decent $$ on put options and can tell you that none of it’s fundamentals have had anything to do with how the stock has or will trade. Having said that I can also say that they are basically ground zero for implosion in Florida. It was only Carl Icahn’s attempt at a short squeeze that has put off the decline, by almost a year, but that did’nt stop them (WCI) from continuing to issue guidance that was pulled out of there own asses, $1 billion in FCF projected in March for THIS YEAR.

    WCI deserves whatever it gets but the fools who rode it down are still in control and are still carping about “shareholder value” as the stock went from over 22 a share to under 10 at present. Those bonds are what Icahn and his cronies are after……they represent the real value..


  15. michael schumacher says:


    Yes I recall that anaylst said that the day before CFC tapped it’s credit line.

    “yea we’re ok but we needed over $13.5 billion from 41 banks and 2 billion was in the form of a dilutive secondary (call it what you want but that’s what it is) to be in the same shape we were in 6 months ago”.

    Coincidently Mr. Mozilo is still on his options dumping spree

    What a crock of shit this guy is……let’s pop out a secondary AND keep dumping shares….but we’re all good.


  16. Marcus Aurelius says:

    A 30% drop is maniacally optimistic.

    I worked as a marketing manager for a major east coast builder for the past 10 years. Got out last year when I realized their delusions regarding the future of the market were chronic and had no correlation to the reality of the situation (at this point, I have downgraded my diagnosis from chronic delusion to congenital defect).

    The RE market, generally, and new home builders, specifically, will never return to the types of products we have come to expect during Pax Americana. The numbers, when viewed realistically, no longer support the advancement American dream.

    When the housing market comes back, it won’t look anything like it does today.

    I have a market-responsive product developed, investors lined up, and and I’m waiting for market/economic forces to drive the buyers our way. The model counts on low PPU, in return for huge market share.

    Making money in a trashed economy. Is this a great country, or what?

  17. PegofLI says:

    here is the snowball just starting down the hill, NYC is next!

  18. SPECTRE of Deflation says:

    Now I’ve heard EVERYTHING. The pot calling the kettle black:

    “Mozilo also accused a Merrill Lynch & Co. analyst of “irresponsible behavior” in suggesting in a research report this month that Countrywide might face a possible bankruptcy if market conditions worsen.”

    Posted by: karen | Aug 23, 2007 11:56:19 AM

    Here’s a little something from Greenberg regarding (T)angelo. Hey Tangelo I have an idea. You want to restore investor confidence? Then take the hundreds of millions you have made, and inject all the proceeds in CFC. Otherwise, please shut the Hell up.

    Was Merrill Analyst on Countrywide ‘Irresponsible’?
    In his interview on CNBC today, Countrywide (cfc) CEO Angelo Mozilo said the analyst at Merill Lynch who put a “sell” on his company was “irresponsible” and not unlike yelling “fire in a crowded theater.” Sorry, Angelo, you are wrong. The analyst, who used to work at Countrywide, was merely doing his job. At that point there was no telling what would happen to Countrywide — a public company. The analyst’s obligation was to his clients, not to Countrywide’s customers or the image of Countrywide. That he switched from a “buy” to a “sell” before upgrading again just shows how fast-moving this fire was. This is just the latest in a growing effort to bully and intimidate analysts who are trying to do the right thing.

  19. karen says:

    Postscript to my comment above about the pot calling the kettle black:

    The ML analyst was not acting irresponsibly to my thinking, just calling a spade a spade.

    Hey, it just occurred to me that as rumor had it Buffet did get his piece of CFC (via BAC.)

  20. techy2468 says:

    pego can you post few keywords….unable to copy the link you posted

  21. SPECTRE of Deflation says:


    I am well versed in what has transpired at WCI. I have made some decent $$ on put options and can tell you that none of it’s fundamentals have had anything to do with how the stock has or will trade. Having said that I can also say that they are basically ground zero for implosion in Florida. It was only Carl Icahn’s attempt at a short squeeze that has put off the decline, by almost a year, but that did’nt stop them (WCI) from continuing to issue guidance that was pulled out of there own asses, $1 billion in FCF projected in March for THIS YEAR.

    WCI deserves whatever it gets but the fools who rode it down are still in control and are still carping about “shareholder value” as the stock went from over 22 a share to under 10 at present. Those bonds are what Icahn and his cronies are after……they represent the real value..


    Posted by: michael schumacher | Aug 23, 2007 12:01:02 PM

    MS, here’s some info on WCI by Mike Morgan:

    WCI Bal Harbour – I made a trip to Bal Harbour this week, and what I saw even surprised me. There remains a great deal of work before they can close. We have been hearing about a September closing. That will never happen. From what I saw, and what I have seen, there remains at least 90 days of work before they can get a final CO and close on these units. My clients will receive photos of this trip and more detail. Here is one photo of the north side of the project.

    The work yet to be done includes outdoor amenities areas, front entrance, North side of the property and a great deal of interior work, as well as exterior finishes. I did not see enough activity to demonstrate they are even trying to hit a September closing.

    While speaking with workers at the site, I heard the gamut of a September closing to a January/February closing, and even a few chuckles with no date. With the overall market imploding, this is not a good sign for WCI.

    WCI Bal Harbour Listings – Another drop in the number of listings as buyers realize they can’t get a mortgage if their unit is listed. Here’s the real kicker. While we saw a drop in listings, we saw a lot of new listings. Some folks get it, and others are going to learn the hard way. But getting a mortgage to close is not the only problem facing these flippers. The big problem is falling prices . . . daily.

    Let’s start with the two big penthouse units listed at $13.5M and $11.9M. They are no longer in the MLS. As for prices . . . unit 2108 was listed at $7M last week . . . now it is yours for just $6.3M. Or you could buy a better view, two floors higher in unit 2308 for the same $6.3M. This unit was $6.5M last week. How about unit 703 listed last week for $2.95M and now $2.2M. That’s a 25% drop in one week . . . and still no units at Bal Harbour have gone Pending. Do you get the picture? For more on pricing, call me.

    WCI Rumors – I’ve heard them all from Steve Cohen allegedly increasing his SAC stake to buyers looking at the equity, and Icahn making a new bid. I simply can’t believe anyone would make the same mistake Icahn made . . . and there is no hidden value. The Gulf Coast properties at Westshore, Hammock Bay, and Old Colony are dead in the water with flippers falling over each other to lower prices. Tuscany is a ghost town. On the East Coast, Oceanside is a complete bomb with estimates of 60-70% of the units sold. This may be there worst project. Lousy location, overpriced for the market, and I can’t see more than 30-40% of the buyers actually closing. That puts WCI at a 20-30% closing rate in Oceanside. Then you must ask who pays the condo fees and insurance on the remaining 70-80% of the units.

    I’ve received several calls from people showing an interest in buying all or parts of WCI. Let’s face it, if anyone does step up to the plate they have several insurmountable obstacles from dealing with the bond holders to carrying costs on projects that are not selling. It’s not a triple whammy. It’s a complete knock-out. More color for clients.

    WCI Notes – Second quarter results are due for release on Wednesday, with a pre-release warning of $34-$54M in impairments and a projection of $530-$730M in case flow. The impairments are not enough, and I don’t see how they even hit the low end target of cash flow. It will be interesting to see where they think this cash is going to come from.

  22. michael schumacher says:

    The money has already been made on WCI, from a trader’s perspective…..;-)


  23. Bob A says:

    Many things are unforseeable when your heads up your butt.

  24. VJ says:

    And Down and Down We GO:


    (Bloomberg) – U.S. banks and thrifts suffered the biggest increase in late loan payments in 17 years as more homeowners fell behind on mortgages, the Federal Deposit Insurance Corp. said.

    Loans more than 90 days past due rose 10.6 percent to $66.9 billion in the period ending June 30, the largest quarterly increase since 1990, the FDIC said in its Quarterly Banking Profile released today. Loans more than 90 days past due grew 36.2 percent from $49.1 billion in the second quarter a year ago, the largest 12-month increase since 1991.

    At least 90 U.S. mortgage companies have halted operations or sought buyers since the start of 2006, according to Bloomberg data.


    Ah, like Father like Son.

  25. David Merkel says:

    Hey, Barry. Remember how much you liked my piece, “The Fundamentals of Market Tops?”

    I had a second piece which I entitled “The Fundamentals of Real Estate Market Tops,” though the editors changed the title.

    I wrote it in May 2005. It was easy to see coming, and I even caught the inflection point.

    Not that I am always right, but someone paying attention to the dynamics of the mortgage markets could see this coming.

  26. a guy called john says:

    didn’t peter eavis (?) call this on like 4 years ago?

  27. michael schumacher says:


    While you are busy patting yourself on the back you should have a little chat with J Strain as he feels it’s all up to the consumer to make the “necessary changes” to weather the foreclosure market and even suggests that, as an individual, you should “have a plan, “consider selling”, or “consider a second job”

    Sounds like wonderful advice for the banks who continue to not “have a plan”…..

    If the banks all “had a plan” we would’nt have the credit problems we now face.


  28. mark e says:

    is there any way to track the amount of money withdrawn from 401ks and the like? my guess is this will replace the MEW effect for some time. i’ve been sipping on mine for over a year while hoping hyperinflation wipes my debt away…

  29. wally says:

    How low will Countryside drag BofA if it goes BK? Will Angelo be floating in the east River or will he take it on the lam?

    Stay tuned…

  30. michael schumacher says:


    I still fail to see how wages will rise as the Fed is totally reluctant to show ANY inflation and a wage increase is just that.

    We’ve had all of these (fake) jobs and the unemployment rate never really reflects any sort of reality (like how all of those mortgage jobs that were lost last month somehow resulted in a net loss for claims??)
    Which would imply that we have a tight labor market (well that’s what they want you to believe) which in turn would cause wages to rise…..has’nt happened yet….and since it shows a form of inflation my guess is that it’s not going to rise (officially) even if it goes up off the charts (real inflation may accomplish a portion of this anyway)

    Wages are stuck at a level that panders to the need to have the Fed show that (once again) it’s all contained…


  31. SPECTRE of Deflation says:

    MS, since you mentioned the ticker, I thought you might enjoy the reading the article. Is the stock at zero by the way since it’s not tradable for a profit? LOL!

  32. michael schumacher says:

    Going long on WCi (with all it’s overhangs and out and out deception by the BOD) is not my idea of a good ROI. Shorting a stock that has seen it’s SP cut by more than half in a short time (I already sold my puts)is also not a good ROI… can make money however you would need to overlook a large portion of debt, total fraud by the BOD and Icahn and his “affiliates”, and PR that border on total and complete lies Oh and it’s book value?? according to today’s PR no one really knows what it is and Icahn has said as much.

    Other opps. at this point without all the “noise”.

  33. Jane you ignorant slut says:

    “No one expects the Spanish Inquisition”
    - Monty Python

    The signs were all around us since 2004 when my wife and I first looking to buy our first house. We lived in San Francisco at the time. Everyone, and I mean everyone ignored the obvious fact that home prices were outpacing incomes at an unsustainable rate. No one expected the market to decline because “this time it’s different”. Maybe people were making too much easy money and started to smoke their own press releases.

    I read somewhere that in 2004 and 2005 that 2/3 of all Bay Area mortgages were interest only, and 1/2 of Washington, DC mortgages were interest only. I can’t verify the numbers but that’s crazy if true.

    - Jane

  34. a guy called john says:

    imagine this interview on cnbc:

  35. Marcus Aurelius says:

    I read somewhere that in 2004 and 2005 that 2/3 of all Bay Area mortgages were interest only, and 1/2 of Washington, DC mortgages were interest only. I can’t verify the numbers but that’s crazy if true.

    - Jane

    Posted by: Jane you ignorant slut | Aug 23, 2007 1:39:47 PM


    Your DC numbers are a bit low. There are still some buyers. Most of them chant the mantra, “DC housing prices have never gone down.” Un-freekin’-believeable, as a quick investigation would set them straight. The numbers are so bad, it’s hard to believe there’s still construction going on. No new starts, though.

  36. karen says:

    thank you for the clip! (how well spoken that Treasurer was!)

    which leads me to believe, there’s got to be a bid under the spx and indu. anyone care to comment on Todd Harrison’s rumor?

    “As it relates to the “curious bid” in the S&P futures yesterday, a well-informed friend informed me that the Government of China was buying the S&P futures. I don’t have first hand knowledge (I didn’t work the order) so please treat this subject with care.”

    also, anyone else thinking what I’m thinking about the Mozillo show today? reminiscent of the Cramer show in which he “implored” the Fed to lower the funds rate?

  37. I just got this quote from someone I would describe as a very important hedge fund manager, one of the best in the biz on CountryWide CEO Angelo Mozilo:

    “In my view his conduct is borderline criminal. The amount of selling he did while knowing the imprudence of the policies he was pursuing is disgraceful.”

  38. michael schumacher says:

    the curious bid story

    Only one place in the whole world with that much capital to do that much damage in such a short time. The Chines have been buying the futures for several months now. They actively participate in the market (and always at key technical levels) or right as the entire market is about to fall off a cliff it gets “magically” bought off a 3% decline with less than 30 minutes to go.

    It’s so obvious who it is because no one entity or firm has the power to move the S&P up 31 handles in 30 minutes.

    The Olympics (and continued consumption by Americans-which is mentioned as an afterthought because once the games are over on a sporting level they will only begin to start on a financial level) are just THAT important to them.


  39. bumble says:

    Anyone know what this is about? Fooling around with capital reserves?

  40. SPECTRE of Deflation says:

    I just got this quote from someone I would describe as a very important hedge fund manager, one of the best in the biz on CountryWide CEO Angelo Mozilo:

    “In my view his conduct is borderline criminal. The amount of selling he did while knowing the imprudence of the policies he was pursuing is disgraceful.”
    Posted by: Barry Ritholtz | Aug 23, 2007 2:13:09 PM

    I agree completely, and further, if he wants to make a statement, he can quit whining about a rate cut and stick the hundreds of millions of dollars he made from these toxic loans back into the company. Tangelo has spent too much time in the tanning booth, and it fried his brain.

  41. michael schumacher says:


    your friend works where now??

    you can be clever too.


  42. D. Park says:

    Can someone please enlighten me on something. When Bill Gross says that the government should bail out the 2m distressed homeowners in a reconstruction mortgage corporation, what would that look like? How would it work? Any thoughts?

  43. michael schumacher says:

    D Park-

    read the third comment on this thread…….


  44. jds says:

    And even though the futures have a bid under them, CFC does not. It is sitting on fresh lows for the day.

    I guess that the Chinese want the entire US market and not damaged goods like CFC.

  45. karen says:

    Michael, I was quoting Todd Harrison (Minynville); I don’t have any friends :(

    So, if the chinese bail out our stock market, and the US government bails out our distressed homeowners, can i get bailed out of my short positions? (that’s a rhetorical question; i already know the answer.)

  46. techy2468 says:

    D. Park..

    its pretty simple…bailout every homeowner not able to afford his mortgage…and the money will be provided by the FED printing machine. subsidised by taxpayers.

  47. michael schumacher says:

    sorry Karen I had’nt noticed the quotes…..
    my mistake..


  48. SPECTRE of Deflation says:

    Can someone please enlighten me on something. When Bill Gross says that the government should bail out the 2m distressed homeowners in a reconstruction mortgage corporation, what would that look like? How would it work? Any thoughts?

    Posted by: D. Park | Aug 23, 2007 2:28:24 PM

    It would be like a circular firing squad. The Dollar would be toast.

  49. michael schumacher says:

    you know it’s getting bad when Goldman feels the need to PR routine debt sales:{ede07dc3-247c-4eec-b213-3e6f60a56628}

    We (us retail folks) NEVER hear a peep out of GS unless they want us to.

    “See look….we sold some paper…now we need the FF cut so that we can get rid of that nasty premium”


  50. michael schumacher says:

    sorry that link goes’s the text:

    Goldman Sachs $2.5B Debt Sold;Yld 6.274%; Tsys +1.67BP
    Last update: 8/23/2007 2:56:16 PM
    NEW YORK (Dow Jones)–Goldman Sachs Group Inc. (GS) priced $2.5 billion of 10-year self-led debt, according to IFR. Terms were as follows:

    Amount: $2.5 billion
    Maturity: Sept. 1, 2017
    Coupon: 6.25%
    Issue Price: 99.823
    Yield: 6.274%
    Spread: 167 basis points over Treasurys
    Settlement: Aug. 30, 2007 (flat)
    Ratings: Aa3 (Moody’s Investors Service)
    AA- (Standard & Poor’s)

    -By Anusha Shrivastava, Dow Jones Newswires; 201-938-2371;


  51. Fresh Looks at Housing Slump

    Housing watchers get two new data readings in coming days. First are new-home sales, released tomorrow, followed by existing home sales Monday. Economists expect the data to be weak, and are looking more closely at the effects on the broader economy. Here’s a look at notes out today:

    “We have made further concessions to our housing forecasts given turmoil in the mortgage market. Liquidity has been severely squeezed, causing a bigger pullback in issuance and a jump in mortgage rates for non-agency loans. This in turn prices a greater number of potential homeowners out of the housing market. … We now expect starts to fall to about 1.2 million by the end of next year, which is nearly a 50% decline from peak to trough. … Weaker sales and the huge imbalance between demand and supply should put more downward pressure on home prices. We now expect OFHEO home prices to fall 2.5% next year and NAR and Case-Shiller home prices to fall between 3% and 5%.” – Lehman Brothers Economics

    “There is considerable uncertainty about how the financial market turmoil will play out. A critical market challenge arises from the lack of knowledge about the equilibrium value of U.S. mortgage securities and about the distribution of the related risks. The large excess supply of U.S. housing makes any forecast of the bottom in housing prices heroic, limiting the ability of investors to circumscribe the market risks. The willingness of financial institutions to leverage these securities adds to the lack of transparency.” — Citigroup Economic & Market Analysis

    “Friday’s data on new home sales are clearly ‘pre-turmoil’ but should nonetheless be shockingly weak, underlining that the housing market was continuing to meltdown even before the credit crunch of recent weeks. … Add in the fact that the new home sales data (and the inventory data) are not adjusted for cancellations which are still running at a 30-40% rate according to some of the major homebuilders then the ‘true’ new home sales number is far lower than the data being reported each month. And given spiking mortgage rates and increased uncertainty, cancellation rates appear to be rising once again.” – BNP Paribas Fixed Income

  52. lewis says:

    wow, look at all the chicken littles. Made me run outside my office and check, but no, the sky had not fallen, didn’t even look like it was falling, although it is a little cloudy out.

    Those are some crazy mad predictions, strike me almost as funny as the Dow 36,000 ones (although, yes, some day it will happen and I will roll over in my grave to celebrate it).

    ain’t gonna happen cause markets adjust, and the long term picture is more people gonna need more houses and inflation in general will limit any losses. Now I will admit that someday you may point to some market in California, Nevada or Florida or the like that went bust by 50% or 30%, and deservedly so ater outrageous gains but nationally, calling for a 30% drop in housing prices is one far out call.

    Is there some place where I can put some money down on the over/under of a 30%+ drop nationally, sounds like easy money to me…..


  53. michael schumacher says:


    you actually think that the reporting agencies would allow any of that to occur officially?

    you’ve quite a bit learn

    the NAR still counts cancellations as signed contracts so by using them as you’re measure of whether or not home prices decline by 30% or more is laughable.

    If we could settle on a mutual barometer then hell yes I’d be happy to take your money from you…..How about Case-Schiller?? strip out the high and low and you’ve got a bet.


  54. Strasser says:

    So Gross just made his rounds on CNBC and Bloomberg advising Pres Bush to set up a “Reconstruction Mortgage Corp” and “write some checks” to homeowners, and oh, by the way, it may bail out speculators, but what the hay.

    What an idiot! Why stop there? What about paying off car loans? and while they’re at it, I’d like a big fat check for my stock portfolio!

  55. bsneath says:

    Please critique this:

    A major recession is already in the pipeline.

    The principal reason is the decline in housing values and the resultant impact on mortgage equity withdrawls (HEWs) and housing related economic activity.

    The effects have yet to show up decisively in most economic statistics because many consumers still have residual balances from past HEWs.

    Once these residuals deplete, consumer economic activity will drop significantly.

    While export-related jobs may offset construction job losses, they do little to offset HEW discretionary income.

    The Federal Reserve should be lowering rates immediately to lessen the severity of this upcoming recession, but Bernanke cannot without a loss to his credibility. (Greenspan likely would have lowered interest rates by now)

    Because the Fed will be late to lower rates, the economy will fall into a steeper recession.

    Ultimately the Fed will need to lower rates to a much greater extent since it is far more difficult to pull an economy out of a deep recession than it is a mild one.

    Asia has indeed “de-coupled” from its nearly complete dependency on exports to the USA. Growth across the continent is in high single digits, and then there is China. On a purchase power parity basis, I guess the economies of Asia are collectively about 3X larger than their offical GNP stats. That tells me that at some point in the future, their currencies will appreciate significantly. It also tells me that the true size of their economies relative to the USA is greatly understated and thus the ability of a recession in the USA to bring these economies down may in turn be overstated.

    My Conclusions:

    A deep recession is in the cards.

    Deflation, not inflation will be a concern.

    Short-term interest rates will be much, much lower in 12 months.

    The dollar will no longer be considered the safe haven currency and it will decline in value significantly. (this time it will really happen!)

    The lower dollar will increase costs of imported goods and commodities, but not enough to offset deflationary pressures (this is based on Japan’s experience of last decade).

    The USA recession will hurt the global economy but not enough to derail it. It will however result in lower global interest rates and capital flows into higher yielding emerging markets.

    My Investment Strategy:

    No investments at all in USA financials or consumer goods and services.

    Invested in Asian ETFs, Emerging Market ETFs, Oil & Gas, & USA agriculture. Lesser amounts in health care, USA tech firms with global footprint and Japan/European funds, including global small caps.

    I apologize in advance if this is an innappropriate posting to this site.

  56. MarkTX says:


    what makes it all VERY LAUGHABLE is they keep

    using the word “homeowner”.

    You should not be called a homeowner unless you own the damn house!!!

    Someone with a

    -F’upped loan
    -negative equity
    -no chance in hell of ever being able or willing to pay off their mortgage


  57. mysterious eggs says:

    Bailing out homeowners would wreck the fortunes of quite a lot of people. It will marginalize the tortoises and leave only the hares to dart around like idiots. It is good for the bottom line in the short term but doesn’t anybody sitting on piles of debt reading that story while tucking junior into bed feel the irony?

  58. techy2468 says:


    my take on it.

    emerging markets will be mauled if USA goes into recession.

    keep in mind that most of the stuff we import from china is not what we badly need.

    food and energy is the stuff we really need, in a recession we wont be buying new clothes (i have enough for three years).

    emerging markets may get into worse conditions since the high unemployment over there will lead to political problems, which will lead to foolhardy policies (anti capitalist).

    in the short term you are on the right path (short on us dollar and us market, long on emerging equity market). but after a while better stay in a foreign government bond (like australia, india or any other country).

    keep in mind that equities market all over the world closely follow US equity market, so a correction/crash here will be repeated over there also.

  59. bsneath says:

    “keep in mind that equities market all over the world closely follow US equity market, so a correction/crash here will be repeated over there also.”

    Thanks techy2468

    That certainly was the case this past month.

    Other options out there besides bonds? I wouldn’t want to put $$$ into treasuries if I think the dollar is going to depreciate.

    Possibly emerging market bonds (commodity-based economies) if one agrees that the global economy will uncouple and global interest rates will fall.

    These countries have much stronger currency reserves than in the past.

    I have no idea how to invest in such, however. Will need to reseach.

  60. techy2468 says:

    bsneath: my take on this:

    china is a toast if USA goes into recession

    so is india….these two countries are still dependent on usa exports to pull them up.

    i dont know much about brazil or other emerging markets.

  61. Aaron says:

    Goldman Sachs estimate of 15% might be conservative. I get the feeling we’re going to be hearing a lot more of this talk that the government should bail out homeowners in the next few weeks. I guess I should just get used to it.

  62. Winston Munn says:

    A simple but overlooked phenomenon could trigger a crash: a change in GAAP.

    All we have seen so far are results from illiquidty and risk aversion, minus a few hedge fund blow ups; the real contagion thus far had been successfully hidden in the books; the amount of real loss is sure to be staggering, and that, I believe, is why Nouriel Roubini is classifying this as a debt/solvency problem that cheap money cannot solve.

    The game being played right now is to prevent mark-to-market as long as possible in hopes that The Lone Ranger might ride in to the rescue.

    Alas, the Lone Ranger just bought puts.

  63. 14 days says:


    Re: “I have a market-responsive product developed, investors lined up, and and I’m waiting for market/economic forces to drive the buyers our way.”

    Ok, you got my interest. Could I get a little additional information? fourteen.days(at)gmail(dot)com

  64. mcauleychalkin says:

    i wonder if PIMCO isn’t feeling a little heat right about now in their portfolios?

  65. Dk says:

    Bill Gross aka Dow 5,000, is an effin idiot, he hasn’t been right on anything for about 7 yrs now (missed the entire curve inversion, missed out on emerging markets until 3 months ago when he thought they looked attractive, etc), if he’s so concerned about the poor subprime souls who are about to lose their homes why doesn’t he put up some of his $500 mln, same goes for his boyfriend McCulley.

    oh yeh, Pimco has no exposure to subprime? B fn S, they manages a number of CDOs.

    Bill you are a liar-

  66. HiHo says:

    As the whole planet has bought some subprimes, it means that the world is sharing the financial risk. Depending of how much subprimes are owned by foreigners, it should lower the burden of the US economy/stock/funds.

  67. unirealist says:

    bsneath, my take on this (and I am a very conservative small investor, but debt-free) is that cash will be not only king for a while, but critical to both financial and personal survival. I mean like cold hard cash, not FDIC bank accounts. As in the Great Depression.

    But following this relatively short period (weeks or a few months?) the dollar will have to hyperinflate. When it does, gold and silver (which have performed reliably for the past seven years) will skyrocket.

    My simple advice is divide your investments between greenbacks and gold/silver bullion. I don’t think even the pessimists on this site comprehend how catastrophic this collapse will get.

    I’m not a financial advisor. I’m just a simple guy who took off his rose-colored glasses a long, long time ago.

  68. techy2468 says:

    unirealist….i am with you on this..

    but somehow i am not too interested in gold and silver….i prefer foreign government bonds which are decoupled from usa.

    even though i am a pessimist i dont expect a catastrophe, just a big correction in the financials because they are the ones holding the bag right now.

    of course since usa is a debtor…they will drop the interest rate….hyperdeflating the dollar (make others pay the bill).

    but even the above may not happen….if they can bailout the home owners…such that they can service their debt….with the help of subsidy from FED(government)….and its going to happen…because that will also help steer away from outright depression.

  69. 8 says:

    Look at the long term picture. Property taxes are skyrocketing. Boomers are entering retirement. They are going to move or try to buy smaller homes. They will also start spending their savings. Lots of the Asians and Europeans with huge savings are also retiring. These nations, along with the U.S., also need to issue a lot of debt to pay these retirees. Long story short? Interest rates are going up. Higher taxes and higher interest rates does not equal affordable housing for people under age 30. Prices will have to come down.

  70. The Ongoing Impact of the Housing Sector

    Introduction Who should we blame for the problems in the credit markets? This week in Outside the Box