Paulson Still Doesn’t Understand Housing’s Problems
Treasury Secretary Hank Paulson once again reveals his appalling misunderstanding of the Housing market and its problems today when he floated his latest idea to “Stem Home-Price Declines.”
There are two problems with Housing:
- Ultra low rates and an abdication of lending standards put 3 – 4 million people in homes they could not afford. The real costs of home ownership have been forcing many of these people to move back into more affordable quarters (i.e., rentals).
- By just about every measure, home prices remain significantly elevated over historic metrics.And given the chain of sales that accompanies any existing home sale — the starter home/move up home/bigger house/even nice home/downsize retiree — anything that keeps home prices out of reach of the starter and move up buyers damages the entire chain fo purchasers.
Excerpt:
“The Treasury Department is considering a plan to revitalize the U.S. housing market by reducing mortgage rates for new loans, according to people familiar with the matter.
The plan, which is in the development stages, would use mortgage giants Fannie Mae and Freddie Mac to bring loan rates down as low as 4.5%, a full percentage point lower than the prevailing rates for 30-year fixed mortgages.
Government officials are under pressure to stem foreclosures, which underpin much of the current financial crisis. Treasury has struggled for months to come up with a plan that would ease the market without appearing to bail out homeowners and lenders.
Under the plan, Treasury would buy securities underpinning loans guaranteed by the two mortgage giants, which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration. Fannie and Freddie guarantee a large proportion of all new home loans made in the U.S.
Bad idea, Hank.
>
Sources:
Treasury Considers Plan to Stem Home-Price Decline
Rates Could Be as Low as 4.5% for Newly Issued Loans
DEBORAH SOLOMON and DAMIAN PALETTA
WSJ, December 3 2008
http://online.wsj.com/article/SB122833771718976731.html
Paulson Considers New Plan to Lower Mortgage Rates
Robert Schmidt and Dawn Kopecki
Bloomberg, December 3 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=axAJBzAz986w&
December 3rd, 2008 at 6:59 pm
Grand ignorance as usual.
The only way to “revitalize the U.S. housing market” is to allow homes to become more affordable. Period.
December 3rd, 2008 at 7:01 pm
I kid you not, Citibank is buying an infrastructure company in Spain for ~$10 Billion. What does that have to do with increasing lending? Nada, as far as I can tell.
How much bailout money did Citi just get? $20 billion immediately and $300 billion in guarantees?
This is BS. Citi is acquiring the company, Itinere Infraestructuras, through its infrastructure fund,
Citi Infrastructure Partners.
http://www.khl.com/magazines/construction-europe/detail/item29555/Citigroup-acquires-Spain/?s-Itinere-Infraestructuras/
December 3rd, 2008 at 7:04 pm
Of course this wont revitalize the US housing market. No one can put more than 5% down, and here in the OC prices are still far above median income.
What it will do is equalize the playing field which needs to be done. All of the “bad actors” out there who got loans they never intended to pay back while “Joe-Make-My-Payment On Time” gets to hold the bag. If every one got a universal loan mod to 4.5% the economy would revitalize. Would investors now be getting the shaft? Well, that’s why it’s called “risk capital” isn’t it?
For those homeowners without a loan they need a $20k tax credit spread out over 5 years.
Then commercial rates also need to be at 4.5% so that this whole thing can be settled. If you cannot survive on a 4.5% rate based loan, you should be allowed to fail.
My .02c
SGIP
December 3rd, 2008 at 7:16 pm
I believe they’re now denying this is seriously being considered. Think it was being discussed but they weren’t expecting the details to be leaked. This would be a really stupid idea, obviously.
On a related note, SRS down pretty big again today? Has been down big two days in a row and well off its recent high of ~280. Hhhhm, time to re-load?
December 3rd, 2008 at 7:18 pm
It was the abdication of good mortgage practices that gave us the problem. That’s it. Ultra low rates didn’t do it.
It was a lack of ability to afford the property when interest rates went up that caused the problem. But whoever “qualified” at the 2/28 should have been able to afford he 28 piece.
There are people who WON’T move within their own city due to increased loan rates. If you have a loan at $300K at 5.25% interest, would you move into another house across town you really love at $375K if you have to pick up the loan at 7.75% interest? No.
Inter-city house buying is a considerable part of the housing market
December 3rd, 2008 at 7:24 pm
Not sure he is trying to help home owners. Probably trying to help home builders. As in this is a political pay back for support.
Usual, wall street thinking. I only want to think about the next three months.
December 3rd, 2008 at 7:27 pm
These types of plans are being consideration for many of the same reasons one hears about re: China. towit, ‘they’ (Peking) needs to keep the ‘Economy’ growing, or the Peasants will become unruly/Revolt..
“Joe-Make-My-Payment On Time” has been asking, for months, “Where’s my ‘Bailout’”, his fuse is getting shorter by the news-cycle..
speaking of which, the ‘news-cycle’, when is TBP going to do a piece on the ever growing amount of ‘Made-for-TV’ News being produced, as prole-feed, for general consumption..
you’ve often point to the ‘Financial Services’-sector as recipients of ‘bailouts’, at least you could put the on-going, Federal/NGO/ThinkTank, subsidy of our beloved Media Industrial Complex into Frame..
this, for starters: http://www.nytimes.com/2008/04/20/washington/20generals.html?_r=1
isn’t exactly from alt.conspiracy/govtoverthrow.com, though, sadly, it is but one facet..
December 3rd, 2008 at 7:31 pm
Paulson is proving-out to be among one of the dumbest know-it-all multi-millionaires alive.
As previously posted, until current home values, er…the current home values inflated by roughly 30 percent, come down to realalistic values and those non-first lien mortgage holders who bet that so and so would not default take the deserved haircut for making such a bad wager, not much is going to change.
December 3rd, 2008 at 7:32 pm
@Homerpalooza: So you’re saying “ultra low rates” didn’t contribute to this problem at all? I disagree. Those ultra low rates were a big component of this mess. They distorted the behavior of everyone who was involved in buying/selling homes and then repackaging/selling mortgage-backed securities. They also helped to inflate the price of homes and the subsequent flipping activities that went on.
Artificially lowering rates on new mortgages merely serves to artificially inflate/prop up housing prices. As a homeowner, this would be good for me, I suppose, but I don’t think it will help get us out of this mess. Home prices need to be allowed to fall to their equilibrium. Propping up prices artificially merely kicks the can down the road and likely causes all sorts of inintended consequences.
December 3rd, 2008 at 7:34 pm
Why is that a bad solution? If I could buy a house at a severe discount from someone who is willing to short sell it, then the cheap rate makes it all the more enticing. In many of the 20 markets that S&P / Case Shiller monitors, the discount I could get in short sale isn’t really far off from the required drop in housing prices (for my target sub-section) to get close to “historic price levels”. In that case, everyone wins: the current homeowner avoids seven years bad credit along with the loss he’s going to take either way, the bank avoids having to take on a house and also reduces risk by having me take over the property, and I get a good bargain.
December 3rd, 2008 at 7:40 pm
This could even exacerbate the problem, if enough people that can afford their present house refi at a couple of percentage points less. Anyone holding mortgage paper could see the good loans disappear and be left holding the shaky stuff.
December 3rd, 2008 at 7:46 pm
@ larster – in terms of re-fi’s and new sales, I’m inclined to agree with Hank.
re: your point on mortgage paper, isn’t he planning on backing that anyway?
December 3rd, 2008 at 7:51 pm
@larster: Which is precisely what we’d do (re-fi) OR we’d sell our home at its inflated value to someone who would snap it up with that distorted new low interest rate and possibly rent after we move (my wife’s company is deep trouble and may not make it beyond early ‘09, in my estimation, so it may be a great time to sell, pocket our equity and get the heck out of dodge for a while).
So, actually, this could benefit me greatly but I don’t think it does much to solve the bigger problem. All this does is try to keep the game going a little longer (do I sense a pattern here with these policies?). Face it, we are becoming the new Japan of the 21st century.
December 3rd, 2008 at 7:55 pm
How can you simply “command” rates to be lower? This all just seems really, really nutty.
Lots of irritating whipsaw today. This is hallmark of Wave Fours. Market closed at a good retracement, the 70.7 at 872.31. If we decisively break 880 tomorrow then it will look like an easy ride to 906 – 911. 906 is the 23.6% retracement of the Major Degree Third Wave and 911 would be a .618*a=c up from the 741 lows. If the 906-911 zone gets taken out…then hold on tight.
I sold SP futures today. Sold into the 61.8% at at 864 and looked like a genius for a short period of time…then we get rumors of Governmental Dictate the rates will go lower. Love it!
I’ll probably have to ride this short for remainder of the week and get out on a close above 911.
Good Luck.
- AT
December 3rd, 2008 at 7:55 pm
McMansions make way for the new McShanties.
http://news.yahoo.com/s/nm/20081203/us_nm/us_homebuilders_downsizing
The demise of American gluttony will be a good thing, in more ways than one.
December 3rd, 2008 at 8:01 pm
All this does is try to keep the game going a little longer -@December 3rd, 2008 at 7:51 pm
also, it’s a fine jobs program for those, remaining, RE Agents, Mtg. Brokers, and, other, assorted species of the FIRE Economy..
and, in many jurisdictions the transactions, themselves, provide tax revenue to the true landlord( The State)..
December 3rd, 2008 at 8:13 pm
Maybe I completely misunderstood the report on CNBC, but I could swear the conversation between Diana Olick and Steve Liesman went like this:
“This is NOT a Treasury plan, but a plan developed by NAR, endorsed by the home builders, and sent to Treasury for consideration.” Futher, it was apparently ‘leaked’ to press as a “Treasury proposal”…
That’s what I heard anyway…
December 3rd, 2008 at 8:18 pm
@crowncitycap: Policy being written and promoted by influential private interests? Hhhhm, sounds vaguely familiar. Where have we heard that strategy before?
December 3rd, 2008 at 8:18 pm
i don’t see how lower rates would help the housing market. the buyers don’t exist as they don;t have the money to even consider doing any thing (consider they have bailed on autos which have a shorter loan, why would they even think about a home?) . housing prices will continue falling until they match wages (which means they have a long way to go!!! a really long way! maybe up %50 (or more) in some areas, but at least 30% in others. and thats if wages can start to grow. lotsa luck on that one
December 3rd, 2008 at 8:29 pm
Mannwich: At the rate it’s going, SRS will soon be down to where I have a standing buy order at 82. Maybe I can get it cheaper. Of course, I think I said that a couple of weeks ago.
Agree with Mark Hoffer that this sounds like just an attempt to get the bubble puffing up again. Will not really save anything and you still have to figure our how to subsidize it.
The basic assumption that we need hot single family market is flawed. It eats up capital that could be used to build factories or restore infrastructure to detour us from our current path to a third world country that produces nothing but some raw materials for the smart people in other countries to use.
December 3rd, 2008 at 8:30 pm
Low cost loans for housing siphon capital that would otherwise be available for productive uses. The government already distorts demand for and pricing of owner-occupied housing by providing a tax subsidy of mortgage interest and property taxes. Also tax free capital gains up to $250K or $500K per couple make it a more attractive investment during times when prices are going up.
We need to wean ourselves off of the real estate subsidies. Going forward, smaller homes will be built as homebuyers will demand homes that are affordable without the subsidy. An unfortunate side-effect would be a depreciation of existing homes whose prices reflect the embedded subsidy.
I’m tired of subsidizing somebody else’s McMansion in the exurbs. Do any of the other “advanced” western economies provide a similar subsidy?
December 3rd, 2008 at 8:37 pm
Seriously, I think our treasury is either run by fascists, socialists, or insane people, I’m not sure which. I’m thinking:
1) How many market participants are getting SCREWED by this: bond traders, equity traders, companies or individuals who properly hedged their risk? So many of these people will probably end up walking away from the market altogether for some time or permanently. The government may become the ONLY buyer and seller. How the hell do we did ourselves out of that hole?
2) Does a mandated low rate support home buying to a large extent. Hell NO! I’m an example of a prime potential homebuyer. Gainfully employed with a well paying job, married, late twenties, and sitting on a pile CASH, just waiting. No WAY am I buying soon. In the Boston area, nothing reasonable in a safe area is lower than 500-600k. I estimate ‘fair value’ for these homes MIGHT be 350-400k if real market prices were to take hold. So does a 4.5% mortgage entice me to buy a house with an artificially propped up price? No thanks. I’d rather have the price drop to 350k and take out a mortgage with a 15% interest rate (as they were in the 80’s when I was a kid) because by then, I will have a significant down payment and will not need to borrow much.
The law of unintended consequences is a bitch. They should just leave things alone. At least then, we know the rules.
HCF
December 3rd, 2008 at 8:38 pm
Al Czervik Says: “I’m tired of subsidizing somebody else’s McMansion in the exurbs. Do any of the other “advanced” western economies provide a similar subsidy?”
No, but they provide extensive subsidies for far less important items such as universal health care, public transportation, infrastructure improvements, and other useless, wasteful boondoggles that proclaim to promote the “public good”. I mean, what would you rather have – millions of empty, overpriced, subsidized McMansions in the middle of blighted nowhere or the items stated above?
Let’s face it, this is merely an attempt to get the whole game started again. Homebuilding is the only thing that we “make” (or should I say “made”) in high volume in the U.S. anymore, so let’s go back to the well and party like it’s 2004!
December 3rd, 2008 at 8:39 pm
Another scheme to mess with the free market…another scheme, that even if it is enacted, and even if by some fluke it actually helps, will have to be unwound someday, causing more disruption.
December 3rd, 2008 at 8:41 pm
I’m afraid I’ll get slaughtered by this group, but my feelings are thus: if they can set the fed funds and discount rate (and now an acronym zoo of borrowing methods) for banks (to basically steal from the populace), they can finally do something for the taxpaying, working citizen in an owner-occupied situation. Homes should not be investment vehicles, they should be homes. Home prices will still fall in many areas and stabilize in others until the affordability factor is realized.
December 3rd, 2008 at 8:42 pm
I’m tired of subsidizing somebody else’s McMansion in the exurbs. Do any of the other “advanced” western economies provide a similar subsidy?
—————–
Well, basically your fiscal and social policies have basically forced the world to adapt to your ways. So, yes, in Canada, we’ve been following your footsteps.
December 3rd, 2008 at 8:50 pm
@karen: I hear what you’re saying and part of me has similar thoughts but I just don’t think it will work. Besides, they wouldn’t be doing this for the “taxpaying, working citizen” anyway (if that were their intention, they could have done far more for us up to this point and they haven’t really done squat, aside from robbing all of us to bail out their friends and then trying to justify it by saying they’re saving the system so that we’ll all be better off on Main Street). They’d be doing it for the homebuilders, real estate, mortgage, and banking industries, so once again it’s all for private industry.
That’s the thing with this crowd – everything they do (I mean EVERYTHING) is done to promote their ideology of furthering the interests of private industry, and that usually means looting our Treasury (see Iraq, Afghanistan and our so-called “Homeland Security” boondoggle) to do it. Just think of all the new fees the mortgage re-fi’s will yield! Whoo-hoo, party on! Time to become a mortgage broker…..
December 3rd, 2008 at 8:54 pm
Barry,
I don’t know if it is so much that Paulson doesn’t get it or that he knows that until the problems with housing stop, the credit markets won’t function and the stock market will continue to drop, maybe this reality has just set in so the solution must be to artificially prop up home prices. You fix that problem or you let the pain continue. It is such a terrible idea so it fits because that is the same as many of the other decisions. I find this typical of him and the attitude of letting someone else deal with the next problem that was created by my “solution”. it seems to be the way of “leadership” to make decisions without even considering the intermediate and long term consequences.
All that I can do is try to figure out how to protect my own money based on the decisions of these clowns.
December 3rd, 2008 at 9:05 pm
@ben22: What’s especially infuriating to me is that they might (key word being “might”) have been able to solve this mess much more quickly at much less cost to the public if they went to the heart of this problem from the get-go – namely the homeowner and mortgage market but they didn’t want to do this largely because it would be “violating the sanctity of contracts” (namely the “free market”) by forcing write-downs of bad mortgage-backed securities and CDO’s. They’ve basically tried to do everything in a round about manner that doesn’t harm any of the culprits of this mess, but hurts everyone else, and, in the process, doesn’t tackle/resolve the real problems that remain.
But the horses, the chickens and all of the cattle are out of the barn at this point. This is just another half-baked idea in the long litany of stupid ideas by an administration is continually pulling things out of its arse on the fly that merely delays the inevitable……
December 3rd, 2008 at 9:10 pm
karen Says:
December 3rd, 2008 at 8:41 pm
I’m afraid I’ll get slaughtered by this group…
speaking of this group, here’s the unseen to ponder: IF something like Stammerin’ Hank’s Plan gets the go-ahead, watch for the strings attached–as opposed to the “Banker-Takeover Bill” w/ cosmetic strings & Zero transparency, this Plan, for the Taxpayor/Home-Debtor, will be so full of strings, peep will be thinking of Gulliver…
as an additional +, the Transparency afforded, to everyone else, will make the T/H-D-er’s Finances a common reference to anyone with a question/U$D 50 bucks for DVD jammed full of detail..
as the the old adage spells: “Time tells All.”
December 3rd, 2008 at 9:14 pm
Jeff, thanks for not crucifying me. I have some history on this as I was a realtor in Phx, AZ during the early 80’s when home prices were bottoming… when I started out, I was living in an apartment and I can’t tell you how scary my first closing was having never been through one myself! I was 25-ish then, and living hand to mouth. The point is, I understand the plight of young people trying to buy a home, or anyone that was out-priced by the insanity of the housing bubble. I also have a soft spot for CRE because I was subjected to PMI on my first and second home, and the banks then were TOUGH. Rates were 10-11% back then, too. Actually, I remember a second on a home that was 17% with a balloon. People came out of pocket to sell then.
December 3rd, 2008 at 9:15 pm
@Mark E Hoffer: So true, so true. As they say, “read the fine print”. Geppetto himself would be proud of the strings that will be attached.
Nothing this group does is aimed at the “public good”. It’s all about promoting powerful private interests (read: their friends). We’re all just collateral damage”…….
December 3rd, 2008 at 9:18 pm
@karen: I hear you. Believe me, I do. It’s just that the cynicism of these criminals and jackals is really starting to pi$$ me off. Maybe I need to make a stiff drink and hit the hay. I’m getting a little cranky again……..
December 3rd, 2008 at 9:18 pm
Please excuse my poor writing skills in the above comment. I was interrupted by two phone calls and should have proof read before posting… i think i got all the commas in for Mark, though.
December 3rd, 2008 at 9:20 pm
Hoffer and Soylent are right.
December 3rd, 2008 at 9:22 pm
@Mannwich said > “That’s the thing with this crowd – everything they do (I mean EVERYTHING) is done to promote their ideology of furthering the interests of private industry”
Who is “this crowd”? Paulson…or Geitner? Bernanke…or Greenspan? Sullivan or Ruben? Bush…or Obama? Dodd? McCain? Frank?
December 3rd, 2008 at 9:25 pm
Mark, just saw your post. I agree, I agree, Time Tells All. Just the same, I think these guys are desperate to keep the wheels turning. The US is a great machine, or was, or could be, again. I don’t want to dig to deep here (read, embarrass myself as I swill my plonk.)
December 3rd, 2008 at 9:27 pm
Whoever names it, frames it: The “Patriot” Act; the “Moral” Majority; the War on “Terror”.
Call it a “credit crisis” and trillions of dollars get transferred to creditors. Call it a “housing crisis” and money gets thrown at housing.
It was never a housing crisis or a credit crisis; it is an income crisis.
No one needs more credit; everyone needs less debt.
December 3rd, 2008 at 9:29 pm
Tom,
no “or”’s needed, nor any “?”, they’re All a feather.
http://www.boaf.org/
December 3rd, 2008 at 9:31 pm
@Mannwich
yes, I totally agree… free markets, haha. No I don’t really believe that anymore.
December 3rd, 2008 at 9:32 pm
karen Says:
December 3rd, 2008 at 9:25 pm
stop being ‘afraid’, and fear not ‘want(-ing) to dig to deep here (read, embarrass myself..)
fear is a cage, be not you’re own Jailor..
December 3rd, 2008 at 9:34 pm
But people, let’s talk about corroboration and causation. ARMs are out. Can anyone offer a 30 year at 4.5% ? That would be nuts. It would also be a way to say: You’re not paying it in interest so we’ll jack up the principal! That is the plan to keep prices jacked. The twist is that only “credit worthy” people will be able to benefit. However, it won’t work because ultimately housing prices have NOTHING do do with location or other such baloney but have EVERYTHING to do with the ability of people to pay the mortgage, i.e. WAGES. Wages are THE causative factor. Paulson could care less. He’d die before admiting wages need to go up. So the house of cards continues to fall. Make work isn’t the answer either. We as a country need to create a massive job base of high paying jobs producing something needed and socially redeeming. I haven’t a clue what that is but if we don’t do it, we’ll be poor withing 30 years. You can’t eat atomic bombs.
December 3rd, 2008 at 9:35 pm
@Tom K: Until now, the Bush admin (Paulson, Bernanke, Geithner, Bair, etc.). They’ve been running the agenda on the bailouts. The idiots in Congress basically were threatened with “meltdown” if they didn’t comply and didn’t have the courage to say no (even though most of the country was probably against it from the start). I imagine the new administation is now involved, so in my mind they’re on the hook for anything going forward as well.
December 3rd, 2008 at 9:36 pm
@Tom K: Sorry, but yes, Greenie in there as well. Heck, he’s the pied piper of this crew. Sorry to leave him out.
December 3rd, 2008 at 9:39 pm
@rww: Bingo. You hit the nail on the head in far fewer words (and less vitriol) than I. Bravo.
December 3rd, 2008 at 9:57 pm
One obvious question: what about refi’s. You let me have a 30 fixed rate loan, tax deductable, at 4.5%, and I’ll take at least a million bucks of that. If they let people refi at 4.5%, every outstanding mortgage would get refinanced, and with a “cash out” to boot. How much would that add up to for the whole country? Five trillion, 10 trillion dollars? Completely insane.
This whole thing may have just been an attempt to manipulate the market. Anyone holding call options on the homebuilders made a mint today.
December 3rd, 2008 at 10:01 pm
AGG:
And I have yet to see anyone seriously address the decline of real wages in this country. The politicians sure as hell won’t.
December 3rd, 2008 at 10:06 pm
Andy Tabbo @ 7:55
“How can you simply “command” rates to be lower?” It’s not a “command”, exactly; just a humongous subsidy at taxpayer expense.
As for the S&P, I don’t see it going much higher than 900 without an intervening correction of at least 7%.
December 3rd, 2008 at 10:19 pm
Consensus seems to be that the current financial crisis started, and can only be stopped,
in housing. The housing market suffers from depressed prices that depresses credit availability.
This in turn keeps people from selling their houses and builds ever greater supply,
further depressing prices, thus creating a deflation cycle.
It seems to me that trying to force the banks to lend will never work, since they have to rebuild
their capital from the mounting losses and this will take a long time and mean while the prices
will just depress further. I would propose that instead of looking to the banks to facilitate a
pickup in house sales through credit, that the government or some enterprise would set up a
housing exchange that would let people exchange houses and only have to settle the difference in
price of each parties house. It would be on the real estate agents to submit a house to this exchange if
an owner wishes. If there is no real difference in price, it would then only be on the
banks to let the current credit of a house owner follow that owner to their new possession,
and the banks would have an interest in this
(or the government could convince them). If there is a real difference in price this could be settled in
the form of an I owe you from one owner to the other. These trades would of course have to operate
on many more parameters then fixed price; location, price range, the trade could be more then two sided,
and other preferences.
I have read somewhere that 90% of people who are trying to sell their house, do so with the intent
to buy a new one, due to a new job, divorce and so on. If say 10% of these could be matched by such an exchange, and complete the deal,
then a lot of excess supply would be removed from the market and thus help to break the deflationary
cycle.
I like to think in possible solutions, but if im totally off, then please be gentle in your critique
December 3rd, 2008 at 10:24 pm
I try to avoid making short-term market calls…But put me down as seeing a market rout in the next few days, quite possibly due to the jobs report. The 10 day MA on equity put/call is low and due to get even lower the next 2 days. Lower lows will be seen.
December 3rd, 2008 at 10:25 pm
@Mike in Nola: I’m very close to putting most of my trading account in SRS. Another big dip or two and I’ll likely commit to it (while keeping a chunk in QID and EEV). I don’t care what the feds do – commercial real estate is in the early innings of some serious carnage.
I was at my annual mall visit earlier today and it was a morgue in there. I’m not a big shopper (I maybe go to the mall once or twice a year, can’t stand shopping) but I’ve never seen it that empty around the holidays. It was very strange, almost eerie, in fact.
I would love for SRS to hit 82 again. If that happens, I’m all-in and pulling a Steve Barry on SRS.
December 3rd, 2008 at 10:41 pm
Mannwich @ 10:25
“…while keeping a chunk in QID and EEV…”
I don’t much like EEV. QID and SDS are fine; but you need razor-sharp timing for EEV. I’d rather be short EEM than long EEV.
December 3rd, 2008 at 10:44 pm
@DL: Thanks for the tip. I’ll check it out. I’ve noticed the same thing, which has been frustrating me about EEV lately. SRS and QID are my strongest plays. Getting close to getting into SDS as well too.
December 3rd, 2008 at 10:46 pm
Mannwich:
I had a good bit of SRS, SMN and DUG starting in the early spring and bailed on all of them way too soon. Hope to get back in at a reasonable price. That’s why I’m hoping the rally goes a bit farther.
December 3rd, 2008 at 10:57 pm
Jeff, don’t do it. stay in cash. wait. please. don’t go short is my best opinion. of course, i’m nobody. the downside is limited, the upside is exponential. oops, leftback thinks i’m a bossy b*tch, so don’t heed me…
December 3rd, 2008 at 11:02 pm
@karen: I’m waiting to go all-in on SRS and probably won’t get the cojones to ultimately do it. Still have some money in there but am waiting for a big rally in the markets to grab some more, so don’t worry. Appreciate the concern though.
We may rally between now and the end of the year but the ugliness will truly begin in earnest in early ‘09. We ain’t seen nuthin’ yet.
What makes you think the upside is exponential at this point? Based on what, exactly?
And why exactly does leftback think you’re a “bossy b*tch?” I don’t agree!
December 3rd, 2008 at 11:03 pm
@karen: Oh, and I’m still mostly to the long side overall in my portfolio by just a little bit but waiting for the big, fake rally to sell most of my longs into it (as I’m sure many others are) and possibly going mostly or all short.
December 3rd, 2008 at 11:17 pm
wait, wait for srs sub 90 at a minimum… this spring could shock people between the price drops and the buying power. I know people with ALL their homes for sale. They will take the first real offer. I take it you don’t have school age children? The end of the school year is what everyone waits for…
ah, the upside to be wary of is gov intervention…
leftback knows i am very opinionated; but worse than that, i always think I’m right! i do change my opinion as the situation dictates. (like on the tbt!)
disclosure would dictate that I tell you I have nice realized capital gains this year from being short, but i could wipe most of them out if i chose to take unrealized losses.
December 3rd, 2008 at 11:47 pm
It wasn’t low interest rates per se that caused the mess, it was the complete collapse of standards who who those low interest rates were given to. You could give me a 5 million mortgage at 0%, it still doesn’t mean I can repay it. You could give me a 250k mortgage at 10% and I could pay it just fine.
In the meantime, will it help the decline in house prices? That’s the real problem. It’s the same situation with stocks. There are people able to buy, wanting to buy, but holding back because they feel they’ll get a better price in the near future. Once house prices show some strength again (whenever that is, I conceded it could be years away and much lower than here), you will see a huge amount of activity as those people jump in and buy their house, scared of the market getting away from them.
Nobody wants to buy a house and go through 2007-2009 (10, 11?) again, but nobody who wants and needs a place to live wants to not buy a house then watch 2003-2005 again either…
December 4th, 2008 at 12:03 am
I’ve made a mini-fortune on SRS and SKF this year. Unfortunately I didn’t sell or set stops Monday afternoon, and wasn’t around to correct my mistake Tuesday morning. I got hammered in the last 48. I think now is a phenomenal time to get in to this. I’ve been buying oom put contracts 6 months out, currently hold a few dozen contracts of both. When we hit one of those huge downdrafts (or up, for that matter) those babies FLY. It’s been a wild ride.
December 4th, 2008 at 12:06 am
Steve Barry at 10.24
Ha. All I do is make short term calls everyday. And I agree with you. ABC patterns are the most important and difficult to understand in Elliot Wave study. The move from 896 to 816 very much looks like an “a” wave down and since then we’ve just been chopping and whipping back in forth in a “b” wave that I think completed at 873 today, the 70.7% retracement, which has been a very common retrace target lately.
If this is correct, then we should see a pretty strong down move to 794 for an “a”=”c” target, which sort of lines up with the 61.8/70.7% retrace of the move from 741 to 896. I would cover shorts around 800 for sure.
- AT
December 4th, 2008 at 12:24 am
AT:
I’m not a student of your studies…but my attitude for this current market is not to trade it at all. You say cover shorts at 800…why do I need to cover if QQQQ short interest ratio is .65? They can’t even squeeze a tube of toothpaste with that level of short interest. RIMM short interest is .5, stock making new lows…AAPL at .73…GOOG at .8.
If you can’t short and stay short with these metrics, when can you?
December 4th, 2008 at 12:41 am
As Mannwich and I have discussed, I have been tracking real estate in Minneapolis several times a week. I look at all price changes and new properties on the market for apartment between 120k and 200k. In the last six months, I could almost count on one hand the number of new properties that I’ve seen come online in my target range. I have been surprised by the stagnation. I expected to see prices falling like crazy.
The subprime mess has already moved through the consumer, but still rests in the secondary market. The Alt-A’s are still shaky ground and even higher, people are so far underwater that they’re asking themselves why they shouldn’t walk away.
As companies continues to cut j0bs, people who might ordinarily be safe, will have trouble paying the monthly mortgage or will have to dip deep into their savings. Better lending rates offer re-fi opps and encourage potential buyers (like me for example) to take advantage. The fed fosters lower rates and they guarantee the securitized version. In theory, this would reduces risk for banks which would help jump start credit.
I have no clue if it will ever get implemented, but we shouldn’t expect that any one “tool” is going to do the trick. Let’s hope the sum of them all works.
December 4th, 2008 at 12:52 am
4.5% ?
If it happens we are going to do two things. First refinance all our various debt into one package at a never before never again rate. Then go looking for a line of credit at a bit higher rate. There are some bargains out there that will make good rental property. Then in 10 years or so when I’m ready to retire the price will be high……………
Jack
December 4th, 2008 at 12:54 am
Steve Barry @ 12:24
Sorry to bud in on your conversation. AT trades S&P futures, and surely he must use some leverage.
As for me, I’ll be tempted to cover my shorts in the 790-800 region as well, then wait for a rally, which we will surely get. For me, it’s just a question of the amount of risk I want to take on at any given point. (If the VIX gets to 80, I’m definitely out). Even with a short interest ratio of 0.65, the S&P can rally 15% in a few days.
January 20th has got to cause a big move in the market in one direction or the other.
December 4th, 2008 at 1:17 am
Another day, another government encouraged Ponzi scheme. If they actually did this and it somehow managed to work, the fallout when the chickens finally come home to roost will surely take the S&P to400, levels that some of the most bearish people like Yamada are calling for.
December 4th, 2008 at 1:32 am
If they get it done the S&P will be at 4000, But it wouldn’t be worth 400. Maybe I need to invest in wheelbarrows to carry all that money around.
Jack
December 4th, 2008 at 1:33 am
Remember the law of unintend consequences and worry
Jack
December 4th, 2008 at 1:40 am
I’m against all of these bailouts, but if one begins with the premise that the government cannot resist the urge to throw taxpayer money down the drain, this 4.5% mortgage idea might have some merit, provided that all of the following conditions were met:
(a) the loan would apply only to the purchase of foreclosed properties, and no refi’s; (b) the loan @ 4.5% would apply only to the first 250K of the mortgage; and (c) the borrower would have to put down at least 15%.
If all three conditions were met, there might be some merit to the “4.5% solution”.
December 4th, 2008 at 1:50 am
@ Trickstar (and anyone looking for housing),
I suspect you’re looking in the wrong places. For good deals on real estate, I use craigslist.
For instance, check out this awesome deal: http://tinyurl.com/5cs343
December 4th, 2008 at 1:58 am
@ karen,
You say “bossy bitch” like that’s a bad thing, …
…anyway, I like to use SDS as an overall hedge to a core long portfolio.
December 4th, 2008 at 3:06 am
@wunsacon -
too frickin funny. too funny.
i was ready to write a check!
December 4th, 2008 at 3:15 am
TrickStar, ya know, I’ve been noticing the same thing as you and Mannwich: where the heck are the “bargains”? In over two years of monitoring, very few properties are showing up in my price range (same as yours: 120-200k). I still can’t afford anything I’d actually like to *live* in. Prices sure are sticky downwards.
December 4th, 2008 at 3:35 am
wunsa-
you query: “where the heck are the “bargains”?”, to me, it seems that prices have, just, come down from Insane to Waay Overpriced..
Be Patient, sadly, people are just starting to lose their jobs..you know what that does to spending/purchasing power..
differently, part of the current price structure could be holding an ‘inflation hedge’ premium..
also, MLS offerings are, typically, the Retail end of things..
if you’re really interested, go by a few Auctions and see the ‘Market’ up close..
December 4th, 2008 at 3:44 am
Thanks, Mark. I’ll give that a shot (to at least learn something).
Just to be clear, do you mean I should go to one of those courthouse-step auctions?
December 4th, 2008 at 4:21 am
wunsa-
that’s one type, also, there are ‘auctioneers’ that hold auctions–usually on site..
the Yellow Pages should have a list of those guys–call them up and ask, they know the more bidders they attract, the higher the avg. price, the higher their Fees..
also, depending on your locale, there is, usually, a weekly/bi-weekly ‘newspaper’ devoted to Auctions in the nearby area(s)..
after a few steps down that path, you’ll begin to piece together a whole, different ‘non-retail’ world..
some think it’s better than Disneyland..
December 4th, 2008 at 6:34 am
It’s the right thing to do. Interest rates for homes are too high. When prices for homes are falling the land and home actually starts to come close to it’s actual value then. So the default risk and loss becomes lower. Therefore the interest rates in general should be lower not higher.
What this country needs to get out of debt is lower interst rates for a significant period of time and reforming the general loaning business to only loaning to people who can pay back.
December 4th, 2008 at 6:38 am
This is just Hank being Hank, helping out his buds and cronies.
Housing market is supported by people who have jobs and mortgage companies who can lend. They were over stimulated by people who couldn’t afford what they had, and shady banks, (appriasal companies, RE agencies, etc) telling them they could.
Hank is a idiot throwing a(nother) bone to his dogs on his way out the door. Good riddance.
December 4th, 2008 at 7:10 am
Unrelated:
In a sign of the times, CNBC to cut jobs. Unfortunately, none will be Dennis.
http://www.reuters.com/article/ousiv/idUSTRE4B32IU20081204
I had said back earlier in the century that the real sign of a bottom would be CNBC going off the air. I guess that would too much to hope for.
December 4th, 2008 at 8:11 am
DL and Steve Barry.
Yes.
Steve, I completey agree with you. We will see the 600 level “ultimately.” My issue, as DL pointed out, is that I use a ton of leverage and don’t sleep much because of it. But, I have to make rent by trading futures everyday. So, if I had a “day job”, I would probably be 25% short right now, looking to go to 33% at 900, then 50% short at 950…etc…etc…up to a max 100% short at 1000 and then just hold on….
- AT
December 4th, 2008 at 8:13 am
‘Hank Paulson once again reveals his appalling misunderstanding ‘
‘Hank is a idiot’
If you take these as givens, you might be mistaken. Just remember that when placing bets. Personally, I agree with those who say he just helping out his fellow felons. He may be an idiot, and he may misunderstand, but I doubt it….
December 4th, 2008 at 8:30 am
BR
Your 2 pts are crystal clear and the essence of the problem. THEY understand this very well but lack the courage to admit it. Until we ALL arrive at Acceptance and take our collective medicine we will linger in an economic coma.
I also think that the Kubler-Ross model for the Five Stages of Grief is relevant here. We are in Denial, we’ve jumped to Bargaining and soon enough will have Anger. Plenty. Then things will get really interesting. Notice what follows… begins with a D.
We have gone so far down the road to perdition…anyway, enough!
Great work Barry
Oh and I’m buying your book.
December 4th, 2008 at 8:41 am
We as a country need to create a massive job base of high paying jobs producing something needed and socially redeeming. I haven’t a clue what that is but if we don’t do it, we’ll be poor withing 30 years. You can’t eat atomic bombs.
——————————
It’s not very complicated.
1. America needs to get off its consumerism binge.
2. America needs to reduce its imports so that means it needs to reduce its energy dependancy
2. America needs to increase its exports. If it consumed less of its imports that would surely help!
3. Once exports and imports are balanced, America is much freer to focus on products and services that benefit the quality of life of its people.
4. America needs to sit down and determine what happiness is and what truly increases quality of life. I think Americans have lost their marbles. Is it the size of your house or TLC?
5. Instead of subsidizing the car industry, maybe it can subsidize the education and health care systems. These are 2 sectors that are going to be crucial for the next 20 years.
6. Everyone treats healthcare and education as a cost (that’s because it’s been so badly managed in the first place) A change in paradigm is essential. Every sector is a cost for another. IT can be seen as a cost. Energy can be seen as a cost. If you stop looking at education and healthcare as a cost you will see the opportunities. It’s hard to change this mindset because everyone today has been brainwahsed into thinking that more stuff makes you happier. Most would prefer plunking down more money into an expensive car and house than quality healthcare and education (because those sectors have been so badly managed). Instead of spending half your income on your mortgage payment and you car leases, shrink your goods consuming life and spend them on services that truly increase the quality of your family’s life. Sorry but a well paid, loving nanny is worth much more than a Mercedes. People don’t know what quality of life means anymore.
7. Since America is now commodity and energy constrained, it needs to reduce its dependency on consumer goods that bring no added value (all the dollar store lootbag crap that ends up in the dump). It needs to buy services for itself and sell consumer goods to foreigners.
8. While consumerism grows in the rest of the world, pollution is going to get out of hand in developing countries. The value of clean and protected land will soar. America needs to protects its environment, this will increase the value of its land. Environmental solutions for developing countries are a huge opportunity for America.
9. This will probably not happen because:
Human beings are materialists by nature
Americans have been brainwahsed into thinking that if they work hard enough they can all get in the top 1%.
December 4th, 2008 at 8:50 am
I for one like the plan as it gets to the heart of the problem. It benefits the folks who patiently waited on the sidelines to purchase a property. Also benefits those who are able to refi. I think the program should allow up to 120% LTV as long as there is no cash out to ensure folks who have dutifully paid their mortgage are not excluded. This allong with falling gas prices would put a lot of spending money back in the average homeowner’s pockets. It would create an enormous amount of stimulus for the economy.
With the 10-year well below 3 percent the government would likely make a significant return offering mortgages at 4.5%. There would also be multiplier effects from the stimulus and increased government tax revenues as a result. This stimulus would also decrease spending on counter-cyclical expenditures such as unemployment insurance and medicaid.
Bottom line, if foreign governments are willing to lend money to the USG for 10 years at crazy low rates the USG can pass along that to its citizens with a 1.5% spread to more than cover losses from defaults.
December 4th, 2008 at 9:18 am
I have it on good authority that officials within the Treasury and even at the Fed are of the opinion that – there is widespread market failures in the housing market. The premise that is repeated over and over again is that even good credits can not get a loan. Therefore housing prices will continue to fall. They should prevent an “OVERSHOOT” of housing prices on the downside, otherwise the problem will continue to get worse.
I see two very BIG problems with this line of reasoning.
1) House prices are NOT falling due to oversupply (or foreclosures or scarcity of loans etc). House prices are falling because they are too high and they are now correcting.
2) The Fed or the Treasury can not manipulate a market as big as the housing mkt in the US. How much do you need to corner a 55 trln dollar market, Ben?
December 4th, 2008 at 9:22 am
2) The Fed or the Treasury can not manipulate a market as big as the housing mkt in the US. How much do you need to corner a 55 trln dollar market, Ben?
————————-
20T?
December 4th, 2008 at 9:30 am
I awoke at 3 AM realizing an error in one of my above posts… i was a realtor in Phx in the late 80s, not early 80s. I moved back to california in 1989 and home prices continued to fall for a few more years…
December 4th, 2008 at 9:36 am
Some of you guys crack me up! Paulson isn’t dumb, he just has a tough job! You don’t get to his position by being dumb. Don’t get me wrong, I can’t stand the SOB, nor Ben, but I respect them. However I’d offer that the low rates don’t have JACK to do with lower inventory. They aren’t concerned with lowering inventory through sales as most on here imply, they want refinancings! That’s how you stop the forecloures from growing, not through home sales. Shut the well off, (inventory growing) and you can then address the oversupply.
December 4th, 2008 at 9:59 am
@karen: LOL. THAT woke you up? After how many cocktails? Too funny……
What wakes me up is wondering how my SRS can continue to drop like a stone, at which time I remind myself, “patience grasshoppa, patience”………..
December 4th, 2008 at 10:00 am
Isn’t this the exact situation that led to the current bubble?
From what I recall, unreasonably low interest rates, courtesy of old Greenspan, created bubble pricing and fueled lax lending standards. As a result, people found themselves in homes they could not afford. How is this plan any different from simply recreating the past lending environment?
The only solution is to allow homes to return to their equilibrium pricing. While this may lead to some unfortunate people losing their homes, strawberry pickers making $15k/year were never supposed to be buying $720k mansions ( http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2007/04/13/carollloyd.DTL ), it is a necessity. Not to mention the enormous strain this plan would place on the Treasury. Seriously, what is Paulson thinking, “Lows interest rates will raise home price right? I mean it worked for Greeny. Wait, no one would buy these news MBSs, even though the US government is effectively backing them…..I know, the government can buy them, I mean…we are the government right? How could this possibly go wrong?”
I am doubtful that Paulson’s plan would work, but if it does we are only prolonging the inevitable and likely setting ourselves up for an ultimately bigger crash.
December 4th, 2008 at 10:20 am
Jeff, i admit, too much pinot; i’m not that big of a person but i will be if i keep up with the wine every night : )
So after I got over my posting errors, I had visions of stockcharts dancing thru my head… and I thot you’d sold your SRS. Here’s what macro-man said this morning:
But Macro Man has learned this year to be surprised by nothing and to be wary of one-way bets…
December 4th, 2008 at 10:34 am
@karen: I sold my SRS at 240-260 or so (in different chunks) but recently got back in a bit after it dropped to ~121. Not even close to all-in though, so I’m OK. I can be patient and will buy much more if it goes below 100.
December 4th, 2008 at 11:48 am
Meanwhile, from the WSJ on-line MarketWatch http://tinyurl.com/5zbyum
“U.S. homes now undervalued, economists say”
“Compared with their long-term fundamental values, U.S. homes are now 3.8% undervalued, the economists said”
WTF? To which long-term fundamental values can they possibly be referring?
Been averaging into SRS @ 120/115/110
Next nibble @ 100, then ramping up at 90 and below as Karen suggests.
December 4th, 2008 at 2:20 pm
Lower rates or lower prices would both decrease the montly payment and give more people the ability to afford a house. The advantage of getting more people into houses via lower rates (instead of lower prices), is that it doesn’t also put a lot of the current mortgage owners under water. Then current owners can indeed seel their houses and move up. The housing market chain is partly locked up because of the fall in house prices and further fall in prices will not solve the problem. In the long run we have to get housing prices to a realistic level, but in the short run we need to make both purchase and reselling of houses possible (even if it takes a little reinflating). So I am with Hank on this one (if he actually have the sence to do it). Use the current “free money” that the treasury can get in the marked and hand the saving over to allow people to purchase a home they can afford. Its “we the peoples” government, why should the people not be able to harvest some benefits of the fact that dysfunctional capital markets are mispricing risks on loans to the government vs. mortgage loans.
I agree with larster that anyone holding the bad paper would be left holding the bag – that’l teach them. If the only ones hurt are those dumb and greedy enough to invest in other peoples misfortune (sub-prime) then I would call it the perfect plan. But I am inclined to think this is just a rumor. This is not an administration who is inclined to help “little” consumer class people at the expense of their rich masters (which is why they will never be able to solve the problems).
Wunsacon; look for auctions in your local paper. I went to a few and you can basically get things for half price if you have the cash and loan ability to bid on it (make sure to arrange credit before the auction). I got a 6 ac. lot of building land for $3500/ac. that had been sold to a builder for $7000/ac. in late 2005 in an area where they have been selling for about 6K/ac lately. The reputable (established) auctioneers will make sure you can get a clean title at closing. At the courthouse you don’t have any idea what you get, so leave that to the pro’s (or hire one to help you.
December 4th, 2008 at 10:55 pm
The solution is at http://www.grb.net