Today the FOMC reduced the Fed Funds rate by a half point to 3%. A half point rate cut was expected by Traders and so far we do not have significant changes (yet) to mortgage interest rates. However, if you have a HELOC, your interest rate has just gone down again. The Fed also reduced the Discount Rate to 3.5%. The Fed is leaving the door open for future cuts as needed. You can read the press release here.
We still have Thursday’s PCE report and Friday’s Jobs Report which both highly impact mortgage interest rates. If either indicate strong inflation, we will see mortgage rates increase.
Tell me something. If the Dow heads to 10,000 and Fed cuts rates to say 1% should mortgage rates be lower or higher at this point?
Mike, who knows in this market? If the Dow was to head down to 1%, mortgage rates historicially improve as traders would be pulling funds from stocks and move them to bonds (like mortgage backed securities).
With the Fed rate cut you’re suggesting, a lot would depend on how much of it was anticipated by the markets. The Fed cutting the Funds rate typically drives up mortgage interest rates.
Mike,
Unfortunately there is no direct correlation between Fed fund rates and mortgage rates. As we saw last year, mortgages based on the LIBOR were have their rates jacked up even as the Fed dropped it’s own rates.
If the credit crunch gets worse we could have situations where lenders simply become skittish about lending under any circumstances and demand large interest rates regardless of what the Fed offers.
I also think we could continue to see the spreads on rates to various borrower types grow substantially. For example, tightening credit criteria has frozen many people out of the mortgage market altogether (i.e. because they no longer quality), and the elimination of many risky loan types (e.g. option ARM, negative amortization, etc).
Thus, it could be possible that the Fed fund rates could be at 1%, and 30 year fixed mortgage rates were even lower than today, but that few people could qualify for the loans that were still available.
Rhonda,
Aside from the actual interest rates, have you observed any other changes in the mortgage market since mid December? Have things stabilized, or are we still seeing products being withdrawn and criteria being tightened?
Sniglet, second mortgages have tightened up with LTVs and credit scores.
I’m hearing rumors that Countrwide is freezing HELOCs to California homeowners.
We also have credit score based pricing w/Fannie and Freddie loans. Some lenders are adding credit score based pricing to gov. loans, too.
Underwriters are calling for more comps or interior photos on some appraisals.
It’s interesting times to be in this industry!
Didn’t the 10year Treasury spike upward on the FOMC drop?
That’s not supposed to happen, right?
Ok, no correlation between Fed funds rate but how about if the stock market slides lower (which I fully expect) over the next 1-2 years. I thought a weak stock market does correlate with lower mortgage rates.
In a deflationary spiral, you get a much lower stock market, AND you get spiking interest rates (due to return-ON-capital concerns). Jobs are hard to come by, and everyone is trying to raise cash.
Housing is going to get positively crushed.
Mike, when the stock market does poorly, generally you’ll see mortgage rate improve because money is being moved from stocks to bonds. The reverse is true: if the stock market is doing great, traders pull money from bonds to stocks and mortgage rates go up. This is “typical”.
Eleua, I don’t really follow the 10 year (which it does appear to be up by 19bps from this morning). I pay more attention to the 30 year.
It’s all trading…dependent on the traders reactions. I’ve heard them referred to as “wild turkeys” once which is quite the visual for me.
Just six more cuts like this and we’ll be at zero percent! Free money!
Ohio gozaimasu!
Mike –
Not this time, nobody wants to buy mortgage securities because they are time bombs. S&P just downgraded $500 BILLION in CDO/MBS after the market closed today. Expect to see rates rise and standards tighten considerably more no matter what the Fed does, especially when alt-a, and prime securities start to screw the pooch as recession sets in.
b, then how do you explain we are seeing lowest rates in years just as the stock market recently tanked? Oh I see, the next leg down will affect rates differently. They will head up now. Umm Yeah.
Seven more cuts like this one and you will have to pay people to borrow money.
Well, the Fed has cut rates 1.25% in the last week, so at this rate by mid-February we will be in negative interest rate territory.
Domo arigato!
Uh – this does mean that mortgages will go to zero percent and everyone will qualify for one, doesn’t it?
You guys are batting 1000!
I’ve heard the markets are pricing in another Fed cut when they meet in March. Of course, a lot can happen between now and then.
If you think mortgages are difficult to understand now, just wait until you try to explain to people that even though they are getting paid to take on debt they are really going even further into debt because of deflation.
That is why these cuts are happening you know. Deflation — falling prices — is a risk in both housing and the stock market. Lowering the rates combats deflation by promoting inflation.
If this letter gets legs, you won’t have to worry about mortgages, interest rates, or anything else.
The ignition sequence has begun. Critical mass is just moments away.
CRASH-CON 1 is looming.
OK Mike the Dow can hit 10,000. The Dow was hovering at 4500 in 1995. The Dow today seems to be inline, but it could still take and handle a major correction. Where do you think rates would go?
And sorry money can go anywhere; it’s no longer trapped between stocks, bonds, and commodities.
I hate to be a broken record on this (actually, I don’t, but I thought I’d say that to be polite), but…
If the bond insurers get downgraded, all the insured debt will have to be repriced (lower), and that will drive interest rates skyward in a breathtaking fashion.
Givent that mortgages are at the very heart of the problem, I would assume they will get pole-axed with the corresponding high interest rate.
This will happen with a declining stock market. Capital destruction, or deflation, will ensure this.
Eleua,
I know what you mean about sounding like a broken record…for day’s I’ve been saying…”no mortgage rates will not go down when the Fed lowers the Funds rate…in fact, they may go up”.
Ronda, the difference is the thing you were suggesting has happened repeatedly.
Not to totally discredit what Eleua is saying. The Fed’s action today has totally removed just about all confidence I have in the economy. I’m actually thinking about doing something really stupid and taking Jim Cramer’s advice (pulling out of the stock market entirely). I really have the feeling the Fed is flying blind, and if they aren’t that’s even worse.
Eleua, re. 18…it’s concerning to say the least. We’re not done with what’s going on in the industry. I’m beat…been working since the wee hours and I’m calling it a night.
i dont think anything drastic is going to happen in this election year. The politicians will not let a BIG crash happen in bond or any bank to fail. I guess 2009 all bets are off.
After reading all the views on Fed’s cuts, mortgage rate (going to be hi) and overall economic situation (going to be bad)… Should I buy a house now (in Sammamish…given Microsoft and Boeing are around)?
srini –
It is not wise to believe that politicians are all powerful.
Mike –
It is not a immediate 1:1 correlation, especially since this is a rare event. Have some patience, this is going to take years to totally play out.
Interest rates will go down but not to the same extent as years past. There are several reasons for this, some were already mentioned. The securitization market is out of whack from the subprime, ABCP, CDO, Insurance debacle. With the secondary market “liquidity” deminished, the originate-to-sell model has essentially disappeared. Banks will keep rates higher than they did in the past to compensate for the upfront “gain on sale.”
Rates will go lower because the Fed will do what it takes to stimulate the economy. That means it will continue to lower FFs and implement other policies (stimulant package) to keep the wheels turning. FF Futures are already implying another 50bps at the next meeting and another 25 after that for the remainder of 2008.
This makes sense if you think about it. We had a market fueled by unqualified buyers and speculators, which was made possible by a secondary market that put too much faith in the structures of these investment vehicles and the Rating Agencies who gave them AAA ratings. Pass performance does not guarantee future performance!!
” I’m actually thinking about doing something really stupid and taking Jim Cramer’s advice (pulling out of the stock market entirely). I really have the feeling the Fed is flying blind, and if they aren’t that’s even worse.”
The problem is that there are not many attractive options as far as stashing your money. Even a bank account seems to have its risks these days. Mattress seems like one of the best places.
I’ve been quite bearish over the last year, but man this thing is spinning out of control faster than I expected. 1.25% in just over a week? The Fed minutes are stoic, “some downside risk” but their actions indicate they are in total panic mode. I’m starting to side with E’s rather outlandish predictions.
E,
Off topic, but I just wanted to tell you have very much I appreciate it when you try to be polite 🙂
There is another possibility of what may occur if the bond insurers go bust: that mortgage rates will stay low but that criteria will tighten even more dramatically. I am not at all sure that mortgage rates will rise, if for no other reason than the fact that investors still need to put their money SOMEWHERE. Super safe mortgages will continue to be an attractive investment for people who don’t want to put their cash under the mattress, no matter what happens in the economy.
The key, however, is that only EXTREMELY super-safe mortgages will get funded. 50% down, 750 credit score for a 30 year fixed perhaps?
I dont’ think 50% down will be required, Sniglet. Fannie and Freddie are showing preference to 30% down and to 10-15 year fixed mortgages (no credit score pricing).
I’m up to my eyeballs in alligators…and will try to comment as much as work will permit me to. 🙂
I recommend locking before the Jobs Report tomorrow…but that’s just me. I don’t like to gamble rates.
Eddie-
The market in the Seattle area seems to be in better shape than the rest of the country (Florida, California). The local economy is still doing well and I suspect that it will continue to buoy home prices. You may however be more aggressive in your approach since it’s more a buyers market now then in the last few “bubble” years.
” I am not at all sure that mortgage rates will rise, if for no other reason than the fact that investors still need to put their money SOMEWHERE.”
If panic is high enough, all the investor money goes to Treasury bills…
Affluent-
There will be a major shift in portfolio management going forward. Right now the industry is still trying to determine what makes sense. There will be policy as well as regulatory changes for sure.
Some more sophisticated shops will eventually convince their credit dept. to buy non-agencies, but until then a lot of them will sit on the sidelines rolling short-term paper.
Q-Diddy –
The local economy and home prices disconnected several years ago as they did pretty much everywhere else that had bubble appreciation. It is hard to argue that Seattle has a far better economy than Silicon Valley (where I live) or LA, San Diego, Boston, etc yet all of these places are experiencing serious price pressure. Foreclosures are through the roof and home prices falling all of last year, yet we have 5% unemployment and moderate GDP growth overall. I think once you saw price growth really disconnect from wage growth around 2003 is when this happened. As they come back together again, a decent local economy will not help much except stop a total collapse.
b-
What I’m saying is price appreciation has not affected the greater Seattle Area as muh as it has in other parts of the country. This implies that wages are currently able to maintain price levels, but for how long I’m not sure. The market still seems to be robust here relative to other parts of the country.
Q-Diddy –
You are right, some parts of the country are worse. However, Seattle (according to Case-Shiller) home prices, on average, have doubled since 2000, with the majority of that occuring from 2003-2007. Doubling of prices is quite a lot considering wages have been largely stagnant since then. The price/income ratio had increased nearly 40% between 2000 and 2006 (widening further with 2007’s housing gains). That kind of disparity in growth shows that the current price levels are hardly maintainable.
Q-diddy,
If you took out the X-Cal equity money, you would be very strained to keep the local housing market anywhere near these levels.
Ask a Bainbridge Realtor what the market would be like with no Californians. When she recovers from the fainting spell, say you were serious. Have paramedics close by.
California is almost completely inverted. The equity is drying up and X-Cal locusts are becoming yesterday’s news.
Our incomes can’t support our prices. The fragile financial state of our economy can’t support our incomes.
Prices in the PNW will fall hard. Boston and San Diego had the initial stages of their busts fall into a relatively good economy. That will not be the case here.
-60% to -80% from the peak. Bank on it.
Unfortunately, I think that high income levels, or jobs, may not be enough to prevent significant price depreciation. If lenders tighten criteria, or eliminate products, it reduces the buying power of existing customers. For example, if larger down-payments are required than previously, then potential buyers have to save more in order to buy a house even if their income remains at the same healthy level.
I think that real-estate market is driven more by the global availability of cheap credit (i.e. the demand for buying mortgage securities) than by any factor in a local market, with jobs, income levels, etc.
Couldn’t have said it better myself.
We are not immune.
To all those that reponded to my comments
Y’ll made some great points and I’m like you, I am pestimistic about prices and I’m not saying that homes will continue to rise like before All I’m saying is price appreciation has not hit the Seattle as hard as it has in other parts of the country. Like I said, it is more a buyers market now then before, but that doesn’t mean we are or we will experience a market like CA. I’d tread lightly.
Q-Diddy –
The problem is that price appreciation DID hit Seattle as hard, I am not sure why you believe otherwise when the data is readily available. Seattle’s appreciation curve is very similar to the SF Bay and even Las Vegas when using Case-Shiller. They all doubled in the same timeframe and all had the bulk of growth after 2003, the only difference is that those markets peaked in 2006 and Seattle peaked in 2007, likely because the equity locus money moved from the Bay Area to Seattle/Oregon in 2005. Believing that Seattle will not see large price declines is a fantasy, it is behind the curve but will probably get clobbered even harder because a lot of appreciation was based on Californian speculation.
B-
It might get hit as hard and see large declines. Iet’s just put it this way, I wouldn’t be speculating on the market right now as a buyer. But to say that Seattle will drop as much as CA is an outright lie unless you have some data to prove it!! Who knows, I might be eating crow when the next several price reports are released, but until then I’m sticking to my story.
Eleua-
When you say 60-80% from the peak what are you referring to? Prices? Growth?
Q,
Prices.
No, I’m not insane.
Q-Diddy –
Why wouldn’t prices decline as much for comparable areas of California and Washington? I have a hard time imagining why prices would decline more (percentage wise) in Silicon Valley/SF (where I live now) than in Seattle/Bellevue. The run up percentage-wise was basically the same, we just started at a higher price (and earlier) down here. I agree with you that some places in Cali are going to be totally decimated, like Stockton/Tracy and the IE, but when comparing metro areas I think the carnage will be similar across most states.
B-
A lot of it is due to the local ecnomy. Businesses here are thriving and that in turn supports wages, which supports housing. Add to that stimulus program, FNMA/FHLMC regulatory changes and decreasing interest rates and whatever else the Fed will throw in. Growth here will slow down of course (it already has), but will prob be moderate to flat.
http://seattletimes.nwsource.com/html/homevalues2007/2003714481_homevalues20.html
B-
A lot of it is due to the local economy. Businesses here are thriving and that in turn supports wages, which supports housing. Add to that stimulus program, FNMA/FHLMC regulatory changes and decreasing interest rates and whatever else the Fed will throw in. Growth here will slow down of course (it already has), but will prob be moderate to flat.
http://seattletimes.nwsource.com/html/homevalues2007/2003714481_homevalues20.html
Jeez. Tell me you didn’t just link to Lizzy “cheerleader” Rhodes to justify your specious argument. I hear Lereah and Yun think housing’s hunky-dory too.
In my opinion, Lizzy will have done more harm to more homeowner finances than all the subprime lenders in the Puget Sound.
In case my point isn’t clear: she’s a hack.
Q,
The stimulus program is good for one trip to Wally World, or perhaps two weeks of the mortgage. GSE regulatory changes make for a longer fuse and a much, MUCH bigger boom.
Interest rate decrease? In your dreams. Soon, we will be remembering the early 80s with fond nastalgia. Ask yourself, after the mortgage sector defaulted on hundreds of billions of loans, why would people that still have money want to put it at risk for interest rates that are at historic lows?
The FED doesn’t set rates or dole out money for loans.
Seattle is going to do a huge cliff dive in real estate pricing. Yes, that is tough to swallow, but it is still true. I don’t care what the local fish-wrap has to say about it. They are in the business of telling everyone that everything is fine. Remember, they all own homes. They are just as much in denial as everyone else.
Seattle is by no means special, immune, or different – just late, clueless and arrogant.
B, I think you’re probably wrong on your claim that Seattle has had just as much of a run-up as your area, but in any case, Seattle has been much less cyclical that California over the past 30 years. By that I mean there hasn’t been a cycle. And by and large, our economy has plugged along pretty well when other areas haven’t.
As to E’s claim that property values will decline 60-80% from their peaks, that just not going to happen absent something very severe happening to the economy, or perhaps a pandemic that kills off 40% of the population.
As I mentioned in somewhere, I was priced out of houses and into condos back in 1977. At no time since have prices decreased any significant amount. I’m pretty sure you can’t say that for any populated area of California. I’d guess each major city has had probably at least two significant downturns in that time.
Eleula wrote: “Seattle is by no means special, immune, or different – just late, clueless and arrogant.”
Q–It’s rather pointless trying to argue with someone who thinks their predictions have any value at all, and then is rude on top of that.
It’s impossible to predict real estate prices. Anyone who thinks otherwise is delusional.
KLK,
It will happen, precisely because the economy is going to tank, and tank hard. Unless you are 90 years old, this will be a life-shaping event.
Why will it tank? Real estate speculation gone bad. The kind of mindless speculation you saw around here in the 2004-06 time frame.
Interest rates will be double digit for A quality borrowers, and standards are going to go through the roof. It would not surprise me to see 30% down payments as standard. Ask yourself, how many GenXers have 30% of the median house in savings?
That’s $150K for a $500K house. $75K for a $250K house. If they qualified for a $150K house, I’d be impressed. Remember, equity is just one more year away from total destruction. How do you think Bainbridge/Mercer real estate would do if they didn’t have a steady drip of California funny money? We will soon find out.
Jobs will be destroyed, as well as available capital. This is what happens when you engage in mindless speculation and simplistic platitudes like “real estate always goes up” and “Seattle is special.”
The 2000s pricing paradigm is over. You won’t be able to securitize mortgages, which means that available funds will dry to a trickle.
Scoff now, but 2 years from now, you will wish you had used this time to prepare.
KLK,
Q is asking good questions and I think we are having a meaningful dialogue.
It is possible to predict real estate prices. The entire REIC has been predicting that it would never end.
Some of us predicted that it would end in a spectacular fashion.
You choose whom you wish to listen to.
Inventory is a pretty good clue as to which way real estate prices are going to go – somehow the market has to work through the 12,000+ houses and condos for sale in King County.
Kary said: “As to E’s claim that property values will decline 60-80% from their peaks, that just not going to happen absent something very severe happening to the economy, or perhaps a pandemic that kills off 40% of the population.”
Without arguing whether a massive price decline is possible in the Seattle area, there are plenty of precedents around the world that demonstrate no major catastrophe need occur for real-estate prices to drop 60% or more. Japanese real-estate prices dropped up to 80% off their peak in the late ’80s without the need of any major disaster (most homes in Japan are still 50% less than the ’80s peak values). Hong Kong also saw massive property price declines of over 50% shortly after unification (prices still haven’t fully recovered there either). Historical research of prices in Holland, going back many hundreds of years, have shown that property prices have a tendency to fluctuate by 60% to 70% every hundred years or so (leaving an average of about 0% apprecation, when adjusted for inflation).
There are many other instances where property prices have tanked big time without the aid of war or pestillence.
Frankly, I don’t think massive price drops are all that scary. It is easy to get worked up thinking a massive price drop would be the end of the world, but there are more than enough examples to demonstrate this is NOT the case. It’s not as if society collapsed in Japan when their property prices fell. Life goes on…
Eleua-
GSE regulatory changes make for a longer fuse. Why? Doesn’t raising the minimum cap while tightening credit provides liquidity for the more qualified borrower?
Why would people put money back into the mortage sector? Because it is still a great source of reliable income and provides spread over risk-free treasuries. Portfolio managers aren’t paid to match risk-free returns. The secondary mortgage mkt will come out of this much healthier than before.
The Fed doesn’t set rates? Actually they just did! No, they don’t set mortgage rates, but they do affect them.
Seattle is going to do a “huge cliff dive” – Sure, there’s always a possibility that it CAN, but until it DOES, why the negativity?
Affluent-
You forgot the other side of the equation – Demand. I agree with you though, inventory (supply) seems to be outpacing demand lately.
Eleua-
This is what happens when you engage in mindless speculation and simplistic platitudes…
Aren’t you doing the same thing?
Just the facts please.
“Doesn’t raising the minimum cap while tightening credit provides liquidity for the more qualified borrower?”
Sure – in a stable housing market with appreciating prices.
But I don’t think banks are going to loan money at reasonable rates on a depreciating asset. (housing) I think mortgage rates are going up, regardless of what the FED does.
Nolaguy-
Let’s ask some of the rate experts here. Where are rates lately? Anyone? I’d bet they’re going down…but not with 2 or 3 handles (2,3 percent) like before. But hey, 4 or 5 handles ain’t a poke in the eye either!
Banks will continue to lend, but they will be more conservative on how they do it. It’s logical, If you ran a bank you’d do the same thing. Without a secondary market, banks will not loosen up on credit, but they still will want to lend. It’s a profitable business with about 200-300ish bps of fat. You do the math.
“But I don’t think banks are going to loan money at reasonable rates on a depreciating asset. (housing)”
This is what we found out in Japan – even if the banks can borrow money from the central bank at zero interest, they still aren’t going to lend it out if they think that principal isn’t going to be repaid.
Affluent-
We’re not Japan. There are regular Joes and Jills in the USA that want a mortgage and can afford one. Banks will lend to these customers.
“Banks will continue to lend, but they will be more conservative on how they do it.”
Agreed – I think we just have different views of what “more conservative” will be.
Regardless, this will significantly reduce the number of people that will be able to get mortgages. The supply of buyers will be reduced – which will impact housing prices.
“We’re not Japan”.
That’s right. Japan had a country full of savers and they weathered the recession.
The USA’s regular Joes and Jill are not savers – they won’t have that down payment that the banks will start requiring.
The coming recession could be worse that Japan, IMO.
“Affluent-
We’re not Japan. There are regular Joes and Jills in the USA that want a mortgage and can afford one. Banks will lend to these customers.”
And there weren’t regular Hiro-sans and Atsuko-sans in Japan that wanted a mortgage and could afford one? If banks view housing as a depreciating asset, they will demand huge down payments to protect themselves from that depreciation. As Nolaguy noted, generally speaking, Japanese save and we don’t, so down payments will be more of a problem for us than for them.
Nolaguy-
What is a recession to you? What is it in financial terms? Think about this one a little more.
We may be heading towards a recession, but we may not be stuck in it for too long.
Banks are already demanding higher scores and more down payment, but they aren’t going about it unreasonably. Banks are recalibrating what a true “borrower” looks like. It probably wasn’t a good idea to put Fast Food Joe into a million dollar home.
Nolaguy and Affluent-
Banks don’t make calls on depreciation or home values. They hire appraisers for that. Yes, some appraisers were pressured and some had different motivations, but banks don’t try and predict which way the value of homes will go. They try to rationalize the customer. Will he/she able to pay? This is a credit phenomenon.
The market is already reduced and home prices are already falling. Are we at the bottom? Perhaps, maybe not. But we definitely are not at the highs and banks still need/desire to lend. Albeit to a smaller pool of safer customers.
Q,
Great questions. I enjoy the opportunity to dialogue.
Raising the GSE cap is an attempt for the private sector to shuffle bad mortgages off onto the GSEs. If the mortgages were good, the private sector would take them, albeit at a higher interest rate. Even if the mortgages are currently sound, this increases the portfolio of the GSEs beyond what they can handle. They still have not published audited financials, but we want them to take on more risk?
Any further downturn in the market would put those mortgages under pressure. The GSEs carry the appearance of gov backing, but they do not have it. Thus, the spreads are lower, and the potential for a huge fallout to be higher. Mispricing of risk is what this entire crisis is about; why add to it?
It just buys time and delays the inevitable, but with a bigger bust when it happens. Perhaps we learn nothing. Here, touch that red hot stove again…
There isn’t going to be any significant secondary market for mortgages. We sold the world on our MBSs, and they didn’t like the taste. Our response? Sucks to be you.
Think they will want another bite? I think not. Would you? If they buy these products, you can bet the interest rate will be very high. Low mortgages are in their final days.
Your view on the FED is completely wrong. The FED FUNDS TARGET sets nothing. I’ll say that again: THE FED FUNDS TARGET SETS ABSOLUTELY NOTHING. All it does is tell the FED how much to slosh the member banks to keep the rate they lend to each other in a stable range. As credit collapses, the FED has to lower rates, lest they drain the remaining liquidity and cause a banking bust. That is what this last week was about. Credit is collapsing, yet the uninformed are cheering the rebirth of our economy. YIKES!
Regarding my “mindless speculation and simplistic platitudes”…
I wonder what you are referring to? I tend to bring some pretty good reasons for why I say what I do. I lack the comfort of the herd, so I have to do my homework. When I say that real estate will go down, I offer reasons. When I say that the viability of the monoline insurers is the only thing between us and a crash, I back it up.
11 months ago, I was on this forum warning of a banking crisis that would be caused by, and threaten real estate. I was catagorically dismissed. 5 months later, it hit with full force.
I don’t consider what I say to be negative. Sure, if you are fully invested in speculative real estate, overpriced stocks, and money markets you probably are in for quite an expensive education. The reason for this descends from a profound lack of curiosity regarding how the money system operates. People just say, “invest for the long haul” and “real estate always goes up” and think they have it covered. We will soon disabuse people of those frauds.
Being able to see around the corner is very handy when trying to prepare for major events. You can continue to believe that we have something special, which innoculates us against the wave of financial chaos that is sweeping the nation. You can also take a cautious stance and realize that Seattle is just another city with people that have overpaid for their homes, and like other cities, will suffer the same fate.
Happy thoughts and wishful thinking are no match for economic reality.
Excellent analysis Eleua. Spot on as usual.
The upcoming deflationary crash in assets (housing, equities, cars, boats, art, gadgets, st. joseph statues…) will be epic.
The best way to prepare is to be debt free and have plenty of cash around and lay off the kool-aid as much as possible.
60 – 80% declines is a depression, a world-wide depression of epic magnitude.
Eleua’s dire predictions are chilling, yet it appears she is happy about what she’s saying. I find that disturbing.
Being new to this reading, I have no idea if Eleua has the background to be correct or not.
What I can say to everyone: a depression of the magnitude she is hoping for will create wars like we’ve not seen before. And, within our own city, who will we trust?
In looking at my own family, here’s some data:
mom – still alive, owns her own house with a small $10,000 mortgage. good, we’ll all go live with her in that 3 bedroom rambler.
me/wife – $700,000 house with a $350,000 mortgage. If we lose 60 – 80%, what’s the point of making those payments? Zip.
my sister – $550,000 house with a $300,000 mortgage. Ditto.
my sister 2 – $300,000 condo with a $280,000 mortgage. Ditto.
my brother – $400,000 house w/acreage, $200,000 mortgage. Ditto.
My daughter – $225,000 condo, with a $210,000 mortgage. Ditto.
This family isn’t unusual, but if Eleua is correct, my mom is going to have a lot of company.
The crime rate is going to be astronomical, and it won’t just be petty. I’d recommend stockpiling ammo and guns right now.
Or at least, not rising to the doom and gloom that Eleua is preaching.
These blogs are not news, they are a frightening display of meanness from some, and well-meaning discussions from many.
But, do not mistake: if the sky-is-falling-crowd captures too much of your attention, they gain footing and credibility. You have got to choose your sources of information, and news.
We are certainly in a changing market and a changing world. Do not hover too long on these blogs, they will eat you alive as they have Eleua, Synthetik and a few others.
Mike, why do you consider someone’s prediction of a decline in asset prices “a display of meanness”?
Is a prediction of rising asset prices considered “goodness”?
I think looking at data or an opinion this way is partly the cause of the current bubble in asset classes. Some people made decisions based too heavily on emotion.
Gee–I’m late to my own party. It’s been pretty busy lately. This is a changing market and I do think what’s great about “these blogs” is that different views can be heard. As long as it’s a healthy debate of expressing views and not one sided, low or mean…I think it’s great.
I don’t buy into gloom and doom nor do I RE cheerleaders saying everything is coming up roses. Things don’t always pencil out…sometimes there’s more to buying a home than pure profit. You don’t have a guarantee of success if you were to take all of your investments and dump it in the stock market…guess you can leave you money in CDs or in your mattress if you want.
Nothing is cut and dry…at least not to me.
I do believe that people should learn as much about money and credit as possible (even in school, Jillayne!) and make informed decisions…and be responsible for those decisions.
Eleua-
“Raising the GSE cap is an attempt for the private sector to shuffle bad mortgages off onto the GSEs. If the mortgages were good, the private sector would take them, albeit at a higher interest rate. Even if the mortgages are currently sound, this increases the portfolio of the GSEs beyond what they can handle. They still have not published audited financials, but we want them to take on more risk?”
What makes you think the private sector is trying to shuffle bad mortgages off? These are customers with high FICO’s and low LTVs. The more traditional borrowers actually. Setting a higher conforming price cap does not equal a downgrade in credit. The GSE can handle this extra addition. They already hold a ton of captital as required for being a GSE. This move won’t break the bank for them.
“There isn’t going to be any significant secondary market for mortgages. We sold the world on our MBSs, and they didn’t like the taste. Our response? Sucks to be you”
Actually, investors are still buying MBS and in the billions of dollars. Merrill Lynch (et al). who took a huge hit from subprime and CDOs have already said they will remain in the business, although to a lesser extent. The market isn’t completely shut off, the spicket is just turned down and rightfully so until more investors can digest the credit. The market will rationalize and correct itself and the game will slow down to a more reasonable pace. And we are right…it does suck to be them! Understand the credit structures before you make your bets!
“When I say that the viability of the monoline insurers is the only thing between us and a crash, I back it up”
Companies have already wrote down a large portion of their investment portfolios due to the monolines having their ratings decreased to less than AAA. They have already set aside larger reserves to compensate for this lost. Companies did this in 4th qtr to set themselve up for 08 and beyond. Why do you think BofA bought Countrywide? Why was JP interested in WM? Not everybody thinks gloom and doom like you. In fact, they’ve already put their money where their mouth is. There is a crap load of capital sitting on the sidelines right now. The smart shops have already and continue to make their bets. They haven’t all just jump ship. They will put money back into this system.
“The Fed Target Rate Says Nothing”
Uhh, you mean the actual cost of borrowing for banks don’t mean anything? So if I’m in the business to lend and someone says they can let me borrow for cheaper I should turn it down? U don’t make any sense. Already the lower FF rate have driven down LIBOR which in turn has made banks more profitable because the interest on bank assets lag the liabilities. LIBOR (liabilities) resets monthly or quarterly while most home loans (assets) reset 3 to 5 years. Also home loans have floors, so they don’t always go down.
Mindless speculation is just as bad as senseless fear. You say you’re not following the herd, but in fact you are. You’re acting like the scared investors who are sitting on the sidelines earning 3 percent on Treasuries rather then the 6-7 percent on AAA MBS.
@ Mike:
Yes.
Not so. I am actually quite bummed-out that the last half of my life will be spent in the smoldering aftermath of our financial lunacy. I am just trying to find a way to amelioriate the damage and help others understand what is coming their way.
Background is not important. A good financial history of the US is a good place to start. Also, get a wide variety of opinions and see how everyone arrives at their conclusions. Some arrive at conclusions, and then work backwards.
I never really considered the war angle, but you might be onto something. China and India are going to have 2billion people to keep mollified, and without huge cash infusions from the US, that will be tricky. They have no ability to project power, so I would imagine they will dust it up with each other.
The only war within our own city will be of a civil nature. Nobody has the ability to project power into the US. The only threat we have to worry about is Russian missiles. If they try that, we are all dead within the hour, so who cares?
Family will be important in the upcoming few years. Treat them well.
Thank you for illustrating the core of the matter. This is my entire point.
Mother’s Day is coming. Make sure you give her a phone call. Perhaps if we all stayed out of debt, we wouldn’t have this problem?
You catch on quick. That’s what I love about Seattle. Everyone is so brainy and enlightened. Give ’em a chance to see the dots, and they connect them very quickly.
Seriously, the crime will spike. We have 300M+ people in a country that can probably employ enough to support 240M. Someone is going to have to get off the merry-go-round, or do without. This is going to suck. Katrina was a foreshadowing of what is to come. Sorry, I don’t make this up. I just pay attention to what is happening around me.
I’m not preaching meanness. If I were a real meanie, I’d tell everyone to jump in and grab the biggest, baddest mortgage you can possibly get, and buy that McMansion or Mercer Island dream home. Go buy a brand new XC-90, and take the family on an exotic South Pacific vacation. Invest all your childrens’ college money in the banking sector, because Cramer says the bottom is in.
No, I’m saying that people should be prudent with their debt management and use this opportunity to scale down and pay off debt. Get into cash and watch the banking sector like a hawk.
If that’s doom and gloom, I’m afraid that the next few years are going to suck worse than they need to. We are going to reap the natural harvest of mindless speculation, which is a punishing destruction of debt and excess. This happens if I post here or not. Happy thoughts can’t stop what 3 generations of bozo-Americans have done to our economy.
I wish it were not so.
Perhaps if we all restricted our exposure to the candy-coated platitudes that Wall Street, Washington, and the REIC put out, we could avoid any icky consequences. After all, it was the bloggers that popped the bubble. Had it not been for us, we would all be living in $2M houses by now. Why couldn’t all the bitter renters just leave well-enough alone?
Mean people suck.
E wrote: “Why will it tank? Real estate speculation gone bad. The kind of mindless speculation you saw around here in the 2004-06 time frame.”
The entire county’s economy is not going to tank because 3 states had “mindless speculation” in real estate. It might tank for other reasons, but not over real estate in 3 states.
And you cannot predict real estate prices because you cannot accurately predict any of the many variables that affect prices. The exception would be the collapse of the economy probably would cause the collapse of real estate also.
Oh, and another exception would be where you see “mindless speculation” driving up prices in excess of 15% a year, there it’s easy to predict a decline following that. It doesn’t take a genuis.
AFB wrote: “Inventory is a pretty good clue as to which way real estate prices are going to go – somehow the market has to work through the 12,000+ houses and condos for sale in King County.”
I’d say sales volume (in units, not dollars) is probably a better indicator. And that number did not look good last month, and will probably look even worse this month.
E wrote: “Your view on the FED is completely wrong. The FED FUNDS TARGET sets nothing. I’ll say that again: THE FED FUNDS TARGET SETS ABSOLUTELY NOTHING. All it does is tell the FED how much to slosh the member banks to keep the rate they lend to each other in a stable range. As credit collapses, the FED has to lower rates, lest they drain the remaining liquidity and cause a banking bust. That is what this last week was about. Credit is collapsing, yet the uninformed are cheering the rebirth of our economy. YIKES!”
I can actually agree with you on this. And if you said IF the economy collapses, real estate in Seattle will go down 60-80%, I could probably agree with that. But if the fed and Congress manage to somehow save the economy from depression (as opposed to recession), I don’t see it.
As to another poster, you don’t necessarily need economic collapse or a pandemic to see major declines–one other scenario would be what I call panic buying. Situations where the price rose very quickly over a handful of years, e.g. 100% in four years might do it, but even that might not be enough.
Eleua-
Speaking of power & modestly off topic: what is it like to land at night onto an Aircraft Carrier? My mom just got back from San Diego and visited the USS Midway. You can e-mail me offline. Thx.
Kary,
Agreed. Inventory up in my neck of the woods is really building and pending activity from those that inform me is not looking well. On the other hand, refinance activity is off-the-charts.
Tim, Tim, Tim . . .. Don’t you know? All those mortgages that are going to reset–they’re going to be foreclosed! No one is refinancing. 😉 😀
Q,
Great questions.
Think about this. If the jumbo-morts were written on such good borrowers, why all the weeping and wailing about the GSEs not taking them? Shouldn’t the private sector take these? If they are not, why shove it off on Fannie? That seems like putting risk in a quasi-subsidised environment.
The GSEs didn’t get into the jumbos because the risk of default is too high. Yes, home prices have risen, but so has the risk. If you want to put these into the GSEs, we will have a bigger fallout than we are now facing, as risk will not be appropriately assessed.
Yes, the secondary market is still there, but it has been in contraction. This is why all the turd-banks are no longer doing subprime. The world is hip to our financial alchemy that treats BBB- as AAA, and right now we are telling them that A = AAA. They will catch onto that as well.
When the insurance goes “poof” all that debt will have to be repriced. This is a financial nuke that is ticking toward zero. We are literally one brainwave away from that happening. As soon as the ratings agencies fear the lawsuits and criminal investigations more than causing a financial meltdown, that will occur. It very well may happen before Spring.
Name the monolines that have been downgraded. FGIC and who else? MBIA was put on “double secret probation” or some such nonsense. It was a way for the rating agency to downgrade it without actually downgrading it.
“Why did BAC buy CFC?”
Easy. To keep their level 2 and 3 assets from being marked to market.
JPM interested in WM? Rumor. If so, it would be for the same reason.
While we are at it, Wells is holding quite a bit of nasty paper that needs to be marked to market.
The money on the sidelines is the smart money that is not lending to banks right now. They know what is coming because they see the insolvency of those instituions. This is a caveat emptor moment.
Your understanding of the FED and its relation to the banking system need some serious work.
The FED doesn’t set the rates banks borrow. They set a target that is for them to add/drain very short term liquidity to help banks meet a consistant and reliable target. That’s why it is called the “TARGET RATE.” You can’t borrow from a “target.” They follow what the banks are lending to each other to balance overnight reserves that are required to back up their lending portfolio. As the reserve requirement decreases, the rates banks charge each other also decreases. In our present scenario, banks are short on capital, so the FED is very jumpy about draining liquidity. It will drop the target rate and add liquidity.
The biggest myth is the FED sets the rate at which banks aquire funds to loan out. This just does not happen. Banks get that money from private sources. Back in November, Citi couldn’t roll their commercial paper, which is why they went to the Arabs to get a 14% payday-loan. They are so messed up they are in a position of having to borrow at 14% so they can loan out at 7%.
It was just to keep them alive for one more quarter.
Citi went to the FED and asked for an overnight loan, and the FED said “no.” The other banks said “no.” Traditional funding sources said “no.” Enter Abu Dhabi at 14%…
This caused a rally in banking stocks. That crapload of money is out for this reason. The people that are buying the BIX/BKX are retail suckers. It’s called distribution.
Borrow short/lend long is what got the banks in trouble to begin with. They locked up money at historic lows, and their funding sources went up in price. Add to that the idea that most of the assets they are holding to offset their reserves are insolvent, and you have the makings of a bank-run.
Doing more of this will not help.
Yes, your AAA MBS are getting 300-400bp over treasurys. Keep in mind that the AAA tranche of those assets is selling for 80some cents on the dollar, whereas treasurys are going out at full value. If you are in the A or BBB tranches of your MBS, you are lucky to get 30 cents.
My treasury bills are backed up by 8000 nuclear warheads and 110K IRS agents. Your MBS is backed up by J6P’s willingness to pay a mortgage on an upside-down house.
I’ll take the low yield and get return-OF-capital.
I enjoy the chat. I hope you do as well.
“Oh, and another exception would be where you see “mindless speculation
@ Tim,
Don’t know about the carrier. I was a P-3C pilot and chased submarines. If you want to know what it is like to be on fire at 10pm, 600 miles north of Iceland in the middle of March, let me know.
@KLK,
It wasn’t three states. It was the entire West Coast, Arizona, Nevada, Florida, Ohio, and the BOS-NYC-WAS corridor. That’s the bulk of the US population. California alone would cause this mess.
BTW, I did predict this mess over 2 years ago. Go to my blog and see for yourself. At the time, the REIC was predicting the new paradigm of never-ending property appreciation. After all, real estate always goes up. Buy now, or be priced out forever. (or so I am told by those “in the know”)
The economy is going to tank, even if Seattle appreciates 50% per year (because all the smart people live here). Seattle would tank, even if the economy stayed stable (because we are overpriced and people can’t afford to buy unless they have a huge buydown from transported equity, or take out a zany loan).
They will both happen, and they will be feeding off each other. When you get a bubble that feeds the economy, which feeds the real estate sector, which feeds the economy (because real estate IS the economy), you get the opposite when the bust comes.
It is foolish to look to Congress and the FED as having the tools to avoid recession. Congress can’t avoid it, and neither can the FED. What can they do? This I have to know.
It was mismanagement by both that caused this mess. More of the same won’t help. What will help (long term) is reinstalling all of the financial safetys that were removed to keep the bubble brewing. Of course, this only will put a bullet into the head of the current economy, but it is necessary. Perhaps our grandparents were not so dumb after all?
Eleua,
OK fine. So, what is it like to be on fire at 1Opm at night, 600 miles north of Iceland in March after pestering sub’s. To make it more exciting, at what altitude? I’d love the “R -rated” version, but this is a family blog, so “G-rated” will do.
; >
Eleua
“As the reserve requirement decreases, the rates banks charge each other also decreases. In our present scenario, banks are short on capital, so the FED is very jumpy about draining liquidity. It will drop the target rate and add liquidity.”
You just proved my point. Liquidity is what banks need to keep the engine lubed. The FED EFFECTIVE RATE (the end of day average of Fed Funds) has dropped from 5.25 in August to 3.22 as of yesterday. I agree with you that Banks don’t get their entire funding from the Fed. But it is still a good chunk of their liabilities. I would say it’s about 5-10% from my experience.
What happened to the Citis, Merrills et al was that their off-balance sheet SPEs (Special Purpose Entities that issue CP, MTN, etc.) that were funding anything from Auto loans, CMBS, Cards to you guessed it, Sub Prime, blew up when defaults began to rise in Sub Prime. The inability to issue CP, MTN, etc. triggered a mass liquidation of assets and supply began to outstrip demand. As buyers of these assets began to jump ship, they also stopped lending to banks regardless of how well capitalized they are. Citi and other banks who carried A ratings typically required to borrow Fed Funds had their lines yanked from underneath them (HERD MENTALITY). Keep in mind that these SPEs typically were 8-10% overcollateralized, meaning they had plenty of cushion to weather fluctuation in asset performance under normal conditions, but we all know now that Sub Prime was anything but normal.
The events we’ve seen in the last 6 months was about the lack of understanding and regulation of the Sub Prime market. From the small time lenders (who are all bankrupt or bought), to the SPEs that funded them, to the Rating Agencies that gave them AAA, to the Investors who purchased them, to the government which didn’t regulate them. ALL CARRY THE BLAME.
But we have to move on and not just JUMP SHIP! A herd mentality to shut off lending doesn’t help this. The banks that should be out of business are already gone. Take a look at recent history and you’ll see what I mean. MBNA, Fleet, Providian all monoline credit card issuers ACQUIRED. Countrywide a monoline mortgage shop, ACQUIRED. What does this tell you? Banks with limited sources to liquidity will be shut or get bought out. Citi has to pay for this extra liquidity because it lacks the retail deposits like BofA or Wells. It has been trying to acquire a retail franchise, but always leaned on SPEs and the Capital Markets for liqudity until that market completely shut down. Even WM (which has a huge exposure to mortgage) has sufficient liquidity to 2010 even if it stopped borrowing simply because of retail deposits!!
Your other points:
“Banks borrow short/lend Long”
Banks will always do this if rates are favorable!! They’d be stupid not too! They aren’t insurance companies, they don’t take a Neutral Duration Gap approach! The trick is balancing the right mix of Interest Margin and Liquidity premium
“The GSEs didn’t get into the jumbos because the risk of default is too high. Yes, home prices have risen, but so has the risk. If you want to put these into the GSEs, we will have a bigger fallout than we are now facing, as risk will not be appropriately assessed.
The risk here is already being assessed. They’re making it tougher and tougher for someone to qualify even if the conforming cap is increased. They’ll want to know more, more documentation, more income verification, do you have a Credit card, what’s your payment history, etc. They’re not going to reopen the flood gates!!
E wrote: “Think about this. If the jumbo-morts were written on such good borrowers, why all the weeping and wailing about the GSEs not taking them? Shouldn’t the private sector take these? If they are not, why shove it off on Fannie? That seems like putting risk in a quasi-subsidised environment.
The GSEs didn’t get into the jumbos because the risk of default is too high. Yes, home prices have risen, but so has the risk. If you want to put these into the GSEs, we will have a bigger fallout than we are now facing, as risk will not be appropriately assessed”
They didn’t take them because they couldn’t.
And I really doubt there’s a higher risk of default on a $600,000 house in Seattle than there is on a $400,000 house in Nebraska, if you’re talking about chance of default. And as to risk of loss if there is a default, Nebraska is probably higher on a $400,000 house.
The nationwide single limit was absurd.
czb wrote: “Kary,
Such “geniuses
E wrote: “It is foolish to look to Congress and the FED as having the tools to avoid recession. Congress can’t avoid it, and neither can the FED. What can they do? This I have to know.”
So you don’t believe in, understand or possibly even know about monetary and fiscal policy? And you’re making predictions on the economy? All I can say is wow!
Seattle vs Nebrask: I don’t know, Kary. Seattle might be a higher risk…
From city-data.com
Seattle:
Estimated median household income in 2005: $49,297 (it was $45,736 in 2000)
Seattle $49,297
Washington: $49,262
Estimated median house/condo value in 2005: $384,900 (it was $259,600 in 2000)
Seattle $384,900
Washington: $227,700
Lincoln, Nebraska:
Estimated median household income in 2005: $45,790 (it was $40,605 in 2000)
Lincoln $45,790
Nebraska: $43,849
Estimated median house/condo value in 2005: $131,700 (it was $104,100 in 2000)
Lincoln $131,700
Nebraska: $113,200
This data could be wrong, but incomes are similar, but Seattle is more leveraged.
KLK,
Tell me, EXACTLY, what happens when the FED drops the Funds Target? How does that save the economy?
Take your time. You will need it.
Thanks for the numbers Nolaguy. I wrote two things:
1. And I really doubt there’s a higher risk of default on a $600,000 house in Seattle than there is on a $400,000 house in Nebraska, if you’re talking about chance of default.
This would go to your first numbers. Any you might be right there given our higher loan payments our chance of default might be higher. But default is more often a result of loss of job, illness, divorce, etc. So income alone isn’t necessarily a factor. But I’ll give you that you’re probably right there.
2. And as to risk of loss if there is a default, Nebraska is probably higher on a $400,000 house.
That the median in Nebraska is so low is what I was getting at. The risk of loss in a foreclosure on a $400,000 house that is worth over 3x the median is greater than the risk of loss on foreclosure of a $600,000 house in Seattle that is worth less than two times the median.
That ignore recent price appreciation in the two markets, which is why what I would like to see is a conforming loan limit that was equal to some percentage of the moving average of the median price in the area. For example, maybe 150% of the 3 year moving average.
Let’s say Nebraska was relatively stable the past three years, that would put their conforming limit at about $175,000 or so. And let’s say our median average over 3 years was $300,000–that would put our limit at $450,000.
I’m just picking those two numbers (150% and 3 years) out of the air, so they’re just examples. But the first is designed to make the limits local, so you don’t end up dealing with mansions in part of the country and shacks in another part. And the second is designed to prevent the limits from rising rapidly if you get a panic buying condition that drives the prices in an area up too rapidly.
Q wrote: “Tell me, EXACTLY, what happens when the FED drops the Funds Target? How does that save the economy?”
Hey, I’m not the one saying it will do nothing!
Great idea! Let’s institutionalize the bubble mentality.
Sorry, but at the end of the day, home prices are anchored to people’s ability to pay, and that means incomes. When all the enlightened folks in the coastal regions are paying 3x price/income than all the proles in Flyover Country, you know that will adjust.
I will grant that a slight premium may exist for certain markets, but not a 300% premium. That’s insanity, and to institutionalize it is just as crazy.
Honestly, how does this work? If an area has a price/income ratio of 10 or greater, do we allow the GSEs to take those?
KLK,
That’s what I thought. Nice dodge.
There is no link between the FED’s actions and consumer credit.
The FEDs actions are because of what is already happening to credit, and when they are dropping, that’s a bad sign.
The FED can’t save us. All it is doing right now is hiding the insolvent banks through use of the TAF. Check out the FED’s balance sheet, and you will see that its reserves are now negative for the first time since records of this have been made public (50 years).
You and Q can chirp all about how the FED and the banks are on the mend. It isn’t happening. It’s actually just the opposite.
The monatary and fiscal policy that is presently happening amounts to:
A shopping spree at Wally World
Hiding the insolvent banks through an anonymous bid
Oh, joy!
E, I think I’ve already said it doesn’t affect mortgage rates–that’s a supply and demand issue. The Fed can lower rates all they want, but if no one wants to invest in mortgage backed securities, it won’t matter a lot. But that’s quit a bit different than saying that there’s nothing the Fed and Congress can do to prevent a recession. That’s what, right out of a 1910 economics book?
And have I said the banks are on the mend? I think you’re missing the fact that I’m not disagreeing with you on everything you say. Just some of the things.
Eleua-
“Tell me, EXACTLY, what happens when the FED drops the Funds Target? How does that save the economy?”
As I mentioned before this helps keep the engine lubed, long enough for the market to right itself.
Lowering the Fed Funds Rate will not save the economy alone. More stimulus packages, regulation on subprime, more scrutiny/accountabilty on the mortgage mkt., capital infusion for the wrappers (insurers), investor due dilligence, etc. All these things will help save the economy.
KLK –
It was not “3 states housing” that is going to bring down the economy. In case you haven’t noticed, its 50 states housing PLUS several EU countries that have experienced the same bubble. It would be quite a coincidence that Seattle has a housing bubble that is separate, and thus will not be effected by, the rest of the worlds housing bubble that occurred at the exact same time. Mortgages are also just the largest part of the credit bubble, which also includes securitized 0% down Escalades (buy two for your new McMansion) and 0% APR credit cards (get seven of those to buy the rest of the shit you don’t need).
Once you educate yourself on the expansion of credit in the entire world since around 1998, and how that caused a housing (and credit) bubble across most of the western world, then you can understand the consequences of what happens when it pops. And it is popping right now and quite a bit quicker than I had expected. As the US drags into a recession, expect to see the EU join us in rapid fashion and their housing bubble will similarly burst (it has already started to). I really suggest you start reading the WSJ, FT and Economist regularly, they have all covered the credit bubble since a couple of years ago and the scope of it worldwide is truly frightening.
Q-Diddy –
You have an awful lot of faith in the magical powers of the government. We barely avoided a deep recession in 2002 by the Fed lowering rates to 1% and keeping them there, along with the usual government checks going out, subsidization, tax cuts, blah blah blah. The current banking crisis is orders of magnitude larger than Pets.com trashing the NASDAQ, so large that the government cannot save it. The amount of mortgage debt outstanding is more than our GDP. The amount of just subprime mortgages outstanding is well over a trillion dollars itself. These are the mortgages that are getting written down to pennies on the dollar. Maybe if the US was not running huge budget deficits it could help more, but there is a limit to the kindness of foreign banks. The Fed cannot do anything because this is not a case of liquidity problems. There are plenty of people lining up to take out as much money as the bank will give them, as we have seen in the last several years. The banks don’t want to loan because they do not think they will get paid back, not because people do not want to take loans at XYZ interest rate. The Fed is pushing on a string and has no real way to avert this, witness what the unprecedented 125bps cut this week has done for the world markets: not much.
b wrote: “It was not “3 states housing
b wrote: “The banks don’t want to loan because they do not think they will get paid back, not because people do not want to take loans at XYZ interest rate.”
Are you one of those people that think mortgages are not available? If not, how can you explain that sentence?
BTW, you can’t define the size of the problem by stating the amount of all outstanding mortgages. With the possible exception of some 20% mortgages, no pool of mortgages is worth pennies on the dollar (unless you mean maybe 99 pennies or some other significant number).
KLK –
Go read the latest Case-Shiller, basically every single metropolitan area in the country has had enormous housing growth from 2003-Present. I am not sure why you refuse to believe this when the information is available everywhere and from many sources. Ireland, England, Spain, they all have had similar housing bubble growth to California, again you can find this data anywhere. The fact that a house did not increase rapidly in Bumblefuck, North Dakota does not matter when the core problem is credit expansion. Their housing prices will get crushed just like ours, because nobody is going to lend someone who makes $80k a year $600k to buy a house, its just not going to happen anymore and was foolish when it did happen the last few years. What do you think occurs in a market when people who previously could get a loan for $600k can now get a loan for $300k instead?
I can’t find the data broken out by state, but for the nation I see them showing it went up 30% between 3Q 2003 and 3! 2007. That’s well less than 10% per year, and when you figure that Phoenix, Miami and major cities in CA all went up more than 50% (some almost 100%) in that same timeframe, that would mean many parts of the country probably saw less than 5% annual increases.
b wrote: “What do you think occurs in a market when people who previously could get a loan for $600k can now get a loan for $300k instead?”
I’m talking about the real world, not some hypothetical world that doesn’t exist. For the most part people that could get loans for $600,000 still can get loans for $600,000. Money is currently cheap and available, unless you’re subprime.
I guess if you aren’t out selling houses, what else is there to do?
About three years ago I begged and pleaded with a friend of mine from Denver to NOT buy a house. His reasoning was that the Denver area just hadn’t seen the price appreciation of California, Florida, New England or Florida.
He went ahead and got an interest only loan which he is now close to defalting on. He’s made several attempts to sell the house, none of them successful.
You see Kary, even though some areas of the country “fly over” such as Memphis or Denver haven’t seen huge price increases, they are are experiencing an enormous amount of foreclosures.
Why is that?
As E states, the easy credit situation was worldwide and Denver and Memphis (and Detroit, Cleveland, Atlanta, et al) took advantage, just like everyone else. Workers making $40K a year found that, through subprime and other exotic loans they were able to finally “buy” a house.
And they did.
So while appreciation may not have gone UP much, it sure is coming back the other way – and with a vengeance.
Since you’re in the field, why don’t you know this stuff?
B-
I don’t have faith only in the Gov., what I am saying is the Gov is trying to do something about it. Lowering the Fed Rate may not get us out of a recession, but it doesn’t hurt it!
Go back to my earlier thread about investor due diligence, stimulus package, FHMA/FHLMC, all these things will help the economy instead of sitting on our ass doing nothing.
Eleua-
One more point about the FED FUNDS TARGET not doing anything. I already mentioned that the FED FUNDS EFFECTIVE has come down from 5.25 since Aug to 3.22ish. The correlation between FFT and FFE is .90 for the last 5 years.
The correlation between FFT and CMT (Constant Maturity Treasury) rate is also .92 during that same time . Why is this important? Because MTA (Moving Treasury Average) which is based on CMT is the index used for most ARM loans. As the Fed lowers FFT the MTA goes lower which makes the resets less painful for ARM mortgage holders. This may keep them from defaulting.
“I’m talking about the real world, not some hypothetical world that doesn’t exist. For the most part people that could get loans for $600,000 still can get loans for $600,000. Money is currently cheap and available, unless you’re subprime. ”
Maybe.
In the third quarter, mortgages were harder to get than at any time in the 17-year history of the Federal Reserve’s survey of senior loan officers.
http://www.federalreserve.gov/boarddocs/snloansurvey/
Syntetek wrote: “So while appreciation may not have gone UP much, it sure is coming back the other way – and with a vengeance.
Since you’re in the field, why don’t you know this stuff? ”
What are you talking about? A story of one person in Denver who can’t sell after three years is no more meaningful than the story of the guy in Seattle that couldn’t sell his condo for 9% more than he paid for it 4 months easier.
And the “sure is coming back the other way.” Where? Not here, at least not yet. Basically flat isn’t moving anywhere with a vengeance.
BTW, if you want to watch something in Seattle, it’s not prices, it’s not inventory, it’s volume.
“And the “sure is coming back the other way.
And that -1.43% is a record monthly decline for the now almost 18 years of Case-Shiller data for Seattle.
Bored, the NWMLS data would show an even higher rise for I think May to August (as I recall around 20% annualized during that period), and a fall from then on. I was speaking of year to year data. Sorry for not being specific. I usuaally don’t look at month to month data, but instead compare to the same month of the prior year.
That little blip is the type of action I don’t consider healthy, but when you get year over year numbers in that range it really isn’t healthy.
Stated differently, YOY figures are better to look at, but those month to months can show you unhealthy trends faster.
I just realized I had the data in computer form, but not the percentages: Mean Median
January 2007 523,952 429,495
February 2007 512,521 429,925
March 2007 566,835 454,950
April, 2007 563,619 465,000
May, 2007 590,867 469,000
June, 2007 575,419 470,000
July, 2007 595,483 481,000
August, 2007 593,957 477,345
September, 2007 583,645 450,000
October, 2007 551,019 443,950
November, 2007 540,453 435,000
December, 2007 534,967 435,000
BTW, my guestimate for January 2008 (SFR only) is that the mean will be much closer to the median than any time in 2007. I don’t have a feel where the median will be though–it will depend on which parts of the county did more volume than others (because real estate is local). What I’m seeing if I’m doing my searches right is volume overall will be way down, probably 66 to 50% down from the prior January, and I think even down from the very dismal December.
The December volume took me by surprise, but I can see why January would be down.
BTW, both the above two posts are King County only.
Oh, nooez, could it be?
http://www.marketwatch.com/news/story/us-mortgage-rates-reverse-course/story.aspx?guid=78466647-C370-4AF7-8B75-0B5F9AF005F6&dist=SecMostEmailed
synthetik–As I’ve said, mortgage rates are supply and demand, not the fed. That article suggests rates are going up because of refinancing. The fed cuts might be causing increased demand for refinances (although I know at the same time some people are holding off thinking the fed cuts will cause the rates to go lower).
Also, all the news about variable rates resetting might cause people to move to fixed rate loans.
KLK –
It is not increased demand, for every refi there is some else not buying, it is decreased supply.
b,
I agree except change that to someone else not selling vs. not buying. If you are refying you are usually not going anywhere. I myself am in that should I refi or sell mode. Will let you know where I land.
“for every refi there is some else not buying”.
Actually, if someone does a no cost refi (where the rate is increased to cover the non-reoccuring closing costs), and it still reduces their monthly mortgage payment; they could still sell their home when ever they want.
If there are no closing costs, then there is no time needed to “break even” on the refinance.
b wrote: “It is not increased demand, for every refi there is some else not buying, it is decreased supply. ”
I’m glad that Ardell and Rhonda understand this, because it makes zero sense to me.
I was talking about supply and demand for mortgages, not property. People refinancing increase the demand for mortgage funds. Someone not buying doesn’t decrease the supply of mortgage funds (or anything else for that matter).
Kary,
You need a crash course in bubble-speak 🙂
E- you wrote this last paragraph onto the end of a good post from you, but this last paragraph just sucked. Platitudes in reverse are just as lame from you as anyone else.
E- you wrote this last paragraph onto the end of a good post from you, but this last paragraph just sucked. Platitudes in reverse are just as lame from you as anyone else:
Perhaps if we all restricted our exposure to the candy-coated platitudes that Wall Street, Washington, and the REIC put out, we could avoid any icky consequences. After all, it was the bloggers that popped the bubble. Had it not been for us, we would all be living in $2M houses by now. Why couldn’t all the bitter renters just leave well-enough alone?
Mean people suck.
TO ALL, A HAPPY NEW YEAR, AND A SAFE NIGHT! I LOVE THIS POSTING:
But, do not mistake: if the sky-is-falling-crowd captures too much of your attention, they gain footing and credibility. You have got to choose your sources of information, and news.
We are certainly in a changing market and a changing world. Do not hover too long on these blogs, they will eat you alive as they have Eleua, Synthetik and a few others.
Ardell wrote: “Kary, You need a crash course in bubble-speak ”
I guess so. Yesterday or today I was accused of picking on someone named Tim any time I used the term bubble blogger. There’s so much I don’t know about the bubble world, including who this Tim guy is.
LOL,
He’s actually “The Tim” and he’s the original author of Seattle Bubble. He’s still around, but he is out of town a lot and has enlisted some helpers to spread the “Bad News”.
What’s that Kenneth guy talking about?
Kenneth here. I didn’t write well, apologize for the claritycloud.
Eleua, the king or queen of gloomy stats and news generally writes pretty well. However, he/she said the following
at the end of one of his little ditties: “Perhaps if we all restricted our exposure to the candy-coated platitudes that Wall Street, Washington, and the REIC put out, we could avoid any icky consequences. After all, it was the bloggers that popped the bubble. Had it not been for us, we would all be living in $2M houses by now. Why couldn’t all the bitter renters just leave well-enough alone? Mean people suck. ”
And Kenneth replied: ‘- you wrote this last paragraph onto the end of a good post from you, but this last paragraph just sucked. Platitudes in reverse are just as lame from you as anyone else’
And Kenneth now says: ‘Trying to be glib and candy-coating-cute, he just came off as clueless as the cheerleaders he wants to quiet.
The Emperor has no clothes.
Housing prices dropping and becoming more affordable is actually a good thing….
You guys are great! This is one of the better threads ever on RCG (with the exception of Ardell’s “I don’t give an RA about banks) thread.
It’s nice to be recognized as the industry leader in gloomy stats. Thanks.
Anyway…back to my style of commenting….
Yes, I did throw out some grade A snark at the end of post #77, and that was to try to slap people into thinking about what is ACTUALLY being said by both sides.
On one side, we have all the “Golly-gee, Beav, if we just didn’t panic and trusted all the powers-that-be, our situation as the landed-class would be permanently cemented. Wouldn’t that be swell?”
On the other side, we have people that are actually trying to get you to think about “what if…?” It was the Bubble Bloggers that got this right. It wasn’t the case of a broken clock eventually telling the correct time. We all said that the lending market was unstable, and that all of you were loaning lots of money to louts, and they would default.
The REAL story is going to be when the A-paper defaults in large numbers. Yes, that will happen. There isn’t enough money on earth to bail that out.
What if…we went too far in getting people into homes?
What if…homes are overpriced on the Eastside?
What if…mortgage rates go up appreciably?
What if…lending standards are about to tighten beyond our life’s experience?
What if…we are in too much debt?
What if…the banks are about to blow?
What if…the FEDERAL RESERVE is out of reserves?
What if…the FDIC has only $50B and your demand account is thrid in line to get paid?
What if…the bond insurers get downgraded?
Would you want to be burdened with debt, overpriced assets, low liquidity, and a job that is linked to the credit bubble, REIC, and consumer discretionals?
Hey, I could be wrong. It happened a few years ago, and it might happen again. If I am totally off base, then enjoy your Eastside home. If you are within 20mins of Microsoft, it will probably appreciate to 400X income within the next decade.
If I am right…Pioneer Square flophouse.
LOL E! Actually close to Microsoft is faring much better than other areas. See my Sunday night stats. The less desireable areas that didn’t appreciate as much, are also the same areas that are getting hit the hardest with fewer buyers.
Buying where it’s cheaper is generally not a good plan…it’s cheaper for a reason.
E–Good post.
Kenneth,
Just as a point-of-order…
I’m not trying to silence anyone. I’m trying to get them to think.
E,
You are so often so misunderstood. What do you think of this Kenneth guy? I can’t seem to figure out where he is coming from yet. Sometimes I think he is an agent, but I hope not.
Ardell,
No idea about Kenneth.
Glad to hear your market is doing well enough. My RE sources on the Westside are starting to confirm my thesis. One friend is having her business go up while sales and prices are down. Reason? The newbie agents are getting washed out.
I’m hearing that the sellers are starting to grasp reality, and that is lubricating sales. Buyers think they are getting the deal of the century, when it is the sellers that are getting the deal of the century.
Hope all is well. Stop by a banker and tell him you give a RA.
(btw, how do you do smiley codes on this forum?)
All the best,
E
Providing a “center” for RE professionals since 2006….
E,
I would…but I still don’t give a RA LOL. I pick it up as and when it affects real estate. Some of it does and some of it doesn’t and some of it does here but not there 🙂
Just a colon and a right parenthesis.
I’m adoring your new style BTW. Maybe we “center” one another.
The Federal reserve bank needs to drop the interest rates, maybe back to 1%. Once the economy stabilized, the federal reserve bank need to increase the rates gradually (not like they did before, a quarter point every time they meet).
Jay,
Do you have any clue what the FED actually does?
Let me give you a little insight into where we are.
The bank run has already occurred, and the banks made a run on the FED. The FED is $18B in the hole and it is increasing almost $500M per day.
The depositors run on the banks is just around the corner.
They could drop to 0% tomorrow and nothing would change.
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