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« Bending slowly towards justice | Main | Fear the fish. Or don't. »

Jan 28, 2008

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Bubba

From the link:

"A wave of foreclosures and tightened lending standards have made it more difficult to obtain a mortgage, even for buyers with good credit ratings. And banks have been more reluctant to lend in light of the subprime mortgage crisis."


Really?

"Now if you listen to the news, you might think nobody can get a mortgage, but that’s a myth. If you can verify income and have good credit, you can get a loan. There are still 100 percent loans for first-time buyers."

Let's put all that into its proper perspective:

"In fact, after subtracting income taxes, rent, mortgages, car leases and loans, debt service on credit cards and property taxes, incomes rose 3.9% faster than inflation in the year through September. Commercial paper issuance is rising again, as are mortgage applications."

"But housing is now a small share of GDP (4.5%). And it has fallen so much already that it is highly unlikely to drive the economy into recession all by itself. Exports are 12% of the economy, and are growing at a 13.6% rate. The boom in exports is overwhelming the loss from housing."

"What Federal Reserve Chairman Ben Bernanke recently estimated as a $100 billion loss on subprime loans would represent only 0.1% of the $100 trillion in combined assets of all U.S. households and U.S. non-farm, non-financial corporations. Even if losses ballooned to $300 billion, it would represent less than 0.3% of total U.S. assets."

So WHAT could possibly be the actual reason that made "new home sales fell 26% last year", assuming that statement is accurate?

David Hoggard

Hillary Clinton running for president? (I'm guessing here)

Do tell, Bubba. Do tell.

David Hoggard

After much pondering, I figured it out, Bob. It was an Ed Cone post that caused the decline. Please tell me I've guessed it. What do I win?

(In case you can't tell, Bob, I truly hate rhetorical questions. What I'm hoping for here is for you to actually forward YOUR theory on the matter. Take a stand)

jimcaserta

People love buying assets when the prices are going up, but don't love them as much when prices fall. Prices are definitely falling in SoFL where my family is. People didn't blush buying a $500k house when the price was $450 last year, and was expected to be $550 next year, but when the price is expected to be back down to $450 next year, people don't want to see $50k disappear. It's a buyer's market in FL & CA right now. If prices aren't coming down to reasonable levels, that should make it a great time to buy!

Ha, on the WSJ link. Wesbury wrote a book about how to make the most of the market, back in 2000! From Amazon:

He says mutual fund investors, for example, should have a portfolio that's 50 percent index funds and 50 percent sector funds that buy new-era biotechnology and Internet stocks.
Also, the value of homes is in decline. Losses and measuring total assets are two totally different things. If home prices decline by 10%, the decline in asset values is more in the $1-2 trillion dollar range. How much have assets been devalued since the Dow was at 14k?

I'd be interested to see how many people sold property in hot markets like SoFL and moved to NC. I know one family that did, but ended up in Charlotte. I'd expect the number of people doing this will be less because there is less cash to extract from properties.

Ed Cone

IF the numbers from Bush's Commerce Department and those housing-haters over at the National Association of Realtors are to be believed, the causes of the declines, in descending order of impact:

1. This blog.

2. Phony consensus around climate change.

3. Babble, dribble, drool and spew.

4. The usual suspects.

5. Other stuff that does not surprise us.

6. Bernanke and Paulson and Bush and the Commerce Department and double-digit declines in the stock indexes, all conspiring to make people feel bad when they should be jolly.

7. The fact that the people cited in Bob's comment -- the ones who can still get loans, the ones who can verify income and have good credit -- weren't driving the bubble in the first place.

8. The fact that bubbles build on themselves, and people aren't flipping real estate anymore.

9. Enormous and as yet not-fully-accounted-for stresses on global credit markets.

David Hoggard

Hysterical comment, Ed. Made my night.

At least I guessed one of the causes correctly. But I'd still like for Bob to answer his own question.

jimcaserta

Good buyers were contributing to the bubble. People were putting less money down (as a % of sale price) and were buying more expensive homes. ARMs allowed a fairly constant payment, but people were even willing to pay a higher % of their incomes to their homes because they were a great investment. If a person who was willing to buy a given house for 300k will then tolerate a price of $450k, you have the makings of a bubble.

jimcaserta

There is a difference between speculation and investment. If you are solely counting on an asset to increase in price without a commensurate increase in said asset's ability to generate cash, you are speculating. Real estate is an investment when you can generate cash from it - rental properties. Many people expected home prices to increase faster than rents and incomes indefinitely. Lots of real estate investment was really just real estate speculation

jimcaserta

typepad didn't like my {rant} tags

Brian Clarey

We may not have been overpriced, but we may have overbuilt... there are a glut of $100,000 or so homes in my neighborhood that simply aren't moving and making it unrealistic to sell my own house, which is 10 years old, at this time.

Roch101

"3. Babble, dribble, drool and spew."

And splooge! Don't forget splooge.

anglico

You forgot 9-11, Ed. Rudy asked me to pass that along.

Bubba

I'll give Caserta and Clarey credit. They both tried to add something of value to further the discussion on the typical Ed economic nonsense thread.

We see ample evidence of the quality of response from the tag team members when they can't argue the merits of the point, and indeed, have absolutely nothing of value to add.

It's just one more example of the standard circle jerk that's used here when the counterpoints can't be refuted.


Any else of no particular value you folks wish to add?

Jim Rosenberg

"Any[thing] else of no particular value you folks wish to add?"

Just that I can't relax and really enjoy the circle jerk when Lisa Scheer is taking pictures the whole time. It makes me tense.

Ed Cone

10. Overinvestment in first-person plural pronouns.

11. Short-selling of hard data.

anglico

Qui

Bubba

Still nothing of value from the circle jerkers. How long can they keep it up?

Meanwhile, here's something worth reading:

"So when you see the market gyrating wildly downward and hear some pundit saying it’s because of this or that data or this paradigm or that ratio, remember trader realism. The traders move the market any way they want, any way they think they can make money, and then they whisper a reason to journalists later in the day. Then the journalists print it or say it on television, and the amateurs believe it. And the traders snicker."

David Hoggard

I was hoping that it would be you who would "add something of particular value", Bubba. You asked "WHAT could possibly be the actual reason?". I'd really like to know what you believe to be "the actual reason".

Jim, I'm comfortable with photographers. Let go, man. youcandooIT.

David Hoggard

Thanks for the response, Bob. We must have crossed in the ether.

So, the 26% drop was all based on whispers from traders to journalists? It's really just that simple, huh? Amazing.

Bubba

"So, the 26% drop was all based on whispers from traders to journalists?"

And that's the conclusion you drew from reading the link?

On second thought, don't even bother to respond.

David Hoggard

No, I hadn't read Stiller's piece when I responded, I reacted to your excerpt. Have now though.

Stiller has a good point. "Trader realism" is quite real, I'm sure. I'm just enough of a cynic to be able to visualize the example he cites that occured in London.

Investors have a herd mentality and the traders are the shepherd dogs. Makes perfect sense to me. Really, it does. Glad I'm not in the market.

Ed Cone

"How can a loss of roughly $100 billion on subprime — with some recoveries sure to come as property is seized and sold — translate into a stock-market loss 25 times that size?"

Stein says the answer is "trader realism." It's an incomplete answer at best, one that works much better in the short term than over the seven-months-and-counting run of market turmoil.

Another key factor is uncertainty about the extent of bad news still concealed -- markets famously hate uncertainty, and we don't know what remains on the books of big banks, or how bad the refinancing wave will be, the effects on consumer spending, etc.

Also, something we've discussed here before: leverage.

Traders and journalists didn't put the monoline insurers on their deathbeds, or force the CEO of Moody's to acknowledge that the ratings agencies didn't do their jobs, or lead Bernanke and Paulson to action, etc, etc.

It's one thing to guess what the impact of this stuff on the larger economy will be over time. It's another to pretend that this stuff isn't actually happening, and hasn't been happening for two quarters.

By the way, here's Stein in September: "Everything Is Going to Be Fine." The Dow is down 1500 points since then. Of course things will be fine at some point, but predictions have a shelf-life, and Stein's prediction expired a while ago.

anglico

A serious post about the precipitous drop in housing sales gets redirected by the King of Assholes, who then proceeds to label other commenters circle jerkers because they don't happen to buy his steady stream of happy horse shit about the stock market. And no one calls him on it?

Sorry, Mr. Ed, but that is one fucked up way to operate.


Ed Cone

Bob's work speaks for itself.

Bubba

"A serious post about the precipitous drop in housing sales gets redirected by the King of Assholes, who then proceeds to label other commenters circle jerkers because they don't happen to buy his steady stream of happy horse shit about the stock market."

I love it when a plan comes together.

Keep on posting, little buddy.

Bubba

"Bob's work speaks for itself."

And your work speaks for nonsense.


Always has. Always will.

Not that it ever seems to bother you.....

David Hoggard

Of course it was Ben Stein's article, not Ben Stiller's - my bad.

jimcaserta

Stein's point also completely disregards dropping home prices - the actual point of the post. Are realtors to blame for that, seeing as they're fudging the numbers anyway?

Did trader realism cause the internet bubble to burst? The thing that caused much of the problem is a mispricing of risk - specifically an underpricing. How does someone with limited means qualify for a sub 6% mortgage (say some option-arm type product)? And then how does that bond get an A to AAA rating?

What really, really worries me is the amount of risk that Fannie Mae is subsidizing. People look at their bonds as 'riskless' with some sort of government protection. What if the bonds fail? The government & American people are bearing that risk position, and since home prices were going up, the risk was not apparent.

The other risk that people took was funding 100% of their home value, or extracting up to 100% of their equity in frothy markets. People knew there was a risk, however miniscule they perceived it to be, of their home price falling and them being in a bind. Many chose to ignore it, because who doesn't like spending money? Part of how homes are appraised is the problem - to a large degree it is based on comparable recent sales. The more home turnover, the faster prices can rise. This issue is somewhat a non-issue around here because of the sanity in home prices, but it is definitely an issue in FL & CA, two fairly large markets.

Ed Cone

Damn those traders!

"Countrywide Financial Corp. lost $422 million in the fourth quarter, failing on its promise to return to profitability...Fourth-quarter results were hurt by higher estimates of future loan losses, and overdue loans rose more than expected during the period, Countrywide said in today's statement. Markets where Countrywide sells mortgages to investors also remained weak."

Also: "New York Insurance Superintendent Eric Dinallo's attempt to bail out bond insurers is 'coming too late in the game' to stave off ratings downgrades, CreditSights Inc. analysts said in a report."

Both from Bloomberg.

Doug H

I have to say, when I saw this from the article that Bubba linked to:

"The traders move the market any way they want, any way they think they can make money,..."

I had to wonder...so, the traders are trashing the market so they can MAKE money? Wow, why hasn't someone thought of that before?

Ed Cone

According to that logic, the game is fixed, and traders always win.

Traders can make money in down markets, and can have a lot of impact on markets, but we are seven months into a serious correction. There are reasons that investors are nervous, some of them are good reasons.

There is good news out there, to be sure. Let's hope there is more of it ahead.

Jeffrey Sykes

I'm not that bright on the market, but I enjoy a good discussion of macro/global economics.

A good discussion is found here.

I believe Bob has a point in that the psychological impact of negativity may be the biggest threat to the coming months. One of the panelist in the above linked video made the same point.

That's not to ignore anything related to subprime/credit crunch, but I think, given the lasting debate on this site, the perspective from the CFR panel is important.

jimcaserta

...that it revealed that not just risk was re-priced, but that the leveraging up of many financial institutions, both on the balance sheet and off the balance sheet, I think has led to a much more abrupt re-pricing and a more severe re-pricing of risk than we might have imagined.

Ed Cone

Of course investor mindset is important -- but it's vital to consider the data that informs the mindset.

The CFR discussion says we have broader problems in our financial markets involving risk and liquidity and leverage and credit quality and opacity. These are real issues, not bogeymen.

When Morgan Stanley announces that it is reclassifying $7 billion in assets (link in previous comment), it is going to spook investors.

So -- is the problem the spooked investors, or the information that is spooking them?

Bad news can be self-reinforcing, which is a problem of its own, but that doesn't mean that it's not actually bad news, or that investors are unwise to be uneasy.

jimcaserta
The second thing that makes it unique, that Mickey alluded to, I think, is the nature of this housing decline. There still are very large imbalances in housing markets that have to be addressed. And, you know, whatever the Fed does won't really address those in the short run. We have to see a realignment of demand and supply in housing. There still is an excess of supply.

Unfortunately, what that means is that we're starting to see in a lot of markets around the country that home prices, which have risen dramatically in the past five years, are starting to retrace those increases and to decline.

And two things happen when you start to see declining home prices. People feel less wealthy and they're less able to sell their homes, and buyers are not willing to step up in a market where pricing are falling and bid for those homes until they see some sign of stability. So with that collateral impaired, that adds to the financial and economic restraint working its way through the economy.

jimcaserta

Look at home prices & home sales...where the post started. Home prices are not declining because people have a negative mindset, they are declining because they had become overvalued. Looking at mortgage backed securities, the value of those are not declining because of any mindset, but because their risk was miscalculated and mispriced. Ed's question is key: "is the problem the spooked investors, or the information that is spooking them?"

Dave Ribar

Bubba has become the Baghdad Bob of economic prognostication.

Bubba's source (Brian Wesbury) isn't big on negative economic fundamentals. In Senate testimony in 2002, Wesbury played down the roles of the dot-com bust and 9/11 in causing the last recession, stating

To summarize, the recession was not caused by tax cuts, a bursting bubble, a drop in consumer confidence due to terrorist attacks, or an inventory correction. It was caused by policy mistakes, specifically, high taxes and an excessively tight monetary policy.

Interestingly, he also had a different story then regarding why the recession was as shallow as it was. In particular, he pointed to housing demand as a major strength. Now he says that housing is inconsequential.

jimcaserta

There are two fundamental problems underlying much of the problems today: misvaluation of risk, and overleverage. Those are not the result of a excessively pessimistic view of the economy, not even a midly pessimistic view, but an overly optimistic view. Risk miscalculations were made by lenders and borrowers, with the middlemen offloading any burden and taking sweet comissions. Households overleveraged by borrowing higher percentages, or even > 100% of their home values. Banks engaged in overleveraging, but describing the details are beyond my expertise. We probably have not fallen to a realistic view of housing yet, and we may potentially undershoot and at some point have home prices being undervalued (we're way off from that). Falling home equity will have a real impact on spending, and falling construction will impact also.

Fec

I thought I was little buddy. Sniff.

Dave Ribar

The Census Bureau is reporting that home ownership rates have fallen by the largest one-year amount (1.1 percent) since it began its surveys. Home ownership is now down to 67.8 percent, roughly where it was during the last economic slowdown and well below its peak of 69.2 percent from 2004.

Despite Pres. Bush's mantra that he has been creating an "ownership" society, he may well leave office with home ownership below the rate that he started at.

Jeffrey Sykes

That's very true Dave.

One thing I've come across in recent days is a gem from John Kenneth Galbraith. I've been revisiting The Great Crash, a book we read in an American history seminar covering the New Deal.

One point he makes early is that a fuel for the pre-crash bubble was people looking to get the benefits of ownership without paying the costs of ownership.

Now I'm no scholar, but I think the relevance of that observation in that situation to the current situation can't be overstated.

As Ed has pointed out there are many, many factors interacting with each other. But many people I have listened to and read over the last few days seem to indicate the interconnectivity of the global economy will eventually work in our favor for those who create wealth the old fashioned way.

Bubba

"Bubba's source (Brian Wesbury) isn't big on negative economic fundamentals."

So tell us, Dave.

Specifically, what points of Wesbury's linked analysis are wrong?

Which statistics that he uses are incorrect?

What material misstatement or inacurracy did he commit?

jimcaserta

1. Wesbury compares an income statement to a balance sheet. If you want to look at total US wealth, look at the decrease in home prices. The Case-Shiller index is off 10% in the past year, a rough $1 Trillion drop in assets - 10X what Wesbury states, with probably more to come.

2. When Wesbury says "Models based on recent monetary and tax policy suggest real GDP will grow at a 3% to 3.5% rate in 2008, while the probability of recession this year is 10%." those are his models. I wonder if they are the same models that said a rough 25% weighting in internet stocks in 2000 was the place to be?

3. "Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset." Say BoA has given you a full 100% financed mortgage for $500k. Say that home is now worth $400k - sure there is an underlying asset, but that asset may not be worth the value of the loan.

Subprime is just one part of a housing market that is not doing well. People are much less likely to sell their home when it is in their financial best interest than to sell a stock position. People will do what they can to avoid selling, so problems get put off.

So Wesbury says everything's OK, but that's what he said in 2000, when there were real problems. Besides, Ed's post only talked about real-estate, which while it might be just a blip to you & Wesbury, is a BIG part of most people's financial picture.

jimcaserta

JS - WOW - on p3 of JKG's book talks about overspeculation in FL real-estate - in the 1920's!

Ed Cone

The relationship of those "real economic assets" to the securities they supposedly support is tenuous, as the news linked above from Morgan Stanley demonstrates: "A storied Wall Street firm -- one that's already taken a $9.4 billion write-down -- says another $7 billion in assets that had been valued according to models instead of actual market prices can't even be valued by those models anymore, and relegates them to a category valued by 'little more than management guesses.'"

And of course if the real economic assets undergirding these holdings were so valuable, then Morgan Stanley (to stick with that one example) wouldn't have already written off $9.4 billion, would it?

Bubba

1. Case Shiller deals only with 20 particular metro markets. It's alittle dubious proposition that total US market values can be determined by them.

2. So?

There's no evidence he employed some of the modelers and models from the Great Global Warming Alarmist gang.

3. Don't sell, then.

"Besides, Ed's post only talked about real-estate, which while it might be just a blip to you & Wesbury, is a BIG part of most people's financial picture."

And when I pointed out that the mortgage money was still available, despite the false claim in the linked article, and that the whole thing needed to be put into perspective, the Tag Team went to work with the standard operating procedure of marginalization that's favored here.


Obviously, it didn't work.

Jim Rosenberg

Bob: "And when I pointed out that the mortgage money was still available, despite the false claim in the linked article, "

What the NYT Article Said: "A wave of foreclosures and tightened lending standards have made it more difficult to obtain a mortgage, even for buyers with good credit ratings."

What the Article Bob Linked Said: "But now lenders will be looking more closely at credit scores and stated income for first-time homebuyers or owners wanting to refinance."

What false claim? Simple, straightforward request: quote the published claim that is false without resorting to reading between the lines or asking another rhetorical question. Simply quote the textual matter in the NYT article you are claiming is false. Shouldn't be that hard.

dave ribar

Baghdad Bubba:

Much of the recent growth that we've seen in the economy has been due to consumer spending, and nearly all of it has been debt financed. At some point that party has to come to an end.

Growth in house prices had sustained a great deal of the expansion in debt, and now that source is gone. Moreover, some types of debt (subprime debt) are now sharply curtailed.

There is also a continuing financial mess out there. Wesbury writes "Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset." Except when there isn't. So far the banks have been willing to tell us that $100 billion that really doesn't exist.

These things will all be drags on the economy going forward. Maybe we'll get lucky this year and muddle through. Maybe the Fed will manage to reinflate the debt bubble. Maybe oil prices will moderate. Maybe we'll make it through the year with great weather so that farmers are productive and there aren't any large-scale natural disasters.

We do know that economic growth is slowing right now; we don't know how much farther it will continue to slow.

It's useful to keep two things in mind with respect to model forecasts. First, the underlying models are estimated on a certain range of data. Some things that are happening in the economy right now (changes in home sales, foreclosures, the levels of debt) are much different than they have been in the past. To the extent that these things enter models, the models are now predicting off the support of the data. Second, economic relationships change over time. The Fed went for years in the late 1990s worrying about inflation that was supposed to show up in the economy but never did--the economic relationships had changed. The loss of home-price inflation as a driver in the economy is also going to change some underlying relationships meaning that forecasting models are going to be dodgy.

Bubba

Here's the point, Rosenberg:


"Now if you listen to the news, you might think nobody can get a mortgage, but that’s a myth. If you can verify income and have good credit, you can get a loan. There are still 100 percent loans for first-time buyers.

What part of that do you fail to understand?

Bubba

"Much of the recent growth that we've seen in the economy has been due to consumer spending, and nearly all of it has been debt financed."

Citation?

"Wesbury writes 'Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset.' Except when there isn't. So far the banks have been willing to tell us that $100 billion that really doesn't exist."

You're entitled to your opinion. So is Wesbury. He's not alone in that opinion by any stretch.

Suggestion: Why don't you write a counterpoint opinion to Wesbury and send it to WSJ.

"The loss of home-price inflation as a driver in the economy is also going to change some underlying relationships meaning that forecasting models are going to be dodgy."

All the more reason to cap the hysteria, wouldn't you say?

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