Market Conditions: Treasury May Buy Securities to Push Mortgage Rates Down
Rumors are circulating that the Treasury Department may buy mortgage-backed securities with the goal of pushing 30-year mortgage rates to 4.5% in order to spur home sales.
Will low rates drive sales and stop housing’s decline or will it provide just a brief respite?
After the Fed announced last week it would buy $500 billion of mortgage-backed securities from Freddie Mac, Fannie Mae and Ginne Mae, rates dropped to 5.5%. Rates have already rebounded to 5.75%.
From CNNMoney:
“If it gets people buying homes and spending, it will help reverse the economy and get us out of this recession,” said Scott Talbot, senior vice president of the Financial Services Roundtable, which is pushing the measure.
While it takes time to entice new buyers into the market, low rates accelerate that process, said Greg McBride, senior financial analyst at Bankrate.com.
“It is clearly designed to bring buyers into the marketplace and soak the inventory of unsold homes,” he said.
But others are skeptical it would make much of a difference.
From Marketwatch.com:
Conrad DeQuadros, an economist at RDQ Economics in New York, said lower mortgage rates should provide some support to the housing market by allowing cheaper financing to new buyers with solid credit profiles to the housing market. But he added that a greater impact would be felt if the proposal also permitted refinancing opportunities. However, he also expressed some skepticism about the extent of the impact.
“There is still a massive supply of homes on the market and consequent expectations of further declines in home prices may still keep buyers away,” DeQuadros said.
“In addition, the weakness in the labor market appears to be intensifying and rising unemployment will depress housing demand and increase delinquencies. As with all of the Fed and Treasury programs, any new plan will have to be given time to work before judgment on its effectiveness can be made.”
Treasury mulls plan to lower mortgage rates to 4.5% [CNNMoney.com, Dec 3, 2008]
Treasury may set mortgage rates at 4.5% to boost sales [Marketwatch.com, Dec 3, 2008]
This is outrageous. Who are these people in Washington and what have they done with the Republicans? There is no stopping an asset value correction. All they can do is keep prices inflated for a while longer. Eventually they have to stop subsidizing mortgage rates and when they do prices will continue their fall. Then all these people who bought will be under water also.
I’m not too concerned about this proposal. It doesn’t have much substance. A slightly lower interest rate won’t ignite a firestorm of first time homebuyers. Prices are still to high for many and saving a $100 or $200 bucks a month in interest isn’t quite the enticement like rock bottom REO prices. Even if they allow refinancings the borrowers will still need good credit to qualify for rates of 4.5%. And as far as I know Fair Issac’s and Co. hasn’t changed their algorhythm so a late payment or two will ding your score by a hundred or more points and there’s no way anyone will get a 4.5% interest rate with a score of 650 or below.
I just hope our government doesn’t introduce a scheme like Gordon Brown introduced in the UK. In Britain, anyone who experiences financial hardship can forebear the interest for up to two years. So if I get a pay cut, I call my bank and say, “Hey, I can’t make my 30 year fixed payment b/c I spent all my money on my car and flat screen tv. Can you convert my loan to a pick-a-payment option arm for the next two years?” Now that program is a joke, England will feel the pain of their housing bubble for years to come.
Gary the Republicans don’t exist anymore. Thats why those who identify as them are getting swept out of office.
Paulson’s “plan” is nothing more than talk.
Remember this is the Treasury secretary who said he didn’t see any issues with subprime in 2007.
Remember this is the Treasury secretary who assured us the financial crisis was completely contained after the BSC bailout.
Remember this is the Treasury secretary who repeatedly assured us Fannie and Freddie were fundamentally sound and there was no problem, only to nationalize them less than 48 hours after his last assurance.
Remember this is the Treasury secretary who decided to let Lehman default, yet backstopped AIG a few days hence initially for $85B of taxpayer money, but later for over $130B.
Remember this is the Treasury secretary who proposed TARP via buying troubled mortgage securities, then promptly reversed himself. Then reversed himself several weeks later when markets didn’t like that response and reflect that displeasure in the price of financial stocks.
Remember this is the Treasury secretary who demanded the resignation of AIG’s CEO but made no punitive demands on Citigroup for receiving a second infusion of taxpayer money and essentially nationalizing their debt but not exercising any form of government control over their operations.
Rememeber this is the Treasury secretary who as recently as November 18th said he would not spend any more of the TARP funds to maintain flexibility for future administrations.
“I’m going to do what we need to do to keep the system strong and to react the ways we need to react during the nine weeks I’m here, but I’m not going to be looking to start up new things unless they’re necessary or it’s just clear that they need to be done or [that they] make great sense,” Mr. Paulson said. -11/18
http://online.wsj.com/article/SB122695439734334685.html
Oh okay so he’s not going to do things unless he wants to do things.
Just another gimmick that won’t stimulate demand. A 100bps drop in rate doesn’t offset the fact that median home prices are over 4x median incomes in Chicago and higher in the sun belt. Paulson lost credibility a long time ago, he’s just to arrogant to understand that he is a lame duck and noone cares about his policies full of hot air anymore.
LMAO. They floated this out there for something other than the stated reason. Their resistance to the correction is futile and they know it, regardless.
Yes. Banking’s excesses of the past are a cancer and not going to be cured by a band-aid. Pumping money into the economy to keep these inflated prices is only going to make the inevitable worse. How do so many miss such basic economic principles. I would like a full investigation into who materially benefited most from the shanannegans I have a feeling Goldman did ok.
We need prices to adjust, not more creative financing…
I wonder if the real rationale behind this is that they want to print money and get it pumped into the economy and one of the most efficient ways of doing that would be to buy 10 year treasuries. Bernanke outlined that potential strategy years ago. They may feel that selling it to the public as “pushing down mortgage rates” may be a more politically palatable message than “printing money to create some inflation.” I really hope they aren’t stupid enough to think that artificially low rates will help anything.
this is a bad idea on many levels. I would be what they are calling “credit worthy” buyer, at my price range (assuming 70% down), it adds up to a difference $150 a month ($100 after tax deductions). I don’t think I will be making purchase decision based on interest rates, especially since rates are not about to rise anytime in the near future.
On the other hand it will discourage some buyers from pulling the trigger since they will wait for the final decision on this and hence make things worse.
Can these guys do anything right?
The proposed write-down is just one more ‘bailout’ that will no way address the core problem.
So far, the tote for ALL interventions from last year to the present, including unpublicized loans to banks, is at about $7 trillion dollars, and it’s not working and never will work.
Worse, the mortgage scammers are now taking advantage of the “liquidity” supplied to the FHA to write a new batch of bad loans, which will give us ANOTHER wave of defaults in a few years, in addition to the $250 billion worth of OPTION ARMs scheduled to reset in the next year alone.
None of these interventions are working because lack of liquidity is not the problem. The problem is that borrowers are TAPPED OUT, OVERBORROWED, MAXED OUT, IN UP TO THEIR EARS, and that their incomes are deteriorating and they are LESS creditworthy, not more.
Any intervention that does not address jobs and incomes, which are deteriorating, is only adding to the problem, and will only prolong the situation and give us that many more years to the bottom.
“Gary the Republicans don’t exist anymore. Thats why those who identify as them are getting swept out of office.”
I remeber that kind of talk in 1993 when Clinton took office. Then the GOP took the Congress in 1995. It ebbs and flows Bob, it ebbs and flows.
No matter what the gubmint does people won’t be buying houses enmass until they get reemployed or feel secure that they won’t lose their job.
I could buy tomorrow but why would I lay out tens of thousands of dollars from my nestegg and deplete much of the reserves I may need if I lose my job due to this economy?
Stablize the economy and housing will eventually follow.
We need a really good fire to burn down about 1 million homes. That would solve a lot of problems. (All empty and vacant homes of course! With noone around for miles!
How about starting with the entire south loop?
(JUST KIDDING!!!!!!!)
Guys – you are looking at all wrong. Essentially at this point the government owns Fannie and Freddie yet debt issued by these entities carries a hefty rate premium to US Treasuries. It is a smart move to buy back these expensive obligations and replace them with cheaper government debt. Anyone have a problem with the government acting responsibly and lowering the borrowing costs of companies they effectively own?
“We need a really good fire to burn down about 1 million homes. That would solve a lot of problems. (All empty and vacant homes of course! With noone around for miles!”
San Bernadino, Riverside and Northern San Diego counties. And the fire has to skip over both any occupied homes AND any insured homes. Smart fire.
The only explanation that can suffice for the magnitude of the treasury price surge over the past few days has to be government intervention (buying treasuries). The speed and magnitude of the surge almost guarantees it.
My only question is if the 30-yr is yielding a paltry 3.14%, why are 30yr mortgages still over 200bps higher? We’re going to see rates lower than 4.5% if the 10yr stays around 2.63%. 3.5% mortgages. Although the real interest rate will be higher with the coming deflation.
This plan is going nowhere. It is being pushed by developers hoping to reduce unsold inventory.
In other news I have been looking at rabbits and ducks in grant park, high protien food source and easy to catch. Just wanted to throw it out there…
“why are 30yr mortgages still over 200bps higher?”
Banks, fearing deflation, are hording cash thus reducing the supply of mortgages and driving up the price. Same with commercial loans.
“We’re going to see rates lower than 4.5% if the 10yr stays around 2.63%.”
Mortgage rates used to move with the 10yr but diverged over the past year or so.
didn’t easy money and an overextended consumer get us into the problem? and now the solution is more easy money and propping up the consumer? If so i don’t follow the logic.
It is sick that we could think it would be good to “burn down about a million homes”, when we have a substantial number of impoverished people who cannot make the rent on a slum apt on their minimum wage jobs.
Market manipulations that A)enable people to buy houses they can’t afford, and B)prop prices up at artificial levels, harm everyone, but the poorest among us most of all.
Most people have the uninformed idea that a truly free market economy – which we have NEVER had- benefits only the “rich”. Yet, the people who really need a Free Market the most are the poor. We all had better think about that, because the anti-free-market policies and interventions being promulgated now are going to reduce to SRO poverty a substantial subset of our current middle classes.
Let the free market work- let these houses fall as low in value as they will, even if it means they will be bought, or rented to, po’ folks. It’s not the government’s job to prop up propterty values at unsustainable levels, just as it is not the government’s job to make sure that people can buy houses over their heads and live beyond their means.
T2: Bingo.
Stuart: It’s less obviously responsible of a move when the long term, higher interest debt is being replaced with short term, lower interest debt. I’d say we have good reason to believe that debt is going to get more and more expensive for the federal government as time goes on (and as China stops buying as many of our treasuries, for many reasons). That means the government is doing the equivalent of converting from 30-year-fixed mortgages to 5-1 ARMs. And we know how well that has turned out for home buyers….
Although todays Market Ticker commentary is not for the easily offended (fair warning), there is a chart showing debt as a % of GDP since 1916. Convincing argument that debt is NOT the way out of this mess.
http://market-ticker.denninger.net/
CH: didn’t easy money and an overextended consumer get us into the problem? and now the solution is more easy money and propping up the consumer? If so i don’t follow the logic.
Juliana,
I definitely agree with the blog post you linked to, as well as his conclusion as who is responsible for it. Given most who voted for the TARP were re-elected to office, it doesn’t pain me to see the standard of living in this country go down. An ignorant populace does not deserve a higher or even equal standard of living to previous generations.
And America is going to learn this the hard way. It will be interesting to see how much money can be expropriated from taxpayers and the treasury and who benefits from this, however. The lack of outrage among most I find both fascinating and amusing.
**In other news I have been looking at rabbits and ducks in grant park, high protien food source and easy to catch. Just wanted to throw it out there…**
Good thing I kwon how to hunt and fish!!
LAURA: I was kidding about the fire, and I agree with you.
Not sure I agree with all the negative reactions.
If interest rates drop to 4.5% I sure as hell will shave 2 points of my mortgage. It will free up a nice chunk of change every month. With the extra money I have, I’ll be purchasing more things than I am now, spending more money in the marketplace. I’m sure there are a lot of people who fall into my same scenario. On a national scale, over the course of the next year or two, this could help put a substantial amount of money into the marketplace.
The idea behind this one might not be to move more housing, but to stimulate consumer spending.
Sorry, Jason, refi’s don’t qualify. It has to be a new purchase.
Subsidized interest rates are another great sign the bottom is a long way off. You can guarantee it will not arrive until mortgage rates rise considerably to correctly price in risk.
Kenworthey:
Big assumption on what they replace it with. if they issue a mix of 5s, 10s, and 30s they will be duration matched.
thanks G, didn’t realize it was for new purchases.
“Essentially at this point the government owns Fannie and Freddie …”
The gubmint has always owned them. They’re GSE’s, I don’t care that they were publically traded. Washington has always stood behind them financially.
“This plan is going nowhere. It is being pushed by developers hoping to reduce unsold inventory.”
I assume you all are familiar with the NAR’s 4 point plan for housing? If not:
http://blog.lucidrealty.com/2008/11/16/nars-four-point-housing-stimulus-plan/
They put this out there over a month ago. That lobby is much more powerful than I imagined or than they deserve.
If the standards for these new mortgages are anything like the old ones, any mortgage can be a “new purchase” depending on how you fill out the paperwork. With banks getting all this government money without additional regulation I doubt they’ll suddenly act responsible and start verifying loan apps.
Don’t worry Pete, the bubble “standards” will not be returning this lifetime. Besides, the banks have not been lending very much of their new govt money anyway.
Laura, you said it as it is:
“None of these interventions are working because lack of liquidity is not the problem. The problem is that borrowers are TAPPED OUT, OVERBORROWED, MAXED OUT, IN UP TO THEIR EARS, and that their incomes are deteriorating and they are LESS creditworthy, not more.”
It looks to me the Fed wants to prop up the home builders in a similar way they wanted to prop up the IB. Well, when the FED bailed out WS, GS was $125. Today GS is $70, so we all saw how well this worked. I do not expect different outcome here – this baby is going DOWN.
On another note, two colleges of mine bought two moths ago and both were very happy, I would say almost proud, that they got 5.65%. I cannot even begin to imagine how screwed they feel right now. The government will scare the RE investors (knife catchers) the same way they scared the average stock market investor. There will be a lot of nasty unintended consequences in this price fixing.
Juliana: Thanks for the link to the market ticker. That graph of the debt level to GDP is really telling.
Will our outcome be the same as that after the great depression? You can see that the generation right after the depression took on absolutely NO debt (for about 50 years.) And then the cycle started again.
The increase in debt has been out of hand. However, keep in mind that interest rates have plummeted over the past 25 years, so the actual debt service as a percentage of income is not nearly as bad as that graph would have you believe.
I think the death of the consumer has yet to be fully proven. Remember, it’s been virtually impossible to get any consumer debt over the past 6 months, so the drop in consumer spending tells us nothing more than the fact the credit is very hard to come by. If credit becomes readily available again and people still don’t borrow, we’ll know a lot more about the health of the consumer. My guess is that consumer’s a scared (rightly so) about their jobs, but once confidence and credit return you will see an explosion in spending again. The questions is whether that starts in 2009 or 2012…
Consumer credit isn’t ‘virtually impossible’ to come by it’s just more difficult to obtain for non-prime borrowers … and secured borrowing for all borrowers requires a larger down payment. My credit cards have been working just fine during the last 6 months, have yours been shut off? Just kidding…
One of the problems right now is that many borrowers are tapped out so to speak and they barely have the cash flow to service their debts in a timely manner. Anyway you look it a typical american household with $60k in income, $150k mortgage, $25k in credit cards and $15k in car loans is struggling to keep the ponzi scheme afloat. I’m in the trenches and I see the debt zombies everyday. Bankruptcy is new for me. Dozens and dozens of cases literally few into my lap as the debt zombie default on their debt. I know plenty of people 30 – 40 years old who make $70k annually but are hundreds of thousands of dollars in debt.
And for every default or foreclosure there’s a major creditor like HSBC, BofA, WaMu, Wells, GMAC, that takes a large financial hit. And the hits keep coming and coming. They’re so scared of what lies ahead they’re surrendering like the French in WWII and now they’re begging the government for loans.
There is still millions of zombies out there in the lurch. I personally have friends that I’ve witnessed go into the debt spiral. a significant amount of their income is allocated towards debt service. They can’t take on anymore debt because they’re broke. It’s like seeing a large black storm cloud on the horizon. You know it’s just a matter of time before the storm hits.
“Remember, it’s been virtually impossible to get any consumer debt over the past 6 months, so the drop in consumer spending tells us nothing more than the fact the credit is very hard to come by.”
T2: I thought we were at the highest level of debt as a percentage of income in our history? Isn’t it like 14% or 15% of income now?
I know the bears in the room would love to believe the graph on Juliana’s lunatic site but the debt to GNP numbers are wrong. Go to wikipedia and search on “United States public debt.” It’s more like 60% not 360%.
Americans will not have access to debt the way they did. The risks will be diversified going forward by the lenders. They all got burned thinking they were “The Man” and playing with “the big boy U.S.A.” Now they learned and will move on. The only role we played was as consumers. In a world of 6-7 billion that is not a hard thing to replace in an equation. The average American is going to see what equilibrium looks like for everyone else in the world. It is not pretty.
RunnerRunner,
I too was skeptical so I poked around a bit and found several references to a similar graph. I found this one on a respectable site: http://www.nakedcapitalism.com/2008/07/has-deleveraging-even-begun-not-for.html
The source is Ned Davis Research, which is fairly reputable.
The tin foil hat website confuses US debt (which is like 60% of GDP) and US credit market debt (which appears to be 360%).
RunnerRunner,
The 360% is total debt, held by consumers and government, not US governmenr debt.
Sabrina,
Debt service is certainly at (or near) all time highs. However, because of the drop in rates, the actual monthly payments made by consumers have not increased anywhere near as much as total debt. I’m not saying the situation is good, it’s simply not nearly as bad as a graph like that makes it seem.
The other thing to remember is that we operated on a quasi-gold standard until the 70’s, which limited the amount of dollars that we could create. Under a fiat monetary system (no link to hard assets) like we have now, it’s expected that debt would explode. My point is that we aren’t going back to those debt levels anytime in our lifetime unless the entire US monetary system collapses. Believe me, none of us want that to happen…
HD,
Funny story about CCs. I carry a 5k balance on a Citi card that has a 0% intro rate. They wouldn’t raise it to 7.5k b/c I was near the current limit.
Even more humorous is this GAP card I have backed by GE Money. Its never used except maybe twice a year to get discounts at their stores but they were kind enough to let me know my credit limit had been cut to $1,100. I have no idea what it was before.
Silly GE–they’re a day late and dollar short. Maybe I should offer to send Immelt to a risk mgt class with my credit limit 😀
As a responsible consumer who doesn’t spend more than they earn I could care less about CC limits, but I fear much of the rest of America is financially stupid and doesn’t understand spending less than you earn.
“My credit cards have been working just fine during the last 6 months, have yours been shut off? Just kidding…”
HD,
No one would argue that there aren’t a lot of “tapped out” consumers at the margin, but my point is that there has been a massive tightening in credit, so it’s impossible to separate the effects of credit tightening vs being tapped out on the recent behavior of consumers. If credit started flowing freely again tomorrow, some of those tapped out consumers still would not be able to borrow. However, the vast majority of consumers would and I think that would offset those who are tapped out. It’s just my opinion, but it seems silly to attribute the bad consumer spending numbers solely to being tapped out and neglecting to consider the significant effect of no credit availability.
The number of tapped out consumers at the margins is larger than most people realize. In the last year a few major banks and most major mortgage wholesalers/lenders have gone out of business or have been begging the government for assistance. This doesn’t happen when fringe consumers default on the debt. Defaults are factored into the rates they charge. Major bank failures happen when the fringe consumers defaulting is much larger than models anticipated.
GEMB is totally f’d. For the longest time they would give money to anyone who could fog a mirror. Probably 50% of the Bk credit reports I see include a GEMB account.
The other company I always advise against is HSBC. They’re financials are supposedly strong and they’re supposedly weathering the storm OK, but, all I see is foreclosure after foreclosure and defaulted credit card debts. HSBC STILL practices the fog a mirror test to get a Best Buy credit card. I have an application on my shelf that I kept. Client was 21 years old, lived at home, said she had no job or savings or checking, wasn’t even in school. HSBC approved the purchase of a plasma for $2,100.00. Of course the 21 year old had no income so she made zero payments.
Just yesterday someone told me they bought $2,400 worth of electronics on Black Friday from Best Buy with a brand new deferred interest HSBC credit card, and their credit wasn’t very good in the first place. HSBC lent this person $2,400 on top of the $40,000 worth of car loans, $110k in mortgages, and $20,000 in other credit card debt this person has. This person’s household income is $30,000 a year. I’m not exaggerating here. Repeat this scenario for millions of customers and we have a financial tsunami baked into the cake.
HD, you spend all day talking to tapped out consumers, so you probably think that they are more widespread than they are. No one is denying they exist, but you are getting a skewed look at things. It’s like a divorce attorney I know who told me not to get married because everyone she knows gets divorced! Are there tapped out consumers? Sure! But there are also 300 million Americans, so 6 million tapped out consumers, while it’s a lot of people, is still only at the margin.
Bob, you see, what I’ve seen lately is that over the last few years, the cost of living has increased greatly (healthcare, food, energy, ARM mortgages, education, etc) but wages, especially for the median rung of society and below, have stayed stagnant or decreased. The consumer, instead of tightening the belt and trimming expenses, decided to run up credit card balances for every day purchases. Now that the cost of living is slowly trickling downward, the consumer is stuck with all this debt that they care barely service with their current income levels. These are not fringe consumers I’m talking about the 25%-75% band of households. Citi doesn’t want to take the risk of allowing you to run up another $2,500 in gas and groceries and then default when the minimum payment gets out of whack with your income.
T2, debt has gotten cheaper, for prime borrowers. The subprime and alt-a borrower don’t pay prime rates. They’re the ones paying 29.99% interest on the credit cards, the mortgages are ARMs with crazy margins like 5.0 + the 6 month libor….etc. One late payment on a revolving account and your interest rate shoots through the roof.
I know my view is skewed because I deal with debtors all day, but I”m telling you I’ve been looking at individual consumer finances for 10 years now, since I first started working in law offices, and I’ve never seen anything like this before, ever. It’s like a bomb went off and all these debt zombies floated to the surface. This stuff fell into my lap. I didn’t go seeking them out, they came to me.
T2: What drop in rates? Most people have their debt on credit cards. Citibank just announced if you’re late on a payment your rate will be 29.99%.
That’s “low”?
People are massively stretched. They need more debt to exist with their current standard of living (as HD keeps recounting.)
There was a woman who called up on CNBC last night (on that personal finance show they run) who had a 30-year mortgage at 5.0% and wanted to know if she could refinance because she wanted to pay off credit card debt.
How low does she think interest rates will go? For how long can she milk the house? It was absurd.
Unfortunately, that’s most of America.
“What drop in rates?”
Are you kidding me? Have you looked at what interest rates have done in the last 25 years? Treasuries were yielding north of 15% in the early 80’s, now they are at 2.6%! Mortgages were close to 20% at times in the past, now they are at 5.5%! The vast majority of the debt taken on by consumers since the 80’s has been at lower and lower rates, not 30% credit cards.
HD, wages have not stagnated at the median, by the way, that stat was manipulated data used for political purposes. The average HOUSEHOLD income has stagnated, but that’s because the average household has fewer people that 10 years ago because more people are living alone! Wage growth has been unspectacular for the median worker this decade, but it’s been steadily improving. You also need to remember that median stats are skewed if you add millions of low-wage workers to the pool. Say you added 10 million unskilled workers from a certain desert country south of us to the labor force over the past decade, that would greatly skew the median number downwards. Beware data presented by people with a political agenda!
T2 – Well the margin was just reported 533,000 larger today. All economic movements happen at the margin and what has been surprising is the number of people that were at or near the margins….they were bunched up there because of being over leveraged, they weren’t evenly distributed. Fortunately I am bunched up on the polar opposite, but there are so many people out there with so much debt — a pocket full of credit cards, store cards, auto loans, 2nd mortgages, etc. that I seriously do not know how they keep track of it all! The people and businesses that are over leveraged have no cushion and one blow to income and it is over for them. This was a general credit bubble that burst. Homedelete may be dealing with this everyday and “may” have a skewed perspective in your opinion, but I think he is more like the canary in coal mine instead.
The Market Ticker commentary and chart are discussing total debt, not just government debt, so who is confused? For some funny reason many people consider it an important statistic. Micheal Hodge’s “Grandfather Economic Reports” has a whole page on total debt. But you’ll probably dismiss that as a tinfoil hat site too. Whatever helps you sleep at night, I guess.
http://mwhodges.home.att.net/nat-debt/debt-nat.htm
Homedelete: The tin foil hat website confuses US debt (which is like 60% of GDP) and US credit market debt (which appears to be 360%)
I called it tin foil because when I loaded the page the headline asked if I wanted my children to be raped. It takes a lot to offend me but ridiculous coments like that strain credibility.
T2: “No one would argue that there aren’t a lot of “tapped out” consumers at the margin….however, the vast majority of consumers would and I think that would offset those who are tapped out. “
Are you saying that the “tapped out “ is contained, kind of like the subprime was contained?
I hope the equation of: ‘you earn greater than or equal to what you spend’ comes back to reality and devastates the finances of those who couldn’t figure out this simple equation.
Sorry its math even a second grader can do. If you’re living beyond your means you need a reality check, I have no sympathy for people living the high life on other people’s borrowed money.
I said nothing about being “contained.” Let’s review the facts:
1) Consumer credit has become unbelievably tight over the past 6 months for most borrowers
2) We’ve had a ton of job losses
3) Consumer spending has plummetted
Simply attributing the drop in spending to long term trends and ignoring the short term shocks we’ve experienced is foolish. Yes, many Americans were/are overextended, we know that. But, given the short term issues we are facing, trying to attribute the drop in spending to one long term factor while ignoring the short term ones is ignorant. You can’t separate the two and determine which one is having more impact. Once credit starts flowing again and the job market starts to improve (probably not until late 2010) then we will see if this slowdown in spending was truly a secular event or whether it was just because of short term job losses and credit availability.
Why is it that everytime someone offers an assessment that doesn’t involve the world coming to an end, everyone on this board jumps all over them? Why are you all so pessimistic, is it just wishful thinking because you can’t afford the home you want? You may want to look in the mirror and be honest with yourselves on that one…
T2 you are not in the trenches like some of us. The lofty macro economic policy viewpoint that the numbers show doesn’t vibe with what is happening on the ground.
T2: “Why are you all so pessimistic, is it just wishful thinking because you can’t afford the home you want?”
FYI, I am currently spending about 1% (let me write this down, so you do not think that it was a mistype – one percent) of my gross income on housing. Please do not worry about me and the rest of the bears at this point. However do worry about people that make their plans on the hope that by 2010 the economy will be OK.
T2: “I said nothing about being “contained.””
But you said that the effect on the economy from the fact that a small portion of the US consumer is tapped out will be negligible, in other words the pain will not spread due to it, i. e. CONTAINED. Look at your own words:
T2: “Are there tapped out consumers? Sure! But there are also 300 million Americans, so 6 million tapped out consumers, while it’s a lot of people, is still only at the margin.”
“What drop in rates? Most people have their debt on credit cards. Citibank just announced if you’re late on a payment your rate will be 29.99%.”
We just had our rates increased on most of our cards–both regular and default rates–and we have exactly $0 of non-mortgage debt (and mortgage is ~1x income). So it’s not just default rates that are going up.
“T2 you are not in the trenches like some of us.”
Anyone who extrapolates their anocdotal experiences to the entire economy is an absolute fool.
“But you said that the effect on the economy from the fact that a small portion of the US consumer is tapped out will be negligible”
I said absolutely nothing of the sort, what are you talking about? All I said is that it’s immpossible to know whether the drop in spending is truly due to consumers being tapped out vs. the fact that jobs and credit are scarce. Why is that so hard for you to understand?
“due to consumers being tapped out vs. the fact that jobs and credit are scarce”
Um, how do you define “tapped out”? I agree with points made on both sides of this, but you seem to be narrowing “tapped out” into a meaning that isn’t quite clear.
I’m not the one who started using the term “tapped out.” It was Laura and then the great economic oracle that is HD.
“Why are you all so pessimistic, is it just wishful thinking because you can’t afford the home you want? You may want to look in the mirror and be honest with yourselves on that one…”
So says the person who thinks their claim to an MBA from “one of the two best programs in Chicago” brings validity to their opinions.
Home prices would be falling due to the bubble even without the general economic decline. The overall economic decline means a collapse in RE.
As far as T2’s quote above, I have a sneaking suspicion that owners of “desirable” real estate will be feeling more pain than those currently without. Who’s not being honest?
T2: “All I said is that it’s immpossible to know whether the drop in spending is truly due to consumers being tapped out vs. the fact that jobs and credit are scarce. Why is that so hard for you to understand?”
T2, why do you think the jobs and credit are scare – because the banks were overwhelmed with defaults. Why the banks were overwhelmed with defaults – because the tapped out consumers started to default on their loans. I am not picking on you, but I think you are confusing cause and effect here. The economy is in the toilet because people cannot service any more debt and curtail consumption as a result. What you think is: the economy is in the toilet because people are not given enough credit, but once they are given free money again everything will be fine. You cannot fix a broken damn with more water.
“I have a sneaking suspicion that owners of “desirable” real estate will be feeling more pain than those currently without. Who’s not being honest?”
What does that even mean? Desirable real estate in Chicago has yet to show a significan drop. Are you sure you don’t want to resort to name calling so that you can avoid explaining your silly comment?
crazy,
The banks are in trouble because many consumers AT THE MARGIN are in really bad shape. Because of this, many of the healthy consumers also cannot get credit right now. Once credit and jobs come back over the next few years, the healthy consumers will once again have access to credit and consumer spending will likely boom due to pent up demand.
The difference here is that I think that the current spending drop is due to only SOME long-term forces (tapped out consumers) but mostly shorter term cyclical ones (jobs and credit). Everyone else here seems to attribute the drop only to long-term issues (consumers tapped out). This is not surprising. Everyone here wants housing to drop, so they are CHOOSING TO BELIEVE the worst-case, long term problems because it fits their world view the best. They are CHOOSING TO IGNORE the clear short term factors in all this because they would imply that this mess can be fixed over the next couple years. That would lead to a smaller drop in housing so the pessimists choose to ignore it because it would not give them their desired outcome. You folks need to become aware of your cognitive biases.
“I’m not the one who started using the term “tapped out.””
Yet you insist that consumers are NOT “tapped out”, so you must be assigning it some meaning. What is the meaning you are assigning to it? If you aren’t assigning a meaning to it, you can’t validly claim that it isn’t true.
Tapped out as a colloquial means insolvency. Not paying bills as they come due or barely mainatining enough cash flow to keep current with debt obligations.
“You folks need to become aware of your cognitive biases.”
You need to become aware of constructing straw man arguments.
“Everyone here wants housing to drop”
Look, I understand that you are being hyperbolic and excluding those that agree with you, but I have a strong personal preference that housing *not* drop, however, that doesn’t change my opinion that prices have gotten out of whack w/r/t rents/fundamentals/incomes/whatever. So, while I do NOT *want* housing to drop (as higher residential prices benefit me), I’m not blind to the fact that real prices are likely already too high to sustain substantial future increases.
You think it’s the margins only! I think you should check out any suburban wal-mart this holiday season to get a better idea of what the heck is going on out there.
I’m not extrapolating my experiences to the broader ecomony. I see trends that your economic numbers do not yet reflect.
HD: [defining “tapped out”]
I know what it means (and think that you are unnecessarily limiting its common meaning), I want to know how T2 is using it to say that consumers are *not* “tapped out”–with the expectation that T2 is well aware of the common meaning, but may be narrowing it (in much the same way you are–and if so, I’m more on T2’s side of that argument) for purposes of this argument.
“You need to become aware of constructing straw man arguments.”
Thanks for avoiding the question, as always.
“see trends that your economic numbers do not yet reflect.”
Once again, any individual who extrapolates the trends they “see” to the whole economy is an abolute fool. That’s so stupid that I’m not even sure I should engage in discussion with you anymore because you clearly are a moron.
” think you should check out any suburban wal-mart this holiday season”
REALLY bad example HD. WM is (almost) the only retailer *beating* expectations this year.
T2, this is so much bigger than housing and it will have so much further reaching effect on the overall economy that you and people that think like you will find themselves flabbergasted in a couple of years.
I’m saying that a significant part of the consumer base, at the margin, is tapped out and cannot afford any more debt. Because of this, even healthy consumers cannot currently get credit. My thesis is that once credit markets normalize, the tapped out margin will still not have access to credit, but the healthy majority will once again be able to borrow. This, when it happens, may lead to an explosion of spending due to pent up demand. HD seems to think that the whole country is bankrupt because he spends all day with bankrupt people. I don’t think my thesis is particularly “bullish” but there seems to be no room here for any opinions that don’t end with the world coming to an end.
crazy frog, I appreciate your hyperbole. Do you have any evidence of this or is that what you read in the NY Times today? Why, exactly, should we give your statement any credibility? Making outrageous statements about how “this time it is different” is just as dumb on the way down as on the way up.
homedelete on December 5th, 2008 at 9:19 am
I called it tin foil because when I loaded the page the headline asked if I wanted my children to be raped. It takes a lot to offend me but ridiculous coments like that strain credibility.
The denninger of that web site is no doubt Karl Denninger, who has quite an interesting history and past with some Chicago roots there, and some might even pin the “kook” label on him.
Google him up.
T2: “Why are you all so pessimistic, is it just wishful thinking because you can’t afford the home you want? You may want to look in the mirror and be honest with yourselves on that one…”
G: “I have a sneaking suspicion that owners of “desirable” real estate will be feeling more pain than those currently without. Who’s not being honest?”
T2: “What does that even mean?”
Not holding a depreciating asset is preferable to holding one.
That “one of the two best MBA programs in Chicago” was Kellogg, right?
Don’t know where you get your information from, but there is plenty of credit available for healthy consumers. I know, because I am one of them. Most of them just aren’t interested in credit, which may be why they are healthy. They resisted the urge to spend beyond their needs during the credit bubble. Don’t look for them to save the day and help blow the bubble up further. And, by the way, I am long real estate, so I am getting hurt too. I just don’t have any debt so my pain has limits.
T2: “I’m saying that a significant part of the consumer base, at the margin, is tapped out and cannot afford any more debt. Because of this, even healthy consumers cannot currently get credit. My thesis is that once credit markets normalize, the tapped out margin will still not have access to credit, but the healthy majority will once again be able to borrow. This, when it happens, may lead to an explosion of spending due to pent up demand. HD seems to think that the whole country is bankrupt because he spends all day with bankrupt people. I don’t think my thesis is particularly “bullish” but there seems to be no room here for any opinions that don’t end with the world coming to an end.”
Sorry anon(tfo) I should have clarified my example:
WAl-mart is a great example of people who live hand to mouth dressed in tatters using the credit cards to buy lcd tv’s and other expensive imported chinese goods.
” think you should check out any suburban wal-mart this holiday season”
REALLY bad example HD. WM is (almost) the only retailer *beating* expectations this year.
T2: “crazy frog, I appreciate your hyperbole. Do you have any evidence of this or is that what you read in the NY Times today? Why, exactly, should we give your statement any credibility? Making outrageous statements about how “this time it is different” is just as dumb on the way down as on the way up.”
The evidence is all around you. I cannot help, you if you cannot see it. I do not read NYT. I got my information from Dr. Roubini’s blog, Mike Shedlok’s blog, Calculated risk and some other economic blogs. I think getting your info about the economy from the MSM is at best wasting of time, at worst very dangerous for your portfolio.
You keep on saying that HD leaves in a bubble and cannot see the picture right. Are you sure that it is not you that leave in a bubble.
Another point that I find very puzzling and that I encounter in my discussions with other bulls – I am quoting you here: T2 ”My point is that we aren’t going back to those debt levels anytime in our lifetime unless the entire US monetary system collapses. Believe me, none of us want that to happen…” Do you really believe that any reasonable person wants the USA to go into depression so that he can tell you I told you so??? And also, the economy does not care what we want. Whatever has to happen will happen no matter what we want. With statements like this you are making it to sound like we the bears caused all this debacle. No this was caused by the happy borrowers/spenders, not by the prudent savers.
And lastly, you are sayingT2 “I’m saying that a significant part of the consumer base, at the margin, is tapped out and cannot afford any more debt. Because of this, even healthy consumers cannot currently get credit.”
All the important things in the economy happen on the margin. Let me give you an example. A corporation has 1,000,000 shares. Every day 1% of these shares are sold and bought on the stock exchange (the margin that we talk about). So this 1% determines what price for all 100% of shares is at that time. It does not matter that many investors own a lot of this stock in their 401k and do not intend to sell it anytime soon, what matters is the margin.
I consider myself a reasonable person and I wouldn’t mind if the US went into a depression so long as I kept my job. It would mean increased purchasing power for me and lower prices on goods & housing.
Just as a rising tide doesn’t life all boats a falling tide won’t beach all of them either. Its all a matter of individual circumstances.
T2 your thesis is just as wrong as the computer models for subprime lending. I don’t mind
This is like Deja Vu; the same hack arguments from some guy with allegedly impecible credentials who repeated calls me a moron. Shill, is that you?
I enjoy reading his Market Ticker. Denninger may be a little hysterical at times, but I don’t know what “interesting history” you are referring to. For me, I am looking for the truth and am not looking to kill the messenger for his delivery methods. Its hard enough for us sheeple to look past the propoganda we are offered through the usual media channels.
RE watcher:”The denninger of that web site is no doubt Karl Denninger, who has quite an interesting history and past with some Chicago roots there, and some might even pin the “kook” label on him.”
Bob, we are not talking about tide here. We are talking about a tsunami. The PTB will make sure that they will get hold on your money one way or another. What is even worse is that your future incomes will be greatly reduced. Do not full yourself. There will be no one who will benefit from this. I am from Ester Europe and I have personally leaved through and seen a total collapse of state, economy and society. Believe me, it is not a pretty picture.
The margin is important when it comes to pricing assets, your example doesn’t make any sense, we are talking about two completely different things
G, I wasn’t talking about Kellogg or GSB, I was talking about DePaul and Loyola.
So you meant “Tier 2” not “Top 2”. HUGE difference. I’d go as far as saying there’s a huge difference between Loyola and DePaul but that’s just my personal bias.
Hehe!
Credit? We just got pre-qualified for a mortgage of up to $750,000, which is so stunningly stupid that it defies belief. I only really want about half that. My agent says that as a negotiating tactic, that when we are ready to make an offer we’ll get the broker to substantially lower the amount in the letter.
T2: “The margin is important when it comes to pricing assets, your example doesn’t make any sense, we are talking about two completely different things.”
Aren’t we talking about pricing of credit? Look at your own words:
T2“I’m saying that a significant part of the consumer base, at the margin, is tapped out and cannot afford any more debt. Because of this, even healthy consumers cannot currently get credit.”
The above statement should be read “…even healthy consumers have to pay higher prices for credit” since everything is for sell at the right price, and the banks will lend at the right price that reflects risk of defaults.
You are right that there are healthy customers out there, but the banks cannot afford to offer these costumers credit at a reasonable price, because the banks already made a lot of bad loans to the MARGINAL tapped out customers. Now the banks need to take the high probability of default on these bad loans into account when they make new loans even to trustworthy customers. In essence the new customers will pay for the defaults of the old ones. Hence the marginal customer, even if it looks insignificant to you, affects the price for credit for everybody. This is exactly why we are all subprime now. The contamination is totally widespread. Use your one advise to HD and try to look beyond your own and your peers situation and try to see the big picture. ?
T2: “The margin is important when it comes to pricing assets, your example doesn’t make any sense, we are talking about two completely different things.”
Aren’t we talking about pricing of credit? Look at your own words:
T2“I’m saying that a significant part of the consumer base, at the margin, is tapped out and cannot afford any more debt. Because of this, even healthy consumers cannot currently get credit.”
The above statement should be read “…even healthy consumers have to pay higher prices for credit” since everything is for sell at the right price, and the banks will lend at the right price that reflects risk of defaults.
You are right that there are healthy customers out there, but the banks cannot afford to offer these costumers credit at a reasonable price, because the banks already made a lot of bad loans to the MARGINAL tapped out customers. Now the banks need to take the high probability of default on these bad loans into account when they make new loans even to trustworthy customers. In essence the new customers will pay for the defaults of the old ones. Hence the marginal customer, even if it looks insignificant to you, affects the price for credit for everybody. This is exactly why we are all subprime now. The contamination is totally widespread. Use your one advise to HD and try to look beyond your own and your peers situation and try to see the big picture.
Sorry for the double post.
froggy,
I’m not disagreeing with any of that. There is a lack of credit available right now and this is driving the cost of credit up and in many cases it is simply not available. What I’ve been saying, though, is that once credit markets normalize, the healthy borrowers will have much more access to credit than they do now. This will lead to a spike of pent-up demand. Many of the people here seem to think that ALL American consumers are “tapped out.” I’m simply saying that it’s only the marginal consumer that is tapped out and they are having a TEMPORARY effect on the healthy borrowers. Once credit markets normalize (whatever the new normal will be) the TEMPORARY lack of credit for good borrowers will dissipate and there will be a spike in demand.
Funny. I look at it historically and see us now moving back towards “normalizing”
What went down the past few years was the outlier. So extending credit, once again, to people that can’t pay it back would be “normalizing”?
This is not just on an individual scale, this is on much larger scale.
No one said that ALL consumers are tapped out. Many consumers are tapped out. The marginal consumer comprises a larger segment of American consumers than you want to admit. The fact that bankruptcies have doubled since 2006 and that 1 in 10 mortgages in the US is 30 days or more late is a testament to the fact that the marginal consumer is much greater that previous modeled. This was released today…
http://www.bloomberg.com/apps/news?pid=20601087&sid=a37uyBrX6dvY&refer=home
“Mortgage Delinquencies, Foreclosures Rise to Record (Update3)”
By Kathleen M. Howley
Dec. 5 (Bloomberg) — One in 10 American homeowners fell behind on mortgage payments or were in foreclosure during the third quarter as the world’s largest economy shed jobs and real estate prices tumbled.
The share of mortgages 30 days or more overdue rose to a seasonally adjusted 6.99 percent while loans already in foreclosure rose to 2.97 percent, both all-time highs in a survey that goes back 29 years, the Mortgage Bankers Association said in a report today. The gain in delinquencies was driven by an increase of loans with payments 90 days or more overdue.
“Until we see a turnaround in the job situation, we’re not going to see these numbers improve,” said Jay Brinkmann, chief economist of the Washington-based bankers group, in an interview. “We’re seeing more loans build up in the 90-days bucket as lenders work to modify loans and states put in place programs that delay foreclosures.” ”
________________________________________________________________
T2 said, “Many of the people here seem to think that ALL American consumers are “tapped out.” I’m simply saying that it’s only the marginal consumer that is tapped out and they are having a TEMPORARY effect on the healthy borrowers.”
The banking system is so f_cked is not even funny. No feasible amount of bailout can cover if 5% of all homes go delinquent on payments (mortgages are only on half of all properties I believe).
The worst part about the data is no sign of stabilization in house prices or delinquency rates. In fact the delinquency rate uptick seems to be accelerating. Hell can it go much higher than 10% of all mortgage properties?
HD,
I’d like to see a breakdown of the foreclosures to see what percent are principal residents vs. speculative properties.
T2, you might be right in your expectation that when the credit market “normalize”, it will return to the old status quo of easy lending and economy based on consumer overspending. I personally think that this crisis is a game change and the “normalized” credit market will look much more like the one before 1980, where frugality will be held to much higher regard than overspending. What makes me think so? Look at the state of any financial institution not only in USA, but anywhere around the world – they are all insolvent; they are flat out broke. The only thing that keeps them from falling apart are government interventions. The massive deleveraging will be painful and the recovering process will take years, if not decades because this time the crisis is global and it is a race to the bottom for every country. Call me pessimist, but I just do not see the silver lining anywhere (and believe me I DO want to see some hope).
T2, I agree, I’d like to see a breakdown of residential vs. speculative properties. My intuition based upon what I’ve seen (I work for a mid-sized firm that has a substantial foreclosure/REO dept) and what I’ve researched is that the speculative mortgage defaults have subsided and much of the current defaults are residential. I say this because real estate transactions have been dead for while and speculators for the most part have been out of the game. Congrats to them if they’ve been able to hold out this long paying for a loser investment. My feeling is that they were wiped out months ago. My office hasn’t seen as many investment properties in Bk or in foreclosure lately. Lately I’m seeing more regular consumers who are insolvent. I know you don’t like my anecdotal experiences extrapolated to the market as a whole, but, through my job, I see fairly representative and real-time cross-section of the foreclosure and bankruptcy market. It’ll be 3-6 months before the stats and figures represent these new twists and over a year before the banks sell the REO (for a large loss) and even longer before they put it onto the books as a write down.
TransUnion said that they expect mortgage delinquencies to peak in 2010. (Sorry Bloomberg no longer has the link from yesterday). I think I concur with their assessment. Just b/c we peak in 2010 doesn’t mean the defaults will stop; it means only that they’re crested. Add two or three years for the other have of the wave and that puts the market at 2012-2013 before we’ve ‘normalized’ whatever that means.
Which is what I’ve been saying ALL ALONG. Look at my posts for as long as I’ve been posting here; that’s what I’ve been saying all along.
Of course if the government figures out a way to mod every potential default or places a stop on all foreclosures we might shorten or (more likely lengthen) the pain from this mess. But based on my assessment of the current situation, I continue to say 2013 before this mess has for the most part sorted itself out.
When I typed residential above I mean principal residence…Thanks
I think it may take until 2013-14 to get completely through this mess I think the volatility associated with these massive capital misallocations will mostly have worked through the economy earlier. Likely by the end of 2010.
The size of the losses can’t be quantified until mortgage delinquency rates and real estate prices have stabilized. I think we’ll be there in two years.
I thought 2012-14 would be the bottom for housing too, but that was before the SHF in the overall economy. Seeing how fast the things have been deteriorating in the economy and how inadequate is the response of the government and the FED, I cannot make any predictions anymore. Just stay calm and do not try to catch any falling knives – it is a tricky exercise, which can leave very deep cuts or even bleed you to death.
I think 2009 becomes the year of the marginalized company… Throw in states looking pretty ugly also, pension funds having been decimated, should be entertaining. I was down in Argentina last week and kept on thinking how much worse the U.S. balance sheet is than theirs.
The bubble in price, supply and demand was fueled by easy credit. The easy credit is gone for good. Therefore, the bubble, with its inflated demand and prices, is gone for good.
The lending standards today are just a return to pre-bubble requirements. You know, the kind that actually get the lender paid back. Any thought of current “pent-up” demand due to credit availability (that will not return) is actually a sign of demand destruction.
I love the doom and gloom. ZThe fed will pump money back in in hopes making up for the decrease in volocity. Whether this wowks and causes inflation is yet to be seen. If is does not work we will face deflation.
Safe yourself the long winded theories and just admit you are purley speculating. Whether we see inflation or deflation depends 100% of the cinsumers willingness to spend.
Just saw you know citibank just increased my credit line by 20% and best buy offer no payments for 24 months. Credit is not hard for most and should get easier in the next few months.
steve Heitman said: “ZThe fed will pump money back in in hopes making up for the decrease in volocity.”
– Yep, it will be like pissing in the wind… Credit is continuing to be pulled back…repayment of principal risk is paramount. So, bye bye subprime anything.
Steve they might have increased your credit line 20% but the problem is losses and profits going forward. People just got a huge chunk of their wealth wiped out between housing and the stock market. Many are terrified about job security and real unemployment is over 10% and losses are still being hidden. I just see a trend.
12.55% of all subprime mortgages are in some stage of foreclosure!
http://interestrateroundup.blogspot.com by Mike Larson
Mortgage delinquency, foreclosure rates surge to new records in Q3
The Mortgage Bankers Association just released its latest data on mortgage delinquencies and foreclosures, covering the third quarter of this year. Without further adieu, here’s a look at the numbers:
* The overall mortgage delinquency rate rose again to 6.99% from 6.41% in Q2 2008 and 5.59% a year earlier. This is yet another record high for the delinquency rate (the MBA data goes back to 1979).
* The subprime DQ rate resumed its rise — climbing to 20.03% from 18.67% in Q2 2008 and 16.31% a year earlier. This is a fresh high. And as I have noted several times, this mortgage crisis stopped being just about subprime long ago. The prime-only delinquency rate rose to 4.34% from 3.93% in Q2 2008 and 3.12% a year earlier.
* Delving further into the numbers, Prime ARM DQ rates rose to 8.2% from 7.49% in Q2 2008, while subprime ARM DQs climbed a bit to 21.31% from 21.03%. Meanwhile, the DQ rate on FHA loans inched up to 12.92% from 12.63% a quarter earlier.
* The percentage of mortgages entering the foreclosure process dipped ever so slightly — to 1.07% from 1.08% a quarter earlier. But the overall percentage of mortgages in any stage of foreclosure rose again to 2.97% — up from 2.75% in Q2 2008 and 1.69% a year earlier. A whopping 12.55% of subprime mortgages are now in some stage of foreclosure.
One interesting note comparing foreclosures now versus during the Great Depression, back then you had to have a sizable down payment of say 50% and had a short term maturity on the mortgage (say 10 year max). Hence, when you got foreclosed upon, people resented the banks since they were preying on people and taking their wealth. What is happening now is the reverse. Hopefully policymakers realize that…. It is the banks wealth that is getting swindled this time since many people had minimal equity in the homes that are being foreclosed upon now.
Obviously the FHA shouldn’t be in the business of providing mortgages if their DQ is so much higher than conforming prime loans. Our taxpayer dollars at work: helping those who can’t afford something live beyond their means.
The banks aren’t being ‘swindled’ out of anything. They are the ones who underwrote the mortgage. In many cases they even sold off the mortgage, so the person being ‘swindled’ is the speculator in mortgage backed securities.
I wish our policy makers would be more aggressive in shutting down banks and crafting punitive measures to make their life increasingly difficult as the bankers were a key party complicit in this disaster. Most of the mortgages in default would’ve never been underwritten if the bank had to keep the loan or a fraction of it on its books.
Well T2 TS TZ or whoever was the doubter…. Roubini is now articulating what I had said:
“Also, in deflation the fall in prices means the real cost of capital is high – despite policy rates close to zero” 12/3/2008 Financial Times.
If you recall, I dismissed 5% (or whatever) the mortgage rates were since the REAL rate needs to incorporate deflation and so we are looking at real mortgage rates, at least in the next year or so, more like the nominal rates from the 1970’s. You hear it here first people…. 🙂 Now it is print.
Bob said: “The banks aren’t being ’swindled’ out of anything.”
– Wanna bet, I have become increasingly aware of the massive fraud, particularly by foreigners, that went on. To date I know of several people….practically bragging…how they will stop paying their mortgage to force a lower interest rate or shortsale, or just leave the country with their money…even though they can afford their mortgage payments. Banks are being swindled, and yes, a lot of it they did it to themselves by exposing themselves, but if people just acted with honor regarding their debts this thing wouldn’t be as bad as what it is now.
Banks still have a lot on their books…
Oh and watch the video of Roubini…he calls the over investment in supply a “structural factor”….ummmm I think I said that already…. Again, this is not a “cyclical recession” it is a “structural recession”.
http://finance.yahoo.com/tech-ticker/article/138999/2009-Recession-Will-Be-Severe-%27There-Is-a-Global-Deflationary-Risk%27-Roubini-Says?tickers=%5Edji,%5Egspc,TLT,UDN,UUP,GLD,SPY
http://immobilienblasen.blogspot.com/
Bertrand Benoit FT – To the German radio presenter, the real news about the measures announced by Washington on Tuesday to jolt banks into lending again was not so much the astronomical costs, but a little-noticed comment in Hank Paulson’s statement.
“Millions of Americans,” croaked the US Treasury secretary, were being denied credit or facing rising credit card rates, “making it more expensive for families to finance everyday purchases”.
The notion that families should finance everyday purchases on credit, the anchor commented, “suggests Washington has still to understand what brought us there in the first place”.
John – Are you saying that the Fed will allow us to just fall into a deflationary spiral? In the short term you are correct. In the long term Bernanke has already told you how deflation will be dealt with.
My whole argument few days ago was find a great deal. By that I mean purchase a home that is priced less than inflationary growth since the ’90’s and lock in at 5% or less. When the printing presses turn on those that do this will be happy they did.
There are a lot of things in print on this site and I hope Sabrina saves the posts. It will be interesting to look back a few years. I had an argument with Deaconblue a while back that I wish I could find. I wish I could remember what month it happened because I can’t seem to find it with the search function.
TS – Yes it will be very interesting to read years from now, and with this blog being one of the best out there, better than anything in Miami for sure, historians will have a better understanding of what people were thinking at the time. With that said, the fed govt can’t prop up the asset prices in so many categories…they just don’t have it and having the fed govt assume poor debts that are outstanding just passes it to our children. The bad investments just need to marked down. I don’t think the fed govt is large enough to solve this problem….we are in a deflationary spiral already…which is good to get prices marked down…the fed govt roll is to prevent it from spiraling out of control and beyond. Same with the liquidity trap that we are already in. Where I disagree with Roubini is in the response…he calls for writing down the principal on the mortgage debt…I disagree and prefer the lower interest rate refi and longer term (say 40 year mortgage) and make it an assumable mortgage where possibly the fed govt can step in and make that home almost a hybird of ownership-rental type of thing before you get title. In ten years the mortgages won’t be underwater for the vast majority of mortgagors so we need a stop gap for that, not a giveaway of principal to irresponsible borrowers (doubt politically feasible anyway). a home isn’t like a credit card debt or some other consumer credit writeoff….it would be dangerous to start treating it that way since we would truly have a tsunami of people feigning inability to pay (just have wife stop working for a year and get $200K!) type of stuff. So I am surprised that Roubini as an economist who studies human behavior and collaborates with Shiller wouldn’t have seen the unintended consequences of that action…or perhaps he really is that worried about things…. Don’t know. But again, this isn’t a depression nor is it a typical recession…. it is a “structural recession” that will be long and nasty and will be a major overhaul of capital and the economy. Start using the term “Structural Recession” maybe it will catch on….for me, it describes what is going on better than anything I have heard or read elsewhere. Peace out. Time to hit the beach it is 80 degrees here….and rents are cheaper here than Chicago….go figure.
Oh also, the deflation was the result of bad credit, simply passing that bad credit around to the fed govt won’t prevent deflation since there is nothing left to feed the demand beast…the govt spending will only feed at most half the gap. Demand has slimmed down, no the obese supply is sweating to the oldies of traditional lending standards….
Here you go again John… Doom and gloom! It is obvious that we may be turning the corner when people like you begin to reiterate what the bears have been saying for years.
No one is going to use the term “structural recession” until you come up with a meaning for it. The definition you provided before was nothing but the definition of regular recession. Roubini’s quote doesn’t use your term in the same way, nice try though. By the way, if you listen to his whole interview, he specifically said that we will not go into a depression and that by the second half of 2009 we will go back into a weak expansion. Sound familiar?
T2 for once I aree with you. The term structural recession is really just a regular recession. I think what he’s trying to imply that this recession is going to be deep and long because the world economy has been growing to meet demands that were based upon excessive use of credit. Now that credit is contracting demand is also contracting.
Basically we wasted a lot of resources to meet a need that didn’t really exist. The endless subdivisions in the exurbs is a perfect example. Few people want to live in BFE but they built hundreds od thousands of homes out there that no one wants to live in. We wasted billions building condos in the south loop and now the supply far exceeds the demand. Its going to take quite a few years to shake off the excess of this decade.
John and TS,
Keeping your posts for posterity? It’s cool to throw in your 2 cents worth and get a good exchange going but you guys take yourselves a little too seriously. This is a blog in a far corner of the cyber-universe, not a congressional hearing.
homedelete – What I am saying is that this is not what you would consider “just a recession”. That is the point. Lowering the fed funds target rate, increasing govt spending, providing tax incentives will not be effective here like in all the other recessions since the Great Depression. Other actions need to be taken in order to prevent a very nasty and unnecessary self-reinforcing negative feedback loop. Moreover, simply saying we have a credit crunch that needs to be unfrozen fails to understand the problem too. This was a sudden and sharp shift in the demand level caused by the busting of the credit bubble that had artificially created that demand level. Investments in the supply structure had been made over many years to provide a supply level to meet the demand level…in fact the demand level was so elevated that the lag in supply had caused asset prices to continue to rise. We had a stair step down of demand not a decrease in demand following an economic or business cycle. That is the difference. And now we are experiencing a lower structural demand at a time when too much debt compared to equity had been used to buy assets, too little savings (equity) over all at a time when new purchases require equity, along with a huge over supply = deflation across the board…and wealth destruction. Debt took on the risk of equity without the proper rate of return and now entire banking system (the debt providers) are SOL without the fed govt to backstop them…..the equity providers need to step in but are gun shy in a deflationary environment….and so we wait on the sidelines as assets deflate..and watch the knife catchers get hurt. The govt wants to raise the demand level back by reflating the credit bubble through govt debt…putting the world at risk.
RunnerRunner – Keep everyone’s posts…not just mine. If only we had blogs 100 years ago, we’d know so much more about history. This is an important time in economic history….worth keeping.
John,
I don’t think the prediction of a deflationary environment is whats keeping equity holders at bay. Its that there are going to massive corporate defaults/bankruptices in the coming couple years and they don’t want to lose any more money. Look at what happened to equity holders so far in this credit crunch: 9 times out of 10 they were SOL. Look at the equity investments by hedge funds and sovereign wealth funds into such companies as WaMu, Leh, Citi, MS, etc.
In short the glaring holes in balance sheets from the credit bubble are too large to expect to reasonably be replaced by equity. Even if it were possible the dilution would be enormous.
Equity is gone as a source of financing because it doesn’t make sense: the markets are still in a price discovery mode with regards to debt and equity always takes lower priority in any bankruptcy.
I predict before this cycle is over there will be some spectacular returns on equities, but predicting the survivors that are cheaply priced from those who will ‘die in the trenches’ of this downturn is pretty tough.