Thursday, May 19, 2005

Fed Worship Turns To Disillusionment

It is amusing to hear this WS Journal writer's disbelief that the Fed has been wrong about the housing bubble. "For a long time, Alan Greenspan dismissed suggestions that the U.S. was in the early stages of a housing bubble. He talked about the extraordinary demand for houses among hard-working immigrants. He emphasized that it's almost impossible to have a national housing bubble. He explained that it's hard to speculate in a house that you own because to sell it you have to move out."

"But there has been a little more concern creeping into his commentary in the past few months. 'We do have characteristics of bubbles in certain areas,' he said."

"The Fed..contributed to the housing boom by keeping short-term interest rates so low for so long, and encouraging the bond market to do the same with the long-term rates that determine mortgage rates."

"If house prices stop climbing, it won't be pleasant. Americans will feel poorer."

27 Comments:

At 9:25 AM, Anonymous Anonymous said...

If house prices stop climbing Amercans may well feel poorer.

But if house prices drop even a little bit vast numbers of Americans will be bankrupt.

At that point many will start to wonder why the panderer they elected to represent them in Congress took the big bucks from financial industry donors and obiediently passed the recent Support of Usury legislation.

 
At 9:26 AM, Anonymous Anonymous said...

If house prices stop climbing Amercans may well feel poorer.

But if house prices drop even a little bit vast numbers of Americans will be bankrupt.

At that point many will start to wonder why the panderer they elected to represent them in Congress took the big bucks from financial industry donors and obiediently passed the recent Support of Usury legislation.

 
At 9:48 AM, Anonymous Anonymous said...

"23 percent of all homes purchased in 2004 were for investment, and a further 13 percent were vacation homes."

This is too much... just imagine that the main reason why the fed steps-in -- and really does something -- is because of this survey... how ironic would that be?

 
At 10:00 AM, Anonymous b said...

being on the inside (mortgage business) i can tell you that that number is severely understated. these flippers know that owner-occupied loans are better in their terms and ltv's. how do you think these 20 year old are buying 3 0 4 houses at a time. 4 owner occupied homes from 4 different lenders. that's how.

 
At 10:07 AM, Anonymous Anonymous said...

As a realtor, I second that. Whenever possible, people state "owner occupied", when it's not. I have personally seen lenders (mortgage brokers) recommend that to borrowers.

 
At 10:15 AM, Anonymous Anonymous said...

Support of Usury legislation....I call it the Economic Slavery Act of 2005.

 
At 10:22 AM, Anonymous Anonymous said...

You people do remember 9/11 dont you? What should Greenspan have done post 9/11? American consumers were shellshocked and our financial markets were on the verge of collapse. If Greenspan hadn't dropped interest rates to 40 year lows in order to re-flate the economy, where would we be today?

 
At 10:26 AM, Anonymous nostradamus said...

***

Saw this on Minyanville.com today:

Moody's (the bond rating folks) just did a research piece on I/O loans that is widely read on Wall Street.

A lot of MBS traders want to know just how risky the mortgage market is getting. Here's one snippet:

I/O loans represent up to 2/3rds of some securitized ARM pools.

A typical $500,000 5/1 loan is where the rate is fixed for the first 5 years and resets annual and is marked to market every year thereafter.

Assuming that the original loan was written when rates were 6%, that would represent a monthly payment of $2,500.00 per month. If mortgage rates were to rise only 150 basis points to 7.5% in that 5 year period, the payment would - in the 61st month - jump to $3,695. A tidy 48% increase.

The probability is small that even a meaningful percentage of these IO borrowers are aware of these dynamics and this level of sensitivity.

 
At 10:29 AM, Blogger Ben Jones said...

The NAR reported the 23% speculator and 13% vacation home numbers long ago.

b,
Thanks for the inside info.

 
At 10:31 AM, Anonymous Anonymous said...

10:22 Anon, you talk as if it is possible to avoid recessions at all. Boom and bust are features of the capitalistic society.

He was right in lowering the interest rate, but he kept in low for too long.

What was he thinking? To avoid a recession before his retirement!

 
At 10:38 AM, Anonymous Rob said...

"If mortgage rates were to rise only 150 basis points to 7.5% in that 5 year period, the payment would - in the 61st month - jump to $3,695. A tidy 48% increase."

Ouch.

Does anyone know if it is possible to find any graphs on # of I/O loans, age, and fixed term length? It would be interesting to see when the bulk of these loans become unhinged.

 
At 10:46 AM, Anonymous jimbo said...

(What should Greenspan have done post 9/11? If Greenspan hadn't dropped interest rates to 40 year lows in order to re-flate the economy, where would we be today?)

Look, I shouldn't complain. I've made out like a bandit on real estate over the past few years. We are in the process of selling most of our holdings. We sold about half last year.

Still, I'm not convinced that Greenspan has made the right moves. He flooded the economy was cash after the '87 stock market crash. Yes, it stablized the market. But what really happened was that money flooded into RE and created the late '80s boom, which led to the S&L disaster and tons of bankruptcies and foreclosures in the early 90s.

He flooded the market with cash/debt after the Asian currency crisis of 1997 and the LTCM scandal in '98 which created the stock market mania. He flooded the market in late 1999 during the Y2K scare and it led to a blowoff/crash in the Nasdaq.

See a pattern?

The financial powers-that-be love the guy because he lines their pockets with cash. But the avg Joe often ends up holding the short end because he/she gets in at the tail end of these booms and gets nailed.

To me, the way to grow a sound economy is by rewarding stable, productive growth and behavior---not lining the pockets of Wall Street rascals who love manias/booms.

While I have personally done very well, we were doing well anyway before this housing mania. Why? Because we owned decent properties that threw off decent income. Now we are selling because the numbers no longer work. Greenspan, IMO, has once again flooded the engine and soon the car won't run at all.

Basing an economy on asset inflation and currency depreciation seems to be his only strategy. It leads to grossly overvalued assets which deflate violently only to see another asset class pick up the baton and go through the same process. It is an unsustainable strategy, but it has worked for 20+ years.

 
At 11:33 AM, Anonymous Anonymous said...

Right on, jimbo.

I also agree with those saying that owner-occupied numbers are inflated. I've been renting for a while, and my last landlord wanted me to tell his mortgage company that I was a friend of his who was staying in his house with him. (This was when he was getting the house re-appraised to pull out some equity.)

 
At 11:59 AM, Anonymous Hee Hate Me said...

The bubble will pop when Ben gives up on this blog and starts one called "How to get rich flipping houses using IO loans."

 
At 12:00 PM, Anonymous frankthebanker said...

( I've been renting for a while, and my last landlord wanted me to tell his mortgage company that I was a friend of his who was staying in his house with him)

Same here. I rent a home valued at $2M here in NorCal. The owner (a contractor) wanted to buy another one and fix it up. But he needed to drain equity from this house to buy the new one. He couldn't get the HELOC unless it was owner-occupied. So he still gets mail here and has a phone and answering machine set up in the basement so that he can get "calls" here from the bank. Hey, whatever works...

 
At 12:16 PM, Anonymous Anonymous said...

"What should Greenspan have done post 9/11?"

What should a remora do when it's shark gets bit?

What should your bookie do if the star horse comes up lame?

The FED is a parasite, not a productive member of the economy. What exactly that you need does the fed produce?

 
At 12:16 PM, Anonymous Anonymous said...

<< he still gets mail here and has a phone and answering machine set up in the basement so that he can get "calls" here from the bank. Hey, whatever works... >>

Yeah, I'm gonna be pretty pissed if/when my taxes go up to bail out these weasels.

 
At 12:23 PM, Blogger Thomas said...

Yet one more angle for my work-in-progress litigation trade journal article on how lawyers can profit from all the shenanigans that get revealed in a downturn.

Lenders are going to be looking for every potential angle to get some of their money back if they find themselves holding debt that exceeds their security, especially in an antideficiency state like California. Fraud is a beautiful thing in this regard, because it (1) isn't dischargeable in bankruptcy and (2) may not be affected by antideficiency statutes.

The downside, of course, is that the average fly-by-night speculator is going to be so wiped out by a correction that he may well be judgment-proof.

 
At 12:34 PM, Blogger The Original Anon said...

"The downside, of course, is that the average fly-by-night speculator is going to be so wiped out by a correction that he may well be judgment-proof."

Judgment proof for a while, but not forever necessarily. This debt will follow people to their graves. You're right that fraudulently obtained money cannot be discharged by bankruptcy (assuming the bank makes an assertion of fraud--fraud is not self-executing, like taxes). So all these people with inflated stated incomes will have a rude awakening the next few decades. It won't be a defense to say that the mortgage broker told them to inflate the stated income.

 
At 1:09 PM, Anonymous Anonymous said...

Try thinking of the 5/1 arm adjustment as the lockup period for an IPO. Except in this case, you know what will happen to the stock price once the shares can be traded.

 
At 1:54 PM, Anonymous Anonymous said...

Using the IPO mindset, 2009 will be the year that prices really tank if all the folks in 2004 got 5/1 ARM.
So, the market will slide until 2009 when it will dive...splash!

 
At 4:21 PM, Blogger Thomas said...

"It won't be a defense to say that the mortgage broker told them to inflate the stated income."

Indeed. In fact, it would just add another defendant for me to go after.

 
At 8:40 PM, Anonymous Anonymous said...

"If Greenspan hadn't dropped interest rates to 40 year lows in order to re-flate the economy, where would we be today?"

The same place we're going to be in about a year. Greenspan only delayed the inevitable. Probably just made it worse, in fact.

 
At 8:51 PM, Anonymous the unoriginal anon said...

"Using the IPO mindset, 2009 will be the year that prices really tank if all the folks in 2004 got 5/1 ARM.
So, the market will slide until 2009 when it will dive...splash!"

There will be no slide, it will just be SPLASH within the next 6 months. What everybody is forgetting is that the entire economy is one of consumerism.

The real problem with even a flat RE market is that refi becomes impossible. This, in turn, will lead to a massive slowdown in the retail sector as the house ATM runs dry, followed by large layoffs in retail and all associated RE businesses, leading to more foreclosures and larger inventories, etc. in a downward spiral.

Interest rates driving up your payments through the roof is only one aspect of the fragile RE bubble.

 
At 10:44 PM, Anonymous Anonymous said...

Greenspan's overall track record is good. I don't blame him for the tech crash in the Nasdaq, because in the real world there is no such thing as perfect monetary policy, except in hindsight, and even then its not always clear whether Fed adjustments could avoided a certain outcome.

However, the one thing that has disturbed me about Greenspan were his repeated comments he started making 2 to 3 yrs back in various congressional hearings, basically seeming to marvel at the wonders of cash out home equity loans, how great they were by putting all this cash into the economy

He seemed to be acting like a cheerleader for reckless behavior, and I found that very odd. My guess is that Greenspan figured by early 2004 real estate would come into for a soft landing of sorts, and the home equity craze would smooth out as home values flattened.

Instead we now have a major bubble, and I think even Greenspan is very worried

Now of course real estate bubbles tend to be regional, however sector crashes in certain critical areas of the U.S. would likely have massive effects on the entire U.S. economy

If for example New England, mid-atlantic, and West Coast all got hit at once, the results would be very serious - and this is an entirely plausible scenario

 
At 11:44 PM, Anonymous gary indiana said...

(If for example New England, mid-atlantic, and West Coast all got hit at once, the results would be very serious - and this is an entirely plausible scenario)

I keep reading housing bulls say that housing is local, local, local. If pressed, they say that certain hot areas may see a bit of a slump---like California, Nevada, Arizona, Florida, NY, Northeast, Washington DC.---but no national bubble so nothing to worry about.

Well, if all those areas get hammered, you are talking about at least 25% of the country and probably 50% (or higher) of the nation's real estate wealth and value. That sounds like a problem to me. I think they're whistling past the graveyard, "So what if NY, CA, AZ, NV, FL, DC, MA, CT, MD crash. We'll always have Peoria."

 
At 6:57 AM, Anonymous Anonymous said...

greenie was a huge fan of these cashout refis... he thought it was the best thing in the world... also... he seriously promoted the value of ARMs... that was back in, i believe, february of '04... just before he started this rate increase cycle... just amazing how this housing bubble has progressed...

 

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