Thursday, May 12, 2005

Home Price Bust More Damaging Than Stocks

This OpEd piece by a writer in Baltimore echos the realization that is occurring all over the world. "My earlier perturbation turned to concern as I listened to my friends' responses and saw new, disturbing trends emerge."

"When I asked one friend about her methods I noted a second trend, and it raised hairs on my neck. 'The real estate market always goes up.'The classic bubble indicator, 'irrational exuberance.' A twentysomething law student with no training in economics or real estate speculation just told me that the market always goes up."

"The third trend: too much credit. 'You can take out a junior mortgage to pay down your credit card bills. That's what my parents did.' I grimaced."

"The fourth trend: insolvency. A default brings down neighboring home values. So homeowners who expect to pay down credit card bills and a second mortgage with appreciation could be surprised."

"'Well,' some say in their last-ditch effort to overcome economics, 'the government can't let the market fail.' And there it was: the elephant in the closet."

"Fannie Mae and Freddie Mac are leveraged into the trillion-plus dollar range with complicated derivative securities. At the same time, mortgages comprise almost a quarter of bank holdings, and most insurers and pension funds are heavily invested in mortgage-backed securities. So, Fannie and Freddie are not only giant hedge funds, they are effectively the largest mortgage bankers, S&L's and portfolio managers in the world."

"If Fannie and Freddie haven't done a good job ensuring creditworthiness, sniffing out fraudulent valuations, or matching risk, they could become insolvent (if they aren't already)."

"The great irony would be that we never recognized the true origins of the Great Depression. The stock market wiped out Wall Street, but it was average people defaulting on mortgages that sank our economy."


At 9:40 AM, Blogger Melody said...

Fannie Mae Delays First-Quarter Financial Report

BY AL YOON - Bloomberg News
May 12, 2005

Fannie Mae, the biggest American mortgage buyer, said it won't file the required first-quarter financial report with the Securities and Exchange Commission on time as it undergoes a restatement of earnings.

The government-chartered company announced the delay yesterday in a filing that also disclosed a decline in the Washington-based company's share of the market for mortgage-backed securities.

At 9:47 AM, Anonymous Anonymous said...

Moral Hazard. The government will not let the market fail.

I begin to think that it was wrong for the FED to bail out LTCM in 1998, sparing an OTC implosion.

A few years ago Buffett said that OTC derivative is highly problematic. The Oracle is always right.

The OTC positions in Fannie and Freddie make LTCM looks like a small investment club.

At 10:01 AM, Blogger goleta said...

The government will not let the market fail.

If the market doesn't fall, people will be deeper in debt to buy houses at current level. That combined with the dropping of real wages means we are heading into a GD, as most people have no money left for anything.

At 10:02 AM, Blogger Ben Jones said...

9:47 Anon,
To that I will add Chrysler, NYC, Russia, Mexico, Mexico again (it was really Goldman Saks that got bailed out), the airlines....

At 10:05 AM, Blogger bubbleman said...

i actually heard a realtor on the radio telling people that if there ever was a huge real estate crash that the government would just bail everyone out. what a joke.

At 10:30 AM, Anonymous Anonymous said...

I am really tempted to get into a non-recourse loan with the most creativity. If the market continues to go up, I win. If the market crashes, I walk (AG wmay bail me out anyway, then I win too).

Too bad. Credit and integrity mean a lot to us.

At 10:54 AM, Anonymous Anonymous said...

I have always lived well within my means. I have never taken out home equity loans, or made foolish investments in overpriced real estate based on the greater fool theory. I have no granite countertops nor do I have an SUV. (Hell, I don't even have a flat screen tv!) Not only do I have money in the bank, but I have over $500 in my wallet right at this very moment.

If the day comes when I have to pay for my neighbor's exhuberant spending through a government bail out, it will be clear that this country is no longer one built on integrity and hard work.

The government will have to be pretty sly to find me on the beaches of Spain to collect "my share" of this mess.

At 11:00 AM, Blogger Ben Jones said...

Thanks for the news that realtors are turning to the doomsday scenario and concluding they will be bailed out. I doubt the US government could handle a Fannie meltdown, much less a regional or multi-region bust.

Keep in mind that when the govt. "bailed out' the S&Ls, it was really a coordinated liquidation. Nobody was made whole. When the deflation hits the fan, Uncle Sugar will have too much on his hands to help individual citizens.

At 1:21 PM, Anonymous Loren said...

In the great depression the govt bailed out the banks, but not individuals. Many families lost multi generation land holdings.

The govt won't bail out "real estate", and besides the Feds are in hock so badly already they're insolvent right now. According to GAAP standards the Federal Government should be placed into recievership, and Congress should be put in jail. It won't happen, but it should.

At 4:59 AM, Anonymous Anonymous said...

Anon 9:47,

"The oracle is always right."

Really? Buffett himself would die before he would make that claim, it's equivalent to rubbish like "house prices will never fall".

If you look at the annual reports from Berkshire Hathaway (Buffett's company), they are FULL of 'we got this wrong' statements.



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