Ok, let your collective minds wander for a second.
You are producing a movie about the housing bubble; you cast Bruce Lee as the archetype fat stack boomer overlord, one who has always somehow done everything right. The Zen of Being a Boomer.
You then cast Chuck Norris and Steven Seagal as prospective tenants who have to go "mano a mano" for the “privilege” of paying ~45% of Bruce's mortgage on the flea ridden $hitbox.
My money is on Chuck as tenant.
Ok, who wins when Bruce tries to up Chuck’s rent?
I said “upchuck”.
This whole thing makes me sick.
One could cast Jean Claude in a cameo, but then there would be double the Van Damage and who needs that?
Who would you cast as the trolls?
Who plays David L?
I have already cast Jenna Jameson as Leslie Appleton-Young.
Dreamworks SKG just gave this the "greenlight".
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FollowBefriend15 threads5,071 comments astrid's website
"The financial condition and objectives of 95% don’t matter to the 5% who have to sell for employment or financial reasons. If those 5% end up selling at irrationally low prices, those comps WILL matter to future buyers."
Amen! RE prices will be set by actual transactions, not by how much homeowners *want* their house to be worth.
Furthermore, those coping behavior such as multi-family cohabitation and illegal rentals will lead to an increase in rental/housing supplies, thus depressing rent prices and reduce the rental value of houses.
Overall, I sort of see where Randy and the paper is going. But I maintain that the Japanese experience will likely differ dramatically from the oncoming American one due to our different bankruptcy law, our credit based lifestyle, and our extremely loose residential RE borrowing standards. We may want to look to Hong Kong or Malaysia or LA circa 1990 for sharper drops, rather than look for the debt overhand.
I personally prefer the sharp painful drop. The pain will be borne mostly by the people most responsible for the bubble and the rest of the economy will benefit from shifting investments to more productive areas, rather than throw good money with the bad RE dollars.
FollowBefriend (4)44 threads4,602 comments Los Altos, CA
Good points. To clarify, I am not arguing that the correction will be soft. In fact, I am increasingly tilting towards a hard landing scenario. I am arguing that RE prices are sticky, which I think lots of folks are interpreting as necessarily meaning a soft landing.
Prices can be sticky and the landing still hard. I believe, assuming a hard landing is coming, this is occurring now. If RE was liquid, frictionless, and therefore not-sticky, then expectations would have already forced prices down today. Instead we see increasing anecdotal evidence that sellers are behaving exactly as predicted in the models proposed by the study I linked.
Specifically to your counter points: reasons for selling and holding periods matter a great deal. This is because the behavioral arguments for mass panic assume that current owners will make a sell/no-sell decision based upon exogenous factors. I contend that most people do not sell for such reasons, but instead for internal family/life-stage reasons, and they will not enter the market on the supply curve simply because of a developing hard landing for that reason alone. In fact, the opposite should be true with many people deferring life-decisions during a bad market with the hope of a better market in the future.
I don't think search cost will be a major problem, unless Randy was thinking about foreclosures. I can spend a couple hours on realtor.com and zillow, and get a pretty good idea of the price level in an area.
As for foreclosures. Yeah, they're not easily assessible. But if they arrive on the market in large numbers, their presence will be felt by the RE market at large.
You are confusing sticky with hard. RE is sticky. It is empirically demonstrated, whether people like it or not. The paper is proposing not that RE is sticky as a new concept, but that RE is sticky for more than frictional transaction reasons, but also debt overhang reasons.
If you read through that model in the study you can see how variables of difference between Japan and the US are held constant. They are merely analyzing the effect of financing on seller behavior, as a generational (quantitative term, not demographic term) model.
Comparing the Japanese housing bubble/crash to the Amerikan bubble, ignores a well known fact, most Amerikans are now not known as savers;
This is not relevant to the model. One needs to read the paper to understand the model. They aren't "comparing Japan to America". As debt to savings can be reduced to a ratio within the model, it is only relevant as a contributing constant factor. It does not change the output of the model, only the absolute levels at which ranges start and end.
If you're saying that RE is illiquid compared to stocks...I thought that was already well understood. From that point, I can see the debt overhang effect, up to the point until it becomes unbearable for the FB. In that case, we're just debating about the number of overleveraged people who have enough income to cover PITI.
(I admit, I was lazy and just skimmed the paper :oops: )
I left out an :oops: on the last comment
We are now in complete agreement. The cycle could become a terrible positive feedback loop, whereby sellers decide to stay on the upper shelf of the supply curve and "ride it out". But that depresses consumer spending. They quit taking vacations, sell their Hummers, cancel plans for that kitchen upgrade, stop their frivolous Williams & Sonoma weekend sprees, and cut back sushi to once very couple months.
But this eventually feeds back into housing itself, in the form of unemployment probably. But that will take some time. It isn't an instant effect. Probably 6 months in a free-fall scenario; more likely 12-24 months.
And then, as people get progressively peeled out of their houses due to financial distress, even those homes do not re-enter the market for 6 months (the average is 10 months, I'm being generous assuming banks get more efficient at disposing of real property from foreclosures). So this further gums up the price descent.
The predicted result is growing inventory with growing unsatisfied demand at price. Perhaps I will be wrong about earlier assumptions, and this cycle carries through all the way until real-holding costs (PITI + stuff) becomes less than real rents.
If the factors are mainly behavioral psychology, and not rational economic, then people 50K in the hole will be far more motivated to ride it out than people, say 50K in the black, but off from 100K in the black.
This is simple escalation of commitment, and it holds pretty much universally for all but a very tiny number of people who have trained themselves to think otherwise (like professional traders, etc.)
"To clarify, I am not arguing that the correction will be soft. In fact, I am increasingly tilting towards a hard landing scenario. I am arguing that RE prices are sticky, which I think lots of folks are interpreting as necessarily meaning a soft landing."
Randy, thank you for the clarification; I was indeed confused.
ARMS start resetting in large numbers 2007-2009. Of course some marginal owners will be dislocated; probably in progressively larger numbers.
I still doubt this will cause panic so much as it causes aggressive restructuring for existing families near the edge. Everyone in the system (you included as a comparable homeowner) has a vested interest in seeing that increasing foreclosures do not cause Torschlusspanik. As such, I fully expect that the first glimmer of a true hard landing will result in Fed easing of rates, massive refinancings, and mortgage lenders figuring out ways to extend the term of amortization. In the UK they now sell loans that are IO for something like 10-15 years, then they revert to 50 year standard loans, which survive with the property during inheritance. There is a lot of runway between where we are now and there, if the alternative is a complete loss of confidence in MBS,CDO markets.
What are your latest thoughts on a reasonable time to re-enter the market? Many calculations seem to take 2005 as the peak, add a 3-year ARM reset, plus another year or so of lag. That points to 2008 - 2010.
Does the stickiness suggest a different re-entry point?
My current thinking is that stickiness will manifest itself (assuming a hard landing as I did in my analysis) as a series of sharp declines separated by stubborn plateaus, like we're on now, during which little sells except for outliers at erratic prices.
The best I can offer is that one should consider buying if and when one of these downward spikes puts your target home within your "best utility" zone. That is, where you get equal or better value from being in a house than you do from waiting for another price fall some many months in the future.
I say all that because some folks may wish to buy after just one, good, 15-20% kick. Others may be better served waiting however many months or years it takes to get 40%, 50%, whatever.
The real question is, if you buy at -20%, will you still be happy when that home is at a relative -50%, and you could have had "30% more home" for the same $.
For this reason, I'm being careful to try to equally adjust my expectations for both house type and price. So, hypothetically, if one is prepared to pay $1M for a home, and then it comes down to $800K, they should look somewhere in the $900K homes to satisfy both the desire to get a better home for the money, and the desire to save money.
* Finally — and I know this is an unpopular stance here — I believe that financial hardships as a percentage of existing homeowners are tremendously overestimated by many folks... Many people will find unlikely and creative ways to hang on, not the least of which being borrowing from family, tapping retirement accounts early, unpleasant refinancings which trade terms for payment levels, multi-family cohabitation, illegal renters, and so on.
There are approximately 70 million homeowner households in the US. About 10 million own their homes outright. There is $9 trillion in mortgage debt (including $2.5 trillion "cashed out" during the bubble). $9 trillion spread over 60 million households = $150,000. (And this is not even counting the $2.2 trillion in consumer debt--much of it owed by homeowners, as renters tend to have low credit limits.) Median household income in the US for 2005 = $49,747. Presumably, it is higher for homeowners--let's assume $75,000 (I can't find a data source). That means that people owe, on average, an amount equal to 2x their total annual household income for their houses alone (again, not counting credit cards, student loans, auto loans & leases, etc.).
I would argue that it is the "unlikely and creative ways to hang on" which sustained the bubble in the first place. But at this point, I suspect that these creative schemes are pretty much tapped out. There is no one left to borrow from--the HELOC has run dry (or will soon), the credit cards are maxed, the FB's friends and families have their own diminishing equity to look out for, etc., etc... And now it is time for the ARMs to adjust.
As a person who once had debt equal to 2x my household income, I can tell you that it can be a severe strain. Luckily, my wife and I were able to stay employed and get our debt down to a more manageable level. However, many people will not be so lucky. Sure, some of them will keep their jobs, pay off their mortgages and live happily ever after. But if the average homeowner has debt equal to 2x their household income, it is hard for me to imagine that large numbers of these households will not suffer due to job losses, illness, divorce, death, etc., etc.. Most homeowners are "dual income" households. This means that a loss of one income will, in many cases, lead to the loss of the family home. There is no wiggle room.
Moreover, I suspect that there is a bell curve distribution of household debt. If the average is 2 x income, then there is a range from 0 x household income to 5 or 10 x household income. (In my data, I chopped off the "fat tail" of homeowners with 100% equity, but not the "skinny tail" of those with debt equal to 4, 5 or 10x household income.) There are a lot of these "skinny tail" people in California. Large numbers of these people will not be able to sustain their debt loads, in my opinion. The use of ARMs, Neg-am loans, etc., will only exacerbate and accelerate the problem.
During the tech bubble, it was said that tech stocks were "priced for perfection." That is, the stocks were reasonably valued if you assumed that the companies would continue to grow earnings at 50%+ per year for the next decade+. I would argue that the current housing market is "priced for perfection." That is, if you assume that US wages will go up steadily at 3 or 4% per year, no one will add to supply by building any new homes, no one will get divorced, lose their job, or die, then perhaps the housing prices could be sustained. Even then, though, the future appreciation is already priced in, so there is no upside left for future buyers.
Amen! RE prices will be set by actual transactions, not by how much homeowners *want* their house to be worth.
True. And, as they say, economics matters at the margin. It is the marginal buyer and marginal seller who will set the price. In the coming years, the marginal seller is likely to be a bank's REO department, an unemployed FB or an overleveraged flipper. The marginal buyer is likely to be a bubble-sitter or a shrewd RE pro with ample liquidity.
FollowBefriend1 threads6,749 comments
I keep trying to play that scenario out in my own mind and keep coming back to the cold hard reality of how these "mercy re-fi's" would ultimately be distributed to the street. There are a lot of yield hungy investors out there but since these would be done at new (artificially lower rates) whom would they actually appeal to? Institutions? Not likely, they already own a ton of this paper and trying to figure out what to do with their Ford paper as well. Retail investors? These people have already taken a beating and no longer have much of an appetite so I'm curious as to how the Fed and the street would manage such a "debt swap" especially w/falling home valuations?
I'm open to anything but since I'm one of the guys that would be expected to "move this inventory" how would I script that to clients?
"Mr. Client, you and I have worked together for some time haven't we?" Well what I'm about to tell you will cause you to "re-think" the way you feel about MBS! We all know that defaults are on the rise and home values are plummeting, right? So, we have our hands on debt paper that's yielding a little higher than munis so on a taxable equivelant yield basis it's a wash, PLUS there's more risk! But the upside is..........
And that's where I draw a blank.
Firstly how are things down at the old "Cask and Flagon"?
Anyway, 2003 was THE hey-day for mortgage brokers when refinancing peaked as rates hit generational lows. Everyday more loans are re-setting! What fries my bananas is that the brokers built this "debt time bomb" into their business models. Now all they have to do is hang on long enough to "benefit" from the very trap they've laid.
Oh and so many FB's are staring down the barrel of some pretty stiff pre-payment penalties! Oh they'd love to re-fi alright it's just that they'd also be refinancing 10 or 15 or 20K of PPP BACK into their already shaky equity position.
Now they've got find a r e a l l y sleazy MB that has the "connections" for an "appraiser" that understands these types of situations? How is this gonna work?
True. And, as they say, economics matters at the margin. It is the marginal buyer and marginal seller who will set the price.
That only holds true for efficient markets in which sellers are price takers and products are pure commodities directly substitutable for one another, and no price discrimination (the economic term, not the popular social term) exists.
None of that is true for real-estate.
But since people keep coming back to this sort of understanding, maybe because it is the common basic understanding of "supply & demand", let's stick with it:
* Even in a marginal price market, in which all the above are true, the following must hold:
** Marginal Cost = Marginal Revenue
If the marginal cost to the seller is greater than the marginal revenue gained by the sale then they exit the market with no transaction. They are better off to no participate.
If the marginal cost is less than the marginal revenue then another seller will undercut that price because they can do so and still be profitable. Because of this, all sellers are price takers.
Therefore if sellers have a debt overhang then their rational behavior is to refuse to sell below their own marginal costs.
* Therefore, sellers are behaving rationally in an Econ 101 sense by just waiting until Price = marginal cost, meanwhile exiting the market, even at the risk of being forced to forfeit their assets.
Even in this analysis, and assuming sellers have no means to delay inevitable liquidation, assuming all sellers are liquidated, and assuming prices do not rise, prices are still sticky by the delta period between now (actually some months previous to now), and the ARM reset + Foreclosure action + 6 to 10 months average cycle time.
FollowBefriend2 threads2,498 comments
Some interesting links for this morning:
First, from Sunday's SF Chronicle Op-Ed, a rather bearish housing view, from the Chronicle no less!
Second, an NYU econ prof heads up something called RGEMonitor (sorry if I'm ignorant about this group). They run an economics blog, and they have 2 back-to-back housing bust related topics. It's sort-of heavy reading, but interesting nonetheless:
Hey, could someone take my last post out of moderation? There are 3 links included - I think that's why it's hung up.
I'm not the bond expert here, so I can't comment on why & how such seemingly implausible schemes work. For some reason all that annoying "bond math" I had to learn doesn't seem to do much good figuring out yields and such these days.
Can you point me to any data that shows that the average equity position of our set of "FBs" is below 20%? I have no trouble accepting that many or most recent bubble-buyers are at 5% or less. But most of the propelling consumer spending came from HELOCs by pre-bubble buyers. The best data I've been able to find suggests that, even after HELOCs, they're still sitting on about 25-30% equity. That's plenty of room to refi if they took an ARM for some reason during the bubble; so long as they do it early enough.
This is what I suspect is starting to occur now, and lagging data will show it in about 6 months.
People ignore things like PPP because of how they "mentally account". It's kind of like "shipping & handling", not counted in their mind as part of the true cost.
And there was almost no real-estate lending for years after the crash.
This is the biggest fear I read economists worrying over. It would also punish all us bubble-waiters and bubble-sitters.
The scenario is such:
1. Everything in this and pretty much all our previous threads happens.
2. Banks won't lend you the money to buy a home, even though the damned thing is now 50% cheaper.
Credit crunch is a real possibility, even in the US, if the landing is hard enough to shake the MBS, CDO industries.
Think of this: You have great, stable income; even your husband/wife works and has a respectable, stable income. You have 30%, maybe even 40% to put down. Your PITI to AGI will be under 25%.
The bank still says no.
Why on earth? Because their internal required rate of return has just skyrocketed, and either
a) rates they can charge aren't high enough to make lending a better proposition than simply buying gov't bonds.
b) rates they can charge make something in the above paragraph not true for you, the model buyer.
It's foreseeable that one would have to put over 50% down to get a bank to offer a loan during such a crunch.
I will check for a specific ref. but I keep reading articles titled "Home owners equity at an all time LOW" etc. etc. I think Charles Hugh Smith had several that were cited and linked here.
Yes, I do find "bond math" annoying as does the Fed and Fannie right now. The only way I can see a debt swap of that magnitude taking place is if there were some kind of "sweetner" in there. Like individual shareholders being able to write off their share of the losses dollar for dollar (rather than just a hit to yld.) or some built in premium at 1st. call or maturity or a "death put" or some kinda damn thing to entice people to bite at this paper.
As is I think it would be a tough sell even w/3 pts. to the broker.
True, true. Scary indeed and penalizing for even the most prudent! Remember though that lenders "mark up" the loan and that has to be calculated into their overall return and likely if this 3rd or is the 4th major wave of re-fi's take place b/c of "cry uncle" rate reductions by the Fed gub'ment paper will be less appealing as well?
What a mess.
Jackie really felt torn when all of the special effects blockbusters came out. Initially they were stealing market share but he stuck to his guns for the most part and all of the stunts are real. This blue screen or green screen stuff had to come to an end. Really awful and eventually movie goers tired of it.
If you have the chance get "Operation Condor". Critics hate it but Jackie's fans love it! The copy I have was some sort Philippine bootleg version with Mandarin sub-titles? Really daring and funny. I think what made him so popular is that many of his fans (Hong Kong) probably will never leave the island but through Jackie, they get to see the world with his globe trotting antics.
The gals that work with Jackie are pretty fearless too!
Michelle Yeoh had never even operated a motorcycle before when she did some of her stunts! I think she said they only gave her a day or two to practice and it was "roll film"! It's a huge break for these gals to be in a Jackie Chan movie even if they never "cross over" their careers locally are pretty much assured. I guess it's like becoming a "Bond Girl"?
FollowBefriend (4)117 threads17,655 comments
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It’s foreseeable that one would have to put over 50% down to get a bank to offer a loan during such a crunch.
That would mean debt-deflation.
Will it actually happen? I don’t know, but I am not holding my breath. There are too many factors that are designed to prevent this particular ‘disaster’, even though it appears to be the exact Newtonian reflex to a credit bubble.
Did that happen in Hong Kong and japan after the RE bust? I do not think so.
This bubble appears huge to us only because we are in Kalifornia.
After awhile most of Jackie's movies are pretty much the same but I still love them! Michelle was in the one they filmed in Kuala Lumpur (KL) to locals where she rode her motorcycle on to a moving train (so no risk there, right)? I guess she fell several times and cushioned one of the falls with her chin. Kind of like saying I got in a fight and hit the guy real hard in his fist with my face?
In your scenario houses (in Cali at least) would need to depreciate by an enormous amount for there to be a sizable number of bubble-sitters/waiters benefited. Those waiting out the bubble are also a distribution curve, from those who sold and have huge amounts of cash in the bank waiting on a dip to those who are waiting because they couldn't afford to buy in. If prices only revert enough to skim off the top (trade uppers), then that won't really help the larger numbers looking to buy their first.
Add to this the deteriorating jobs market. The reason credit crunches suck is because it's a vicious circle with unemployment. And unemployment wrecks your creditworthiness, even if you are employed, because lenders up the risk premium for everyone. Basically, it becomes the old adage: banks will only lend to those who don't need it.
This is a bit academic at this level of disaster anyway, because, as DinOR pointed out, such a cycle would be interrupted by massive Fed liquidity. This would devalue gov't paper so much that banks are forced into lending credit if they wish to remain solvent.
I've never actually been there but many of the money managers in Boston (all up and down State St.) use it for incentivizing the troops along with tickets to Fenway Park. I've heard so many embarrassing stories come out of that place I do feel like something of a "regular?"
One thing Boston does have is a great pub scene. I do miss that. It's a bit slick, and in a funny spot, but I love the Kinsale, or how about Grendel's in Harvard Sq?
Firstly how are things down at the old “Cask and Flagon”?
It looks like an awful lot of people on this board have lived in and loved Boston!
I do agree, Boston has a great selection of pubs and bars. Having come from a suburban university in the south bay, I occasionally envy students here--they don't even realize they live in the ultimate college town.
From a real estate perpective...it's amazing watching the new condos go up all over Boston. People act as if the area is built out, but then someone notices an abandoned 10-acre railyard. Gee, think some condos will fit there?
Can I be a contrarian and say I've always preferred the works of Donnie Yen, Chow Yun-Fat and little Tony Leung? Kungfu is fun, but Hong Kong gun play is awesome. The House of Hidden Daggers gets bonus points for bamboo choreography.
Have you ever checked out Jet Li's first movie, Shaolin Temple? That's allegedly some very real hand to hand wushu.
Can I be a contrarian and say I’ve always preferred the works of Donnie Yen, Chow Yun-Fat and little Tony Leung?
For Chow Yun-Fat: A Better Tomorrow series, God of Gamblers, The Killer, and the most of all, Hard Boiled.
Tony Leung: Well, most of his action movies and Wong Kar Wai stuff. The Infernal Affairs series is quite good and he was pretty amazing in Hard Boiled.
Bulletproof Monk is a pretty dreadful effort all around. Once Upon A China with Donnie Yen is a lot of fun.
Tony Leung is pretty awesome too. He plays one of the main characters in Hero and in Infernal Affairs.
The best Hong Kong actors and actresses of that generation are incredibly versatile. They do Cantopop, Mandarinpop, slapstick, romantic comedy, drama, adventure stories, action, horror, fantasy, gunplay, martial arts, etc., often in the same movie.
FollowBefriend2 threads2,944 comments Different Sean's website
I also don’t think we’ll get a mass panic of people rushing to sell their houses as prices fall.
except for foreclosures in a falling market, where the bank is happy just to recover its 80% :(
there will also be some panic selling from speculators and flippers
and investors who are being burnt by repayments, and have decided to leave the market also...
just like a major share market downturn
Atrios posted this graph by Shiller courtesy NYT:
that's very illuminating... what goes up, must come down???
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