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The subprime meltdown has swallowed its biggest victim. NEW is almost certain to file for bankruptcy as it doesn't have anywhere near 8+ billion to repurchase its mortgage obligations. CFC sees "earnings volatility" and LEND shares are down over 20% today (again).
Just 2 months ago everything was going to be fine in Goldilocks economy. Today, no one knows how bad it will get. The ARM resets are just beginning. In general there is near universal agreement that we are just at the beginning of a financial storm.
On MSN investor, Bill Fleckenstein says ...
One who does [understand] is Lou Ranieri, sort of the father of the mortgage bond market. In a recent interview, he warned: "This is the leading edge of the storm. . . . If you think this is bad, imagine what it's going to be like in the middle of the crisis." In his opinion, more than $100 billion of home loans are likely to default. ("Just divide $100 billion by the average loan amount and you get a lot of people, a lot of families.") He also expects to see some form of bailout at some point, because "foreclosures in those amounts are politically unacceptable."
The B-word again ! Coming not from a doom-gloom blogger but from a reputed source. So it's worth visiting this hated word again.
What kind of bailout ? Bailout who ? The lenders or the borrowers ? Or both ? By doing what ? Pumping liquidity ? Forgiving loans ? Giving tax breaks ? None of the above or all of the above and more ?
What kind of bailout do you see the government attempt ? What's your conspiracy theory ? Of course adding 3 zeros to everyone's bank balance is not what the Fed/Government will realistically do.
Bailout or no bailout. The economy won't be fine - to make an understatement. Even if the bailout comes from the Government, it will probably come too late and it's unlikely to help common folks who actually need it. This is just an observation of typical inadequacy of Government measures.
So as a financially conservative person who did not participate in the mad party, what do you do ? Just what the hell can you do now ?
StuckInBA
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The MSM is completely in shock. They are now waking up to the fact that this was a house of cards. In blogsphere, the tone is simply, “Told you so”.
I must say, I am in total shock. Some of the more daring types were shorting (and losing their shirts) on the HB stocks last year (see Ben's blog). Most everyone else on the "Internets" was talking about how the ARM resets would trickle down and eventually bring sanity to the market. About the only hint of this &%$#@! storm was a couple of MSM articles and many first person blogosphere accounts of the massive fraud that was happening in the marketplace. Amazing how "free money" brings the creative folks out of the wood work.
I hope the "pine table" ends up in the Smithsonian when all is said and down.
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The technology (JSF, vXML, SOAP) and collaborative-content aspects (wiki) are quite real. Where it starts to come off the rails is when you look at the business applications and the business model. Just like back in Y2000.
Yeah, but technologies do not make money. Businesses do. :)
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Schools are really over-rated. Let's just say the kid goes to a good elementary school, a better high school, and then Stanford. So what? He will just become YET another geek squandering his life in a cubical.
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The subprime story is making me nervous. My biggest fear in my life right now is missing yet another great shorting opportunity.
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Redwood City, CA
He will just become YET another geek squandering his life in a cubical.
Better than squandering it at a french fry station.
Good schools DO help kids have more choices in what they do with their lives. But they won't turn a moron into a doctor. I can understand not wanting to live in a district with really crappy schools, but at the same time I don't think it's worth 200K-500k more for a house with a school district that's 'tops' over a house in a school district that's 'good'. The parents that demand all schools over 900 API for their kids and pay so much more will probably not get a much better education than schools in the 800s. People who won't consider a school 'good' unless it's in the top 5% are a little crazy. It's especially funny when you meet somebody who's looking for those schools and you meet their kids who are decidedly 'average'.
You shouldn't use the retarded levels that some parents will go to for 'super schools' to dismiss the fact that schools DO have a valid impact on housing. And usually a self reinforcing one. Schools get some of their budget based on local taxes, so higher house prices usually result in better funded schools. Any township wanting to 'gentrify' itself a bit would be well advised to start boosting school funding.
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Mountain View, CA
Sub-prime problems? I think Alt-A will be a BIGGER problem - back in 04 we had a broker tell us we should just state the income we needed to get the house we wanted and laid out a range of salaries against a range of house prices to show what our stated income would need to be for a specific price range! He did not want to know what we really earnt at all.
Of course, we thought that was just crazy, so we didn't go for it!
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SP,
XP == S&M ? That's a great one. :-))
But I MIGHT like lap programming depending on who is sitting on my lap.
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Claire,
I agree. Besides the distinction between sub and Alt is almost non-existent which we're about to learn here shortly. That IS funny though. The MB was basically saying do you want to lie a "little" (and live in a dump) OR... lie a "lot" and have a place you can both be "proud" of!
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What I should have said is, borrowers that elected to go the sub-prime route DISCLOSED their credit short falls whereas Alt A borrowers elected to CONCEAL them?
So....big difference!
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Redwood City, CA
You have your pick of Gollum, “Pat” from SNL, or Chris Farley.
I choose Gollum. At least he's occasionally funny.
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Better than squandering it at a french fry station.
Only superficially. Did you mean Freedom Fries? ;)
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Any township wanting to ‘gentrify’ itself a bit would be well advised to start boosting school funding.
How does school funding work in California?
In most places, local property taxes goes directly to the schools - with some state aid.
I thought schools here are completely paid by the state, to ensure equality and all that jazz.
If that's the case, then spending per pupil should be the same in all schools in CA... right? So what can local cities do?
(Ignoring the strange edge cases where Gunn parents donate $2k per student to hire a music teacher, etc)
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I thought schools here are completely paid by the state, to ensure equality and all that jazz.
The best way to ensure inequality is to attempt equality.
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HARM's website
NEW has been de-listed and is no longer view-able @ Yahoo finance, but you can still see the chart for it under the ticker "NEWC" at Bloomberg:
http://www.bloomberg.com/apps/cbuilder?ticker1=NEWC:US
The 5-year chart is my 'fav --truly a thing of beauty! :-)
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Redwood City, CA
Dang... It's under a buck according to the bloomberg tracker...
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The subprime story is making me nervous. My biggest fear in my life right now is missing yet another great shorting opportunity.
My biggest fear now is much much faster than anticipated RE meltdown. We knew ARM resets are coming en masse, we knew it would be difficult to refinance. But what now ?
It's going to be IMPOSSIBLE to refinance a subprime loan. The speed of death spiral may shock everyone. No one here wanted a slow 10 year downturn. But it happens in 1 year the financial shocks are hard to imagine. It won't be gloom and doom. But a big unpredictable chaos. It will be harder to find opportunities then.
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StuckinBA,
Did you mean it will be harder to "find" or "fund" opportunities?
Finding may be a dime a dozen, getting someone to finance it might be another matter.
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Redwood City, CA
SIBA,
It's the beggings of Mad Max. Gas prices and subprime meltdown lead to a wasteland distopia.
Of course, that means the ThunderDome development is going to be the new 'prime' area. Get in while it's cheap!
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No one here wanted a slow 10 year downturn. But it happens in 1 year the financial shocks are hard to imagine.
I guess the lesson is to be careful what you wish for. You will know it is time to buy a house when roaming mobs start engaging in random violence and destruction of private property. This should be the point of peak pessimism.
http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999-2002)
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Allah's website
The dow is down over 200 points and sinking!
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It WILL be imposible to "refinance" a subprime loan! No question. It might be a two part answer though. Obviously as the easy money spigot gets wrenched ever tighter it will get harder to find. I contend though that what might be the bigger factor is..... all the negative equity Mr. FB is sitting squarely on top of!
We all knew going in that the guy had shaky credit BUT.... as long as the asset was appreciating...? There will still be some sub dollars out there, just not for YOU Mr. TooMuchHomeBuyer! :)
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I take a sip of Hi-C fruit punch, grab a handful of Cheetos and munch as I flip news channels. I see the stock market is down and the subprime market is collapsing.
I scratch my head, look at my watch and think, "gee, this whole thing is really going down pretty much according to the schedule of bloggers on Patrick.net. Finally, some justice for having been cautious and played by the old school rules while others gorged themselves like there was no tomorrow and thought they could make a quick buck and eat their free lunch."
l
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Well, the pundits can't point to the FTSE, Hangseng or Nikkei this time around. All were down today, but not sharply down.
Watch the PPT paint the tape between now and close.
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More WSJ:
Food for thought:
• If you bought in Rochester, N.Y., in 1980, you would have seen only a mediocre 4% annual growth for the next 25 years.
WTF, have these people ever heard of leverage? I guess I shouldn't complain as this type of thinking will cause an overcorrection in the marketplace. I mean, 4% would probably place them on the "green" appreciation line on the Shiller graph. Nice, sustainable appreciation.
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Uncle Angelo on CNBC stumping for rate cuts. (Yesterday would be nice).
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If we have rate cuts and this results in lower CD rates, and stocks are going down, where do I put my money? I'm not into gold.
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Allah's website
These people crack me up!
So, after four bids on different places that were flat out rejected, someone actually countered our latest bid.
We probably bid too high.
I'm terrified.
update -- we totally bid too high; they accepted our counteroffer.
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Los Altos, CA
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New Thread Subprime!
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Let's try to estimate how much the sub-prime collapse is going to bring down home prices. We know what percentage of loans are sub-prime, is that the same for the Bay Area as a whole?
We can estimate that 1/4 of those will go into default, that should give us an idea as to how many excess homes will come on the market.
We should also be able to estimate how many buyers will be held off the market because they won't be able to qualify for loans.
Given these two values and a reasonable demand curve, we should be able to estimate how much prices will fall.
Does anyone have the latter? RandyH?
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Redwood City, CA
EBGuy, 4% annual growth isn't that great for an 'investment', leveraged or not. It's a little above inflation. It's what a house 'should' do, not as a vehicle for monetary growth (treasury bonds return better than 4% annual growth), but as an inflation hedge and a 'forced' savings program, in which it performs very nicely. It's AFTER you've paid off the house that a home really becomes a retirement vehicle since you start living 'rent free', with only taxes, insurance, and repair to worry about. People seem to forget that and anticipate using their house as an investment, to pull money out of when needed.
Most of the 'rent vs. buy' calculators you see out there assume that you'll pay the same amount of money for rent as for mortgages, and that you'll never 'add' to your downpayment investments the difference if renting is cheaper than owning. They also tend to ignore insurance, repairs, and occasionally taxes. You need to do some very careful modelling to really get a valid calculation for 'rent vs. own' in a given market.
Right now the fact that you can usually rent equivilant homes for half of the mortgage cost of buying argues strongly against buying using a good model. When the costs get down to, say, 20-30% higher TOTAL owning costs, it definitely makes sense to buy.
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We can estimate that 1/4 of those will go into default, that should give us an idea as to how many excess homes will come on the market.
It does not work that way. One variable can change the overall picture. Remember, market is 99.99% psychology and 0.01% fat-fingering.
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Allah's website
Right now the fact that you can usually rent equivilant homes for half of the mortgage cost of buying argues strongly against buying using a good model. When the costs get down to, say, 20-30% higher TOTAL owning costs, it definitely makes sense to buy.
I say that when the price of houses gets down to or close to what it would be under normal historical appreciation 3% - 5% compounded yearly, that will be the time to buy; and this is not going to happen this year for sure!
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SFBubbleBuyer,
We are on the same page here(?) I am a big "fan" of pine box buying and have liked your posts in the past. As you have pointed out previously, it is possible to make a "huge" mistake (buy now), but in the retirement scenario (30+ years), you will still come out ahead of the renter. I do hope SFWoman's friend can belt tighten and make it through to the golden years -- oh, the sacrifices, puhleeze give up the club membership. I consider Randy's Bubblizer to be the gold standard for rent vs. buy calculators, but even that does not go beyond the end of mortgage. I will give in a bit on the 4% in Rochester -- the median home price there is well below $100k so there is no tax advantage.
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but if the conversations with cow-orkers is any indication, home-buying interest seems to have dampened significantly in the past week or two.
Funny Freudian slip :)
MOOOOO.....
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SP Says:
As if this wasn’t bad enough, if you end up with a team-leader who is a big fan of XP (which is pretty much S&M for geeks), you will eXPerience the joy of ‘pair’ programming. Two to a desk.
I near a couple of XP'ers and the only thing extreme about it is that it is extremely loud and annoying. Oh well, at least I sit alone.
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oops, i think i missed a 'sit' somewhere in there...
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Redwood City, CA
EBGuy,
Yah, it does sound like we're on similar pages. 4% appreciation for a house over 25 years (or any arbitrary time period) is EXACTLY what I'd expect and like to see. It means it's performing as an inflation hedge, which is good for a house.
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W.C. Varones's website
Chris Dodd wants a massive government bailout of housing speculators.
http://wcvarones.blogspot.com/2007/03/chris-dodd-proposes-massive-government.html
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astrid's website
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Hmmm, is Jukubot back?
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Jukubot? The autonomous vacuum cleaner?