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Well shoot, it appears that the guy who got fired and went nuts was actually yet another Casey Serin...
www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/18/BATK146S1Q.DTL
Company officials said Wu had been fired for poor performance but declined to elaborate. He was arrested Saturday.
Records show that Wu and his wife, Jie Zheng Wu, went on a property-buying spree starting in 2004.
From June to October 2005, they bought two rental homes and five vacant lots for $526,000 in Hot Springs Village, a retirement community of nearly 15,000 people and nine golf courses. They took out at least $330,000 in bank loans to pay for the properties, records show.
The couple also bought at least five homes and six lots in Washington north of Portland, in the communities of Anderson Island, Vancouver and Ocean Shores. In California, they bought a modest home in Elk Grove (Sacramento County) and a bare lot near Lake Shastina in Siskiyou County.
Republicans want less government, but end up creating more.
Democrats want BETTER government, not bigger, and may just get their way this time.
Money loaned @ 3% when borrowed @ 1% = 300% gross profit. Money loaned @ 12% when borrowed @ 10% = 20% gross profit. Next question.
My math is really bad. 200% -- still 10x more. (1000%) As you can see, it is a better deal for the banks. The banks are in charge -- Paulson is more powerful than Bush.
PS -- since the money is inflated, you now have to borrow $1 million to buy a house, so the banks get the best of both worlds: big margins and the other thing.
Yeah, I suspected there was something up with that gunman, because he bought his residence in 1997 at $470K which should be really easy to pay off given two incomes in the last decade, it should have already been paid off if they were a bit more disciplined.
So he and his wife ended up buying 8 homes and 12 lots? Who did they think they were? Donald Trump?
Back on topic:
Higher interest rates are coming. Not only because the Fed is pursuing an inflationary policy, but because securitzation and mortgage backed securitzation is dead as a mega-sized industry.
So far I have only heard rumors about the govt setting up a mortgage program. Until that firms up, everyone here shold take into consideration rates of over 10% shortly after the economy stabilizes.
Sadly, the govt is STILL:
1. Allowing mortgage interest deduction.
2. Is seriously considering down payment assitance programs.
3. Allows 500K per couple every 2 years write off in capital gains for home sales
4. Allow for non-recourse meaning only the house can be taken in case of default.
5. Allows propery taxes to be deducted federally.
These have the obvious impact of supporting higher prices which I believe is the point of this thread - what solves higher prices?
Loans held to term, interst rates that reflect risk, and less (or no) federal support of home ownership will correct prices to true market value.
What is the "true market value" for housing?
This is hard to guess at since we have had heavy government intervention in the housing markets since WWII. There has not been a true free market for homes for at least 50 years.
The market may have been very close to natural/true free market during the 1950s. But the government housing policies were certainly influencing the market by the 1960s.
The mortgage interest deduction and the rise of the GSEs market share have been the largest factors.
# Zephyr Says:
What is the “true market value†for housing? This is hard to guess
IMO, an estimate based on market rent for the property would be a reasonable way to arrive at TMV. Someone like FAB might even be able to tell you a multiplier (like 10 years rent) to use as an approximation.
The inputs are current rent, current cost of money, expected increase/decrease in rent, and some estimate of long-term inflation, and an estimate of maintenance cost. Using those inputs and solving for NPV should give you a purely financial estimate of what makes sense as a price. Since the inputs all have low-high ranges, you would most likely end up with a fan-chart for the output.
This ignores the "intangible" (imaginary :-)) value associated with the 'pride of home-loanership', the value of painting the walls orange, etc. Depending on the foolishness of a buyer who believes in such things, you could bump up the estimated TMV by an appropriate number to figure out what such a person would be willing to pay.
"Money loaned @ 3% when borrowed @ 1% = 300% gross profit. "
A bank with these numbers would actually be losing money. Borrowing at 1% and lending at 3% provides a 2% gross margin. However, banks generally have overhead/operating expenses of about 2.5%, so in this example the bank would be losing money.
A bank should be able to operate profitably with a margin of about 3%.
This may be a mean thing to say; but isn't their a truism that when the foreigners start to enter an investment cycles its already over-bought and you should get out?
SP, I concur with your logic and analysis for a good method to estimate asset value. But remember that market value is what the market will bear. We can only guess at the values for the various intangible elements. And each person will have differing values for these items as well as differing costs of capital. So there really is no single valid calculation of value, as it will be different for each person.
As a real estate investor I have my own standards and costs for evaluating properties. Nothing has fit my standards since early 2003.
But remember that market value is what the market will bear.
Cannot be more true. That is the definition of market value.
The Democrats are better. At least they want goevernment it to work, but they also run up against human frailty.
Justme, if not because of that human frailty, everybody should be a democrat. ;)
But at least I understand humanity. Going against human nature is an exercise that is doomed to fail.
In a perfectly efficient free market world many would be oppressed and discarded by the brutality of the system. In a perfectly equal compassionate world everyone would share equally in the abject poverty.
So under Free Market some will be oppressed but in a "compassionate" world all will be oppressed.
Now we know which side we should err on. :)
TOB, our actions are by definition artificial. ;)
So human nature has nothing to do with Nature. It should be renamed human artifact.
Duke,
if we raw print, which is something I expect to happen, there won't be the high interest rate problem, the Fed can keep the interest rate artificially low for Treasury forever, although USD is toast.
See, Treasury auctions off Ts, Fed writes a check, there is no limit on how much Fed buys, where is the urgency of seeing a spike in interest rate? We are already doing this in stealth, what do you think Fed's taking on crappy asset and paying full price for them equivalent of? Raw print vs. 1.0. How did the Fed expand its balance sheet from $950B to $2.3T in 3 months? Raw print. It is just that our speed of printing is too slow compared to the rate at which debt is getting destroyed. But I have confidence in the Fed to catch up. Better still, we have Bernanke in his driver seat till 2010, what is the odds of him refraining from raw printing at a high speed from now till then?
As for housing value, the only thing that can really destroy it real bad is not interest rate, but unemployment rate, or the expectation of staying employed. Still too many people are being employed in the Bay Area to support the price. Once the current homeowners get laid off, and there are not enough employed to pay for the wishful price, regardless of what interest rate it is, even if it is 0.2% like the Japanese had for years, nobody is going to buy a house.
Housing value is all about expectation: the expectation of appreciation (now in the toilet), and the expectation to stay employed (still struggling).
This is what Obama said in the recent 60 minutes interview
"Question: Where is all the money going to come from to do all of these things; and is there a point where just going to the Treasury Department and printing more of it ceases to be an option?
Obama: Look. I think what's interesting about the time that we are in right now is that you actually have a consensus among conservative, Republican leaning economists and liberal, left leaning economists. And the consensus is this: that we have to do whatever it takes to get this economy moving again that we have to, we're going to have to spend money now to stimulate the economy and that we shouldn't worry about the deficit next year or even the year after. That short-term, the most important thing is that we avoid a deepening recession."
Treasury rates will stay down. With unlimited printing, if China and Japanese sell, our Fed just buy them all.
Raw printing of money will lead to inflation if the pace of printing exceeds the real growth rate of the economy. The peak of the inflation should come about two years after the peak of the printing.
We are seeing very inflationary policies going into place now.
While we are discussing interest rates....
How can a financial institution make any money charging 0% on auto loans for 13 months? The Idahy Credit Union is advertising 0% auto loans for the next 13 months, after which a market rate kicks in. www.idahy.org
It makes sense for the auto manufacturers to advertise cheap loans - they need to move product. But what's the upside for a credit union?
And the consensus is this: that we have to do whatever it takes to get this economy moving again that we have to
Too bad Andrew Mellon is not around. :(
To keep interest rates low in such a scenario the Fed will have to continue printing at an ever increasing rate. The rate of inflation will keep rising. At some point this process collapses.
The future direction of policies will dependent on one variable, the powers at the top, what kind of financial situation are they in?
If the TPTB are not extremely leveraged, then deflationary depression is what they will choose to get out of this, because they can hoard more in such a situation.
If the TPTB are very leveraged, they will choose inflationary depression, or even hyperinflation so that they will be made whole. Hyperinflation is generally what everyone will avoid and it is unlikely to happen. However, it seems to me that it is beyond obvious our government wants to reflate and has failed so far, so there is only one option left - blatant raw print. It will be interesting to see how long BB will wait before he gets to that final step that he prescribed in 2002. I think we are about to start doing this when our deficit of $500B or $700B next year can no longer be funded by legitimate buying, and our President says, spend, spend, spend.
I frankly don't care either way, just want to stay on the same side of the TPTB :-)
Dennis,
it is called teaser rate, the bank is banking on the fact that you do NOT pay it off in 13 months, and then they shock and awe you with the "market rate" which will compensate them for the period that they do not charge you anything.
But more importantly, there are bezillion windows open at the Fed where banks can get free dough, who said banks have to make money from retail customers? Their business model is to make money from the taxpayers.
I frankly don’t care either way, just want to stay on the same side of the TPTB
Absolutely. Any idea?
Whether the government funds its spending with taxes or with inflation, any increase in government spending takes real goods and services away from the rest of us.
Tax increases target those who pay the increases. Inflation steals from everyone.
My bet is we will see mild deflation for about one year, followed by significant inflation lasting much longer.
Well, the government is very obvious, reflate at all cost.
The Fed with SEC and commodity exchanges actually change rules to set off the commodity crash, so there is conflicting evidence, while at the same time, Fed is trying everything to reflate.
So my initial theory is, we do not want a high oil price (which will benefit Russia), but we are ok with high food price (oil is tanked deliberately by our powers, but agriculture is collateral damage). What perplexes me is, why is gold still at $700+ and not naked shorted to a much lower point? Is it because the Fed doesn't want Japan and China to take advantage of this and load up their gold reserve? $700 is kind of a painful price, because it is somewhere in between, if it is $500, then lots of people will back up the truck including our biggest bag holders, and if it is $1000+, USD may go poof any time.
Then the signal from the other fiats are clear as well, they all want to reflate. There won't be a strong currency out there, we are more likely to devalue at the same time. But what are we going to devalue against is the question.
The oil price tanked because it was an unsustainable bubble. The "powers" would have stopped it from rising in the first place if they had such powers.
I know what the government wants, but I need to be careful if it will be successful. There is only one way that it can be successful - raw print.
Those who are betting on inflation are practically banking on BB going through with his last step of raw print, will he go through on this? When? How desperate does he need to be before he starts blatantly raw print?
So if I bet on inflation, I prefer to have a deep deflation next year, because he is not going to blatantly raw print if we are just getting by with mild deflation. It has to be desperate, then he will just turn on the spigot completely disregarding the consequences. A mild deflation actually decreases the chance of raw print. The data so far is good, according to bloomberg we are having the deepest deflation of 60 years, which gives him more motivation.
If we get what we have now, for another 3-6 months, very deep, that is good enough for starting to raw print.
Another angle to consider is, our Chinese and Japanese bag holders are getting very nervous:
Japan calls for Yen-denominated Treasury
http://www.atimes.com/atimes/Japan/JK19Dh01.html
China recently announced multi-billion stimulus and there are still more to come. They only have $2T to begin with.
Putting these pieces together, sometimes next year T auction failure is almost guaranteed, if we don't print.
Here the month that we got net capital inflow in US T
http://www.treas.gov/tic/mfh.txt
Some observations again:
UK's total international reserve is $48B
http://www.imf.org/external/np/sta/ir/gbr/eng/curgbr.pdf
In one year, their holding of US Treasury increased $218B!! Why? Because there is a little thing called Channel Island (BVI equivalent) that got into the statistics reporting of UK. So we can safely assume that most of the buying comes from the Channel Island. I checked with some authority that they said that could be Saudi, oh really?
Let's go down the rabbit hole a bit further. The Channel Island purchase was only up a few $B in the previous months when the oil price was at all time high. Somehow in Sept when oil price crashed and Saudis could only $1.6B, somehow the Saudis in Channel Island was able to buy an extra of $30B, interesting.
Apart from China, the biggest increase is from Carribeans, an increase of $37B, which I can understand because of the deleveraging.
However, this piece of trivia raised my eyebrow. In the last 12 months, our T increased $625B, nice job. The extra buying from Channel Islands and Carribeans ALONE account for $218B, a whopping 35%. I know there are many anonymous tycoons from all over the world that are JUST patriotic to the US, I just didn't realize there are so many of them.
@Denis. Its real just an implied rate. If the CU expects a 5% rate in 13 months but takes off the first year, then their real expectation is 4%. If CUs are getting chunks of money today at 0% and the maring of 3% is the mendoza line, then hey, they aredoing oky.
I also suspect the get a finder's fee rom dealerships, since they can't float money at the mothership any more.
@OO
Interesting.
Are yo saying that since China will spend their $2T that they will have to sell their Treasuries which will make it super hard to auctin new debt against the old debt China will be sending to market.
I guess I would have to fall back on an old analysis, if Asia stopped buying today, the cost of borrowing was thoght to only go up about 1%. So if China dumped $2t with an agregate rate of 5%, in theory we would have to auction new debt at abut 6%. At what rate do we get worried?
It seems pretty clear we are willing to go up to 10%.
So, I think an auction failure next year unlikely. However, I see lots of debt auctions failing elswhere.
Yeesh. This is all ugly.
Duke,
the whole issue is sustainable debt, and everyone in the world knows our debt is unsustainable.
When we had the largest consumer market in the world, people put up with us, because they want to find markets for their excess capacity. Guns are useful in defending a country, but useless in trade, are we going to sail the Kitty Hawk to China so that they will buy more Ts, or buy more Boeing?
Japan shed $18B in the last 12 months, China added $118, when we were sending so much USD their way and they didn't have any internal stimulus needs. In my previous post, the biggest add-on of T in the last year was from Carribeans and Channel Island, accounting for 35% of total new Treasury in the last 12 months. We will see at some point all the new Ts will be accounted for by these two anonymous banking centers where buyer ID is concealed.
Even in the latest Sept Treasury purchase during which there should be a "flight to quality", many countries SHED the T, and the biggest addition apart from China is again, from the Carribeans and Channel Island :-)
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Perhaps the entire credit crunch could be fixed with very high interest rates. Currently, banks and other institutions have to compete with the suicidally low interest rates of the Fed and the Treasury bailout programs.
Say you're a bank and you know that a new mortgage loan has a 10% risk of default. Then you have to charge at least 10% to compensate for this risk before you can even begin to make a profit. But you can't charge 10%, because you're competing with the Fed's 2% rates, and the Fed is lending without regard to default risk. So you would be committing bank suicide to make loans in a market poisoned by the Fed's rates, knowing such loans will generate a large loss on average.
OK, the bank can get something from the defaulted loans by foreclosing and selling off the houses, but still, the point holds: the Fed is ruining the market for credit. It's kind of like American manufacturers being ruined by cheap Chinese imports, only it's American banks and savers being ruined from within our own country, by the Fed.
The directors of the Bank of England once bragged that a 10% interest rate could "draw gold from the moon". If it's credit we lack, let rates rise, and watch credit problems disappear.
Patrick
#housing