patrick.net

Ed S.

That is such an excellent point. And... I imagine someone with a respectable FICO, decent income and a down payment big enough to make their monthly payments tolerable this is all pretty moot.

You're right, for the most part it won't change a thing. Still, it's pretty amazing what these loan salesman won't do to keep "the game" afloat for just a little while longer? Or rather what they "think" will kept afloat a little longer.

eburbed,

"Only about 1.5% of families make over $250k per year; virtually all of them own houses.

Though in the BA, it’s quite a bit greater than 1.5%…"

Actually this chart doesn't even show 250k+.

It's from 2006 and it shows that those who are at the 200k range here in the BA are at 7.5% or so. So while that's considerably more than 1.5% in the rest of the USA it's still not enough to sustain prices.

1985:
20% down, on deposit for at least year, proof of origin
28ish% TOTAL DTI
On the job for at least 2 years
Excellent credit
3 months mortgage left on deposit after the transaction

2006:
Pulse

How did this happen again, Mr. looks like he ate 10 bunches of carrots?

And here's another interesting article about Silly Valley's income levels and affordability:

http://www.siliconvalley.com/thevalley/ci_7200727

Anyone know what the traditional spread on Fed Funds to 30 year rate is for small savnings and loans that wanna cover for their low risk and low profit portfolio?

There are too many other variables involved, e.g. inflation expectations, shape of yield-curve, etc.

It’s from 2006 and it shows that those who are at the 200k range here in the BA are at 7.5% or so. So while that’s considerably more than 1.5% in the rest of the USA it’s still not enough to sustain prices.

In Japan, the majority of families make much more than 250K Yen a year.

USD is heading towards that direction anyway.

OT, but I just won "most creative" Halloween costume at work. I went as "Mr. Subprime".

I went as “Mr. Subprime”.

Pictures please. :)

"2006

Pulse"

When I got my first home loan in the late 80's the process took about 3 months. Additionally they wanted to see that your assets had "aged". You couldn't just borrow 5K from a buddy just long enough for it to show up on an account statement. They wanted to several months worth.

2006? Like going up to the drive-thru.

@Peter P,

I will have to email you or upload to another site. Patrick shut off the upload tool a few months ago due to spam/security issues.

Some of our predictions are coming true at a frightening pace. The Canadian $ is at 1.065 and Aus$ is over 0.93.

I joked a month ago that US$ will soon have parity with Aus $, then Yuan, then Indian Rupee and finally Yen. This is crazy. When has a major developed nation saw its currency plummet so fast ?

My FXA holding has performed better than GOOG. I am not sure if I should be happy about it.

I will have to email you or upload to another site. Patrick shut off the upload tool a few months ago due to spam/security issues.

Sure. You have my e-mail address. Thanks HARM!

Love to see it. :)

When has a major developed nation saw its currency plummet so fast ?

Wiener Germany.

Peter P,
I believe you meant Weimar Germany...

I do like wieners, though. :)

I believe you meant Weimar Germany…

Yes. Sorry. I love wieners too. Mustard. No ketchup.

Actually, "Wiener" is kind of appropriate given our central bank's actions.

Franks a lot, Bendover Ben...

The more I see that picture on top, the more I can't help but hear in my head, things like, "Whyz don't youz guyz give me my way soz I can dooz some more loan shaakin'".

Admittedly, I pulled the 1.5% as a national average; incomes are much higher in the Bay Area than in most other places in the US. And house prices are much, much higher. A 1000 sq ft 2br 1ba "starter" house for $600k?

My point is that an increase in the conforming limit is nothing more than a political attack point rather than a realistic response to THE key problem: a typical family cannot afford a typical family house in many areas of the US based on mortgage standards of the last 60 years. The pain that many families are feeling today (or will tomorrow) is in learning that they can't afford the house they're in (and that maybe those mean, old bankers with 40 years of lending experience did know something).

The increase in the conforming limit is a back-door way to try to get Fannie/Freddie to take the never-to-be-paid back mortgages off of CWC's books.

Step One is to get the limits raised; then when that's done and folks can't meet the income/DTI guidelines comes Step Two: have Congress pressure Fannie/Freddie to "modify" the guidelines. And voila, CWC's bad paper is Fannie/Freddie bad paper.

Step Three is to have CWC (or its successor organization) then complain loudly about unfair government competition. And we're back to where we started.

@ Duke

I agree that we will see a major collapse due to housing. My only question is how long do you think it will take? I am 27 years old and have about $10,000 in savings in one of those internet banks for downpayment purposes. I am getting nervous about my money being there. I have no idea how long it will take the FDIC to repay my money back if Emmigrantdirect decides to fold. I have watched the interest rate of my account drop ever since Sep18,2007. I don't want to be catching a falling knife. The industry I work in requires me to be somewhat mobil. I would like to start a family in a place I can call my own, but I can't afford any mistakes.

Please anyone, post theories or projections for the next 6-9 months. Will we see a major bank/company go bankrupt? I am eyeing CFC as the front runner to a collapse. They took 11 billion dollars out on their lines of credit!

"maybe those mean, old bakers with 40 years of lending experience did know something"

You know Ed I was just making that very point on our local PDX blog.

The example I gave was say for instance getting an SBA loan. Yeah. Balance sheets, annual reports, time cards etc. etc. Mind you THIS for a well established business on a loan of maybe... 250K! Yet we'll lend out 750K to berry pickers for a house in Gilroy, CA no questions asked!

Just think of it, had the SBA been doling out cash-ola like that!?

http://www.siliconvalley.com/thevalley/ci_7200727?nclick_check=1

A new study on the cost of living in the Bay Area and the rest of California says that a family of four in Santa Clara County and the other nine greater Bay Area counties now needs an annual income of $77,069 - nearly quadruple the federal poverty threshold of $20,444 for a family that size - to afford housing and other basic needs.

By comparison, a family of four with two working parents needs to earn $74,044 in Los Angeles County, and $70,648 in San Diego, to afford basic needs. Those estimates do not include any savings for retirement or a child's college education, nor items such as high-speed Internet or cable television.

Does anyone know what the numbers are for places outside of CA? Like NYC, DC, or BOS?

HARM Says:
I guess my expectations of the Fed have gotten so low that even a modest bad move looks like good news now.

Exactly. It is as if Bernanke is a mentally retarded child, who everyone cheers when he manages to sing Jingle Bells without screwing it up.

"Wow - 25 point cut! Gooood job! What a trooper!!"

SP

HARM Says:
I will have to email you or upload to another site.

If you upload to a public site (flickr, picasa), let us know. I would like to check out what the costume looked like...

One guy at the halloween party at work was in a Casey Serin costume - but then he always looks like that, so I am not sure if that counts :-)

SP

Beware of Big Boomer!

That's all I've got to say.

Those "in the know" know what I mean.

Don't trust 'em as far as you can throw them.

OK, you have been warned. I did my duty.

Good luck soldier!

I am thinking about putting the ARM reset chart on my front door and writing BOO! on it. Dipped my toe in GLD today before the Fed did their dirty work. Oh the humanity....

HARM :

If you can describe the costume that would be fine too. Or if you want to email me the photo - you should have my email address from the posts - that will work as well.

Thanks.

from www.jsmineset.com

"Dan Duval’s Commentary

Listed below are a few price comparisons I put together between the USA and Canada this morning on some basic consumer goods. Prices are MSRP directly from the respective US and Canadian retail sites for the given companies.

Think it is more likely to see the Canadian prices drop or the US prices go up? This may be a good barometer for the real inflation coming in the US.

Canon SD870 8.0mp Digital Camera - $168.58CAD (33.7%) Difference
-Canada Price (BestBuy.ca) $499.99CAD
-US Price (BestBuy.com) $349.99USD ($331.41CAD)

2008 Honda CBR600rr Motorcycle - $3413.13CAD (27.3%) Difference
-Canada Price (MSRP) $12,499CAD
-US Price (MSRP) $9599.99US ($9086.86CAD)

2008 Ford F150 King Ranch 4x4 - $9889.52CAD (21.3%) Difference
-Canada Price (MSRP - Discounts) $46,249CAD
-US Price (MSRP - Discounts) $38,420US ($36,359.48CAD)

Ikea Hemnes Bed Frame - $83.68CAD (26%) Difference
-Canada Price (Ikea.ca) $319.99CAD
-US Price (Ikea.com) $249.99USD ($236.31CAD)"

Back on topic-

I think the only pay these snake oil salesmen should get is the snake oil! Tan Man, your stock options vest into sub prime CDOs - enjoy! Same with with the Merril situation and so on.

I just looked at the back of a book of Neruda poetry I just got from Amazon. The prices are:

$24.95 American
$36.95 Canadian

What year's foreign exchange are these book publishers using? The book is a new edition, so it was quite recently printed, and the prices on the back are on a sticker anyway. You'd think the Canadians would request that publishers more accurately price the books.

Response to "thenuttyneutron":

"I have no idea how long it will take the FDIC to repay my money back if Emmigrantdirect decides to fold."

Highly unlikely that Emigrant Bank will fold. Very stable bank, been around for over 100 years in New York City.

"I have watched the interest rate of my account drop ever since Sep18,2007."

Just about every financial institution has cut their savings rates in the past month. Any time the Federal Funds Rate is cut, virtually all financial institutions follow suit.

"Will we see a major bank/company go bankrupt?"

It has already happened. Netbank.com went belly up in September and their deposits were taken over by ING Direct.

SFWoman Says:

> How’s the housing market up in the Pacific Northwest
> area? Has Bend turned yet?

Then DinOR Says:

> Bend is (according to a local MB) a disaster area! However
> he feels the impact to the community will be minimal. For
> the most part the growing, out of control inventory was to a
> large extent, simply REIC players flipping homes, lots etc.
> to one another. That’s a relief!

When I was up in Bend last summer fly fishing I saw a lot of locals with fancy cars, trucks, boats and fishing gear. One guy bragged that he only working three days a week and fishing and hunting the other four days. The fancy new $60K trucks parked on the banks of the Deschutes and John Day rivers made my little 2004 Range Rover look like a little dull toy (since it was the only truck without big rims, a lift kit and diamond plate). When the flippers and developers stop paying big bucks to all the contractors it is going to be a big shock to the greater Bend/Central OR economy (I predict that things in Bend will get worse than they get here in the Bay Area)…

nuttneutron:

Please be patient!

I was your age with similar motivations when I "stretched" to buy my starter home / sh*tbox in 1989, it was a collossal mistake that framed all sorts of choices for a long time afterwards. It's one thing to be house poor. It was a good five years or so (or should I say a "bad five years") before my house was "liquid" enough that I wasn't a slave to it anymore. So it's one thing to be house poor for a few years after buying a home, but it's quite another thing to be house poor during a long, drawn out housing recession.

And that long, drawn out housing recession was during a time of declining interest rates, which was because of a strengthening dollar. And of course, while there were some distressed new FB's like me, we FB's from that era only stretched within the parameters of "prime" (and non-Jumbo) loans as subprime ones did not dominate then. And I don't think there even were such things as option-ARMs.

Nowadays we face a housing recession with a falling dollar, not a rising one. As the dollar collapses we'll be facing rising borrowing rates (at least for mortgages), not falling rates, tightening of lending guidelines, not loosening of them. And unlike in the early 1990's, we don't have a legion of option-ARM resets to look foward to. So this housing recession will be worse than the last one.

The good news is that the value of housing will fall faster than the value of the dollars you've squirreled away. Good thing you're saving for a house and not for food or energy.

Unless of course if you covet a home in the "fortress" so you can buy your kids' way into an elite "public" school, that's a different matter. The buyers there are mainly wealthy Asians, it (The Fortress) is a different market based on the USD purchasing power of the wealth they've got from Asia.

Note from the hinterlands. . .

My badly-rendered link from last night was a Bloomberg item reporting that Mozillo and others had succeeded in establishing and making generous use of credit lines at the Federal Home Loan Banks. Some of the discussion I saw over at CR and at Yves Smith's site indicated that FHLB was accepting collateral which would not have been suitable - or would have been rated as high-risk - at the discount window. Essentially, the Mozillos of the world have found a cheaper alternative.

I don't know enough about FHLBs to know if the Congress would be forced to cover losses if or when these loans default but, again, the online consensus seems to be that ultimately the taxpayer will get the bill. Bloggers - some of them - clearly see this as an end run and a betrayal. Malinvestment rewarded.

Another comment was that FOMC would garner all the media attention today, with the result that FHLB news would pass below the radar. Looks as if that's true so far. Anyway, we know now where the Tan Man got his new credit lines.

FAB, those 'elegant' trucks are increasingly turning up here on street corners as FSBOs. No idea what our roofing contractors will now drive 'for best.' I'm with you for what it's worth: Rover, not diamond plate, for off-road.

i've just discovered http:/.globalhousepricecrash.com, which is a good international forum site, not unlike this one... bit cumbersome being in that phpbb type format tho...

there are more british and australian posters than US at this stage on the site, so i might be hanging around there more from now on -- i think i've improved patrick.net about as much as is possible by now anyhow...

Off topic:

So far today the Fed has loaned out $41B based based on reverse purchase agreements, That's already more than the $38B amount that occurred on one of the peak RP days during the semi-panic around August 10.

Meanwhile, bank stocks are taking a pretty severe beating. e.g. IndyMac (IMB) is down 7+%.
This is probably no coincidence,

Something is telling me that the climate for funding jumbo mortgages is not going to get better in the short term.

Something occured to me about the rate cuts that I don't think I've seen posted here. It has less to do with bailing out homeowners as it does shoring up bond prices on MBS.
I've said this before but a quick refresher since not everyone knows finance. A bond is a type of cash flow, just like a mortgage. If you increase or decrease the APR/Rate of Return on either it is the same effect as increasing or decreasing principal amount since they are a multiplicative relation. When a cash flow is established, the value of the paper is actually an inverse relationship to interest rates. If interest rates go up, the face value of the bond stays the same, but the bond is worth less because it pays a lower interest rate to prevailing rates so an investor will discount it.
Now for the kicker, to cushion the fallout in the markets from declining bond values due to bad loans, it appears the government is actually trying to subsidize MBS by lowering rates. Everything else being equal, MBS values would go up by an amount equal to the effect of lowering the rate on the same cashflow to maintain the same total yield.

Conclusion, the same as has always been said here, savers are being penalized to the benefit of a very wealthy minority.

Thenuttyneutron,

I have an account at emigrantdirect as well. They had a safety rating of 3/5 at bankrate,com last time a checked a month ago. Netbank, by comparison, had the worst possible rating of 5/5 at the time it folded. I cannot vouch for the predictive power or quality of these ratings, but nevertheless I have been using them as a rough guide to safety. By the way, I never saw a bank with a "1" rating. BofA was rated 3, I believe.

Malcolm,

I think you're right about rate cuts primarily being enacted to increase the appetite for higher-yielding MBS bonds and their associated risk.

When Greenspeak spoke of diminishing risk premium, I had not imagined that the way to increase the risk premium/spread was to reduce the interest rate on the lower risk loans. Foolishly, I rather thought it would entail increasing the interest on higher risk loans. How naive of me.

thenuttyneutron,

I think other people have covered your questions well. Your bank is safe and even if not, the FDIC would make your 10k immediately available to you.

Also, people have rightly pointed out that the declining purchasing power of your money due to inflation and the falling dollar is still actually increasing relative to the declines in the housing industry.

However, recessions are funny things. Job loss can really gain momentum. One of the most important things you can do today is try to cement your job (hopefully in a field not particularly subject to a recession) or develop your netowrk of contacts so that you can keep your employment uninterupted.

As for my recomendation with regards to your housing. Wait a few more years to buy, buy within your means (according to the guidelines listed above), and make certain you job can survive the looming recession. This is prudent, if unsexy, advice. Also, do not let anyone pressure you to rush into housing. As rates rise, and they will, the price of the home must be discounted. Financially it is ALWAYS smarter to buy cheaper assets with more expensive money. Even the Volcker Fed only had 2 years of high rates, but housing deals were there for the taking for people in good cash positions.