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Doing Your Part for the Bubble Bailouts


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2005 Nov 20, 6:40pm   41,613 views  290 comments

by HARM   ➕follow (0)   💰tip   ignore  

Rising inventory and plunging sales (leading indicators) and even modest M-M price declines in some areas have firmly established that we're past the Bubble's peak. As inventory continues to build, the pressure will mount for speculators/flippers who are equity-negative, cash-flow negative, and --thanks to exotic financing-- facing huge montly payment hikes as their loans convert to adjustable-rate, fully amotizing mortgages. The change in seller/lender/media psychology is already undeniable, but has yet to filter down to Joe Homedebtor, who remains largely oblivious to these developments. It took roughly 7 years to go from peak to trough in CA during the last cycle (1989-1996), and 15+ years in Japan. No doubt we're in for a long and bumpy ride down to the bottom.

A lot of talk recently has focused on the Bubble's aftermath and the larger implications for the economy. Some estimates place the number of CA private payroll jobs created over the last 5 years directly or indirectly tied to RE at 70% and roughly 36% nationally (http://tinyurl.com/ctdye). Most people are pretty much in agreement that individual homedebtors and speculators/flippers are not likely to get bailed out by Uncle Sam. However, this leaves some very big and very powerful players who may see their balance sheets turn red for years to come, including large institutional MBS-holders (pension funds, mutual funds, etc.), the GSEs (Fannie/Freddie/Ginnie), banks, mortgage companies, REITs, etc. If enough of these $Trillion-dollar behemoths fail, they could take a substantial portion of the economy with them, which brings to mind the phrase (and July Thread) "Too Big to Fail".

To (very loosley) paraphrase J. Paul Getty,
"When you owe $1 million on a condo that's worth $250K, you have a problem. When you're holding $1 Trillion in bad debt, the government has a problem."

We can debate the language of "implied vs. explicit" federal guarantees all day, but an MBS-holder/bank/GSE bailout on some level appears likely when the $hit really hits the fan. My questions are thus:

    1. How much of your hard-earned income would you like to donate towards bailing out irresponsible borrowers and lenders?
    2. Would you prefer that the government directly seize your savings to help bailout the GSEs and MBS investors, or that they sharply devalue your dollars (thereby triggering widespread inflation)?
    3. Do you think the government should institute a special renter's tax to use towards the bailouts?

I'm sure that the NAR, mortgage lenders and homedebtors alike will see the justice in penalizing people who --despite enormous arm-twisting-- stubbornly refused to participate in our nation's great housing boom. Oh, and homedebtors outnumber renters by more than 2-to-1, and tend to vote in greater numbers.

Discuss, enjoy...
HARM

#housing

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190   praetorian   2005 Nov 25, 12:14pm  

Old Scratch just wants a bit of sympathy:

http://tinyurl.com/9gfaj

Cheers,
prat

191   Girgl   2005 Nov 25, 2:06pm  

frank says:
Girgl says: “… deflation is just so unbearable and hard to stop once it started. War is the ultimate cure for deflation by destroying assets that now need to be rebuilt.”.

Sounds like a scary campfire story. :-)

You're right. I've tracked down where I read about the connection between deflation and war. The story is somewhat different, and definitely less dramatic.

Quote:
If [the deflationary phase is] not countered by monetary and fiscal means - a lowering of interest rates, a fiscal Keynesian stimulus, an increase in money supply targets - a monetary deflation might set in.

Full-fledged deflations are rare. Outright or growth recessions, business slumps, credit crunches, slowdowns - are more common. But a differentiated or discriminatory deflation is more common. It strikes only certain sectors of the economy or certain territories.

A monetary deflation - whether systemic or specific to certain industries - is pernicious. Due to reversed expectations (that prices will continue to go down), people postpone their consumption and spending. Real interest rates skyrocket because in an environment of negative inflation, even a zero interest rate is high in real terms. This is known as a "liquidity trap".

Investment and production slump and inventories shoot up, further depressing prices. The decline in output is accompanied by widespread bankruptcies and by a steep increase in unemployment. The real value of debt increases ("debt deflation"). Coupled with declining asset prices, deflation leads to bank failures as a result of multiple debts gone sour. It is a self- perpetuating state of affairs and it calls for the implementation of the seventh and last phase of the cycle: reflation.

The market's failure, at this stage, is so rampant that all the mechanisms of self-balancing and allocation are rendered dysfunctional. State intervention is needed in order to restart the economy. The authorities need to inject money through a fiscal stimulus, to embark on a monetary expansion, to lower interest rates, to firmly support the financial system and to provide tax and other incentives to consume and to import.

Unfortunately, these goals are best achieved militarily. War reflates the economy, re-ignites the economic engine, generates employment, increases consumption, innovation and modernization.
-- from here

Please note that the author makes a distinction between a "deflationary phase" and "monetary deflation", the latter not necessarily happening during a deflationary phase.

Yes, this certainly is beyond your undergrad course in economics. We are debating different schools of thought.

Since I don't have any idea about what those schools of thought are, I'll better shut up while the adults are discussing. :-)

192   Zephyr   2005 Nov 25, 11:23pm  

Frank, you said: "Occasionally, my wife and I walk into “open houses” just out of curiosity. In August, I distinctly remember this one very young realtor we met that insisted (after it became apparent that we were not interested in buying) that prices would not go down (she repeated this several times as we walked out the door).

Well, we just ran into her again at our local Starbucks. She took my coffee order. I don’t think she remembered our previous encounter and I thought it best not to bring it up.

It doesn’t’ happen often, but every once in a while life hands you a precious moment."

It's sad to see people taking pleasure in the failure of other people's aspirations.

193   Allah   2005 Nov 25, 11:41pm  

It is also sad to see people, who market themselves as professionals, either shamelessly or out of ignorance, use outright falsehoods to try to sucker people into taking on debt burdens of 700-800 thousand dollars. And there is no shame in calling such people to the mat.

I second that! These new realtors who got into the business just because of the boom deserve everything that is coming to them.

194   Zephyr   2005 Nov 25, 11:51pm  

But was she called to the mat? Were her naive statements challenged?

It's true that (like many industries) many people who work as realtors are not sufficiently knowledgeable about the product they sell -- while many are others very expert. Those who make the effort to become expert usually do well. Some do not make the effort, and I agree that it is annoying to see such people chanting such naive misinformation. Often, though, these people just have no sense of history other than the most recent years. So the idea of a real estate decline is unfamiliar to them. There are many honest fools in the world. I take no pleasure in seeing their setbacks.

195   Zephyr   2005 Nov 25, 11:55pm  

Allah, Most of these people are just looking to improve their livings standards, and they hear that real estate sales can be a better paying job than what they have. Why do you take pleasure in their setbacks?

196   Allah   2005 Nov 26, 12:11am  

Allah, Most of these people are just looking to improve their livings standards, and they hear that real estate sales can be a better paying job than what they have. Why do you take pleasure in their setbacks?

Because they want to profit from the swindling of others. They are no better than people who sell hot merchandice second hand. "I didn't steal it, I just got it really cheap and I am turning it over for a profit".

197   Zephyr   2005 Nov 26, 12:18am  

So sales people are swindlers?

198   Allah   2005 Nov 26, 12:18am  

There are many honest fools in the world. I take no pleasure in seeing their setbacks.

It is the setbacks from our mistakes that make us more wise. I take pleasure in seeing people learn from their mistakes so they will not be made again.

199   Allah   2005 Nov 26, 12:19am  

So sales people are swindlers?

A great many of them are......but not all.

200   Zephyr   2005 Nov 26, 12:22am  

Do you think we should we paint them all with the same brush?

Treat them all with disdain?

201   Allah   2005 Nov 26, 12:26am  

Only the ones that make themselves look too obvious....you don't have to paint them, cause they already show their true color!

202   Zephyr   2005 Nov 26, 12:37am  

Yes, And it's going to get very ugly in some places.

203   Zephyr   2005 Nov 26, 12:40am  

On average, the market balance turned during the summer. This is more than the usual seasonal shift... The cyclical slowing and price declines are just getting starting.

204   Zephyr   2005 Nov 26, 12:44am  

Supply has finally outrun demand by enough to shift the balance, and there is more supply under construction. The effect will be strongest in the condo market.

205   Allah   2005 Nov 26, 12:48am  

Want to see a realtor who makes him/herself look obviously honest? Show me one that will put their own welfare behind their promise. Show me a realtor who will sign a contingency agreement that reads "If the value of the property sold falls in value and the buyer is forced to sell for whatever reason, the realtor will pay the difference". I would buy right now regardless of the bubble......but that's never gonna happen is it?

206   Girgl   2005 Nov 26, 12:58am  

RIC says:
It is also sad to see people, who market themselves as professionals, either shamelessly or out of ignorance, use outright falsehoods to try to sucker people into taking on debt burdens of 700-800 thousand dollars. And there is no shame in calling such people to the mat.

Well, what about the "professionals" who suckered people into $600k debt burdens two years ago? They made their clients money. Maybe only funny money, but it's very real and believable today. Was real estate overpriced in 2003? Of course it was.
How do they know that they won't make their clients money now?

The cracks are showing right now, but the cracks showed in 1998 and in 2001, and the following years, it was up another 20%.

I have a friend who's lived in the Silicon Valley for 30 years. She's not in a technical profession, and honestly thinks every single software engineer in the valley makes millions now or will make millions later. She also believes honestly that real estate in the valley will always go up, if only for that reason. She will advise you to buy now, and that has nothing to do with deliberately sucker you into something to make her some money.
If she had the money, she'd buy herself.

207   Zephyr   2005 Nov 26, 12:59am  

Allah, You expect too much from the realtor. Their job is that of a middleman. They find a buyer for a house, and a house for a buyer. They should also shepherd the deal to conclusion.

If you expect them to be able to predict future price movements for you, you are dreaming. It is certainly unrealistic to expect them to guarantee the profitability of your purchase decision.

208   Zephyr   2005 Nov 26, 1:02am  

Girgl, Thanks for the interesting links yesterday.

209   Zephyr   2005 Nov 26, 1:09am  

RIC, After many years of interaction with many realtors I have come to the conclusion that most of them (like most of the general public) are ignorant of how market cycles work. So, I expect that the realtor in question is far more ignorant than deceitful. Neither condition is good. I agree that in a perfect world such people would not be realtors, but there is a shortage of well-intentioned visionary economists willing to sell real estate. So, we are largely stuck with what we have.

210   Allah   2005 Nov 26, 1:16am  

If you expect them to be able to predict future price movements for you, you are dreaming. It is certainly unrealistic to expect them to guarantee the profitability of your purchase decision.

I never expected them to gaurantee this....only the ones who state that it will just keep on going up.....I have been told by 3 different realtors that it will keep going up and I had asked for that contingency, not because I thought that they would agree to it, but just to show there true faith in the market....that is priceless! If they really knew that it would keep going up, there would be nothing for them to worry about, would there? If they truely believed this, this would be an excellent marketing strategy!! Imagine how many buyers would flock to them!

211   Zephyr   2005 Nov 26, 1:22am  

I suspect that there is a natural selection effect with new realtors where the more optimistic ones are more likely to succeeed. Being ignorant makes it easier to be constantly optimistic (this is also true for being constantly pessimistic).

There are also many very savvy and honest professionals in the real estate business. In my experience, I have seen these people ultimately become successful investors as well as realtors. I believe ScottC is one of these people. They do exist.

212   Zephyr   2005 Nov 26, 1:31am  

RIC, Hope is on the way... it's always the most insane at the market top.

The next round of elevated insanity will be the over pessimism as we near the market bottom in a few years. When the bottom arrives I will be helping people escape the disasterous real estate market by purchasing property from them.

213   Allah   2005 Nov 26, 1:33am  

There are also many very savvy and honest professionals in the real estate business. In my experience, I have seen these people ultimately become successful investors as well as realtors. I believe ScottC is one of these people. They do exist.

There is noone on this blog who disagrees.

214   Zephyr   2005 Nov 26, 1:37am  

Of course, I have limited resources, so I can not save everyone. That is why it is better that I wait for the very bottom to help those who are in the greatest need.

215   Allah   2005 Nov 26, 1:52am  

How is this for legalized fraud?

[snip]
"As long as we had the mantra that prices only go up, you could have the most stupid mortgages and it was great," he said. But going forward, "the public will see more foreclosures . . . people are maxed out with debt."

....and yet they still are pushing these mortgages!

216   Allah   2005 Nov 26, 2:03am  

No matter how risky these exotic mortgages are, they will continue selling them as long as they can make $$$. When mass defaults occur, the lenders will have their asses covered… I guarantee it.

Of course....at the expense of us taxpayers,...that is why I call it legalized fraud!

217   Girgl   2005 Nov 26, 2:10am  

Zephyr says:
When the bottom arrives I will be helping people escape the disasterous real estate market by purchasing property from them.

Zephyr, what kind of properties will you buy, in which market?

218   Allah   2005 Nov 26, 2:13am  

However, when all the shit hits the fan, many of those lenders who got into the market just because of the boom will probably be filling out applications at starbucks and I will have no sympathy for them.

219   Zephyr   2005 Nov 26, 2:28am  

Girgl, For three decades I have been buying mostly Single Family Homes near the beach in major urban areas that have good weather.

For the future... Where the baby boomers migrate, the prices will rise faster than average.

220   Zephyr   2005 Nov 26, 2:37am  

Pop, It does seem that realtors are overpaid. But keep in mind that the commission gets split four ways, and the agent spends a lot of time on people and deals that they do not get.

The average real estate agent does not really make much money. But, some agents do make a lot of money. It is one of those occupations where most participants earn very little and a minority do really well.

221   Allah   2005 Nov 26, 2:39am  

I have a friend who’s lived in the Silicon Valley for 30 years. She’s not in a technical profession, and honestly thinks every single software engineer in the valley makes millions now or will make millions later.

Wrong.....Software Engineers are being outsourced every day....their days are numbered! She doesn't know much about the Software profession.

She also believes honestly that real estate in the valley will always go up, if only for that reason. She will advise you to buy now, and that has nothing to do with deliberately sucker you into something to make her some money.

No disrespect, but she doesn't seem to bright to me.

If she had the money, she’d buy herself.

She doesn't need money.....there are plenty of lenders out there who will gladly give her a 110% IO loan......even if she works at starbucks serving mocha-chinos........If she truely believes that it will keep going up, then she can't lose with these loans!Hell, if I believed that it can only go up, I would jump at these loans a long time ago....it would be a can't possibly lose situation!........but it's just not true and anyone who believes this is not too bright....but its good that she thinks she can't buy, it will prevent her from joining the group of lemmings that are marching off the cliff as we speak!

222   Zephyr   2005 Nov 26, 2:45am  

I do believe that real estate commissions are generally too high.

223   Girgl   2005 Nov 26, 2:47am  

allah writes:
No disrespect, but she doesn’t seem to bright to me.

I think she's ok brightness-wise, just very very naive and optimistic. She wants to believe that only good things happen. And she does.
Sometimes, I want to be more like her :-)

224   Zephyr   2005 Nov 26, 2:49am  

Kherson, No thanks. I believe that the condo market in Florida is going to experience one of the morst price declines as all the inventory swamps the demand.

225   Allah   2005 Nov 26, 2:52am  

I think she’s ok brightness-wise, just very very naive and optimistic. She wants to believe that only good things happen. And she does.

The younger generation being completely priced out of the market is a good thing? I know the market is going to fall....and I look at that as being a good thing. Believing that when my children grow up, they will able to buy a house near me (or anywhere for that matter).

226   Allah   2005 Nov 26, 3:03am  

on that same note....people who own a house like to believe in what is good for themselves or at least let other people believe that they believe (self denial)....so naturally they will say that it will only go up (even if they truely don't believe it themselves). I am the only one in my family that hasn't bought a house....fortunatly my siblings have bought way before the big boom. They like to believe RE will at least hold its value and they do get aggrevated when I talk about an RE crash because they have found alot of the things I have said in the past have happened (such as the stock crash).....So I try not to bring these things up, but sometimes someone else usually does like on Thanksgiving. :)

227   Zephyr   2005 Nov 26, 3:10am  

Allah, There is hope. No generation will be priced out, other than on a temporary cyclical basis. I remember 30 years ago people were saying that young people would forever be priced out of the market. Then the cycle shifted. It happens about once every 10 years or so.

It is true that some locations will become permanently too expensive for the average buyer, but there will always be other housing that most people can buy at some point in the cycle. Right now is a very difficult point in the cycle. However, it will not stay like this. 70% of US households own their home today – a number that has steadily increased over the last 50 years. This would not be the case if people could be permanently priced out.

228   Zephyr   2005 Nov 26, 3:12am  

Most of the people who owned homes 50 years ago are dead now. The current owners are the young people who were thought to be forever priced out of the market.

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