patrick.net

AntiTroll:

Lereah’s book does seem to be arriving at a time when it would just be fuel on the fire as you say. However, if the market decline has already started, then his book might actually be too late to be of significance.

So his book encourages behavior that if wrong will hurt people financially, and if right will help them. It remains to be seen. The same criticism can be directed at those who have been saying the market will collapse and people should not buy. If they are wrong, then they have encouraged (discouraged) behavior that has already caused financial harm to many people. Time will tell which advocates have caused the most financial harm.

Sorry, Zephyr, but I do not see a moral equivalency between a man who makes his living as the chief financial guru for the NAR arguing for people to make reckless decisions near the peak of a bubble vs. contrarian economists warning people about the risks. Yes, if people listened to the few rare early-bears 4 years ago, they may have missed out on some paper gains (to be given back in coming years, as prices revert to the mean), but urging caution/reason and advocating recklessness are not the same things in my book.

I also don't buy the "maybe he really believes housing will keep going up forever" argument. David Lereah is paid to be an expert in forecasting and market analysis among other his other responsibilites --propaganda minister, for instance. I have absolutely NO doubt that he personally knows better. Much like the CEOs of major homebuilders (see "Rats deserting a sinking ship" thread), I wouldn't put it past him to be playing the old "pump-and-dump" game. At the very least, he knows better than to believe the self-serving nonsense he spews in public.

As for the CEO of Lending Tree, I would fully expect him to talk up the idea of borrowing more money. After all, that is what he sells. Everyone pushes what they sell. Car companies encourage you to buy cars, beer companies push beer, and tobacco companies push tobacco. Alcohol and tobacco are plagues upon our society. These two items are the leading causes of death and illness in America. Put it in perspective. It’s really hard for me to get excited about potentially unwise buying and borrowing.

Every individual must take responsibilities for their own actions and decisions. If they buy or borrow foolishly, it is their own fault. They are not babies… or are they?

Zephyr, I am a big advocate of people taking more personal responsibility --I am NOT in favor of a big government bailout, or letting speculators get off by blaming/suing Realtors, appraisers & lenders when they end up underwater. Nonetheless, these insiders have been acting and talking as if there was NO RISK in real estate in the years during the bubble run-up. RE never goes down, remember?

The big difference between say a tobacco company and a NAAVLP lender is that the risks of tobacco are fully and clearly disclosed to the consumer. All you have to do is sit down with a sleazeball broker for an hour and listen to them talk up how great IO & neg-ams are (as I have), and you quickly see that the same is not true for the mortgage lending industry. Any federally mandated warnings are glossed over/sugar-coated as quickly as possible, followed by the high-pressure sales pitch.

My ignorance of economics and RE market risk is my fault, this is true. If I'm a flipper/speculator, and I don't do my homework, then I deserve to screw the pooch --this is also true. But recklessly pressuring people to go into debt I know they cannot afford, for a house I know is overpriced (because I told the appraiser to "adjust" the value to hit the sellers' target number) is immoral at best, and possibly criminal at worst. If these people sign largely on the basis of my bad advice and distorted numbers, then I share some of the responsibility.

No one's 100% guilty or 100% blameless in this game.

HARM, you said “The big difference between say a tobacco company and a NAAVLP lender is that the risks of tobacco are fully and clearly disclosed to the consumer.”

Full disclosure is not so comforting. The 25,000 or so who die each year because of drunk drivers got no benefit from those disclosures. If disclosures were sufficient we could legalize all drugs and require tobacco style disclosures.

The problem is not the lack of disclosure. It’s irresponsible behavior. Buyers, borrowers, lenders, and others are guilty of this. I agree that it is not necessarily 100% with any one party.

I agree that mortgage brokers are zealot advocates of funding the loan. Once the loan is funded they just pass the trash. Their incentives do not match up with those of the borrower or the ultimate lender. Bad behaviors do result. I don’t know what we can do about this, other than better educating consumers. It is very difficult to legislate morality.

HARM,

I doubt that Lereah believes that the market will go up forever. But he has said that he does not think the market is about to sour either. He has warned about condo prices deflating. However, it seems that he expects the market to remain healthy for a couple more years. I believe he will tell us when he believes the end has come. I think you underestimate his professional pride.

To me it is not a moral issue. I am most interested in who will be most accurate in their forecasts. The results of this market are still to be seen. So far Lereah has been more accurate than most.

As a real estate investor if I could have only one economist as my source for information I would choose Lereah.

I believe he will tell us when he believes the end has come. I think you underestimate his professional pride.

Or he could go on holidays or maybe even write a book? ;)

Zephyr,
I keep looking at the oil price ~$70 and keep thinking that most of the volatility is from speculators. It is just too easy to speculate with futures. Imagine if there were no future contracts, how the price would probably more acurately reflect the current supply and demand. Buy the oil and you have to take delivery and store the stuff. Maybe I'm wrong.

I ask myself the question is oil a little bit like RE.
Lower prices would make it easier for people to manage every day life.

The problem is not the lack of disclosure. It’s irresponsible behavior. Buyers, borrowers, lenders, and others are guilty of this. I agree that it is not necessarily 100% with any one party.

Zephyr,

We definitely agree on the irresponsible behavior part (how did AG term it this time --"speculative fervor"?). I'm not so sure that better disclosure of all the risks (both lending & market cycle risks) would not go a long way towards preventing the problem, though. At the very least, if a well informed consumer makes bad decisions in spite of the warnings, then s/he has no one to blame but him/herself. I agree with you that it won't be a silver bullet, but I think it would help some.

I agree that mortgage brokers are zealot advocates of funding the loan. Once the loan is funded they just pass the trash. Their incentives do not match up with those of the borrower or the ultimate lender. Bad behaviors do result. I don’t know what we can do about this, other than better educating consumers. It is very difficult to legislate morality.

Yes, I think you've hit the nail on the head here --the problem of matching up mortgage risks with the rewards. Right now many lenders (especially sub-prime) simply originate mortgages, then sell them off to the GSEs or other entities for being securitized as MBSs. To them, pushing toxic loans to uncreditworthy borrowers is all reward and no risk. This is one area in which I think more regulation would actually make a positive difference (see, Peter I'm not 100% Libertarian ;-) ). I think requiring lenders to hold a substantial percentage of the loans they originate on their own books (the way they used to) would go a long way towards tightening up lending standards.

To me it is not a moral issue. I am most interested in who will be most accurate in their forecasts. The results of this market are still to be seen. So far Lereah has been more accurate than most.

Well, I don't argue that anyone bullish about housing up to now has been spot on, and I certainly would not ever expect anyone in the RE market to start pooh-poohing their business. What makes his recent comments so offensive to me, however is (1) the timing, and (2) he's basically insulting people for behaving responsibly (paying down their debts). This to me goes beyond mere industry "cheerleading", and I see it as immoral for someone of his public stature to do this.

I ask myself the question is oil a little bit like RE.

Actually, dont the arguments apply for both:-

1) Their not making any more. (a finite resource)
2) Prices only go up. (Hasn't the price gone up significantly)
3) Everybody needs it.
4) Prices going up will create wealth. (for the people that own the reserves).
etc

Therefore investors should be buying more oil.

(not investment advice)

AntiTroll:

Oil prices are surging because of anticipated future shortages. Speculators and end users alike see this condition and bid the price up. They must ultimately either use the oil or sell it. For the user the purchase is a hedging activity, locking in their cost. For the speculator, if the demand is not real then they will take a loss when they try to sell later.

If there were no futures contracts the volatility would occur when the delivery dates arrive.

As for oil being a little bit like RE, all assets and commodities have some market similarities.

Full disclosure is not so comforting. The 25,000 or so who die each year because of drunk drivers got no benefit from those disclosures. If disclosures were sufficient we could legalize all drugs and require tobacco style disclosures.

The difference between the drunk driving accidents and those who (maybe) unwittingly buy irresponsibly into the housing market is that you don't have the CEO of Anheiser Busch writing books telling everyone that drinking and driving is the wave of the future. Apples and Oranges.

I'm sorry but I just don't Lereah as a visionary. I think he's someone who's ridden a bull market to success and that given his position he's really not likely to take a bearish view until he's slapped in the face with a bear market. Personally, I think he's been lucky and I think his cheerleading at the current time is irresponsible.

@SactoQt,

*DING!*

SactoQT:

There is a huge difference between having been accurate so far and being considered a visionary. Lereah has been accurate. Those who disagree with him have been wrong so far. Will he fail to see the bear market? Perhaps. Then he would be wrong too. However, he might get the decline right as well. It remains to be seen.

I happen to think that the decline has already begun in some of the hot markets and will hit other hot markets by this time next year. But this all remains speculation. The current cooling could be seasonal.

Zephyr

I agree on all points. The next year or two ought to be interesting.

Btw, the water cooler talk has changed quite a bit in my neck of the woods. People who less than a year ago were saying the market would never fall are now talking about the decline in progress and how many houses are for sale in their neighborhood. The change is psychology is pretty amazing to watch.

HARM,

I believe that Lereah believes what he is saying. I see nothing immoral in giving an honest market forecast. It seems that you are judging the morality of his comments based on how his forecast compares to YOUR market beliefs.

Regarding loan portfolio sales, you said: “I think requiring lenders to hold a substantial percentage of the loans they originate on their own books (the way they used to) would go a long way towards tightening up lending standards.”

I would think that the buyers of loan portfolios would want the originators to retain an interest in the loans. I worked in that industry in the mid 1970s and at that time the buyers DID require the original lenders to retain a percentage share of the loans that they sold. The buyers would typically take an 80% interest in the loans.

AntiTroll:

People believe all sorts of things.

As for investors buying more oil, they are trying to but they can only buy what is on the market. World oil production is nearly maxed out at about 84 million barrels of oil produced per day. There is very little potential for increasing the production in the near future. However, demand (actual use) is growing. The prices are rising.

World oil production will be reduced after tomorrow.

Just a quick update:

Crude oil is near $70 and natural gas has gone up nearly 20% over the weekend.

Crazy! The hurricane season barely started...

Do you guys have plans to trade the oil or natural gas?

Zephyr, do you know anything about the electronic mini oil contract from NYMEX (QM)?

I have the news on and they are of course covering the hurricane. They say that oil is now over $70 a barrel.

Peter P:

Hurricanes cause tremendous damage on the sea bottom in the gulf. The Sea bottom is like spaghetti with oil pipelines to shore. Even if the oil platforms survive Katrina (unlikely) the pipes and the terminals in and around New Orleans will be out of service.

Production capacity will be reduced, but demand will continue to grow.

I fully expect to wake up tomorrow and see higher prices at the pump.

I believe that Lereah believes what he is saying. I see nothing immoral in giving an honest market forecast. It seems that you are judging the morality of his comments based on how his forecast compares to YOUR market beliefs.

Well, I don't know Mr. Lereah personally (perhaps you do?), so I suppose I could give him the benefit of a doubt for actually believing his own "Home Values and Other Real Estate Investments Will Climb Through The End of The Decade" prediction.

The book aside, what I don't think is acceptable --morally or financially-- is him basically insulting people for behaving responsibly by paying down their debts ("very unsophisticated" and "It's as if you had 500,000 dollar bills stuffed in your mattress" as he put it). I see this as an utterly reckless and irresponsible statement for a public figure to make, regardless of his professional loyalties. We may have to agree to disagree on this one.

I worked in that industry in the mid 1970s and at that time the buyers DID require the original lenders to retain a percentage share of the loans that they sold. The buyers would typically take an 80% interest in the loans.

Wow. What a difference a generation makes. I think when the party's over, we'll see a return to saner lending (and borrowing) standards.

Peter P, I am do not trade commodities. I understand that the minis are linked to and a function of the underlying futures contracts. They are partials with something like 400 barrels for each unit. Short term only.

HARM, I do not know Lereah, and I have never met him.

Zephyr, do oil service stocks correlate well with oil prices?

I have to weigh in w/Harm on the ethics end of the Lereah debate. I think there's too much at stake financially for Lereah to be purely objective. And though that goes toward the "he believes what he says" argument I also believe that he knows people are listening to what he says and that he may have an influence on the market, albeit probably a small one (but who knows). But it is in his financial interests to keep pushing the market, especially since he has a book to sell. But I gotta be honest, the guy has always rubbed me the wrong way, so my opinion is colored as well.

I understand that the minis are linked to and a function of the underlying futures contracts. They are partials with something like 400 barrels for each unit. Short term only.

Thanks!

Peter P, Generally yes, but be careful. The oil service companies can take losses in the storm as well. Even if insured they could have diminished capacity as a result. This, of course, will raise their price power, but could be of little value if they are short of equipment and personnel. I suspect that they are all running pretty much at full capacity now so the disruption by the hurricane is hard to evaluate. I am not an oil guy, so don’t take any of this as expert comment.

BTW
Glad to see you posting again Zephyr. Whether I agree with you or not I highly respect your opinions and can tell you have a lot of experience to share. I appreciate that you spend the time to help educate us 'newbie's' on the intricacies of the various financial markets we've been discussing.

SactoQT, Thanks for your kind words.

Glad to see you posting again Zephyr.

Ditto.

It is good to have a wise man on this board. :)

SactoQT, Thanks for your kind words.

Not at all, I even meant most of them. ;)

I have Fox news on and they're talking about oil futures as I sit here writing this. To be honest, it's still pretty much over my head. But if I can grasp the yield curve, I'm sure I'll catch on to this subject if I keep reading the posts. But it's interesting to see what has captured our interest here is also on the news as were discussing it. I guess were right with the times.

Honestly, I will not be surprised to see $5 gas next summer.

Honestly, I will not be surprised to see $5 gas next summer.

Hi Zephyr,
Is it possible this k-wave might end (if it has not ended yet) with a conflict over the control of oil?

Glad to see you posting again Zephyr.
Ditto.

Double-ditto on that. Even when we disagree, your responses are always cogent, thoughtful and informative. A welcome departure from... oh, I don't know... a certain poster who monopolized the board's attention for far too long.

Btw, the improvement on the quality of posts and volume of participation post-MP has exceeded my expectations. If I had known the impact would be this great, I would have banned him a long time ago --even without a vote.

Btw, the improvement on the quality of posts and volume of participation post-MP has exceeded my expectations. If I had known the impact would be this great, I would have banned him a long time ago –even without a vote.

The difference is obvious and even more substantial than I would have thought. But it was impossible to know until after the fact. Kind of like the bubble we've spent so much time talking about. ;)

Tonight I have been unable to stop watching the Weather channel. Tomorrow (today) will be hell. But it is now way past my bedtime.

Given that we were talking about Lereah and his book, I thought I would leave you with an article that is primarily based on comments by Dr. Shiller of Yale (author of Irrational Exuberance).

http://www.foxnews.com/story/0,2933,166561,00.html

Thanks, Zephyr. The Fox story did a surprisingly good job of laying out and supporting Schiller's arguments (Fox isn't exactly known for being bearish on much of anything). It even went so far as to all but rule out the "soft landing" scenario.

Writing's on the wall people. The ending to this asset/credit bubble will not be pretty.