Pop Goes the Bubble!

While I don't agree with Mike's personal views , he does make some interesting points. I've done some checking and he has his facts about housing in line so it's worth the read.
Vern

Pop Goes the Bubble!
The Great Housing Crash of '07
By MIKE WHITNEY

This month's figures prove that the so-called "housing bubble" is not only real, but that its cratering faster than anyone had realized. As the UK Guardian reported just yesterday, "the orderly housing slowdown predicted by the Federal Reserve will (soon) become a full-blown crash".

All the indicators are now pointing in the wrong direction. Consumer confidence is down, inventory is at a 10 year high, and the number of homes sold in July was 22% lower than last year. As Paul Ashworth, chief economist at Capital Economics said, "Things seem to be getting worse very quickly. Freefall is a strong word, but I think it's the right one to use here." (UK Guardian)

The housing bubble is a $10 trillion equity balloon that will explode sometime in 2007 when more than $1 trillion in no-interest, no down payment, adjustable-rate mortgages (ARMs) reset; setting the stage for massive home devaluation, foreclosures and unemployment. ("By some estimates housing activity has accounted for 40% of all the jobs created since 2001". Times Online) July's plunging sales are just the first sign of a major slowdown. The worst is yet to come.

The blame for this rapidly-approaching meltdown lies entirely with the Federal Reserve, the privately-owned collection of 10 central banks who cooked up a way to shift wealth from one class to another through low interest rates.
Sound crazy?

Well, just as high interest rates cause the economy to slow down; low interest rates have the exact opposite effect by stimulating the economy through increased spending. It's all pretty clear-cut.

When the stock market nose-dived in 2000 the Fed lowered rates 17 times to an unbelievable 1% to keep the economy sputtering-along while the Bush administration dragged the country to war, gave away $450 billion a year in tax cuts, and awarded zillions in no bid contracts to their friends in big business. All tolled, the Bush-handouts amounted to roughly $3 trillion dollars, the largest heist in history, and it was carried out under the nose of the snoozing American public.
At the same time, America's debts and deficits have continued to mushroom behind the smokescreen of low interest rates.

Rather than face the recession which should have followed stock market crash, the Fed chose to increase the money supply (which doubled in the last 7 years) and lower the qualifications for getting mortgages. (I read recently that 90% of first time home buyers not only lie on their mortgage applications, but that 50% of them say that they earn TWICE as much as they really do. The applications are not cross-checked with IRS statements) Now, tens of thousands of Americans live in $400,000 and $500,000 homes without a penny of equity in them and with loans that are timed to increase dramatically in 2007. (Many of the monthly payments will double) So, how can we blame the Fed for the reckless and irresponsible behavior of the average homeowner?
Well, because they knew the effects of their "cheap money" policy every step of the way.

First of all, the Fed knew exactly where the money was going. Greenspan endorsed the shabby new lending-regime which put hundreds of billions of dollars in the hands of people who never should have qualified for mortgages. They were set up to fail just like the victims in the stock market scam who kept dumping their life savings in the NASDAQ when PE's were shooting through the stratosphere.

Secondly, the Fed knew that wages had actually regressed (2.3%) since Bush took office, so they knew that the soaring value of real estate was entirely predicated on debt not real wealth. In other words, home values increased because of the availability of cheap money which inevitably creates a buying-frenzy. It had nothing to do with real demand or growth in wages.

And, thirdly, according to the Fed's own figures, "the total amount of residential housing wealth in the US just about doubled between 1999 and 2006"up from $10.4 trillion to $20.4 trillion". Times Online.
UP $10 TRILLION IN 7 YEARS! That is the very definition of a humongous, economy-killing equity monster. In other words, the Fed knew the ACTUAL SIZE OF THE BUBBLE and chose to steer it towards the nearest iceberg without warning the public.
This is what Greenspan called "a little froth".

There is no real growth in the American economy. Figure it out. Last year Americans saved less than 0% of their net earnings while they borrowed a whopping $600 billion from their home equity to piss-away on a consumer spending-spree. Once home prices begin to retreat, that $600 billion will evaporate, real GDP will shrivel, and the economy will begin flat-lining. (Consumer spending is 70% of GDP)

The Federal Reserve's plan is so simple; we shouldn't dignify it by calling it a conspiracy. It's merely a matter of hypnotizing the masses with low interest rates while trillions of dollars of real wealth is diverted to corporate big-wigs and American plutocrats.

It might not be rocket science, but it worked like a charm.
Now, the trap-door has been sprung; the country is dead-broke and all the levers are in place for a police state. As the housing-balloon slowly limps towards earth, the new Halliburton detention centers are up and running, the National Guard is in Rummy's control, the Feds are able to listen-in on every phone call we make.

The noose is beginning to tighten.
New Orleans was just a dress rehearsal for the new world order; 300,000 million Americans reduced to grinding poverty while the economy explodes into sheets of flames.
Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com

Media, the engine of the housing market

It's been claimed by some that the mainstream media is responsible for the current housing decline. This line of logic has it that hyping a previously non-existent downturn caused it to happen, sort of like a self fulfilling prophecy, or something of that nature. If this is true then it would follow that they were also responsible for the dizzying heights the housing market reached during it's bull run.

It's possible.

That being said, I think every R/E agent, broker, lender, mortgage broker etc... owes a letter of thanks to their favorite media outlet (or hell, all media outlets for that matter) for all the cars, vacations, big houses and mountains of cash they acquired by way of the medias efforts.
It was quite a party.

Vern

Housing has never seen a soft landing, ever

Mike Morgan at Morgan Florida had some interesting comments on housing and the economy.

It is encouraging when people take a hard look at their own industries and plot the real possibilities rather than the ‘head up the arse’ denial that comes from most anyone tied to the housing industry right now. And to all of you – closing your eyes won’t make it go away…
Vern

From Mike Morgan http://www.treasure-coast.us/

Chicken Little
I’ve been receiving quite a few calls regarding the surge in home builders’ stock prices. Well, first off, I am not a financial advisor. My research and consulting services are purely information for the end user to incorporate into their financial analysis.

I think that what’s going on nationwide in housing will effect the country to levels we have not seen since the Depression. Some of you may be equating me with Chicken Little. After all, Cramer is bullish on the home builders and so is Bill Gates. Well it’s not Bill Gates making the call. It’s his financial advisors that run the foundation that are making the call. Second, even if it were Bill Gates, he’s been wrong more than right for the last few years. Bill Gates is not Warren Buffet. As for Cramer, I have no comments except to say that his show speaks for itself. I think you can read between the lines.

Finally, the market seems to have bought into the "Goldilocks" soft landing theory. Well housing has never seen a soft landing ever and I fail to see how this time can possibly be different given the affordability problems and the disparity between housing prices and rents, not just in Florida, but pretty much nationwide. With that comment, let's now turn our attention to the situation facing the homebuilders.

Catch 22
Following are the three business strategies builders are using to survive the downturn in home building.1) Reduce Inventory

Housing inventory is at the highest level we have ever seen since the beginning of time, and growing daily. Back in early 2005 Centex was the first to realize the market was in trouble. They quietly contacted real estate agents and offered double commissions and huge discounts on inventory that would close prior to their fiscal year end of March 31, 2006. As this program grew, the other home builders initially ridiculed Centex, but in their own board rooms, they quickly started cooking up competitive discounts, incentives and commission bonuses. Now it’s a free for all to see who can leap frog the other on the way down, and who can get more creative with incentives. The Catch 22 here is simple. Margins after all of this nonsense are approaching zero for most builders, and the madness has not stopped. But if builders don’t dump standing inventory now, they will have heavier losses if they continue to carry these homes and watch prices further deteriorate as the competition drives prices down further.

(Catch 222) Monetize Land
As if standing inventory was not enough of a problem, builders have two additional problems. First they have land, some of which is entitled and improved. Second they have thousands of projects that are already started, with roads, sewers and utilities already in place and paid for with lots of debt. They might be able to walk from land options and land that is not entitled, but it is not very easy to walk away from land that is already in the development process with billions of dollars of debt tied up.If the builders move forward with the developments, they are further increasing inventory. If they don't, they face problems with carrying costs of entitled land or shutting down a development that has already started. But carrying costs are not the only problems builders face.

If they have already started the development, they most likely have a time frame with the local government to complete the build out. Some local governments require builders to post a bond insuring the completion of developments. And how many homes do you think a builder can sell in a ghost town of a few spec homes? People want to live in a community, not a construction site.

(Thus we have the second Catch 22.3)
Scale Back
One would think this is the smartest option. When demand drops off, it is usually a good time to cut back on supply. But if the builders scale back, that means lower numbers for Wall Street. We’d see lower starts and lower sales and lower revenues and lower profit. Oh, almost forgot the "bonus factor". We’d also see lower bonuses to the top dogs who greedily reaped in tens of millions of dollars each during a market fueled by irrationally greedy speculators that essentially had nothing to do with their business acumen or experience.

One top builder has already announced they plan to continue building so they come out of this as a volume leader and capture branding. They’re losing money on each sale, but they’ll make it up in volume? That’s pretty expensive branding.

Once again, we have a Catch 22.
If the builders scale back, Wall Street will not see the numbers they want to see. If the builders don’t scale back, Wall Street will see some numbers, but the increase in inventory will complicate the problem with lower prices and bottom line losses will be the only numbers Wall Street will see.

Book Value
In addition to the three Catch 22 issues, Wall Street seems enamored with the low book values of the builders. I’ve got news for you. The book value numbers for this group are as misleading as a deaf and blind seeing eye dog. We’ve seen a few builders take write downs on some land, but if you crunch the numbers, it’s crystal clear that these write downs are not enough.

Homework
Look at D.R. Horton’s (DHI) recent write down in comparison to their land position. Look at Lennar (LEN) and the other builders referenced in the informative piece appearing in the October 2 issue of Barrons. Think about WCI Communities (WCI) and Brookfield Homes (BHS). Is their land old land with value, or is it relatively new land that they paid top dollar for. Finally, take a look at what happened to Kara Homes in New Jersey. A large regional builder that choked on their land and inventory. Choked right into bankruptcy.

This is where it gets tricky. It’s not easy finding out at what prices, where, and when the builders purchased land and/or options on land. For land purchased prior to 2000, the book value will most likely hold. For land purchased in 2005 or later, these guys are in trouble, and much of that land is probably worth 25-50% less than what they paid. For land purchased between 2000 and 2004, there is a grey area as to what the land is worth. The bottom line when it comes to land is that builders bought land just like the flippers bought their preconstruction homes. Price was a secondary issue. The primary concern was getting entitled land.

The crash of the housing industry is only now getting started, as it will spread virally to all of the boats it floated during the rising tide. Housing has touched every single segment of our economy, and it will darken all of those segments as the industry collapses to the worst levels we’ve seen since the Depression. The NAR and other groups producing numbers have been great cheerleaders, but when you’re pumping out misleading numbers, I don’t care how beautiful or loud the cheerleaders are, the situation is a no win catch 22 for the homebuilders no matter how one looks at it.

Things will get a lot worse before they can get better

The following is an e-mail to Mish Shedlock http://globaleconomicanalysis.blogspot.com/ from one of his readers, Michael J. Dorff.
Mr. Dorff makes a very succinct evaluation of the state of recent consumer home lending and where it will most probably lead us in the very near future.

This is not a problem that will occur tomorrow or even in the near future but is happening as you read this. Maybe a very masterful magician will appear and pull a rabbit from his hat to save us from ourselves at the last moment, but I wouldn’t hold my breath on that hope. Besides, that would only postpone the reckoning that we should face now, it will only grow larger if we don’t.
Vern

Here is a synopsis of the mortgage side of things here in Orange County and for that matter California in general.What people don't see, the NAR in particular, is the upcoming train wreck. I am talking about all the sub prime loans for refinances as well as purchases that were taken out 2 to 3 yrs ago and are now all coming due to reset. My guess is that 99% of all sub prime loans are all done on a 2 or 3 yr fixed interest only type program. People thought that it made no sense to take a 30 year fixed loan those homes when the short term rates were a lot lower, but they were all wrong.

The time bomb is about ready to go off. All of the subprime loans taken out 2 to 3 years ago have margins of at least 5% or higher and usually based on the London LIBOR program.

Those loans are starting to reset now at fully indexed rates somewhere in the high 9% to 10% range. When those loans were initiated 2 to 3 years ago, they all had start rates of high 5% to low 6%. As of now, the LIBOR alone stands at 5.388 for the 6 month and 5.336 for the 1 year. Take those LIBOR indexes and add the margins to see what is going to happen.

Here is a case in point. One of my clients who took out an interest only subprime loan from another lender just received her reset notice. Her current margin is 5.25% and her index for the 6 month LIBOR index is 5.388%. This means her new interest rate will shoot up to 10.638%. Her note states that her first adjustment cannot go higher than 9.2%. So she will be at 9.2% for the next 6 months. With an initial loan balance at $251,000 at 6.2% interest only, she had a monthly payment of $1,296.83. In December her new payment will be $1,924.33 for the following 6 months before it adjusts again. This is a $627.50 jump in monthly payment. She simply can not afford this payment.

Given her low credit score near 550, she is fortunate to still have equity that will allow her to refinance at all. Even still it is a tough task because not only does she have a bad score, she also a late pay on her record. The best option any sub prime lender would give her was 8.5% but she can not even afford that. The only option left is a Neg Am Option Arm Pick a Pay Loan where her payment is based on an payment rate of 2% but with a fully indexed adjustable rate of 7.4%. She will go negative if she cannot make the interest only portion of this loan. She also needs cash, $75, 000.00 of cash. That is your typical home ATM machine at work.

These Option Arm, Neg Am Pick a Pay Loan programs were one of the things keeping the home building bubble and mortgage lending bubbles going for the last 3 years. Without these products, the market (at least in California) would have collapsed 3 years ago. Instead the bubble just got bigger and bigger and we will see even a greater collapse when it comes. Ninety percent of those who take an interest only loan can only afford the interest only part and not only that, there entire lifestyles are planned around that payment.

Lenders don't really want people to pay the principle off anyway unless there is a prepayment penalty on it. Prepayment penalties are another scam in and of themselves. You can bet the lenders have made a killing on these 6 month interest prepay penalties. Bear in mind that once someone is subprime the odds of that ever being corrected are slim. Refinancing on better terms is usually not an option. Average credit scores for this group on the whole have not improved much if indeed at all over the last few years. I would guess that 80 to 90% of sub prime borrowers stay sub prime borrowers. Those borrowers are in a hole so deep they will never cleanup their credit to get A-paper rates. To top it off, many of them end up paying multiple prepayment penalty each time they need more money. They simply can't wait for their prepay period to expire. Ultimately it is a death spiral to bankruptcy.

Ask any Realtor out there if they know or really care about the types of loans there clients are getting. They may say yes but my assumption is they just want to make the sale. Ask any mortgage loan officer if he or she cares about what loan program they put their client in. Many will say yes but the reality is that they just want to close the loan and get their commission. First greed took over. Now it is a matter of survival.

Here is another reason why these loans are pushed: Lenders pay a lot of rebate on the back end on these loans which fuels the greed even more. Mortgage professionals can make up to 3.5% back end points on these loans while their client's minimum payment stays the same. When you are talking about the high loan amounts in California, the money to be made by pushing someone into one of these programs is huge. So are the temptations. Some lenders went so far as to put on their rate sheets that the maximum a broker or mortgage loan officer can make is $50, 000.00 on a given loan.Initially investors and flippers loved these loans because their payment was so low that by the time they could flip a home there out of pocket expenses were nothing. It all works well when the market is going up. When it stops or even falls, say good bye!

Everyone is in same box. Realtors need sales, homebuilders need sales, and mortgage brokers need sales. Unfortunately those needs too often come before their clients needs. In the end, the bankruptcies and foreclosures that result from this mess will just keep adding to inventory, ultimately forcing home prices lower. We are only in the first year of decline. From where I sit things will get a lot worse before they can get better.

Michael J. DorffTrans
World FinancialHuntington Beach, Ca. 92646

U.S. Dollar Decline

Well, many people have speculated about an impending decline in U.S. dollar value beginning in 07. It started to break out downward yesterday 11/24/06 against the Euro and other currencies, a little sooner than I expected.

This news, held up against the recent reatail products price drops by Wallmart and it's competitors and lower earnings projections by Home Depot, looks like the beginnings of an unwinding.

This combined with a serious drop in the American housing market, which is worsening, and the corresponding drop in consumer spending, (Oh let's not forget the higher than expected unemployment numbers this week).
All this spells an extreme lack of confidence in the future of the U.S. economy. This, all before the holiday buying season begins.

I don't know about you, but I find this news alarming.
Vern


From CNN World Business
http://edition.cnn.com/2006/BUSINESS/11/24/asiastox.friday.reut/index.html

SINGAPORE (Reuters) --
Shares in Asian exporters such as Honda and Sony fell on Friday, hurt by a weaker dollar after the U.S. currency plumbed a two-month low against the yen and a more than five-month low versus the euro.

"The currency movement is one of the factors behind the selling that we're seeing," said Renji Motohashi, general manager in the equity department of Shinko Securities in Japan.

In trade thinned by holidays in the United States and Japan, the dollar was driven down against the euro on Thursday after a strong German business sentiment survey strengthened expectations that euro zone interest rates would keep rising into next year.

"The euro is appreciating against the dollar due to the rate story," said Toru Umemoto, chief forex strategist at Barclays Capital in Tokyo. "But the yen story is more complicated because of the carry trade and the slowdown of the economy."

Carry trades, in which investors borrow the yen to buy a higher yielding currency, have helped to propel the yen to a succession of all-time lows against the euro this year.

Tokyo's Nikkei share average closed down 1.1 percent, after sinking to its lowest intraday level in two months, while MSCI's broadest index of shares elsewhere in Asia inched down 0.1 percent by 0600 GMT.

Honda Motor Co. Ltd dropped 1.2 percent, while rival car maker Toyota Motor Corp. fell 1.7 percent and consumer electronics giant Sony Corp. lost 1.9 percent. In South Korea, Samsung Electronics, the world's top memory chip maker, shed 0.3 percent.

A weaker dollar is generally negative for the exporters that drive many Asian economies because it makes their goods less competitive in the United States, a key market, and lowers the value of their U.S. sales in terms of their home currency.

Retirement Planning ideas

O.K., enough grim news for now. For all of you thinking of retiring,
this from Minyanville.

http://www.minyanville.com/articles/index.php?a=11646
Minyanville Guide to Retirement
Planning for retirement is one of those goals that we never seem to find the time to but it is critical to develop a solid, well-formulated gameplan for reaching your retirement goals.
Below are some useful retirement-planning tips designed to help you retire on your own terms:

Diversification is the key to any sound retirement plan. Make sure you gamble away your retirement savings in both Las Vegas and Atlantic City.

When it comes to saving for retirement, some people say "Don't put all your eggs in one basket." But if all you are saving are eggs, well... then good luck with that.

Have you considered a Rothschild IRA? The 2000 Chateau Laffite Rothschild Pauillac is a safe bet with a maturity range of 2021 to 2050, rated 99 points by Wine Spectator.

A good rule of thumb is to allocate your retirement investments between stocks and bonds according to your age. Another good rule of thumb is to somehow get a whole lot of money just before you retire.

Estate planning can be tricky and involve many unexpected expenses. To save your heirs from unexpectedly high burial costs when you die, start building a giant pyramid now in which to store your jewel-encrusted sarcophagus. Fill the pyramid's chambers with gold and treasures.

Did you know that a single Styrofoam cup of coffee a day would in 40 years turn into the equivalent of $381,437 in the stock market? Clearly, this shows that the best retirement plan is to horde Styrofoam cups.

Some people are concerned that social security will run out by the time they retire. In order to increase the odds that you will receive social security payments, assume various identities with unique social security numbers.

Don't be like a lot of people and forget to write down where you buried the tin can that contains your retirement savings. Also, make sure your name is clearly written on the can in permanent ink in case another investor accidentally digs it up.

US housing crash could bring UK down with it

Here is an article from about two months back. The housing numbers have become increasingly bleak since then however.
I have noticed that they are still experiencing a mini housing boom in the UK but that may change very soon.

I have posited before that this more economically flattened Earth will be more greatly affected if the largest consumer market, (The U.S.) stops buying.

I say the buying has stopped, probably a couple of months ago, the numbers just haven’t come in yet.

Looking ahead we should see a predictable jump in spending in December. Watch for these numbers to be lower than expected however. Holiday sales combined with 06 fourth quarter economic reports should in the first quater of 07 disappoint. This will have repercussions for all emerging economies around the world as lack of orders from the U.S. translate to loss of jobs in foreign markets, resulting in further reduction of consumer spending in those economies.

If somebody doesn’t find a rabbit to pull from the hat very soon, things are going to get ugly.
Vern

This from Briton's Telegraph.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/09/28/cnushouse28.xml

US housing crash could bring UK down with it By Edmund Conway, Economics Editor
(Filed: 28/09/2006)
Your view: Are you worried that the UK could slump into recession next year?
Comment: No avoiding the cold-turkey cure for debt addiction
Disposable incomes hit by higher taxes
Up and down world of US economics

If one of your friends whispered to you that there was going to be a recession next year, you probably wouldn't pay them too much attention. After all, the economy is powering on ahead, isn't it?


Growth this year will be strong, and will endure into 2007, driven by company profits and investment.

We know as much because the Treasury, the International Monetary Fund and other economic authorities have told us so. And, indeed, the consensus forecasts show that growth in 2007 will be 2.4pc, following strong expansion of 2.6pc this year.

But what if that bearish friend of yours happened to be a respected City economist - one whose figures were watched closely by a variety of institutions, including the Treasury?

Peter Warburton, who runs a small consultancy called Economic Perspectives, believes that the UK will slump into a full-blown recession next year, shrinking by some 0.3pc over the 12 months. This would be the worst economic performance since 1991, the last recession, which came amid Britain's ignominious ejection from the European Exchange Rate Mechanism.

Mr Warburton - a member of the Shadow Monetary Policy Committee - warns that the UK will be badly hit by a US housing market crash.
He says: "There is an increasingly large possibility of a scenario where, frankly, economic activity could fall quite materially. In short, I do not believe that the UK has become a more stable economy."

His thesis is that for the past decade, despite its stable growth rate and low inflation, the UK economy has been brewing up potential problems. These include the record level of debt taken on by the household sector, a similarly large jump in government borrowing and a fall in manufacturing output. If, as many experts predict, the US suffers a housing market collapse next year, this could trigger an even more dramatic downturn in the UK.

The reason, he says, is that British companies are particularly reliant on the US for their exports. If they lose much of their custom, they are likely to have to lay off employees, triggering a rise in unemployment and a possible drop in consumer spending.

"The landscape can change quite quickly, and the UK is one of the most vulnerable economies out there," he says. "It's fanciful to suggest that just because corporate balance sheets seem to be in a more healthy state that businesses will carry on spending even if the consumer stops spending.
"You can see that things are already not well in the economy.

Unemployment is up to the highest level in around seven years and the public finances are in a much poorer state than you would ever imagine from an economy growing at 2pc-3pc.

"There is a cauldron of insolvency, which people are trying to pretend is a micro-economic social issue. I think it's a big economic issue.
"Additionally, there aren't any more rabbits we can pull out of the hat."
Grim tidings. And for all that Mr Warburton has been consistently pessimistic about economic growth for a number of years now, his views are an important warning of the dangers facing UK policymakers.

He thinks, for example, that the Bank of England has "seen an inflationary ghost", and its likely decision to raise interest rates to 5pc or beyond could trigger a serious house price tumble.

Perhaps most chillingly for Gordon Brown he believes that the efficiency of the private sector has been slowly eroded by Labour's imposition of stealth taxes and regulation.

Such a miserable outlook is not shared by Trevor Williams, the chief economist at Lloyds TSB Financial Markets. While Mr Warburton was the most pessimistic of all major UK economists, Mr Williams has the brightest outlook, predicting that after expanding by 2.8pc this year, the UK will grow at 2.9pc next year.

For a start, he does not believe that the US will suffer a housing market crash, predicting that it will instead merely see house price growth slow down to more manageable levels - as happened here 18 months ago.
"The global background is quite good for the UK, and we're benefiting from strong growth in Europe and in the US," he says.

"My view is that the consensus developing in the market is wrong. I don't think there will be a crash. I think the economy is fundamentally strong.
"[In the UK] house prices are likely to remain above their long-term valuations for a long time, though there will be a peak to the mini-boom late next year."

Mr Williams's optimism is partly fuelled by his belief that Britain has become a powerful knowledge economy, where growth can be driven by our specialisation in ideas and skills.

For the moment, he is much closer to the orthodoxy. But things change fast in economics, and if the US housing market continues to deteriorate, there could soon be many more joining Mr Warburton's camp.

Look Out Below!

It’s often interesting to see what industry insiders say about their markets.
Vern

From National Mortgage News Online,
http://www.nationalmortgagenews.com/columns/hearing/

Housing starts plunged by nearly 15% in October to an annualized rate of 1.486 million units, the slowest monthly pace since July 2000. The 15.9% drop in single-family starts was the steepest since 1991. Yes, it looks ugly. How ugly? Here's your weekend homework assignment. Look in your local newspaper, in the real estate section, and behold all the deals builders are cutting on new construction. In The Washington Post, Centex Homes is willing to provide 100% financing on all its properties. In one ad I viewed, the builder wasn't even listing the price of homes. Instead, it was highlighting only the monthly payments. What does all this mean for mortgage bankers? For the next six months the industry can survive off of refinancings. After that -- and if the flat or negative yield curve persists -- look out below. The woes of ECC/Encore will spread like wild fire...

UK bankers modeling a 40% drop in house prices

I caught this blurb on the BBC this morning while having my morning coffee.
I checked online but could find nothing more about it until I checked the Housing Panic blog http://housingpanic.blogspot.com/ this afternoon.

It got my attention!
I live in Northern Europe and many folks here believe everything is hunky-dory in their local housing markets. My recent experience however indicates otherwise.

I have estimated possible drops in value of 30% or greater in many European countries including some eastern European countries. - ya, who woulda’ thunk it?

Experts have scoffed at this. Now the modeling based around a 40% drop in UK housing prices is a worrying admission that bad things might be afoot on this side of the Atlantic.
Vern


Thursday, November 16, 2006
FLASH: UK banks told by FSA to prepare for 40% housing price fall, 35% mortgage default rate, in "severe but plausible scenario”
This should cause a bit of nervousness on this side of the pond. Hate to burst their bubble, but... The TimesNovember 16, 2006Banks told to predict effects of a 40% crash in house pricesBANKS in the UK have been ordered by financial regulators to assess how they would cope in the event of house prices crashing by 40 per cent.

The instruction to include a housing slump scenario in their stress-testing models comes after the Financial Services Authority found that some banks were failing to include gloomy enough assumptions in their modelling.The FSA said yesterday that an “appropriate” benchmark was to assume property prices fell by 40 per cent and that 35 per cent of mortgages in default ended with homes being re-possessed.
It stressed that this was not a forecast but a “severe but plausible scenario” and one that banks should examine when deciding how robust their balance sheets were.

In a speech to the British Bankers’ Association yesterday, Clive Briault, the FSA’s managing director for retail markets, remarked on banks’ differing views over the size and impact of a house market downturn, hence the need for reference points. He also warned bankers to ensure that they have properly stress-tested their mortgage portfolios in the wake of decisions by some to lend people greater multiples of their incomes.

In a letter to bank chief executives last month the FSA accused some of failing to consider scenarios in which they might be forced into losses, dividend cuts or capital shortfalls. “We were struck by how mild the firm-wide stress events were at some of the firms we visited,” wrote the FSA’s director of major retail groups, David Strachan. A few banks were “weak in all respects” in stress-testing.

House prices fell about 15 per cent nationwide in 1989-1992, and in parts of East Anglia by 40 per cent, leading to repossessions, write-downs and bank losses.Banks are obliged to stress-test hypothetical adverse movements in asset prices, interest rates and exchange rates to ensure that they have a sufficient capital cushion. But stress-testing is only as robust as the assumptions made. The FSA move came as UK house prices grew at their fastest for four years, according to new figures from RICS.

Spanish Housing Pain

News from Spain

I mentioned in an earlier post that I had seen a very large R/E bubble in Spain this Spring of 2006 when I was there for a month. I believe it could be perhaps the largest bubble in Europe.
Because of this I have kept an eye on Spain’s housing market as an early warning indicator of a broader housing decline across the rest of Europe.

A rapid decline there would be a sign of a coming pull back in Northern Europe.
This is the first news I’ve seen and probably more ominous than the report implies.

Vern

From Spain. “Property professor José Antonio Pérez tells us that prices of residential properties reach their ceiling at 300,000 euros, and from there on sales have more or less stopped. He talks of fear in the property investment market. ‘Many investors are beginning to get very nervous right now, afraid they will not be able to sell. So they end up selling at below market value,’ he says.”

Home equity extraction at record levels in 06

Forget about the flippers and first time buyers who got stuck at the top.
What about all the equity extraction?
I myself was tempted to go this route in 04, but sold instead. This resulted in my leaving the state of Hawaii, which was a hard decision. Prices were rising so fast that by the closing date I could not buy back my house back for the same price.

It is my guess that many people watched from the comfort of their increasingly valuable homes and came to a similar conclusion, but decided to go equity-out instead. How many of these equity loans are ARMs or Pay Option-ARMs?

Vern

Here is a clue:

This little diddy is from The Housing Bubble blog. http://thehousingbubbleblog.com/

“Since January 1999, according to figures compiled by Alan Greenspan and James Kennedy, a Fed staff economist, more than $2.62 trillion has been extracted by homeowners through refinancing and home equity loans.”

“But as rates have gone up, the extraction has continued. In the first six months of this year, even with interest rates rising, more than $511 billion was extracted from homes through cash-out refinancing and home equity loans, and that was more than the amount taken out for all of 2005, a record year for mortgage equity extraction.”

Fudging Numbers

There are many reasons to fudge the numbers. We may never know why or by how much. The fact remains however that the numbers are being played with and it is bound to cost us all in the end.
Vern

This from Mish’s Global Economic Trend Analysis
http://globaleconomicanalysis.blogspot.com/

"Home SalesHere is a little "numbers gem" spotted by Calculated Risk.Historically, the National Association of Realtors (NAR) used 11.43 as their Seasonal Adjustment for September. This year they used 11.73.The NAR reported 6,180,000 SAAR.Using 11.43 results in a SAAR of 6,020,000.On that basis sales fell over 16% from 2005.Here is the actual report: September Existing-Home Sales Ease, Setting State for Stable MarketFor Alternate Headlines and additional information see Calculated Risk's posts NAR: Sales Down, Prices Down and NAR Adjustment."