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Doing Your Part for the Bubble Bailouts


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2005 Nov 20, 6:40pm   41,037 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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1   HARM   2005 Nov 20, 8:17pm  

Thanks, pbass.

On a related subject, has anyone read about the Fed's plan to stop reporting on the M3 money supply on March 23, 2006? Convenient if "Helicopter Ben" is planning to crank up the electronic printing presses, eh?

I've found tons of references to it in many bubble & investor blogs, but nothing linking back the 'official' announcement itself. If you have the link, please post it here, thanks.

2   Michael Holliday   2005 Nov 20, 10:11pm  

"The Lord giveth, the Lord taketh away."

"What goes up must come down."

"There's nothing new under the sun."

Etc., etc., etc...

What a sight to behold, as this whole thing finally comes to it's inevitable
and ignominous end.

3   DinOR   2005 Nov 21, 12:23am  

I've often wondered what a bail-out in this instance would look like. Seniors are reliant on "pass-thru" income from participation in mortgage backed securities so this will take the shape that we are taking food off of their plate. I have friends that deal in loss mitigation and they've told me over the years that it is the inflexibility of the lenders that creates the problems. Joe Homeowner can only come up with $999 of his $1,000 payment so the payment is rejected as it is not in keeping with the terms of the original loan agreement. The logic being, "If we did it for you, we'd have to do it for everybody". So the homeowner begins his slide into arrears, the lender gets stiffed and seniors wind up eating dog food. What I believe we will see is mass "loan modification" or re-negotiations. Lenders can "eat" a certain amount of bad debt so the early victims will not find much sympathy. As things spiral out of control the O.C.C or other regulatory board will authorize the loan mods. I realize this is all speculation but as evidenced in the daily articles we are in unchartered territory. Anywhere there is real estate,there is leverage. The challenge for lenders will be sorting out which borrowers are truly in distress and how to put a positive spin on all of this.

4   praetorian   2005 Nov 21, 1:03am  

Rather frustrating that, though one fights against the spirit of the age, saves rather than spends and practices sane if rudimentary financial analysis, one can still be held responsible for the profligate ways of others. Strong argument for small government, in my crypto-fascist opinion.

Cheerio,
prat

5   Girgl   2005 Nov 21, 1:45am  

A "renter's tax" explicitely created for bailing out irresponsible people will instigate revolution.
30% of the population are still renters, and many of them don't have extra money that they don't need to buy food with.

The bailout tax would have to be packaged differently for these folks to swallow the toad.

Inflation is always a good one.
How about a nationwide VAT, complete with loopholes for the rich?

6   HARM   2005 Nov 21, 2:35am  

Greg, they confiscated gold in 1933. What, exactly would prevent them from doing it again, if there was any chance that most people were looking at Au as a SERIOUS competetor to dollars?

Damn --Jim, ya' beat me to it! :-)

7   Allah   2005 Nov 21, 2:40am  

I think for one thing they should seize the assets of all those who are responsible for making this whole mess to begin with......then, they should make them do community service (maybe help the poor) for the rest of their natural life and pay them just enough to get by....the proceeds could go towards the bail out.

They can start with those executives who are no longer in power, such as Raines & Howards....then they can get all the executives that are in power now.....then they can get the brokers (who made $$$'s) who pushed those suicide loans on the herds of sheep....and they can go after the builders like troll bros and make them pay a percentage of their (overpriced) profits.

After everything is cleaned up, they should never, ever, ever, ever allow anyone to use suicide to buy real estate.....and if someone is caught doing so, they should be shot on site.....and those who used them and defaulted should never be given the ability to use credit for as long as they live.

8   marinite   2005 Nov 21, 2:57am  

I’ve found tons of references to it in many bubble & investor blogs, but nothing linking back the ‘official’ announcement itself. If you have the link, please post it here, thanks.

http://www.federalreserve.gov/releases/h6/discm3.htm

9   Allah   2005 Nov 21, 2:59am  

...others are paying more
http://tinyurl.com/7koen

10   HARM   2005 Nov 21, 3:02am  

@ marinite,

Thanks for the link, buddy!

11   Allah   2005 Nov 21, 3:05am  

Bull$hitter.....Santa will have nothing but coal for you this year. :(

12   Girgl   2005 Nov 21, 3:10am  

allah Says:
…others are paying more
http://tinyurl.com/7koen

Hm. That seems to be awfully close to the 10 yr T-Bill. Are these guys buying mortgage debt from your money? Or how else can they pay 4.5% and still make money?

13   marinite   2005 Nov 21, 3:14am  

If after the dust settles I have to bail out the home debtors, if I as a fiscally responsible person get punished for not having bought an over-priced house, I'm moving to Canada for sure. Or somewhere. Where would you all recommend? New Zealand is nice.

14   Allah   2005 Nov 21, 3:25am  

Whatever happens,......those with explicit guarantees will be the first ones to be bailed out........ I for sure wouldn't bet my nest egg on MBS's.....if the FED says they won't stand behind them, I will believe them.

15   Allah   2005 Nov 21, 3:28am  

Hm. That seems to be awfully close to the 10 yr T-Bill. Are these guys buying mortgage debt from your money? Or how else can they pay 4.5% and still make money?

Who knows...I didn't research them, I was just explaining that emigrant isn't the highest paying ebank....they are all FDIC insured though.

16   ScottJ   2005 Nov 21, 3:30am  

Can someone please explain to those less educated about the American monetary system what the implications of the Fed not publishing "M3" anymore means? And can you do it in laymans terms? Before lurking on this blog, M3 only meant a fancy BMW to me. From reading the posts, It sounds it has something to do with how much money the government prints every year.

Thanks!

17   HARM   2005 Nov 21, 3:31am  

If after the dust settles I have to bail out the home debtors, if I as a fiscally responsible person get punished for not having bought an over-priced house, I’m moving to Canada for sure. Or somewhere. Where would you all recommend? New Zealand is nice.

marinite, I feel your pain, but I'm afraid those countries will offer you no refuge from the RE bubble fallout. Reason being, Canada and New Zealand have it just as bad or even WORSE than the good 'ol U.S.

I just got back from a month-long trip to New Zealand. I travelled all over both islands and (naturally) checked out the local residential RE market.
Guess what? I felt right at home --and I don't mean that in a good way. While the NZ dollar is about 30% lower vs. the U.S., home prices were roughly equivalent to most of Cali. There are parts of NZ that have seen prices more than double in the last 5 years (sound familiar?).

This thing is global, baby!

18   marinite   2005 Nov 21, 3:35am  

I know, it's global.

Maybe I can join a religion that says that paying taxes is blasphemey or whatever. Then I can not pay and say "it is against my religion; don't diss me". Let's start our own.

19   HARM   2005 Nov 21, 3:37am  

Can someone please explain to those less educated about the American monetary system what the implications of the Fed not publishing “M3″ anymore means?

en.wikipedia.org/wiki/Money_supply

Different measures of money have different technical definitions. The most common measures are named M0, M1, M2, and M3 (from narrow to broadly defined). In the United States they are as follows, as defined by the Federal Reserve:

M0: The total of all coins 'minted' and paper 'printed' cash in circulation. (i.e. currency)
M1: M0 + the amount in demand accounts (also called "checking account" or "current account")
M2: M1 + other various savings account types, money market accounts, and certificate of deposit accounts (CDs) of under $100,000.
M3: M2 + all other CDs, deposits of eurodollars and repurchase agreements. As of March 23, 2006 information regarding the M3 will no longer be published by the Board of Governors of the Federal Reserve System, in contrast to the other three reports of the United States money supply, provided in detail .

20   Briana   2005 Nov 21, 3:42am  

any body know whats going on in santa clara county, california....heart of silli valley.....home inventory is reducing here instead of increasing......with 4 kids, dammit i need a house, but not at these prices....how much longer people......?

21   HARM   2005 Nov 21, 3:43am  

Scott J,

As I understand it, M3 is the broadest measure of the U.S. money supply, and encompasses assets in the form of MBSs, government & corporate bonds, and other types of so-called "repurchase agreements". The fact that the Fed has announced it will discontinue reporting it, is taken as a sign by many that a big change is coming in M3 --one that the Fed doesn't want anyone to know about.

22   Allah   2005 Nov 21, 3:56am  

with 4 kids, dammit i need a house, but not at these prices….how much longer people……?

Can you or someone else explain to me why you need to buy a house rather than rent a house?

24   KurtS   2005 Nov 21, 4:10am  

man….this is just wrong!

From the link:

"...Maybe that's why their Children's ATM Bank is such a hit, an electronic teller machine that accepts real coin- and currency-deposits and doles out withdrawals provided Richie Rich can remember his PIN"

Damn.
Seriously, most of this crap is no good for kids; they learn too early to be a passive consumer, vs. inventing their own fun.

25   Allah   2005 Nov 21, 4:15am  

Sales always decline toward the end of the year, so this is an indication of nothing other than the seasonal nature of the market

Inventory has risen significantly in my neck of the woods....and sellers are slashing their prices only to get low-balled furthur. This doesn't seems to be seasonal nature of the market.


Very few people buy homes in late November and December. Why? It’s the holidays, and people are saving for vacations, travelling and presents.

...but in the bubble areas it's the high price and the interest rates going up.

It won’t be until next March or April until sales pick up

well, in the bubble areas you can substitute inventory for sales.

it won’t be until those taxes are paid and returns are received before most people start investing in real estate again.

Over here it won't be until the sellers accept significantly lower prices for their shitty property.

Only the most foolish of investors are unaware of and unprepared for this.

Actually that herd has already took the plunge.

26   HARM   2005 Nov 21, 4:16am  

Sales always decline toward the end of the year, so this is an indication of nothing other than the seasonal nature of the market.

Agree that sales usually decline, but (correct me if I'm wrong here) isn't it also true that for-sale inventory also typically decreases towards the holidays? Right now, inventories are up --way up-- just about everywhere.

27   Allah   2005 Nov 21, 4:26am  

I know some inventory has been pulled either due to the holidays and/or wanting to try again in the spring months.

...and don't be fooled by what you see as far as for-sale signs...some of them don't have a for-sale sign, like my Mother's neighbor. I'm not sure why, maybe because the RE agent doesn't want people to know the true inventory, maybe the owner doesn't want the sign in his/her lawn....or maybe they just plain ran out of them (very likely).

28   Allah   2005 Nov 21, 4:33am  


Seriously, most of this crap is no good for kids; they learn too early to be a passive consumer, vs. inventing their own fun.

Now you know why this generation is so irresponsible when it comes to money...this is why the bubble has grown to mammoth proportions. Every year kids get more and more expensive stuff that just teaches them the wrong things. The next generation is going to be a really screwed up breed, that's all I have to say!

29   marinite   2005 Nov 21, 4:38am  

Sales always decline toward the end of the year, so this is an indication of nothing other than the seasonal nature of the market

In my neck of the woods, sales are off and prices are down much further than you would normally expect for this time of year; and realtors acknowledge that too.

But I am waiting until the Spring to see what happens just to be sure. If sales are still bad in the Spring compared to what they "normally" are, then I am calling it as officially over.

30   Allah   2005 Nov 21, 4:50am  

“(There are) some tremendous gains and it causes first-time buyers to sit back and say ‘whoa, can we get in?’ and my typical response is that you can’t afford not to get in,” he said. “If you don’t get in now, two, three, four or five years from now you’re not going to be able to get in.”

Here is an example of who should pay. This guy should be guaranteeing the buyers that he will pay the difference if the price falls and they have to sell before making a statment like that!

31   Allah   2005 Nov 21, 4:56am  

Any of you ever been to a LI wedding or barmitzva? It’s sometimes not about the child getting married or becoming an adult in the community it’s about the Parent’s showing off.

I was married here and I paid for my own wedding approx $20k which was considered cheap...... I do know what you mean, in fact they even throw expensive sweet 16/graduation parties at the same places where they do weddings. When I got married, I had a hard time booking a place because of this...those damn little brats are already giving me problems, I could imagine when they grow up! :)

32   KurtS   2005 Nov 21, 5:00am  

every year kids get more and more expensive stuff that just teaches them the wrong things. The next generation is going to be a really screwed up breed, that’s all I have to say!

Someday, children reared on objects to validate their existence will be "adults" depending on things to cover a gaping hole they never learned to fill. The irony of ownership is how objects of wealth can so easily become the provider of a person's existence and identity. The same can be said of homes when people leverage themselves to the gills just to be a homeowner But, who owns whom?

33   Allah   2005 Nov 21, 5:07am  

This is another reason I don't want to drop anchor just yet.... Frankly, I don't know what social class I'm in, I guess I'll know when the smoke clears. I guess we'll know at that time who is rich and who is poor. I know I don't want to be a poor peeon living in a rich mans area. I want to live with the same social class as myself, even if it means moving to another state or country... I want my kids to grow up in a snobless world.

34   KurtS   2005 Nov 21, 5:30am  

Frankly, I don’t know what social class I’m in, I guess I’ll know when the smoke clears.

And, who should care what "social class" one belongs to? Like you said, it's far better to be around people who don't try to live the upside of their neighbors.

I hear a lot about how the "middle class" is getting pushed into poverty, but personally I think we've done a bit of it to ourselves. Everyone bought the SUVs, then came the overpriced McMansions, and runaway spending on nearly everything. Look at the savings rate. People convinced themselves they've needed all this stuff, and now they'll have to pay.

35   Allah   2005 Nov 21, 5:34am  

Reminds me so much of "The Great Depression"
http://money.cnn.com/2005/11/21/news/fortune500/gm_cuts/index.htm

36   Allah   2005 Nov 21, 5:43am  

And, who should care what “social class” one belongs to? Like you said, it’s far better to be around people who don’t try to live the upside of their neighbors.

Well...I want to know whether I'm going to be poor....or whether I know I'm going to live a halfway decent life. I know I'm not going to be among the rich....nor do I care to be.

I hear a lot about how the “middle class” is getting pushed into poverty, but personally I think we’ve done a bit of it to ourselves. Everyone bought the SUVs, then came the overpriced McMansions, and runaway spending on nearly everything. Look at the savings rate. People convinced themselves they’ve needed all this stuff, and now they’ll have to pay.

Many people have lost their jobs to outsourcing........they did not ask for this, you should know....company CEO's just got greedier and would screw over the middle class just to make more for themselves...so they could buy their snobby kids $250k toys.

I consider myself middle class, but middle class will soon be extinct.... I never bought an SUV, I never bought a McMansion or even any house for that matter..... I know I have more savings then most people. I have never lived beyond my means and I want my children to learn to be the same.... I didn't need any of this stuff....why do I have to pay?

37   KurtS   2005 Nov 21, 5:53am  

company CEO’s just got greedier and would screw over the middle class just to make more for themselves…so they could buy their snobby kids $250k toys.

Well, just to clarify...I'm not accusing you of living beyond your means.
In general, if people saved more they'd be less vulnerable to economic downturns.

Another irony I see: the US economy's dependence on domestic retail consumption. Want to bring greedy corporations to their knees? Just don't buy their crap, most of which is non-essential anyway. If most of the population has lost their disposable income, these companies are sunk.

38   Allah   2005 Nov 21, 5:59am  

August 12, 1931
“Henry Ford has shut down his Detroit automobile factories almost completely. At least 75,000 men have been thrown out of work.”
– The Nation.

39   ScottJ   2005 Nov 21, 6:09am  

HARM and others,

Thanks for the responses to M3. I just read the wikipedia article, although its a bit tricky for an untrained person someone like myself.

As far as the Fed doing something with the monetary supply that they don't want us to know about, it sounds like the government knows that inflation will occur, but they don't want people to realize it until they find that a gallon of milk costs $5 at the local supermarket.

I guess they might also want to hide stagflation (no growth in GDP with lots of inflation?). Are they afraid that people will say "man you guys $uck, I'm not going to re-elect you."? Aren't people like AG or Ben Bernanke in their posts until they die/retire?

Also, if the housing market crashes and takes the rest of the US economy with it, how can inflation occur?

I should have taken my economics classes seriously in college. The more I lurk on these blogs, the more I realize I don't know JACK! The last line in the wikipedia article gives me some sort of strange relief about my lack of understanding.

"Money supply remains one of the most controversial aspects of economics itself." If its controversial, it can't be simple...

40   Allah   2005 Nov 21, 6:32am  

re. seasonal slowdown or not, I saw Leslie Appleton-Young, the chief economist for the Cal. Assoc. of Realtors, speak recently, and she herself said that what is going on in CA right now is much more than just a seasonal slowdown. Typically inventory is low at this time of year (along with slow sales), but this fall inventory is WAY up!

It's nice to know that there are still some honest people in the RE industry.

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