It’s more than Fannie and Freddie
http://www.frontlinethoughts.com/

A few weeks ago when I was in Maine, I met Chris Whalen. Chris is the managing director of a service called Institutional Risk Analytics, whose primary business is analyzing the health of banks and financial institutions.

What they have done is come up with various metrics which compare how well-capitalized a bank is, how much risk it is taking, and what kind of losses (or profits) it can expect. It is a one of a kind firm, and the data gives Chris a very special perspective on the US banking system.

And what he sees is not pretty. There is a crisis brewing. He expects 100 banks to fail between now and July of 2009. Most of them will be small, but there will be a few large banks. The total assets of those banks he estimates to be $850 billion (not a typo!). Those are the assets the FDIC is going to have to cover when they take over the banks….

The FDIC has about $50 billion. These reserves have been built up over the years from deposit insurance paid by banks that are part of the program. They are going to need an estimated $20 billion just to cover the failure of Indy Mac. The FDIC will have to cover only a small percentage of the $850 billion, as some of those assets will surely be good.

But if they have to cover 10%, then the FDIC would need another $50 billion. Does that sound like a lot? Chris thinks a more conservative number for planning purposes would be 20-25% potential losses, and you hope it does not get there…..

Sober-minded analysis from the IMF suggests that the total write-offs by all banks may be $1 trillion. Dr. Nouriel Roubini is much more alarmed and puts the potential losses at closer to $2 trillion. That means that banks over time are going to have to increase their loan loss provisions, hitting both earnings and capital. And that means they will have to raise more investment capital and equity at a time when their stock prices are low.

It is a vicious spiral. Banks have less capital, so they are able to lend less to the very businesses that need the money; and without said money the businesses will be less capable of paying their current loans, which means that banks have less capital. Rinse and repeat.

CAN YOU SAY DEFLATION??? such a spiral is a perfect example of deflation triggered and driven by credit contraction. This is essentially what caused the “Great Depression” of the 30′s. A freezing of the credit system.

Charting stressed banks

It is routine to weight the risk of a major bank defaulting by looking at the relevant CDS prices.

But here’s an alternative measure increasingly used by asset managers – the spread between the yield on Tier 1 paper and “lower” Tier 2 securities.

SEE CHART:
http://ftalphaville.ft.com/blog/2008/08/22/15308/charting-stressed-banks/

I’ve seen houses listed for quite a bit less than their 2006 prices and what banks are willing to let go at auction is significantly less.

I have a fewwling from my quick look that the homes that are being sold are more expensive and that’s skewing the numbers. It’s not that the median house price hasn’t fallen, it’s that lower priced homes aren’t selling. The article seems to confirm that.

Anyone with MLS access able to do some more digging?

Funny you mention that, I was in line at Whole Foods about 2 months ago and the teenage checkout girl started gushing over something. I looked behind me in the line and saw this sturdy lady that I assumed was an athlete (she was wearing a track suit). My wife than tells me it was Queen Latiffa, guess she lives in Rumson.

“too heavy a dollop of Joisey”

Especially this time of year, most of the bennies will clear out soon though.

“believe me, it ain’t bad, but it’s LA not NYC”

Well, no. I am not sure why any place would want to be like LA, and of course there is nothing like NYC.

ha.. ha..

Wall St. is really quiet these days and NNJ is going to be a ghost town.

but hey.. your govt loves you, now pay that proprty tax you dumb sap!!

SAS

First time poster, long time reader. Good board.

On Chatham, prices have definitely come down. It may feel like there is a certain level of stickiness but for the most part prime properties (residential street, well maintained and updated, good topography, and in the current purchase price ‘sweet spot’ of 1.0m+/-) are around 2005 or so levels. Less prime properties have moved through that date to earlier levels.

It may seem to be hanging tougher mostly because of supply/demand and the fact that for many Chatham is a ‘destination’ town. There actually aren’t that many properties for sale and people move there with the intention of staying, not trading up and out. Also, as I look around some neighborhoods, if we are talking 1m+ dollar properties, I suspect most of the buyers recently would qualify on a 3.0x income to mortgage test but more importantly didn’t need to – they came to the table with a good slug of equity. I know many of the higher end sales at market peak – numbers in excess of 2.5m-3.0m – were mostly cash deals with the buyers taking the 1.0m fed max deductible mortgage just for the tax break. It will be a very long time before these owners see those numbers again but it doesn’t matter that much because they have no intention of moving soon and the home is a portion of total net worth, not the majority of it. Basically, the complexion of the town has really changed since even a decade ago and I don’t think there are that many forced sellers.

Down 30% compared to LAST year.
So, when sales when plummet, what happens to prices?

Ok, that might be too much for you. Instead of talking about the future let’s keep it simple.
These numbers aren’t adjusted for inflation. If you factor inflation from 2005 to … oh wait, you have a problem understanding inflation too.

And if I recall you said you work on the street?
Sweeping?

Anyway, there doesn’t need to be “gloom and doom” for housing to die (which it is doing). The economy can turn around tomorrow (which it won’t) and housing will still be slowly dying.
So, if you don’t already have your house on the market you better get it up now and don’t bother pricing it beyond ’05 prices if you really want to sell it.

2% is a rounding error. Where’s the gloom and doom??

Actually I’m showing 3.2% from last year, 4.5%from peak.
I’m also showing sales tranding DOWN 30%.

For any agent insane enough to sit overpriced open houses in this market (and if the house is held open, it is, indeed, overpriced), the treatment they receive from Gary should be the high point of their week.

Sure beats sitting floor time, going on caravan and sales meetings about nothing.

Do you shop at the Whole Foods? Basically, it has hollowed out, because all the hoi polloi doesn’t shop there anymore. However, it is celebrity/trustafarian central. I keep seeing these unbelievably worked out (althletic, not meat-head) people with these full arm artistic tatooes. Normally, I would just scoff that the person is just a POS base-head, but you look at the clothes and physique, and it is obvious that these people either ain’t needin’ workin’ or are pulling down serious coin in some other way. The other day I say a guy who I swore was Al Pacino, but then I saw some article in a local paper, and I’m sure it was actually Peter Chris of KISS.

Red Bank is a decently good place. I work there are it’s nice to park in the morning, and not use the car until I go home. I probably never give it enough credit, it always ends up being a notch to notch + 1/2 better than I expect. In a way it feels very much like a better executed Hoboken with less yuppie-factor, but more wealth, however, too heavy a dollop of Joisey….the hotties style is ashley dupre….believe me, it ain’t bad, but it’s LA not NYC……

Sybarite101 X Says:
August 24th, 2008 at 10:13 pm
I think Gary is simply looking at open houses to gauge the market. I don’t see what’s wrong with that. I know that Gary can, in fact, afford these places, but he’s sickened by the list prices. You guys need to relax.

Laughing all the way Says:
August 24th, 2008 at 9:51 pm
reinvestor, did you watch that SNL skit that was linked in the other weekend comments section?

http://consumerist.com/consumer/clips/snl-skit-dont-buy-stuff-you-cant-afford-252491.php

You’re right, they realtors and sellers don’t need my attitude… and obviously they don’t need my money either. But, of course, it was ok when times were great and they treated the buyers like a hunk of sh*t, right dude?

Put a shock in it. Noone was treated like shlt during the boom. The buyers were crawling all over sellers and bidding. No one forced them to do that. If you feel like you got dumped on, then take it out on the buyers who outbidded you. Don’t go around picking with realtors and sellers who had nothing to do with your decision to forego getting a damn house.

This is down the road form me. This is the Locust section of Middleton, also I believe referred to as the Navesink section.

We take the dog hiking in Hartshorn woods a lot, it has incredible ocean views from the wooded areas.

A quick trip across the bridge to Barnacle Bills for a stiff cocktail and the best burger in Monmouth Co.

The ferry commute is indeed sweet, but it’s about $700/month. A lot of folks who live down here and work on Wall St get the compnay to pay all or part of ferry pass, so it makes it competitive w/ NJT.

I actually find it hard to believe that this area, along w/ Atl Highlands, has really never grown into a NYC commuter town. I guess the worry that the ferry service will go belly up (as predicted each year) keeps people from settling.