Is this the tipping point?

From Salon (Registration/SitePass Required):

Brother, can you spare a sub-prime (insurance policy)?

Wanna raise hackles on Wall Street? Sneak up behind an investment banker and whisper the words “systemic risk.” As in: The miseries currently being experienced by subprime mortgage lenders are causing enough problems in derivatives trading markets so as to send a destabilizing jolt through the entire universe of high finance.

The response most likely will be a snort of derision, but underneath the sneer might lie a shudder, because the way Wall Street works has changed so much, so fast, over the last 10 years that no one really knows what’s going to happen when the markets get seriously tested. All anyone can do is look at each new blip in the markets and wonder: Is this the tipping point? Is this the moment we will look back upon and pinpoint as the day it all went to hell?

It has been clear for more than a year that Wall Street hedge funds have been betting on trouble coming in mortgage lending markets. Whoever made those bets is probably doing quite well right now. And maybe that’s where it will end — in a perfectly balanced market, someone will profit from someone else’s woes, and so it will go, forever more. Some optimists predict that there will be a period of consolidation in the sub-prime mortgage lending industry, the weak players will get eliminated, and the overall market will be stronger in the end.

Or perhaps economic historians will one day look back and trace this sequence of events:

The rise of credit derivatives allowed banks to sell off the risk of being caught holding the bag for bad loans. This emboldened them to move aggressively into riskier and riskier sub-prime loans. But the subsequent collapse of the housing market led all too naturally to a flock of bad credit risks coming home to roost. That, in turn, has made it harder to buy insurance, because there’s a chance that the sellers of protection might actually have to pay up, rather than just get fat off their premiums. And so the entire system started to get stressed…

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76 Responses to Is this the tipping point?

  1. James Bednar says:

    From MarketWatch:

    Major banks, brokerages unloading bad housing loans: WSJ

    Major financial firms like Merrill Lynch, J.P. Morgan Chase and HSBC Holdings, which bought large amounts of high-risk, high-return mortgage loans in 2005 and 2006, are now trying to force the firms that originated those loans to buy them back, The Wall Street Journal Online reported. The moves, which are speeding a shakeup in the industry that focuses on less-creditworthy mortgage borrowers, reflect the increasing numbers of Americans who are falling behind in their mortgage payments, the paper reported.

  2. Clotpoll says:

    It’s a funny thing…most days, the first piece of news or opinion that hits my eyes comes from this blog. Of course, most days here feature a headline story that, to some degree or another, predicts the collapse of housing, financial markets or the economy…sometimes all three.

    I also sell things. If posters here have ever been exposed to Dale Carnegie- or any type of motivational program- you’ll know that participants are assiduously advised to avoid “negative” news and people (on the theory that the attitude is contagious). People who sell things often rely on this type of program to steel themselves against the normal daily onslaught of unpleasant things that can derail an already-difficult careeer in sales. In case you may not be familiar with sales, we hear the word “no”…a lot.

    What gives here? What is the attraction? Is getting a good slug of bile every morning the equivalent of an emotional immunization? When you read stories here, does the doom and gloom energize- or depress- you? Does it have any effect at all?

  3. thatbigwindow says:

    Clot – It makes me think the entire Northern NJ area will end up like Edgewater was before the clean up

  4. syncmaster says:

    Real Estate Equity Exchange Inc. will give a consumer cash representing up to 15% of their home’s value in exchange for a cut of up to 52.5% of the capital appreciation when the property is sold. The San Francisco-based startup, which is known as “Rex,” gets 3.5% of the gains for every 1% it pays the consumer for the option.

    That is a price that many a consumer should balk at, according to Scott Hanson, managing principal of Sacramento, Calif.-based Hanson McClain Inc., which manages $1.1 billion.

    “The biggest downside is the 50% of capital gains for a measly 15% of the house,” said Mr. Hanson, who also is co-owner of Liberty Reverse Mortgage Inc. of Rancho Cordova, Calif., which originated about 2,400 reverse mortgages last year. “It doesn’t sound like a great deal to me.”

    Consumers don’t pay taxes on the cash they receive from Rex, and they have up to 50 years to sell their homes, he added.

    “This is the first time homeowners have had access to an enormous pool of capital without any debt to service,” added Mr. Cusack, the former head of separate accounts for Charles Schwab & Co. Inc. of San Francisco.

    At the time the house is sold, there is a service charge of approximately $15,000.

    American International Group Inc. of New York became the largest shareholder of Rex in December.

    The company has agreed to provide the capital to homeowners through a hedge fund it set up, Odin Investment Management LLC of San Francisco. AIG also is the largest participant in that fund.

    The company sees enough demand from institutional investors to put up the capital necessary to purchase these options through Rex.

    “I now have virtually unlimited capability for originations,” Mr. Cusack said.

    The institutional investors get access to equity in the housing market. The closest alternative — real estate investment trusts — may own apartment buildings but not houses.

    Institutions’ demand for houses stems from the asset’s proven strength and its value as a hedge to the stock market.

    via Business Week’s Hot Property blog –

  5. syncmaster says:


    I have a comment in moderation. It is dated February 15th, 2007 at 8:15 am.

  6. chicagofinance says:

    ” What gives here? What is the attraction? Is getting a good slug of bile every morning the equivalent of an emotional immunization? When you read stories here, does the doom and gloom energize- or depress- you? Does it have any effect at all? ”

    I budget for one big laugh a day out of this community. If I don’t get it, I will keep a ledger of wasted time just like “Mr. Hand” did with Spicoli in Fast Times. At the end of the year I will go to grim and collect my wasted time.

  7. Pat says:

    One man’s junk is another man’s treasure.
    It’s not the negative news, it’s the triggering of additional action options. Just like it’s not the “No,” it’s your reaction to it.

    As you know from the happy talk seminars, you remember only a fraction of what you hear or read…you remember 95% of what you do. So discussing is a lot different than acting. What you see as negativity has a positive counterbalance in enabling more of a range of actions to take.

    A very negative discussion here, with dire predictions, may take a reader out to look at some possible creative strategies that were otherwise never considered.

    Necessity is the mother of invention.

    People create under stress and duress.

  8. BC Bob says:

    “What gives here? What is the attraction?”


    We all have choices. There are bulls and bears. You argument is based on selling, you should be posiitive. My point of view is based on buying. If I don’t watch my *ss who will?? My realtor?? My lender?? My peers??

    I guess we can log on to the NAR site and listen to their pomposity. We can also listen to realtor’s spin [of course, not those here] that real estate never goes down, there is no bubble, it’s only a correction, it’s stabilizing, we are dancing at the bottom, etc.. We can also listen to the bobblehead slop on CNBC. Hell, just sit on our *ss and watch Oprah.

    That being said, the stories here do not impact me at all. Hell, we have been talking about this[subprime,affordability,flippers,migration,etc..]for over a year. Nothing different except now it’s mainstream, not a big deal. I’m actually suprised it took this long to hit the media. This market is unraveling like many here have said it would. We just saw it before others. Again,not a big deal, no effect whatsover.

    Other ramifications??? For me, only two things give here.

    1)The pocketbook
    2)How this spills into other markets.

    By the way, I could logon to the Boston Globe and read how we got juiced by Dook. Is that a better choice???

  9. curiousd says:

    it makes me think, even if i agree with most of the articles, that a world of permabears would be a very sad, synical place to live. its like the repulicans… if you read it and hear it often enough, then you just assume it’s true. NJ expensive and RE market screwed up? Sure. NJ the next detroit? Not so much. i think we, here, are frustrated.

    From ‘Body Language’ (great book) “One of our deepest urges is the desire to own land. This compulsion comes from the fact that it gives us the space freedom we need.” So, in a sense, we are all in theropy about the economic invasion on our personal space… it hurts, but misery loves blogging.

  10. James Bednar says:


    I think the drive and motivation behind disconfirmation bias are as strong as those behind confirmation bias. Add in a dash of emotion, and what you get is an incredible amount of polarization. It’s of no coincidence that I tend to post articles that I know are going to spur discussion (as well as argument), as that is my goal. Anyone can go out Bloomberg, Marketwatch, or the local papers and read these stories on their own. The headline stories I post are just a starting point to me, the real value lies here in the discussion.

    As far as your comment on Dale Carnegie goes (You’ve read Zig too, I know you have), I agree. Many of those gurus preach avoidance behaviors. I think many salespeople buy into that, to the point where they’ll simply ignore anything contrary to what exists in their own internal utopia (myside bias). This ultimately manifests itself into a behavior that Upton Sinclair describes perfectly..

    It is difficult to get a man to understand something when his job depends on not understanding it.
    -Upton Sinclair (1878 – 1968)


  11. James Bednar says:

    No shortage of conflicting economic data today.

    From MarketWatch:
    U.S. initial jobless claims jump 44,000 to 357,000

    Initial jobless claims increased by 44,000 to a seasonally adjusted 357,000 in the week ending Feb. 10, the Labor Department said Thursday. It’s the highest level since late November. A “small portion,” less than a quarter, of the increase was due to inclement weather in the Midwest and Northeast, a Labor Department spokesman said. The four-week average of new claims – which smoothes out one-time events such as holidays or weather – rose by 17,500 to 326,250, the highest since December. Meanwhile, the number of people collecting unemployment benefits in the week ending Feb. 3 rose by 71,000 to 2.56 million, the most in 13 months

    U.S. Feb. Empire State index rises to 24.4 vs 9.1 in Jan

    Manufacturing activity in the New York area rebounded sharply in February, the New York Federal Reserve Bank said Thursday. The bank’s Empire State Manufacturing index rose to 24.4 in February from 9.1 in January. The increase was unexpected. Economists were expecting the index to slip to 8.7. New orders and shipments increased significantly. The employment index moved up and unfilled orders index rose out of negative territory.

  12. BC Bob says:

    Clot [2]

    John McDonald;

    “There must be a positive and negative in everything in the universe in order to complete a circuit or circle, without which there would be no activity, no motion”

  13. 2008 Buyer says:

    The first thing in the morning I look for articles on the industry. I send them to my colleagues. I try and find some good news (there really isn’t any out there) about the mortgage industry but there are none. Its gotten to the point where they call me Mr. Doom and Gloom. When I see a pretty good article on the web, I immediately visit this site and JB has already posted it.

  14. BC Bob says:

    “Its gotten to the point where they call me Mr. Doom and Gloom.”


    I was called that from late 2004 to about mid 2006. Now my friends want to know what the hell did I see that they missed.

  15. James Bednar says:

    From MarketWatch:

    January industrial output falls 0.5%

    U.S. industrial production fell 0.5% in January, the biggest drop since Hurrican Katrina struck the Gulf Coast in September 2005, the Federal Reserve reported Thursday. Capacity utilization fell sharply to 81.2% from 81.8%. The drops in output and capacity surprised economists, who were expecting production to fall 0.1% and capacity utilization to slip to 81.6%. Production is up 2.6% in the past 12 months. Manufacturing output fell 0.7% in January. Output of utilities rose 2.3% as cold weather returned after a warm start to the winter.

  16. SG says:

    Clotpoll: Good point to discuss.

    I am in Sales too (not RE but Technology), and do understand the point you are coming from.

    The most important thing people in Sales forget is, Would they buy the same thing they are selling at the same price they are trying to sell? Is it really good for their consumers to buy from them?

    If you believe that, you will not need to hear most motivational gurus. The trouble is, in RE, you are trying to sell in the market where conditions out of individuals control are making it difficult to buy or sell. You can quickly see this difference, though RE Agents need to sell, but if you ask them question, would you buy house at this point in time. The answer would be resounding NO.

    In my opinion, the way you can do business in today’s market depends on whether you are sellers agent or buyers agent. If you Sellers agent, don’t take listing for folks who believe they can get unrealistic price. For Buyers agent, don’t push all listing onto your buyer. In fact, tell your buyer, I will give you complete list, but also tell you this are not worth looking into as seller is asking unrealistic price.

    This way when either you list or take buyer to show, you are personally confident, that he/she will actually benefit by making decision. Actually, by telling people upfront the reality, you will actually spend less time in necessary listing or showings.

    My 2 Cents.

  17. James Bednar says:

    Also from MarketWatch:

    Capital flows to US reverse in December to outflow of $11B

    Monthly capital flows to the United States reversed in December to the first outflow in a year-and-a-half, the Treasury Department reported Thursday. Monthly capital flows reversed to an outflow of $11 billion in December compared to an inflow of $70.5 billion in November. In December, private investors sold $42.5 billion of securities. This was offset by $31.5 billion in purchases by official institutions. Net long-term capital inflows, meanwhile, fell to $15.6 billion in December from $84.9 billion in November. This is the lowest inflow since January 2002.

  18. gary says:

    To paraphrase Vito Corleone, “I have selfish reasons” for reading this blog so ardently.

  19. BC Bob says:

    In addition to # 17,

    “The dollar declined against the yen and fell to the lowest versus the euro in more than a month after a report showed the U.S. attracted the least investment in its long-term assets during December in almost five years.”

  20. BC Bob says:

    Let’s not be bearish/negative regarding Reese’s Peanut Butter Cups.

    “Hershey Co., the largest U.S. candy maker, will close more than a third of its production lines and eliminate 12 percent of its workforce after sales fell for the first time in 3 1/2 years.”

  21. skep-tic says:


    this sounds like a tax nightmare waiting to happen

  22. BC Bob says:

    Very positive news. However, is it just a by-product of an extremely negative situation [dollar]?? Avoid the negative news and turn it into a positive.

    “Caterpillar Inc., the world’s largest maker of earthmoving equipment, plans to repurchase $7.5 billion of its stock over the next five years.”

  23. skep-tic says:

    as much of a negative slant as there is on this site, it has been far closer to reality during the past 2 yrs than anything you could have read in the MSM. that, for me, is the attraction

  24. RentL0rd says:

    I apply my old physics law:

    Newton’s third law:
    For every action there is an opposite (and equal) reaction.

    The main stream media is the action, this blog is a reaction, albeit not equal.. yet.

  25. SG says:

    skep-tic: I completely agree with your point on MSM.

    I have worked in past with most major MSM companies, be it Newspapers, Magazines, TV, Radio etc… Fortunately/Unfortunately, I have appeared on most of them.

    People forget the MSM is a business. There is significant pressure on them to do stories which will bring larger viewership/readership etc… Doing stories opposite to main stream view is considered very dangerous. You really have to read between the lines to see what is fluff and what is reality.

    In that respect, I have to give it to FOX News. Though personally I don’t like their reporting, but they took a chance on small segement population view and made a business model around it. It is like, discount airlines, when they started, nobody believed they will be successful, but today everyone believes them. I think BLOGs are in that segment, and now every MSM has BLOG site. Though they defeat the purpose and same Journalist who write MSM articles, are also managing BLOGS.

  26. James Bednar says:

    This deserves at least a “Holy Cow!”

    Gates Foundation unloads home builder shares

    Microsoft Corp. (NasdaqGS:MSFT – News) Chairman Bill Gates has shed most of his investments in home builders, as revealed in a quarterly filing of the holdings of his charitable foundation.

    The Bill & Melinda Gates Foundation Trust showed a strong interest in the industry, according to a filing in November. It took stakes in at least seven home builders, only to quickly divest in those companies, according to a filing on Wednesday that disclosed the foundation’s holdings as of December 31.

  27. BC Bob says:

    “It is like, discount airlines, when they started, nobody believed they will be successful, but today everyone believes them”


    In conjunction with this, the same was said about Toyota. The critics stated that the gas crisis [1980] will just be temporary and the American driver will be back to their bad *ss Cadillac’s in no time at all. After all, American’s will not be caught dead driving a Japanese box.

  28. curiousd says:

    Dear god man, the world really is ending…

    Candy maker Hershey to cut 1,500 jobs

  29. MJ says:

    The 30-year bond is typically 1.5 percentage points higher than the fed funds rate. The 30-year bond yield was 4.89% Monday — 0.36 below the fed funds rate.

    What would happen if the 30-year bond yield rose to 6.5%? “There would be a lot of wailing and gnashing of teeth,” Koesterich says. “It would be biblical.”

    In this article they missed the largest 88B increase in UK Treasury holdings.

  30. Clotpoll says:

    For the record, I assiduously avoid Carnegie, Tony Robbins, and the self-help/motivational world in general. All the “systems” in the world won’t help you if you don’t have a deeply-internalized (and possibly, pathological) drive to do what you do. Also, many sales systems share the troubling characteristic of viewing human beings as management problems and time as something that can also be managed.

    Great comments also on the MSM. Their pronouncements on “our little thing” are 10x more negative and provocative than what’s posted here. Come to think of it, getting a better read on what’s really going on is what drove me here in the first place. MSM’s job is to scare the public, and NAR’s is to narcoticize the public. What comes up here- despite the bearish editorial bent- is a much more accurate gauge of local RE than anything else going.

    Perhaps the real stress of relying on MSM or trade organizations to get your news lies in the fact that neither have any real motivation to present news as news. To them, news is a lever to achieve another desired effect. To any self-aware consumer of news, knowing that is a stressful thing. The funny thing is: coming here, getting bombarded by permabears, deluged daily by gruesome tales of woe and reading the latest dispatches from the Depeche Mode fanclub…is oddly soothing.

  31. James Bednar says:

    From Motley Fool (Personally, I think Dan was a little late with this piece):

    House Flipping Is In

    There’s a rule of thumb in the investing world that once an economic trend makes it to the cover of a popular magazine, it has already topped out. So when I discovered not one but two different television programs extolling the virtues of flipping houses, it made me wonder whether that’s a big contrary indicator, suggesting that we’re in for a longer decline in housing prices than the experts seem to think. Watching these shows, you get the distinct impression that there’s plenty of free money to be made just by going out and buying a house, taking a week or two to hire contractors to do some repairs and renovations, and then finding a convenient buyer to pay you a much higher price.

    In reality, however, many people who flip houses haven’t had to do any significant work on their properties at all. In a rising real estate market, just holding property for a few months is sometimes enough to make a nice profit, especially with historically low interest rates and relatively easy credit. As interest rates rise and real estate prices stagnate, however, it’ll be a lot more challenging for people flipping houses to make money.

  32. bergenbubbleburst says:

    #14 BC Bob; I used to accosted on the weekends when getting my morning coffee, now they avoid me.

    It used to be the topic of every conversation, now no body wnats to talka bout it.

    Some people used to feel sorry for me, now I get to feel sorry for them.

    Some used to say it would never happen, now some of them are jumoing on the band wagon saying well everybody knew that it could not go on.

  33. curiousd says:

    I doubt we’ll get answers out of the topic, but it sure makes for fun quotes…

    “If pessimism is despair, optimism is cowardice and stupidity. Is there any need to choose between them?” -Francis P. Yockey

  34. 2008 Buyer says:

    Pre-packaged Bankruptcies…further proof there’s ways of making money in a bad situation

    ResMae-Style Bankruptcies Are Likely to Multiply
    From: American Banker
    Thursday, February 15, 2007

    In agreeing to buy the assets of ResMae Mortgage Corp. — but only as part of a prepackaged bankruptcy — Credit Suisse Group would be picking up origination capability without the liability for repurchasing bad loans.

    ResMae’s other creditors could balk at the plan, observers say, but the arrangement is the only viable exit strategy for many subprime lenders, and more prepackaged bankruptcies could follow.

    The Brea, Calif., lender filed for protection from creditors under Chapter 11 of the federal Bankruptcy Code on Tuesday. Steven Glouberman, ResMae’s general counsel, wrote in the filing that during negotiations, “Credit Suisse required that ResMae address any balance-sheet impact of contingent claims and debt obligations.” This is why “ultimately it was decided that maintaining a maximum value for ResMae’s assets required that the sale be conducted … under Chapter 11.” Credit Suisse would not discuss the deal; ResMae did not return calls.

    Richard Gottlieb, the head of the consumer financial services practice at the Detroit law firm Dykema Gossett PLLC, said that ResMae’s bankruptcy filing is just “the tip of the iceberg,” because so many subprime lenders “are on the precipice” of collapse.

    “All of these transactions are done in the same fashion, because no one is going to buy the liabilities,” he said. “ResMae chose the only way out, which was bankruptcy, and we’re probably going to see a lot more of these.”

  35. skep-tic says:

    “MSM. Their pronouncements on “our little thing” are 10x more negative and provocative than what’s posted here. ”

    no one here is caught by surprise that the sh*t is finally hitting the fan. contrast that with most MSMs who were proclaiming RE to be the greatest investment of all time precisely as it was peaking. they are late to the party, embarrassed, and have to make up for lost time.

  36. SG says:

    Dark side of the housing boom: Shoddy construction
    Wednesday February 14, 9:12 am ET
    By Sarah Max, Money Magazine contributing writer

    On our discussion on MSM. This story appears today on Yahoo Finance front page. The issue of shoddy construction is not just in Boom time. It existed before as well. The point is MSM sees, there are lot of hits on Housing related articles. They want to ride this boom in clicks too.

  37. Clotpoll says:

    Grim (26)-

    That just makes me want to get longer HBs as soon as possible!

    When Buffett starts dumping his 16,000,000 shares of US Gypsum (NYSE: USG; the guys who supply all the drywall to all the HBs), I’ll get worried.

    Mr. Gates is the scion of a rusted-out 20th Century company whose best days are long behind it. Its business model is no different than the “planned obsolescence” of GM and other manufacturers of the 60s and 70s, who believed that a captive and permanently-loyal consumer would keep replacing stuff that breaks with newer versions of stuff that breaks.

  38. James Bednar says:

    Keep in mind, Buffett did give some $30 billion to the foundation.


  39. James Bednar says:

    I’m not saying Buffett was in any way behind the decision to liquidate homebuilder shares (I’m not saying he didn’t either), but that Warren seems to have a different view of the Gates philosophy than you do.


  40. lowball says:

    Here’s Sen.’Inspector Clouseau’ Sarbanes, master of deduction in housing bubble & predatory lending CSI …uh-oh… 5yrs too late (& couple Trill. short)

    Mortgage clerks united, da’ cracKdown iz comin’!

  41. AntiTrump says:

    More news on Housing:

    Mortgage Hot Potatoes: Banks Try to Return High-Risk Loans To the Originators
    From todays Wall Street Journal:

    “As more Americans fall behind on mortgage payments, Merrill Lynch & Co., J.P. Morgan Chase & Co., HSBC Holdings PLC and others are trying to force mortgage originators to buy back the same high-risk, high-return loans that the big banks eagerly bought in 2005 and 2006.

    Merrill demanded in December that ResMae Mortgage Corp. — which in 2006 sold it $3.5 billion in subprime mortgage loans, or loans to borrowers with poor credit records — buy back $308 million of loans whose borrowers had defaulted. In a filing this week for bankruptcy law protection, ResMae said those demands “crippled” its operations. The Brea, Calif., company said that repurchase requests were “severe and unexpected.””

  42. AntiTrump says:

    More from the same wsj article:

    “Following early payment defaults, we exercised our contractual rights to return loans to ResMae and protect our financial interests,” a Merrill spokesman said. HSBC declined to comment. J.P. Morgan declined to comment.

    Yesterday Accredited Home Lenders Holding Co., a subprime mortgage lender based in San Diego, reported a loss of $37.8 million for the fourth quarter, partly due to heavy repurchases of dud loans from large loan buyers, compared with a year-earlier net income of $43.3 million.

    Accredited uses credit lines from eight financial institutions to fund its mortgage lending. Those lines of credit contain covenants that could allow the lenders to demand prepayment of the outstanding balance if Accredited has two consecutive quarters of losses, the company said.

    Accredited already has received waivers in some cases on those covenants and will need to seek more waivers from the lenders if the company remains in the red during the current quarter, it said.

  43. AntiTrump says:

    Anther article from WSJ:

    Bernanke Calms Worries Over Rates
    “That said, FOMC members actually expect slower growth this year, at 2.5% to 3% in the 12 months through the fourth quarter, than they did last July, when their forecast was for 3% to 3.25%. Mr. Bernanke attributed this to a larger-than-expected decline in homebuilding. He suggested that homebuilding could remain a drag on growth through the end of 2008, telling one senator that it could take that long to bring the inventory of unsold homes down to normal levels.”

  44. AntiTrump says:

    But then again, What the hell does Bernanke know. I would look to David Lereah for housing advice. He is the cheif “PomPomponomist”for NAR.

  45. Clotpoll says:

    Grim (38-39)-

    Buffett gave Gates 30B to give away. The question is, would Buffett give Gates 30B to play the market?

    I think not.

  46. skep-tic says:

    given that the long awaited credit crunch is starting to take shape, might it not be worth looking into buying in a couple of months? without the loose lending, seems there won’t be much competition in the entry level market

  47. SG says:

    We all know lot of other Blog sites. One more to add,

    He has link to Goldman video that Grim posted earlier. In addition the blog has some observations from participants at the event.

    In addition to an excellent opening macroeconomic overview by Jan Hatzius, Chief US Economist of Goldman Sachs, the conference included lengthy presentations on sub-prime and non-traditional mortgages, credit quality, and homebuilding.

    The following chart (click for larger version) taken from Hatzius’ opening overview shows the effect of the housing decline on GDP. Note how declines to housing related employment, mortgage equity withdrawal, housing wealth, and residential investment all weighed on GDP shaving off over 1.5% in Q3 and Q4 of 2006 and are projected to subtract 1% for the remainder of 2007.

    Homebuilders were particularly well represented with Ian McCarthy, CEO of Beazer Homes, Ara K. Hovnanian, CEO of Hovnanian Enterprises Inc., Richard Dugas, CEO of Pulte Homes and Joel Rassman, CFO of Toll Brothers all participating in a panel discussion entitled “Trends in Homebuilding”.

    Kicking off the panel, moderator Chris Hussey asked the audience members to vote on a series of three questions with the results being made immediately available after the voting.

    The following questions-results were given:

    What do you think will happen to home prices in 2007? 52% predict prices will go down 0 – 10%.
    What do you think will happen to new home orders in 2007? 78% predict orders will go down.
    What strategy do you think home builders should pursue in 2007? Majority indicated that homebuilders should clear inventory.
    Richard Dugas and Ara Hovnanian started out the discussion by reiterating a similar point made earlier in the month by Robert Toll by making note of some “encouraging” signs of cancellations abating and increased activity.

    Ian McCarthy quickly followed up with an interesting quip about allowing the audience members to vote to kick any particular home builder off the panel then indicating that he’s yet to see any encouraging signs with still overwhelmingly high inventory.

    Quickly, Hovnanian interjected that he did not want his prior statement to indicate too much optimism and that he would be hopeful for even a very slow recovery.

    When asked about Robert Toll’s interesting “A” rating of the California market in his most recent conference call, Joel Rassman replied “If you looked at the last four weeks, California has shown a remarkable turn around and I think that’s what Bob was indicating”

    To that Ian McCarthy suggested that although he did not want to criticize Bob Toll, extrapolating the results of a four weeks for a given market would be misleading and that more data is required to make any real claim of a market turn around.

    When asked about what product trends that had been seen during 2006 Hovnanian replied “I can’t claim to see a trend by market segment..” adding “its really supply and demand at the local level”.

    McCarthy added “I think affordability is the biggest issue right now… affordability at every price point.”

    Rassman added “I think it’s different in every market… I’m not sure I could say that there is a product type that’s immune from the slowdown.”

    When asked about what cold be done to reduce cancellation rates Rassman suggested that deposits were a key method but that given the circumstances in the housing market “we’ve seen people walk from $60K – $70K in deposits.”

    Hovnanian suggested cancellations for buyers that were less than 30 days into the buying process hasn’t changed measurably but buyers that were in backlog for 6 to 9 months during 2006 dropped out in greater numbers as they witnessed price drops that made their loss of deposit more acceptable.

    When asked whether the discounting has reached the point at which consumers will be enticed to buy McCarthy quipped “Pass the crystal ball and let me rub it… We are still selling homes. It’s very early in the selling season to say that we have reached the bottom in discounting… I’m not sure we are there today.”

    Rassman added “As soon as they believe prices are no longer falling, consumers will come back.”

  48. Duckweed says:

    On MSM, NAR, and biased opinion.

    It always curious to me why NAR cares to maintain a high housing price or claim things have “stablized.”

    Agents make real money on transaction. My assumption is that volume responds positively to changes in price–volume goes up when the price is moving, compounded by the momentum of greed or fear. When price stays high or low, the volume goes down. (Sorta like magnetic field and current). In my mind, the NAR probably gets to keep more agents fed if sellers starts panicking and rushes to get out their empty investment house.

    Granted, 6% commission on a bigger price tag is better money. But in the big scheme of things, if every house takes a 10% price reduction, the income from increased volume would counter-balance the 10% reduction in commission. Furthermore, the faster the decline, the sooner the run up to the next cycle begins.

    So why does NAR want to pursue a course of “stablization” rhetorics that seems to encourage a stand-off between buyer and seller? It seems to me that it is doing itself a disservice. If I were the NAR or a realtor, I’d want as much volitility as possible and make money off the volume.

    I guess that’s why I am generally confused.(Please correct if my understanding of the relationship between volume and price is wrong).

  49. RentL0rd says:

    I have heard similar stories on china recently. Set up a small shop with some name having buzz words like “biotech” and American investors rush-in to cash in on the next Baidu.

    I think these Chinese shops – some fake, some on a thin line bordering fraud, will be the next Nigerian scams of the decade.

  50. Al says:

    skep-tic Says:
    February 15th, 2007 at 11:06 am
    given that the long awaited credit crunch is starting to take shape, might it not be worth looking into buying in a couple of months? without the loose lending, seems there won’t be much competition in the entry level market

    It is still very easy to get piggy-bank loans, 100% financing, arms and so on… As far as not much competition – there will be none – it towns I looked at starter homes are sitiing since 2006 spring…

    Surprisingly, nobody jumping on those little run down 270-300+K cape cods with 5-6K taxes with up-coming property values re-assesment….
    It must be cold weather.

    Come on, some of them are whole 10k off original asking from last year….

    What are you people Want them for free???

    You can easilly rent any of them off for wopping 1600$/month (thats of course after you paint them, and buy all new appliances) – don’t you need extra 1600$/month???

    And the tax Breaks!!!

    And the pride of ownership!!!

    Ohh yea and they all are coming back as brand new listings with 0 DOM!!!

    Plus right now is a great time to buy, since in May you wil be competing with thousands of immigrants including illegal ones who are not afraid of risks (they do not even neeed to declare bankruptsy remember – they are illegal) wanting part of american dream!!!

    So buy now or stay in you pathetic rental forever!!!

    Rates are going lower, prices will skyrocket, economy is strong!!!

  51. James Bednar says:

    It always curious to me why NAR cares to maintain a high housing price or claim things have “stablized.”

    Because it’s tough to sell to a scared buyer.

    The transaction goes much smoother when the buyer is a trained sheep who wanders into an office chanting “It’s a great time to baaa-y, it’s a great time to baaa-y).


  52. skep-tic says:

    here’s what I’m saying

    1. a lot of FBs are going to see their mortgage payments go way up this spring/summer

    2. a lot fewer buyers out there do to uncertainty / increasingly restricted credit

    3. as one of the few available buyers, you may present the only chance for some sellers to avoid foreclosure = massive leverage

  53. skep-tic says:

    “do” = due

  54. James Bednar says:

    It always curious to me why NAR cares to maintain a high housing price or claim things have “stablized.”

    To a lesser extent, I think the NAR is attempting to recreate the sense of urgency that sent buyers into a frenzy over the past few years. It’s amazing the decisions that people will make when they are fearful of being left behind or losing out. Buy now or you’ll never be able to! You’ll be priced out forever!

    Winner’s curse at it’s finest.


  55. BC Bob says:

    “It’s amazing the decisions that people will make when they are fearful of being left behind or losing out.”

    It’s not economical, strictly emotional.Market tops/bottoms are made after the herd jumps in/out. The market will suck in the majority when it tops. Likewise the market will puke out the majority when it bottoms. At the extremes it’s all about greed/fear. Either way,[top or bottom] chaos presents enormous opportunity.

  56. nwbergen says:

    WOW… Thursday is $5 word day!!

    Lets see what we have so far….

    pomposity… haven’t seen that used in a sentence.
    narcoticize ….
    assiduously.. only a $2 but OK
    permabears?? can’t find that one little help here.

    Usage… One to many peanut butter cups can have a narcotizing effect on some assiduously pompous individuals. Side effects include listening to bad 80’s bands like Depeche Mode.

  57. Duckweed says:

    #52, 55

    “Because it’s tough to sell to a scared buyer.”

    As a buyer, I’m much more scared of a $400,000 cape cod than a $300,000 cape cod. And I’m much more scared of a market that has been rising for multiple years.

    “I think the NAR is attempting to recreate the sense of urgency that sent buyers into a frenzy over the past few years.”

    Fear works both ways. I just happen to think that NAR PR money is better spent creating the sense of urgency that send sellers into a frenzy, for fear that they are left behind unable to cash out.

    My only explanation, is that NAR ACTUALLY BELIEVE what they are saying, and talking in the other direction creates all kinds of cognitive dissonence or comformity bias. In my mind, a smarter NAR would be engineering a price crash to drum up business about now.

  58. ithink_ithink says:

    V.interesting about Gates, I had been wondering why the buy… wonder what convinced the sell?

    about Buffett.

    What’s Buffett buying now?
    Berkshire Hathaway is banking on banks. Meanwhile, some major banks are trying to force firms that originated bad mortgages to buy them back. Toyota is reportedly not interested in Chrysler Group’s assets.

    According to the Oracle of Omaha, U.S. Bancorp (USB, news, msgs) and Wells Fargo (WFC, news, msgs) are in, H&R Block (HRB, news, msgs) and Ameriprise Financial (AMP, news, msgs) are out.

    Warren Buffett’s Berkshire Hathaway (BRK.A, news, msgs) last year acquired a 1.3% stake in U.S. Bancorp that was worth $843.49 million as of Dec. 31. The investing guru’s Berkshire disclosed its year-end holdings in a regulatory filing with the U.S. Securities and Exchange Commission yesterday.

    Berkshire also increased its stake in Wells Fargo to 6.5%, or 218.17 million shares.

    The filing also showed that Berkshire had lowered its stake in H&R Block to 4.11 million shares by the end of 2006, down from 10.97 million shares Sept. 30. Berkshire decreased its stake in financial-services company Ameriprise to 8.27 million shares from 19.26 million shares over the same period.

    Berkshire reported having made $52.78 billion of stock investments last year.

    Stocks pulled back from earlier gains, as Federal Reserve Chairman Ben Bernanke prepared to wrap up his two-day testimony before Congress today. Yesterday, markets rallied for the second day in a row, bolstered by calming words from Bernanke. At 11:05 a.m. ET, the Dow Jones Industrial Average had added 8 points to 12,749, after closing at a new record yesterday. The Nasdaq Composite Index was up 3 points to 2,491, and the Standard & Poor’s 500 Index was flat at 1,455.

    more in link about subprime & headlines:

  59. skep-tic says:

    Frank asks Bernanke why easing rates is off table

    By Rex Nutting, MarketWatch
    Last Update: 11:51 AM ET Feb 15, 2007


    congress hard at work trying to bail out the FBs

  60. BC Bob says:

    “Industrial output falls sharply in January
    Motor vehicle output plunges 6%, but weakness is widespread”

    “The report was “dismal,” wrote Stephen Stanley, chief economist for RBS Greenwich Capital, although he judged that the January downturn was a “temporary weather-related bump in the road,” not a fundamental shift in the economy.”

    “The sector is in recession,” wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics, noting that output fell 1.7% annualized in the fourth quarter and is heading for a decline in this quarter as well.”

  61. James Bednar says:

    More conflicting data to the mix, Philly Fed comes in below estimates..

    Factory gauges point different directions

    Two forward-looking indicators of factory activity moved in different directions in early February.

    The New York Fed’s Empire State index jumped to a healthy 22.4 in February after two soft months, but the Philly Fed index fell to 0.6, pointing to a barely growing manufacturing sector in the Philadelphia region.

    In the Philly Fed report, the headline index dropped to 0.6 from 8.3. Economists expected a drop to about 5.3.

    The Philly Fed new orders index fell to negative 0.5, while the shipments index dropped by more than 22 points to 1.7. The unfilled orders index improved to negative 10.5, indicating that manufacturers are working off their backlogs. The prices-paid and prices-received indexes showed little change. The employment indexes contracted.

  62. Clotpoll says:

    Duckweed (49)-

    You are absolutely right. However, NAR continues to throw its membership under the bus by ignoring the real calling of the rank-and-file (bringing buyers and sellers together) in order to promote the investment-grade, “never goes down” quality of RE to the public.

    The public truly doesn’t need hyped-up promises of double-digit gains forever to be motivated to own a home. NAR’s overkill is not only self-serving and self-debasing…it is overkill.

  63. Clotpoll says:

    RentLord (50)-

    The future is now. Check how many dubious Chinese ventures (like Bodisen Biotech) have managed to list on legitimate US exchanges via the “reverse merger”…the practice of taking a company public by inhabiting the shell of an already-established- and failed- public company.

  64. Jamey says:

    No, the way to raise a panic on Wall Street is to tell those working in the finance and financial services field that they have to pay for their own lunches.

  65. chaoticchild says:

    From MarketWatch
    U.S. home builders are still pessimistic, but are growing much more confident in the housing market, according to a monthly survey released Thursday by the National Association of Home Builders.


    It is not over until it is over

  66. BC Bob says:

    “The public truly doesn’t need hyped-up promises of double-digit gains forever to be motivated to own a home”


    How true that is, at least in my case. I’d be happy where we were before this madness, at or near the rate of inflation.

  67. bergenbubbleburst says:

    #65 Jamey most fo the big firm stopped paying for lunches years ago.

    Ah yes the days when lucnh every day came from Harry’s.

    It was nice while it lasted.

  68. BC Bob says:


    Not to mention a martini at Harry’s.

  69. Clotpoll says:

    NW Bergen (57)-

    Watch how you slam Depeche Mode around here. Dave Gahan is like Elvis in these parts.

    I guess being a Depeche Mode fan is healthier than necr@philia (not that there’s much of a difference).

  70. lowball says:

    “I think the NAR is attempting to recreate the sense of urgency that sent buyers into a frenzy over the past few years.”

    ‘Flippers’,(patriotic hyenas who bought multiple properties in the hope of snatching young FTB fresh meat), are the NAR’s TRUE DARLINGS!
    Flippers induce panic attacks in sheeple, create tremendous sales volume, etc.

    NAR wants to party like is 2-0-0-4/5!!

  71. 2008 Buyer says:

    The “dot condo” CondoFlip Web site that encouraged investors/speculators to day-trade condominiums (and proudly declared that “Bubbles are for Bathtubs”) has been dismantled and is no longer operational, replaced by a Condo Super Center. The site now admits, in a mea culpa, that “the condo boom was driven by overly-ambitious speculators, many of whom had been successful in flipping condos in the past. As condo inventories grew and prices rose, many speculators realized that further purchasing was increasingly risky. So, buyers just stopped buying.”

  72. bergenbubbleburst says:

    #70 Harry’s was the place to be, especially the great little food treats he always served at night.

    Then the South Street Seaport opend, and many migrated over there.

    My crowd stayed with Harry’s much more comfortbale, no silliness, than when 87 happened, and the men and women were seperated form the boys and girls. Harry’s came back into favor again.

    Sadly its gone now, but hissone opened a nice place Uylees’s (pardon the spelling)

  73. Pat says:

    Clarification/Direction needed:

    At what point is a $500k POS Cape appropriately renamed a $450k POS Cape for general reference purposes?

    I wouldn’t want to refer to something as a $500k POS if indeed the property could NEVER be refinanced for $500K.

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