“[H]e chose to cheat the people of Newark and the citizens of New Jersey.”

Posted on July 13, 2007 by grim

From the New York Times:

Ex-Mayor of Newark Indicted in Corruption Case

Sharpe James, the former mayor who towered over politics in this city for two decades, was indicted today on 33 counts of fraud and depriving government of honest services, chiefly relating to $58,000 in personal expenses he racked up on city credit cards.

He also faces charges of conspiring with a companion to defraud the city by selling her nine parcels of city land for $46,000 that she turned around and resold for $665,000.

Mr. James, a flamboyant, charismatic leader who built a patronage army largely through cult of personality, is accused of illegally charging Jacuzzi dips, alcohol, movies, meals and weekend getaways for tennis tournaments with friends on his city cards in what the United States attorney for New Jersey, Christopher J. Christie Jr., called “stark examples of the greed and arrogance of unchecked power.”

The 150 fraudulent charges listed in the 89-page indictment include $1,440 for a trip to a beachfront resort in the Dominican Republic, where Mr. James claimed he wanted to assess the tropical gardens to see if they could be replicated at the Newark train station; $3,500 for a trip to Martha’s Vineyard (plus $207 for an advance reservation for his Rolls Royce); $2,976 for a storage unit; $167.22 at nightclubs in Rio de Janeiro’s red-light district; and $297 to inspect a yacht he wanted to buy in Graysonville, Md.

He also paid $39 for exceeding the credit limit on the city card.

“When Sharpe James had a choice between enriching himself or helping the people of Newark, he chose self-enrichment,” Mr. Christie said in a statement as Mr. James appeared in federal court here to plead not guilty. “When he had the choice between impartially serving the citizens of Newark and the state of New Jersey or rewarding companions, supporters and himself with taxpayer money, he chose to cheat the people of Newark and the citizens of New Jersey.”

Posted in Politics | 4 Comments

“You’re only sunk if they go KerPlunk!”

Posted on July 13, 2007 by grim

From Bloomberg:

CDOs Lose Their Marbles; Credit Cries `KerPlunk!’

Investors asking how many beans make four in the market for collateralized-debt obligations are realizing that the likely answer is three if you’re lucky, fewer if you’re not.
…
“Their models are basically unable to predict any `normal’ behavior due to this overriding fraud factor,” Engineer wrote in a research report this week. “The right thing for the rating agencies to do for the 2006 vintage would be to withdraw all ratings.”
…
Mark Zandi, chief economist at Moody’s Economy.com, told CNNMoney.com that a record $50 billion of adjustable-rate mortgages will reset at higher levels in October. A borrower who got a $200,000 mortgage in 2005 at 4 percent has been paying $955 a month; that will soar to $1,331 after the reset.

No wonder RealtyTrac is predicting that more than 1 million borrowers will join the 761,343 already facing foreclosure proceedings this year.

Contagion from the allegedly self-contained implosion in the U.S. subprime mortgage market is drifting through the securities industry like mustard gas. It helped push the dollar to a record low yesterday, triggered the biggest deterioration in European corporate-bond risk in at least three years, and drove an index that tracks leveraged-buyout loans to a nine-month low.
…
Global credit markets face what fund manager Gary Jenkins calls “a KerPlunk moment,” referring to the children’s game in which players withdraw skewers while trying not to dislodge 32 marbles suspended in a plastic tube.

“Volatility to the markets is like a toy to a 5-year-old,” says Jenkins, who helps manage $650 million of bonds and derivatives at Synapse in London. “Your little darling really wants that toy. Then she leaves it in a corner and goes off to play with something else. When it isn’t around, we all want it, but when it gets here, we really don’t want it at all.”
…
As S&P and Moody’s work their way through the gazillions of CDOs they have assigned credit gradings to — last year’s $503 billion of new securities compared with $274 billion in 2005 and just $144 billion in 2004 — further rating cuts seem inevitable.

“If all the marbles fall, you lose it all!” went the pitch for KerPlunk, first sold by the Ideal Toy Co. in 1967 and later marketed by Mattel Inc. “You’re only sunk if they go KerPlunk!”

Those central bankers who have wondered how the brave new financial world of hedge funds and derivatives would cope in a crisis may soon have an answer. Let’s hope it’s not “KerPlunk.”

Posted in Economics, National Real Estate, Risky Lending | Comments Off on “You’re only sunk if they go KerPlunk!”

“Its going to get worse before it gets better.”

Posted on July 12, 2007 by grim

From the NY Post:

HEDGE HORROR
SUBPRIME MELTDOWN COULD WIPE OUT BILLION$

As home foreclosures ricochet through Main Street in rising junk mortgage meltdowns, Wall Street is facing a separate barrage that could swamp its first rich victims – hedge funds for the wealthy.

The financial industry yesterday got more unhinged following a shake-up a day earlier when two credit-rating agencies stripped away the fragile masks of shaky mortgage securities, exposing their worthless sides.

The stunning formal disclosures, which eventually could affect as much as $2 trillion in various mortgage securities, is expected to trigger widespread revaluation of the paper, which some analysts believe could wipe out 40 to 50 percent of their values.

For hedge funds, it would mean having to cover losses by giving back money to clients, even if it means selling off other good assets at a discount to raise money.

“The hedge funds are so over-leveraged, they’ll be the first to crack,” said Peter Schiff, CEO of Euro Pacific Capital.

Even Wall Street banks such as Merrill Lynch are vulnerable, with analysts saying the crisis could wipe out $132 million, 1.6 percent, of its profits this year.
…
Alarms also were sounded yesterday for the nation’s banks when the Federal Deposit Insurance Corp. chief said it is looking “very carefully” at how many banks are holding junk mortgage paper, particularly a tainted and repackaged version of the risky junk bonds, known as collateralized debt obligations (CDOs.)
…
“Its going to get worse before it gets better. How much worse, I don’t know,” Bair said.

Posted in Economics, National Real Estate, Risky Lending | 321 Comments

Subprime fears cause dollar slump

Posted on July 12, 2007 by grim

From Bloomberg:

Dollar Falls to Record Low on Concern Mortgage Losses to Spread

The dollar fell to a record low against the euro and dropped versus the yen on speculation losses on debt backed by U.S. subprime mortgages will spread.

Signs a housing slump will deepen led traders to increase bets on a Federal Reserve interest-rate cut, adding to the dollar’s decline. Deutsche Bank AG, which cut its price target on the stock of Nomura Holdings Inc., an investor in U.S. mortgages, said there’s concern earnings may be eroded by losses from subprime loans.

“The momentum is very much against the dollar,” said Ian Gunner, head of foreign-exchange research at Mellon Bank NA in London. “It’s the subprime issue that tipped euro-dollar through the old highs.
…
The dollar has dropped 1.5 percent in the past three days as Standard & Poor’s and Moody’s Investors Service said they may cut ratings on securities backed by subprime mortgages that are worth billions of dollars, which may increase losses at brokers and hedge funds that made wrong-way bets on the debt.
…
“Slowing housing markets are certainly having adverse effects on consumer spending,” Yuji Kameoka, a senior economist and currency analyst at a unit of Japan’s second-largest brokerage, said in an interview today. “This issue will linger, further buffeting the dollar.”

Posted in Economics, National Real Estate | 2 Comments

Redefining blight

Posted on July 12, 2007 by grim

From the APP:

Appellate court rules Belmar can’t take Freedman’s Bakery for redevelopment

Freedman’s Bakery is not “blighted” and cannot be forced to participate in the borough’s planned downtown redevelopment project, putting at risk a $500 million proposal to virtually remake the downtown, a state appellate court has ruled.

“Freedman’s Bakery is not a blighted area even if its design is not optimal for its
commercial purposes,” the court ruled in a 10-page unanimous decision issued by Judges Ariel Rodriguez, Donald G. Collester Jr. and Thomas N. Lyons.

The decision was distributed to attorneys Tuesday and made public today. Freedman’s had argued that the borough, “performed no analysis that the internal operation of Freedman’s Bakery was a detriment to the public health safety and welfare.” The court agreed, saying the borough had made insufficient showing that the criteria had been met.

The borough has pinned its future economic hopes on the downtown redevelopment plan, where an increasing number of vacant storefronts have become an all-too-familiar sight along Main Street. Freedman’s is located at the corner of Eighth Avenue and Main Street.

Paul Fernicola, an attorney for Bowe and Fernicola in Red Bank, represented Freedman’s in the case and said the Belmar Planning Board had made up its own definition of blighted in order to execute its redevelopment agreement with Gale Co. of Florham Park, the borough’s master developer.

“What was the public detriment? When you really focus on what they said, their argument was that the internal production facilities weren’t up to modern design standards,” Fernicola said. “Modern design standards? Because the plant isn’t producing 150 doughnuts per second? Seriously, the Borough of Belmar is going to tell the Freedman family how to do conduct their business?”
…
State Public Advocate Ronald K. Chen noted in a friend of the Paulsboro court brief that Drumthwacket, the governor’s mansion, qualifies for redevelopment under the broad interpretation of not fully productive that Paulsboro – and Long Branch – have been using. The justices agreed, saying that “blight,” according to the constitution, is “deterioration or stagnation that negatively affects surrounding areas.”

Posted in New Development, New Jersey Real Estate, Politics | 2 Comments

Encap stiffs the state

Posted on July 12, 2007 by grim

From the Record:

A defiant EnCap denies obligation to pay state $16M

EnCap Golf Holdings, which failed to meet a Tuesday deadline for committing $16 million to ensure full cleanup of the Meadowlands landfills, has told the state it does not think it is obligated to hand over the money anytime soon.

The developer’s hardball stance produced a rebuke late Wednesday from Assistant Attorney General Robert A. Romano, who wrote that the New Jersey Meadowlands Commission “does not accept and rejects the assertions.” Romano added that state officials are “considering all their options” in light of EnCap’s stance.

The written jousting suggests that compromise between the state and the developer of the $500 million golf and housing project in Rutherford and Lyndhurst may now be difficult to achieve.

Governor Corzine already had suggested earlier on Wednesday that it might be time to look for a replacement for EnCap, which for two months has been stuck in default because of questions about a revised landfill remediation budget that has skyrocketed to $185 million.

But Corzine said he did not necessarily want to pull the plug immediately on EnCap, in spite of the missed deadline.
…
The EnCap letter was sent late Tuesday night and received by state officials Wednesday. In it, EnCap attorney Eric Wisler wrote that “EnCap does not agree … as to the requirement that additional pre-completion security in the amount of $16 million be provided now.”

Romano noted that was a sharp change in direction from several EnCap letters in recent weeks, each of which promised that a letter of credit would be provided by Kentucky-based First National Southern Bank.

Wisler wrote that EnCap had “a good faith belief” in the deal at the time, but that the terms subsequently had become unworkable.

“As such, all discussions with respect to that anticipated structure have ceased,” Wisler said, while also suggesting that a $55 million working capital loan with iStar Financial has stalled.

Posted in New Development, New Jersey Real Estate, Politics | Comments Off on Encap stiffs the state

“The housing correction … is back on a downward course”

Posted on July 11, 2007 by grim

From Globe and Mail:

No end in sight for U.S. housing slump

So much for the U.S. housing slump bottoming out.

Grim profit warnings yesterday from three companies whose fortunes are closely tied to housing – Home Depot Inc., Sears Holdings Corp. and D.R. Horton Inc. – suggest the trough may not come until next year.

Home prices are still falling, the glut of unsold homes remains ominously high, mortgage rates are creeping up and the mess in the subprime market is worsening.

And that, economists predict, could keep a lid on the U.S. economy for months. The economy grew at its slowest pace in four years in the first quarter – a miserly 0.7-per-cent annual rate.

Headlining the bad news on the housing front was Home Depot, which warned that same-store sales would fall by single digits this year, sending profits tumbling as much as 18 per cent. That’s roughly twice as bad as the home improvement chain had predicted just two months ago.
…
In a conference call with analysts, Home Depot chairman and chief executive officer Frank Blake insisted the housing correction is “pretty far along.”

But, he conceded, “there is still correction that lies ahead of us.”

How much? Mr. Blake, who took over from ousted CEO Bob Nardelli earlier this year, said Home Depot is likely to face “continued headwinds” through the rest of the year and into 2008.
…
Some economists say investors should brace for the industry slump to last up to another year.

“The housing correction, which looked poised to bottom earlier this year, is back on a downward course,” acknowledged Aaron Smith of Moody’s Economy.com in West Chester, Pa.

Carol Levenson of debt analyst Gimme Credit said Home Depot’s problems are further evidence of “dismal market conditions and the inability to predict an end to them.”

Posted in Housing Bubble, National Real Estate | 244 Comments

“There’s no consensus on where the market price is.”

Posted on July 11, 2007 by grim

From Bloomberg:

Subprime Losses Drub Debt Securities as Credit Ratings Decline

On Wall Street, where the $800 billion market for mortgage securities backed by subprime loans is coming unhinged, traders are belatedly acknowledging what they see isn’t what they get.

As delinquencies on home loans to people with poor or meager credit surged to a 10-year high this year, no one buying, selling or rating the bonds collateralized by these bad debts bothered to quantify the losses. Now the bubble is bursting and there is no agreement on how much money has vanished: $52 billion, according to an estimate from Zurich-based Credit Suisse Group earlier this week that followed a $90 billion assessment from Frankfurt-based Deutsche Bank AG
…
“We do not foresee the poor performance abating,” Standard & Poor’s said yesterday as it threatened to downgrade $12 billion worth of securities backed by subprime mortgages. Losses “remain in excess of historical precedents and our initial assumptions,” S&P said.

Moody’s Investors Service went further, lowering the ratings on $5.2 billion of subprime-related debt.
…
“I track this market every single day and performance has been a disaster now for months,” said Steven Eisman, who helps manage $6.5 billion at Frontpoint Partners in New York, during a conference call hosted by S&P yesterday. “I’d like to understand why you made this move now when you could have done this months ago.”
…
A total of 11 percent of the loan collateral for all subprime mortgage bonds had payments at least 90 days late, were in foreclosure or had the underlying property seized, according to a June 1 report by Friedman, Billings, Ramsey Group Inc., a securities firm in Arlington, Virginia. In May 2005, that amount was 5.4 percent.
…
While there’s no consensus on prices, traders agree that the bonds are headed lower. Some of the securities have already declined by more than 50 cents on the dollar in the past few months, according to data compiled by Merrill Lynch & Co.

One subprime mortgage bond, Structured Asset Investment Loan trust 2006-3 M7, is valued at about 91 cents on the dollar to yield 9.5 percent, according to the securities unit of Charlotte, North Carolina-based Wachovia Corp. Merrill Lynch in New York puts the price of the same security at 67 cents to yield 18 percent.

Posted in National Real Estate, Risky Lending | 2 Comments

Racism or generalization?

Posted on July 11, 2007 by grim

From the APP:

Loan rates high for minorities despite incomes

Higher income does not protect blacks and Hispanics from receiving mortgage loans with above-market rates, a new study by a group pushing for reforms to lending laws says.

The report, released Tuesday by the Washington-based National Community Reinvestment Coalition, concludes that in 2005, blacks in 171 metropolitan areas were at least twice as likely as whites to receive expensive loans.

The study was based on an analysis of nationwide mortgage data collected by the Federal Reserve for the most recent year available.

The report, which analyzed 2.3 million high-cost loans in 380 metro areas, also concluded that while the disparity among blacks and whites existed at all income levels, it was more severe at higher income levels, rather than lower ones.

The study found that middle-class and upper-income blacks in 167 metropolitan areas were at least twice as likely as whites with similar incomes to receive loans with high rates. By comparison, there were 70 metropolitan areas where low-income blacks faced a similar likelihood of receiving above-market rates.

Low-income blacks in all areas were more likely to have pricier loans than whites with similar incomes.

The report uses the Federal Reserve’s definition of high-cost loans: mortgages whose rates are at least 3 percentage points above Treasury securities. That definition includes most subprime loans given to people with weak credit records.

The study points to the persistence of discrimination against minorities, said John Taylor, chief executive of the Washington-based group, which has been pushing hard this year for legislation to restrict what it says are widespread abusive lending practices.

The Mortgage Bankers Association criticized the report, saying it focuses on race instead of factors that lenders consider when deciding whether to make loans, such as borrowers’ debt levels and the amount of money they can provide as a down payment.

“This study ignores these other important credit variables in order to make a broad generalization and seeks to identify an overly simplistic answer to a much more complex issue,” Jay Brinkmann, the trade group’s vice president of research and economics, said in an e-mailed statement.

Posted in National Real Estate, Risky Lending | Comments Off on Racism or generalization?

Ratings Agencies “taking heat for the meltdown in the subprime-mortgage market.”

Posted on July 10, 2007 by grim

From the Wall Street Journal:

Moody’s Faces the Storm
Shares Could Come Under Fire as Ratings Are Questioned Anew
By KAREN RICHARDSON and SERENA NG
July 10, 2007; Page C1

Still, Moody’s and other credit-rating firms are again taking heat for the meltdown in the subprime-mortgage market.

“I think they did a bad job, but they’ve weathered reputational storms before,” says Glenn Tongue, managing partner at T2 Partners LLC, a hedge fund in New York that manages about $170 million. “There might be a black eye on the franchise associated with subprime-mortgage securitizations, but the business flow, and probably the liability, will be contained.”

Bearish investors are betting that Moody’s shares will tumble as the company’s lucrative business in providing ratings for structured debt products, such as collateralized debt obligations, or CDOs, could dry up due to fears spreading from rising defaults in those mortgages extended to borrowers with poor credit histories.

Together with some analysts and academics who believe the rating agencies played a key role in the subprime crisis by giving high ratings to thousands of bonds that fell quickly in value, some short sellers also are wagering that legislators, regulators and disgruntled investors will shake up the existing oligopoly structure and put an end to its fat margins and profits.

“It’s a great business model as long as you can get people to pay for it,” says James Chanos, president of Kynikos Associates, a New York hedge fund with about $3 billion in assets that specializes in short selling. Mr. Chanos, among the most vocal of Moody’s critics, is known for having bet early against Enron. “If they have no predictive power over that which they’re rating, then why bother?”
…
Many of Moody’s ratings for subprime debt represent “shoddy goods,” according to Joseph Mason, a professor of finance at Drexel University. “If the quality of the good isn’t going to be maintained by the producer, then it has to be maintained by a regulatory authority,” he adds.

In a paper co-written with Joshua Rosner, an independent research analyst, Prof. Mason argues that the ratings agencies — including Standard & Poor’s Corp. and Fitch Ratings, as well as Moody’s — are deeply involved with investment-bank underwriters in structuring pools of assets, which places them in a more active role than simply publishing opinions on the creditworthiness of the underlying assets. The ratings companies have stated that they don’t advise on the structures, but do provide guidelines on how pools of assets can be set up to achieve good ratings.
…
The argument against ratings agencies appears to be gaining traction, at least in Ohio. The state’s attorney general, Marc Dann, is investigating the role of the credit-ratings firms, including Moody’s, to determine whether they have any culpability in the subprime-mortgage breakdown.

Moody’s says it can’t be held responsible for drops in market value of certain assets. “Our ratings predict the probability of default. We do not offer views on market pricing and valuation,” says Linda Huber, chief financial officer of Moody’s. “People enter the market and trade these securities at their own risk.”

Posted in Risky Lending | 307 Comments

No reprieve for real estate

Posted on July 10, 2007 by grim

From Bloomberg:

U.S. Housing Sales to Tumble to Six-Year Low on Rates

U.S. home sales in 2007 will drop to their lowest level since the start of the five-year housing boom in 2001 as mortgage rates and foreclosures increase, according to a forecast by Freddie Mac.

Sales of new and previously owned homes probably will total 6.28 million, down 7.1 percent from last year, according to the world’s second-largest mortgage buyer. It would be the lowest since 6.20 million homes were sold in 2001. Residential lending will drop to $2.75 trillion, the lowest since 2002, the McLean, Virginia-based company said in today’s forecast.

Buyers are finding it more difficult to finance purchases because of higher mortgage rates and stricter lending standards, Freddie Mac said. The average U.S. rate for a 30-year fixed rate home loan probably will be 6.7 percent this quarter, according to the forecast. That’s the highest level so far this year, and it’s half a percentage point above the 6.2 percent average in the first three months of the year.

“Several risks — the elevated levels of homes for sale, recent increases in mortgage rates, and rising foreclosures of subprime borrowers — point to continued weakness in the months ahead,” Freddie Mac Chief Economist Frank Nothaft said in the forecast.

The number of previously owned homes on the market, the so- called inventory, reached a record 4.43 million in May, according to the National Association of Realtors. Sales fell to 5.99 million at an annualized pace, the lowest in four years, and the median price fell 2.1 percent from a year earlier, the 10th consecutive monthly decline, the real estate trade group said in a June 25 report.

“We’ll hit bottom in 2007 in terms of sales, but we’ll continue to see price declines into 2008,” said Richard DeKaser, chief economist at National City Corp. in Cleveland. “Prices tend to weaken for about six months after inventory normalizes, and we probably won’t see that begin to happen until the end of this year.”

Posted in Housing Bubble, National Real Estate | 2 Comments

“So where does their income go?”

Posted on July 10, 2007 by grim

From NJBIZ:

Living La Vida Loca in New Jersey

Wasn’t it a nice tribute that the most recent U.S. Census put New Jersey as the wealthiest state in the country, per capita income-wise?
Well, New Jerseyans sure don’t feel that honored, or wealthy. And it’s quite possible they’re really not.

I recently spoke about this contradiction with the head of Monmouth University’s polling institute, Patrick Murray, who tracks attitudes in the state about money and politics, among other subjects.

A lot of money may be coming into the average household in New Jersey—but residents say just as much money seems to be going out.

“The rising cost of living in New Jersey is a major problem for families at every income level,” says Murray. “In fact, the large number of upper-income families in the Garden State who feel they can’t make ends meet is something you just don’t see in the country as a whole.”
…
In New Jersey, it’s expected for households to have multiple streams of income, he says, with two people working—sometimes at more than one job. Most households earning more than $100,000 a year require a second income to get there. Yet 60 percent of those polled have that sinking feeling that they are not keeping up.

Skyrocketing house values make people in New Jersey feel “paper rich,” Murray says. “But you can’t chop off a piece of the house to pay a hospital bill in an emergency.”

If that emergency arises after the loss of a job, he notes, only 43 percent of New Jerseyans say they could make it for even six months on their savings, according to a recent Monmouth survey. Moreover, they would presumably have to begin selling assets like their homes, which could take a long time to move in today’s weak housing market.
…
So where does their income go? Two-thirds goes to monthly expenses like mortgage payments, food and the highest-in-the-nation real estate taxes.

The most recent Monmouth poll was very similar to another survey conducted a couple of years ago by the Star-Ledger. “It was truly amazing how few people thought eating out several times a week, expensive vacations and very fancy leased cars were a luxury,” one editor told me at the time.

Posted in Economics, New Jersey Real Estate | 7 Comments

“[S]tate legislators jumping to act.”

Posted on July 10, 2007 by grim

From Bloomberg:

States Push Ahead With Subprime-Mortgage Laws as Congress Lags

State lawmakers, faced with a record number of constituents who may lose their homes, are pressing to pass their own laws to halt mortgage-lending abuses, saying they can’t afford to rely on the U.S. Congress to act.

Legislators in some 30 states have introduced about 85 bills to protect mortgage borrowers from deceptive-lending practices, foreclosure or fraud, according to a Bloomberg analysis of data from the National Conference of State Legislatures.

“The states are going ahead and doing what they think is in the best interest of their citizens,” said Minnesota Attorney General Lori Swanson. “Hopefully, the federal government will act, too, but the states aren’t waiting.”

The initiatives are raising the stakes in a long-running battle over who should take the lead in protecting consumers. Mortgage lenders want federal law to override state statutes, saying multiple laws interfere with their efficiency. State officials counter that they often have stronger enforcement.

Lawmakers from Illinois to Maine are proposing statutes that would bar lenders from making loans they don’t believe a borrower can repay and ban penalties for prepayment of loans. Some want to offer loans to homeowners on the verge of foreclosure. In the most extreme case, they would jail those who show a pattern of engaging in mortgage fraud.
…
About 35 states already have some laws against predatory lending. The state efforts to regulate the subprime market “have been met with resistance or indifference from federal regulators and even Congress,” Smith said at a March hearing of the Senate Banking Committee.

There were “few, if any, significant consumer-protection enforcement actions” by the federal government, he said.

Mortgage industry lobbyists counter that a patchwork of state rules makes it hard to operate across state lines.

The Mortgage Bankers Association, a Washington-based trade group representing such lenders as Countrywide Financial Corp. and Wells Fargo & Co., is blanketing Capitol Hill with calls for a federal law that overrides state statutes.

“For us, that’s been the price of admission, the price of support,” said Kurt Pfotenhauer, the MBA’s lead lobbyist. “That’s what brings our industry to the table with Congress.”

Posted in National Real Estate, Risky Lending | Comments Off on “[S]tate legislators jumping to act.”

“[T]he bursting of the housing bubble will be felt for years.”

Posted on July 9, 2007 by grim

From Barrons:

Why a Housing Recovery Is Far Off

THE SPEED OF THE DROP IN HOME SALES has slowed over the past few months, leading some commentators to argue that the housing-market crisis will soon be over. But it’s far too soon to start anticipating a recovery. In fact, there are solid reasons to think that the bottom might not be reached for a year or more.

The dynamics have changed since sales began to fall in the summer of 2005. At that time, the Fed was in the middle of its program to normalize short-term interest rates, which inexorably raised the cost of adjustable-rate mortgages. The flood of cheap ARMs when the fed-funds rate was very low was a key driver of the housing boom’s latter stages. Many borrowers who were lured into the market by the availability of cheap ARMs should never have been granted loans, but there weren’t many complaints at the time.

While demand was beginning to falter, home builders were still running at full tilt. The flow of new homes onto the market didn’t slow significantly until 2006’s second quarter. Partly because of the time needed to build homes, and partly because of many builders’ hubris, this slow response to falling demand ballooned inventory.
…
The key problem now is not the level of nominal mortgage rates, which are not particularly high by the standards of the past decade. Instead, buyers are backing off because the real mortgage rate has rocketed and continues to rise. At the peak of the boom, people essentially were being paid to buy a home. The average 30-year fixed mortgage rate in 2005 was a tax-deductible 5.9%. The Office of Federal Housing Enterprise Oversight says that home prices rose 10.7% that year.

As long as buyers expected prices to keep rising, the implied real mortgage rate — home-price increase minus mortgage-interest rate — was minus 4.8%. This was an enormous incentive to borrow heavily to buy real estate. Result: a bubble.

But recently, the average 30-year mortgage rate was 6.5%, so with home prices up just 3%, real mortgage rates are now 3.5%. And with most potential buyers well aware of the huge excess supply of homes, there’s no reason to expect prices to rebound soon. A reasonable person might expect them to fall further, boosting the real mortgage rate further.
…
People don’t like to borrow to pay for a depreciating asset. Changing family or job circumstances will lead some to buy a home. But discretionary purchasers, including second-home shoppers, will be scarce for the foreseeable future.

Over the past 30 years, there’s been a very close association between our measure of real mortgage rates and the pace of home sales, adjusted for the U.S. population’s expansion.
…
People with less-than-perfect credit are finding it hard to obtain loans at acceptable rates, so they’re apparently making multiple applications in the hope of finding a friendly lender. Thus, it makes sense to emphasize readings from the pending existing sales index and the National Association of Homebuilders’ monthly survey. Both are still deteriorating.

If home sales do drop for another year or more, even at a slower pace, expect further pressure on retail sales of housing-related items, such as building materials, furniture and appliances.

At the same time, the end of the boom in home-equity extraction means that all consumption is vulnerable, even with employment and wages still rising. The early part of this year saw quite robust spending, but this should be viewed in the context of the biggest drop in gasoline prices in 20 years in 2006’s fourth quarter. Now that fuel prices have rebounded again, chain-store sales are suffering badly, and there is no reason to expect improvement.

In sum, the consequences of the bursting of the housing bubble will be felt for years.

Posted in Housing Bubble, National Real Estate | 363 Comments

“Who would have thought that building home equity in the U.S. was risky?”

Posted on July 9, 2007 by grim

From Bloomberg:

Where to Invest If Your Home Equity Evaporates: John F. Wasik

If you can’t depend on your home equity increasing during a U.S. housing downturn, where do you turn for growth?

U.S. bonds offer cold comfort. With ultra-safe six-month Treasury Bills yielding as much as 5 percent, your real return is paltry after inflation and taxes.

What about U.S. stocks? The specter of a housing recession, consumer slowdown and more ugly surprises in the subprime mortgage market weighs heavily on Wall Street now. That leaves a compelling investment typically neglected by most investors: non-U.S. stocks with high dividends.

Since the U.S. home market may get blistered further by a general economic decline, more houses coming on the market or bond yields surging, you will need to find growth elsewhere. If you haven’t considered how the global economy is propelling emerging markets, it’s time to take a hard look.
…
Massive equity deflation may be taking place. Fueled by cheap mortgage money, low lending standards and the willingness of Americans to plunge ever deeper into unsustainable debt, the housing market was due to hit the brakes.

Banks and brokers lent with abandon, including to millions who were one interest-rate increase away from foreclosure in subprime mortgages.

As Peter Schiff, an investment adviser and president of Euro Pacific Capital Inc., in Darien, Connecticut, says: “Wall Street may be able to buy some time by bailing out troubled hedge funds to keep their worthless subprime mortgage investments off the market, but no such safety nets exist for strapped consumers looking down the barrel of resetting adjustable rate mortgages.”

“Inventories will continue to balloon,” adds Schiff, “until reluctant homeowners come to their senses and slash prices.”

When supplies exceed demand in a time of rising rates, it could be years before the housing market grows again.
…
Who would have thought that building home equity in the U.S. was risky?

Yet millions believed that their domicile’s nest egg was assured and provided a firm foundation for retirement. It’s still likely that in many markets, you won’t lose much, if any, home equity, provided the current downturn isn’t prolonged or severe.

The best strategy is to ensure you are getting growth from somewhere. For that, you may have to look far from home.

Posted in Housing Bubble, National Real Estate | 3 Comments