Waiting for a Soft Landing ( From a not-so-optimistic Economist)

Please note that in almost every major business magazine -- BUSINESSWEEK, FORTUNE and even the WALL STREET JOURNAL, the consensus forecast is that the US economy will be great in 2006 ( low inflation and unemployment and steady growth rate ).

For every optimist, there will always be someone contrarian who wants to hedge his bets in order to be the first to potentially say --- I TOLD YOU SO.

Still waiting (since 2004) for the predictions that the Housing Bubble will pop to come true...

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Still waiting (since 2004) for the predictions that the Housing Bubble will pop to come true...
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It looks to be getting flat in such major bubble areas as New York City, San Francisco, San Diego, Sacramento and even Las Vegas. The interest rate hikes could be starting to take effect...

For every optimist, there will always be someone contrarian who wants to hedge his bets in order to be the first to potentially say --- I TOLD YOU SO.

You real name is Nunez Castro?

"Let London manufacture those fine fabrics of hers to her heart's content; let Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocade, Italy and Flanders their linens...so long as our capital can enjoy them; the only thing it proves is that all nations train their journeymen for Madrid, and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody."
(Prominent Spanish official - Alfonso Nunez de Castro in 1675)

In 2005 the U.S. trade deficit was $712 billion, estimates Moody's Economy.com. That's up from $624 billion in 2004. The willingness of foreigners -- including central banks in China and elsewhere -- to invest their surplus dollars in American stocks and bonds raises U.S. share prices and reduces U.S. interest rates.

For every optimist, there will always be someone contrarian who wants to hedge his bets in order to be the first to potentially say --- I TOLD YOU SO.

That's the M.O. of the pessimists. You nailed it.

Dittohead, Snow Flake, and Bushbot, so what of it?

Here is an excellent analysis of the housing bubble, and the danger posed by the coming wave of ARM adjustments to RE buyers who always thought they could sell at a profit before the early gravy portion of the mortgage expired.

Hybrid Loan Time Bomb

Mike "Mish" Shedlock

January 4, 2006

Starting in 2006 and accelerating into 2007, as much as $2.5 trillion worth of the fancy mortgages called "hybrids" are coming to the end of the free-lunch part of the deal. Economists are still trying to put numbers on this reset factor, particularly when it comes to the riskiest home loans, referred to as "sub-prime."

"We don't have enough data to know how big a problem this will be," said David Berson, chief economist at Fannie Mae, the nation's largest mortgage packager.

The ticking clock.

Sarasota's John Barron is typical of the new crop of homeowner-investors. He and his wife, Lauren Wood, are sitting on big profits at two 2004 purchases in the up-and-coming Gillespie Park neighborhood, close to downtown Sarasota.

But the couple made their big moves using ARMs that are about to be reset. If they don't act soon, their monthly bills will rise by hundreds of dollars per month. They used two separate three-year, interest-only, adjustable-rate mortgages from SunTrust Bank to buy the homes within the past two years.

"Besides the two ARMs, we also took out a home equity line on the Seventh Street house to put down a deposit on the Fifth Street house. There was no cash that we had in our pockets to put down on the Fifth Street house. All we had was our shining credit record. And the faith that the banks have in this real estate market that allows you to borrow 100 percent."

Barron and Wood have a lot of company, says Paul Kasriel, chief economist at Chicago-based Northern Trust.

With possibly $2.5 trillion in household debt that is going to be repriced higher "the household debt-service ratio is bound to climb to new highs," Kasriel wrote last month. "Asset bubbles are characterized by cheap credit. Usually what bursts a bubble is higher cost of credit, because that is what inflates the bubble, is cheap credit."

At Sarasota's Integrity Mortgage Group, ARMs have far and away taken over as the most popular. Five years ago, there was only an occasional one-year or five-year ARM. "Out of 200 loans you'd do 10 adjustables," Integrity President Jason Thurber said. "In the last year, I've probably done five fixed-rate loans, 30- or 15-year, out of 150 loans. So all the rest are some kind of hybrid."

The big picture looks similar, says SMR Research of Hackettstown, N.J., which regularly surveys lenders who make 90 percent of America's home loans.

"I can say that the first half of this year, ARM share was 55 percent nationally," said SMR's George Yacik. "For the full year 2004, it was 50 percent." Making matters worse, it is the the sub-prime lenders issuing the most adjustable-rate mortgages. With those who participate in the survey, 80 percent of their loans were ARMs compared to 55 percent in the broader market.

Fannie Mae looked at 2002-2004 loan data to determine what portion of the existing loan pool would be "adjusted," and when. Fewer than 10 percent of the conventional conforming loans will reset in 2006-2007, but nearly two-thirds of sub-prime loans will. That is because a large portion of the sub-prime loans are two-year adjustables, says Berson, the Fannie Mae chief economist.

Berson offered a typical example of what the industry calls a "2-28," an ARM in which the interest rate is fixed for the first two years and then adjusts regularly for the next 28 to whatever index the loan calls for. The average yearly cap on this loan is 2.3 percentage points per year.

Roughly speaking, a consumer's monthly bill could rise from $330 to as much as $1,425 to $1,755.

(Here is the rest of the column)

http://www.321gold.com/editorials/shedlock/shedlock010406.html

The willingness of foreigners -- including central banks in China and elsewhere -- to invest their surplus dollars in American stocks and bonds raises U.S. share prices and reduces U.S. interest rates<<<

U forgot the most important "foreigner" that invests "surplus" dollars in America...The FEDS PPT!!!...The "Helicopter Ben" investors have already been at work.....Just check M-3!!!!!....Oh wait a minute...The Fed has done away with M-3!!!...I wonder why???....and as to inflation...is the price of gas...housing...food...commodities,gold and silver included, up?????..name one fiat money system thru-out history that hasn't gone to -0-???....just a few questions to ponder....oh...1 more!!!...When the weather report says sunny and u go outside and its raining...Who do u believe?...LOL...It isnt about politics or being an optimist or pessimist...IT'S ABOUT FIAT MONEY!!!...re frame the article in that light and u have all the answers...(but dont believe me...Do your own google search to discover the bigger picture....)

Still waiting (since 2004) for the predictions that the Housing Bubble will pop to come true...

have patience!....Rome wasnt built in a day...nor destroyed either!

Interesting, as are all the quotes at your bio. By the way, I note that Jim Rogers expects 2006 to be a bad year.

It looks to be getting flat in such major bubble areas as New York City, San Francisco, San Diego, Sacramento and even Las Vegas.

I think the housing "bubble" is completely oversold as an idea. FLAT is not a bubble popping. FLAT after years of double digit appreciation is probably a useful cooling. The big POPS in real estate I've seen, like in California in the 1980s and 1990s involved prices falling from all time highs about 20%, then picking up their relentless march upward (to their current all time highs). That's not a bubble popping. A bubble popping is owning Global Crossing or MCI or Pets.com and watching massively overvalued speculative assetts with nothing real substantiate them go from mania driven highs to near zero. Essentially your money is lost. Jim Kramer occassionally will talk about some total loss stocks, where if you bought high and held you lost 93% or 96% or 99.94% of your investment.

Short of a nuke strike your not going to lose 90% of your investment in Las Vegas real estate, LA real estate or New York real estate. In fact if you continue to make your payments (hopefully on your low interst fixed rate loan) you will have many, many opportunities to sell at a tidy profit in the future. Add in all the tax breaks for real estate and it remains a no brainer for most people to buy a house, and a nice one. Or maybe two.

"I think the housing "bubble" is completely oversold as an idea. FLAT is not a bubble popping. FLAT after years of double digit appreciation is probably a useful cooling."

Very true. My husband and I bought at the "top" of the cycle in the Northern Virginia suburbs in 1990, and prices stayed flat for a few years after that. They did not decline; they picked up where they left off when things heated up again. So, maybe our $600k house won't sell for $1M in a couple of years, but it's also not going back to the $190k that we paid for it.

You are so myopic....the whole "housing bubble" issue is the very fact that housing prices outpaced income, so people bought these inflated McMansions using hybrid loans. The only reason people could afford to pay their loans was due to crazy financing schemes and a hope that they could flip their property before their rate adjusted.

IMO, this is a great time to be in cash...in the next couple of years, the foreclosures are going through the roof.

In 2005 the U.S. trade deficit was $712 billion, estimates Moody's Economy.com. That's up from $624 billion in 2004

Yet, we somehow manage to manufacture and export more now than at any other time in our history. Our absolute manufacturing output has increased more than 50% since 1992 while our standard of living continues to grow.

"It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy...What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage." -- Adam Smith

The last time we had a trade surplus was 30 years ago during a recession. Japan and Germany run annual trade surpluses. Would you rather have our economy or 15 years of Japanese deflation and recession? How about the 12% unemployment of Germany?

Folks,

IMHO, this is the elephant in the room we have to focus on ...

The ``yield curve'' of interest rates ``inverts.''

An inversion means that short-term interest rates (say, on three-month Treasury bills) exceed longer-term interest rates (say, on 10-year Treasury bonds). Usually, short-term rates are lower, because the risk of lending for lengthier periods is greater. Since 1965 interest-rate inversions have occurred seven times -- and recessions have followed in five.

The reason: an inversion signals tight money. In 2006 we already see another inversion ( see today for isntance. The 6 month treasury yield is already higher than the 30 year yield and practically equal to the 10 year yield).

The main factor that we hope can help us escape a recession would be because the overall level of rates will remain low.

The last time the yield curve inverted I think was Feb 2000. 8 months later, the official recession started.

Sorry, myopic means near sighted, but I am being far sighted. It might be that a lot of idiots are in over their heads. But still, most houses, the vast overwhelming majority of houses are owned in reasonable ways by reasonable people. These include many homes owned outright, people making modest payments on fixed rates on nice houses with good jobs, people on fixed incomes living in houses that they have small loans on, etc. The really stupid loans have only existed for a few years, and people have not bought 20% of the housing stock in that time with them.

Therefore, while a short term drop may be in the offiing the long term outlook for real estate is still very good. Even if a bunch of people have to bail on loans they can't afford that's a very temporary situation.

Do you really doubt that in 10 years the average home price will not be higher than today, even in the high-boom areas like LA and Las Vegas? I don't.