An Economic Pillar on the Verge of Collapse

Washington Post ^ | December 6, 2006 | Steven Pearlstein

[GodGunsGuts]

An Economic Pillar on the Verge of Collapse

By Steven Pearlstein Wednesday, December 6, 2006; D01

It's been more than a year since we've heard from those who denied there was a housing bubble.

Since then, the industry boosters, along with the "soft-landing" crowd over at the Federal Reserve, have coalesced around the idea that maybe the market got a bit frothy after all, but now the correction is almost complete, the unsold inventory's been worked off and the worst is behind us.

But just when you're feeling hopeful again, you get reports like yesterday's Wall Street Journal piece reporting that delinquency rates are suddenly soaring on all those loosey-goosey subprime mortgages. They are starting to cause real heartburn for pension funds and other investors who bought securities backed by those mortgages on the theory that they were no more risky than a Treasury bond.

"We are a bit surprised by how fast this has unraveled," Thomas Zimmerman, head of asset-backed securities research at UBS, told the Journal, removing his head from the sand. Trust me, Tom, you ain't seen nothin' yet. After the subprime loans come the 100 percent, interest-only loans, followed by the meltdown in the overbuilt multi-family housing sector....

[driftless2]

Oh my god that's it! My wife and I are selling everything and moving to parts unknown to escape the sudden and impending complete financial collapse of the American economy. Why there's no doubt about AND THERE'S NOTHING WE CAN DO TO FORESTALL IT!!! Just ask this nitw...er I mean expert. (smirk)

[Mase]

They won't look at the increased equity position

Exactly so. They lecture us endlessly about our debt levels while posting charts from that idiot (Hodges?) at the Grandfather Report all the while purposely ignoring the massive increase in our assets. You'd think they would have at least learned how to calculate net worth by now.

..they're the kind of people who'd rather own a $100 home with $1 debt, than have a $1,000,000 home with $10 debt.

LOL! Isn't that the truth. These are also the same folks who tell me from time to time that it's better to put high percentages in the bank rather than total dollars.

[driftless2]

There building like crazy around me too, but they're probably just fake developments manufactured by Rove to fool the gullible. Just facades I reckon with nothing behind them. And the paved roads are fake too. And so are the five two hundred grand plus houses built and sold on my side of the street in the last year. (yuk,yuk)

[GodGunsGuts]

The equity is on paper only until they sell. Most or all of the equity from 1998 forward (and for reasons I have detailed many times) could be wiped away over the next several years IMO.

[danmar]

We're doooooooooooooomed!

Nope, our saviors the Democrats are taking over both chambers of Congress, so our collective worries and pains are therefore solved!;)

[capitalist229]

I'd say we are in for both a steep and prolonged correction

Want to see something scary ?

Look at the 80%+ correlation between the NAHB index and the S&P500 where the S&P500 lags the NAHB by twelve months. This uncanny correlation has held for the past ten years.

Then look at the precipitous 50% drop in the NAHB that started nine months ago...

I would NOT be in the stock market until the housing situation is sorted out.

BUMP

[capitalist229]

Doomers actually know about this stuff, but what they push is the part about the real mortgage "burden" going to an all time high. They won't look at the increased equity position;

As housing prices decline, so does equity.

This will shake the confidence of the American consumer and create a political tsunami.

Look for a govt bailout by the Democrats.

BUMP

[Toddsterpatriot]

This uncanny correlation has held for the past ten years.

Look at that chart before that. Totally not correlated.

[Lancey Howard]

Are you a real estate agent?

Broker. But I am in a different area of the real estate business at this point.

[Lancey Howard]

people who think real estate always appreciates are leaving out the last part of the sentence, "...if you wait long enough."

Yep, and it's the same with the stock market. Don't you wish you had everything you had dumped down the social security toilet invested in the stock market from the beginning?

Of course, the Democrats point to short term peaks and valleys in order to scare the gullible and obscure the bigger long term picture so that they can keep their filthy paws on other people's money and wield political power. The filthy scumbags.

[ChildOfThe60s]

Americans are ignorant, stupid and dumb

A) public school/NEA =
B) ignorance =
C) economic disaster =
D) more good Democrats

[Raycpa]

With fixed rates at all-time lows, taking out an adjustable-rate loan is so stupid as to defy comprehension.

Wrong. In order to fix a rate, the borrower is paying a premium. The premium on the fixed rate over the variable rate is almost always going to work out to be higher than what the actual interest paid under the variable rate.

Why? Because those folks quoting the fixed rates are in this to make a profit. If they are going to quote a rate that locks them in for the long term, they are going to project their expectations of the rates over the long haul and then add a cushion for their risk.

A few years ago I compared the variable rates to each years fixed rate and found that except for a few years, every subsequent year the variable rate never exceeded the fixed rate at the outset.

A fixed rate is very costly insurance.

[Marysecretary]

I haven't seen much of a housing slump here, either. Houses are being bought and sold all over town. I image the huge houses people are building might cause problems eventually because they're so expensive and so expensive to HEAT up here. I can never figure out why they build such mansions (usually for two or three people). I'm happy in my one story house--easy to care for, easy to heat. But, I'm old so that might be why (smile).

[Lancey Howard]

If they are going to quote a rate that locks them in for the long term, they are going to project their expectations of the rates over the long haul and then add a cushion for their risk.

Wrong.

Yields are calculated on a prepayment assumption, presently around ten years. Plus, there is no "risk" to banks and mortgage originators. Mortgages are packaged into mortgage-backed securities and sold through Wall Street firms just like regular ten-year bonds. I know, because I sold tons of them. (That was before I owned and operated a mortgage company.)

ARMs may work out better when fixed rates are higher (8%+), and when rates are very high (12%+) they are definitely a smart choice. But with fixed rates today in the 5% - 6% range?? - - going with an ARM simply puts a whole new spin on "stupid". Sorry.

Regards,
LH

[Lancey Howard]

Thank you for your kind reply!
I'm in Bucks County, Pennsylvania and the past couple days is the first time I had to fire up the wood stove. It's going real good right now, nice and toasty, and it is the best kind of heat. My wood stove is a big old cast-iron (2200 btu) workhorse. I keep a cast-iron teapot filled with water on top to add moisture to the air.

[GodGunsGuts]

I didn't have to go far to answer you questions. First, I am of the firm belief that both the GDP and the CPI are manipulated. Our GDP is actually much lower, and the CPI is actually much higher. Rather than wasting time trying to prove this to you, I suggest you consult the following links:

http://www.financialsense.com/stormwatch/2005/0624.html

http://www.shadowstats.com/cgi-bin/sgs

Also, all your rosy charts, graphs and analysis come from the San Francisco FED. And you acknowledge that you are aware that the data you used is only good through 2004, and that in 2005 "the use of adjustable-rate mortgages increased thereby increasing total mortgage debt." So you acknowledge debt has increased after the time period you indicated. Not only that, since you are relying on the FED for your rosy picture, you should know that the St. Louis FED came to the exact opposite conclusion for the exact same time period you selected:

"The findings of the latest Survey of Consumer Finances show a modest slowing in the growth of real median household income and net worth from 2001 to 2004, compared with 1998 to 2001, but larger increases in the growth of household debt. At the same time, consistent with previous surveys, nearly half of all families did not save any portion of their income over the previous year. Over time, this is expected to become a serious liability for those families."

http://www.stlouisfed.org/publications/re/2006/c/pages/digging.html

You might also want to consult the following from the St. Louis FED re: home appreciation not being a substitute for savings:

The Bottom Line: Rising Household Asset Values Do Not Substitute for Saving

"So what about the reported increase in value of households’ assets minus their liabilities—equivalent to 42 percent of disposable income during 2005? Much of this 'wealth gain' was the result of incomplete accounting. For example, appreciated housing values actually are canceled by the unrecorded, but very real, increased cost of living in the houses. Another portion of increased household assets corresponds to changes in the prices of stocks, which go up and down much more from year to year than the underlying economic value of the capital stock they represent.8"

"The dismal conclusion of this exploration of saving and wealth concepts is that, while neither the personal saving rate nor the flow of funds measure of household net wealth is perfect, the long-run declining saving trend probably better represents the underlying economic reality. Rising household asset values by themselves provide an incomplete and misleading picture and should not encourage us to ignore the danger signal associated with low rates of saving and investment in our future prosperity."

http://www.stlouisfed.org/publications/re/2006/c/pages/digging.html

All of this during the very time period you selected. Things have only gotten worse since then. In short, your "rosy" picture is anything but rosy. The trade and budget deficits continue to grow. The CPI and the GDP are skewed to paint a rosy picture over an economy that is rapidly sliding into what will ultimately be a deep recession. Household income is declining while household debt has been increaseing for decades (and now represents almost 100% of GDP). Real Estate represents a huge percentage of household wealth and is now in serious decline. Quite simply, Americans are tapped out...and they have zero savings to fall back on. Got gold?

[Raycpa]

Yields are calculated on a prepayment assumption, presently around ten years.

Exactly, most people are trying to buy rate insurance for 30 years when they won't have the house or the mortgage that long. And if they do, the balance is greatly reduced so that the extra interest paid in the early years is not easily offset by the higher rates in the later years.

As for the lower fixed rates currently, that is not relevant. What is relevant is the spread between fixed and variable. However you cut it the long term fixed rate is the only sucker bet and is pushed by brokers because its easier to get their fees out of a fixed rate product.

What is often the case is the spread for 5 to 10 years fixed is not much different than the current variable rate but still lower than the 30 year. Fixing for the shorter period protects the bulk of the initial interest rate risk and provides the individual time to reorganize if their personal situation changes. But if the person has access to other credit vehicles or the need is short term they should avoid the fixed rate too.

[twigs]

I am busy, believe me.

I was interested in your comment because I'm in your area and we plan to sell our house this year. It seems that houses are staying on the market a long time in Bucks, at least near us. But they do sell.

[HamiltonJay]

Ah yes, the "There's no bubble" crowd, turned into the "Ok, it was, but it was little, no biggie, we'll have a soft landing" crowd.... and now finally are coming to the realization that anyone with a few neurons firing knew several years ago... its was a bubble, a huge one, and when it comes down, its going to be very very ugly.

Soft Landing is wishful thinking.

[Toddsterpatriot]

So you acknowledge debt has increased after the time period you indicated.

Yeah, if 1,000,000 new people bought a house, debt increased.

For example, appreciated housing values actually are canceled by the unrecorded, but very real, increased cost of living in the houses.

My house increased in value by $50,000 last year. What was the unrecorded, but very real, increased cost of living that cost me $50,000? Be specific.

Another portion of increased household assets corresponds to changes in the prices of stocks, which go up and down much more from year to year than the underlying economic value of the capital stock they represent.8"

Yes, assets fluctuate. Who is this idiot?

The trade and budget deficits continue to grow.

That's only two deficits. LOL!