Posted on 08/02/2008 9:55:02 AM PDT by SmartInsight
California's battered homes market may be hitting bottom, suggesting a national housing recovery may follow, veteran banking analyst Charles Peabody said on Friday, citing a rebound in home sales as renters become owners.
As goes California, the most populous state, so goes the rest of the United States, according to Peabody...
Reasons to believe California home prices will firm may be found in data from the California Association of Realtors, Peabody said.
Notably, buyers are responding to sharply lower home prices. The realtors' group reports the state's June home sales rose 17.5 percent from a year earlier while its median home price plunged 37.7 percent. June also marked the third consecutive month of increases in home sales from year-earlier levels in the state.
California's backlog of homes for sale shrank to 7.7 months of supply in June from 16.8 months in January. The days a home for sale stayed on the market fell to 49.1 in June from 71.6 in January.
"At last, the carrying cost of purchasing a home equals rental rates, a condition that should lead to more stable home pricing going forward," he said.
(Excerpt) Read more at reuters.com ...
These MBS securities are investment paper created by major USA banks and investment firms, which are backed by mortgages. When you or I take out a mortgage, the debt is usually sold, unlike thirty years ago, when that mortgage usually stayed with the local bank. These sold mortgages, in good times, represent a nice source of income (your interest payments) and are (indirectly, sort of) backed by solid security (your house).
These MBS securities, mostly created in just the last two to four years, are structured so that, in good times (rising real estate) they pay nice returns (more than Treasuries). But they are structured so that if even a few percent of the mortgages they are based on fail, then they lose value dramatically. Some of these MBS are now worth zero -- total loss.
The banks have been reluctant to be honest about the value of these MBS (and similar derivatives, pyramided higher and deeper on top of the MBSs), because if they were up front about their recent loses on this paper, several major banks, as well as Fannie Mae and Freddie Mac, would be bankrupt ... massively bankrupt.
We are just starting to see a couple of visible evaluations of this paper:
I apologize for my denseness. I don’t see debt in and of itself as being a “financial crisis” when banks are healthy, business is booming. So your definition of a financial crisis, being debt in and of itself, is different than my definition. So in your world view, you are right. The era after WWII was more dangerous as now.
I define “financial crisis” more along the lines of the collapse of the banking system or structural problems in banking that threaten the system. That happened during the Great Depression and it caused a massive painful deflation.
After WWII, the banks were very healthy, money was accelerating, business was booming, expansion was common and we soon reduced the debt.
So our definitions of “financial crisis” have no relation to each others. I appreciate reading your point of view. Thanks.
Here is a definition of “financial crisis” I can relate to.
“A situation in which the supply of money is outpaced by the demand for money. This means that liquidity is quickly evaporated because available money is withdrawn from banks (called a run), forcing banks either to sell other investments to make up for the shortfall or to collapse. See also recession.”
These are listed as among the worst financial crises in US History...
Panic of 1819 — A speculative boom in commodities following the debt and inflation resulting from the War of 1812, collapses and results in many bank failures and many farm and home foreclosures.
Panic of 1832 — Eight hundred banks close and the banking system collapses. One third of manual laborers are out of work in New York City alone. Nationwide, unemployment reaches 10 percent.
Panic of 1837 — Another speculative boom, this time in real estate. Speculators bought millions of acres of public land in the hope their land values would soar if rapidly expanding railroads chose to go through or newar their properties. 340 of 850 banks failed accompanies by massive unemployment.
Panic of 1857 (1857 - 1860), A bubble in agricultural exports to Europe burts, leading to the collapse of the Ohio Life Insurance and Trust Company and a stock market crash and 5000 business failing and a brief period of high unemployment.
Panic of 1873 — the collapse of the post Civil War bubble, and especially over expansion by the railroads, causes the failure of the largest US bank, Jay Cooke & Company, leading to a chain reaction of bank failures, the closing of Wall Street, 10,000 businesses failing and massive unemployment.
Panic of 1893 — the collapse of the over expanded railroad bubble continues to play havoc on the US financial sector as the failure of the Reading Railroad prompts European investors to dump stocks, leading to a stock market crash and banking collapse.
Panic of 1907 — more over expansion and more speculation (seeing a trend here?) leads to yet another bubble that collapses beginning with a run on a run on Knickerbocker Trust Company (a bank) and eventually more than 500 banks fail, and the stock market dives 50%. The Federal Reserve is created.
Great Depression — Nuff said.
These are all major financial crises the US has experienced over the years. Even the Savings and Loan crisis of the 1980s was a financial crisis. So your definition that the debt of post WWII USA is a “financial crisis” is foreign to my viewpoint. We’ll just have to disagree on that definition, but I wanted you to know what I meant when I said that the current “Financial Crisis” is the worst since the Great Depression. I’m talking about the expected bank failures, impact on the stock market, business failures and rising unemployment, all taken together. The trigger is the bank failures caused by the current liquidity crisis resulting from the collapse of US real estate and its impact on the world wide speculative bubble in RE.
I’m a wordy SOB, but if you could at least briefly explain to me in some detail what you mean by the post World War II era being the worst financial crisis since the Great Depression, I would really appreciate it. What was the specific crisis, what specific problems occurred and how did the massive debt of that era create those problems.
In my example, I am citing bank failures, stock market crashes, business failures, and high unemployment among the problems caused by the bursting of speculative bubbles and the damage caused by the resulting deflations.
So in that light, what were the specific problems caused by the massive post WWII debt and what damage did that debt cause to the US banking, insurance, business, employment, industrial, governmental areas? Just so I understand where you are coming from.
Thanks!
Thank you for writing the condescending, juvenile post that shows you at your worst and demonstrates why I don’t take you seriously and why I try to skip your posts.
You seize on a math error and ignore the core points stated and supported in my post.
You avoid any intelligent discussion of the potential shadow inventory of vacant bank owned property that is not being listed among the current inventory of homes that must be sold before a bottom can come in. No mention of the huge volume of Option ARM loans as represented by the lady I overheard on the financial radio program, or of the potential financial ignorance of the bulk of those people, also as possibly suggested by this sample of one. No, a single sample is not proof, but it is well evident of the type of gullible mind that was fraudulently steered into these loans.
I’ve broken a Cardinal rule and responded to you on this forum. Excuse me. I have to wash my mouth out with soap, detox, decontaminate, have my stomach pumped and go to Confession, but I want to sincerely thank you for demonstrating for all to see what a pathetic, sniveling gadfly you are. You are an egregious nuisance who lives to annoy, harass, bully and snipe. I honestly feel sorry for you.
Perhaps you could bring some clarity to the point you are attempting to make. Insofar as each of these “crises” occurred prior to the Great Depression and their effects and causes are not really related to todays situation, why don’t you tell us what it is that is going to happen?
If I recall your original post, you were descbibing symptoms of the situation, not effects. So it sounds as though you wish to establish that the symptoms you describe are going to have a certain effect. Why don’t you set it out there?
Effects vary widely among the affected. You see, my father lived through the Great Depression in Montana and didn’t know it was happening. They just traded goods and skated on the frozen lakes in the winter. He recalled it as a pleasant time, but that was rural America. Not booming, but everyone ate well.
Now, if you are saying that this crisis of liquidity is going to bring that back, then I can better address your concerns. For me to discuss the National Debt versus the National Assets (wow, there’s one you never hear about) is still all rather academic (not that I am an academician). I can’t draw a bead on what you are wanting me to acquiesce to.
From my vantage point, I would say this present situation is going to cause some real hardship somewhere. We already see job loss and some folks losing their homes. I also see a lot of investors from overseas swooping in to take advantage of the bargain prices in real estate (especially Canadians, exchange rate and all) and a fair amount of new businesses starting. This makes it incomparable even to the Depression. Recall, store clerks were buying stock on the margin (10cents/$) anticipating daily rises. All air (like some real estate of the past couple years). But, the banks loaned this money with the stock as collateral and failed to some degree from these margin loans. That is all gone now. Will real estate run to zero? Probably not.
That makes bank losses limited to the delta between the foreclosed value and their loans. Okay, that hurts. But, lots of banks had nothing in that game and now are picking the pieces up from those that did. Still lots of horsepower and value in them, just a pile of loans with deltas. Remember, these are not bad business loans with no assets.
So, was the Tech wreck a financial crisis (2000)? It clobbererd me pretty good. So did the energy companies that followed (2001?). And, the building business and some investment real estate. But, that’s the game. Get in, get whacked, go home. Sometimes it works, sometimes it doesn’t. I just don’t want to argue ratios and percentages when there isn’t an effect to consider. So give us the effects.
And I don’t think you are any wordier than I am (is that the pot defending the kettle?). But, you are likely technically smarter than me.
You mean that 1.6 x 1/1.6 = 1?
Wow, profound.
The crash of the NASDAQ after the dot.bomb collapse was definitely a short, shallow financial crisis. The NASDAQ has never recovered and is still floundering at 1/2 the value it had in 2000. People threw real money into real losses.
The S&L crisis was more pronounced.
Recapping, I said I agree with those who are calling this liquidity crisis the worst financial crisis since the Great Depression and I’m saying the impact will be worse than the dot.com collapse, worse than the S&L debacle, and worse than the economic stagnation of 1973 to 1980.
So, you ask what are the effects of this financial crisis. I assume they will be the same as the effects of prior financial crises. Severe financial crises are deflationary. What are the effects of deflation?
First incomes deflate. People make less money so they buy less stuff. With less stuff selling, businesses order less stuff so businesses stop expanding, shut down stores and lay people off. With businesses ordering less, manufacturers cut back on production and lay people off, and some go bankrupt. With business and manufacturers closing stores and scaling back, they have no need to get loans from banks, so bank profits crash and they go out of business and lay people off. The more people get laid off, the less income there is to buy stuff at stores produced by manufacturers funded by the banks. Round 2 of the deflationary cycle. Cuts get deeper. Rinse. Repeat.
I am saying that the effects of this financial crisis will be the same as the ones I outlined in my prior post. Bank failures. Stock market crashes. Business failures. Layoffs. Rising unemployment. Same stuff.
I’m saying it won’t be nearly as bad as the great depression. I’m saying it will be the worst since the great depression. So the recession of 81-82 will be a cakewalk. It will be worse than the period of 73-80. That is my prediction. Or rather, those who are predicting that have convinced me they are right, so I am agreeing with them.
I agree with those who are saying that this will be the worst financial crisis, with the worst bank closings, worst stock market, worst business failures and worst unemployment since the great depression.
Now if we have a mild recession I am completely wrong. Or maybe the infinite ability of our increasingly socialist government to monetize these financial crisis into nothing more than a soaring of the national debt will continue to absorb all these crises and we will just go merrily on our way.
That is what the government is doing. They are absorbing the losses from Fannie, from Freddie, from IndyMac, from Bear Sterns to a great extent.
On the other hand, as financial crises go, we have already seen MASSIVE banking failures that have required the immediate dramatic intervention of the government. We have seen the 2nd largest bank failure of all time in IndyMac. We have seen investment bank Bear Sterns fail and even Ben Bernanke admitted that allowing such a failure could not be contained and would spread contagion throughout both the banking world and the real economy, dragging both down.
We have seen the failure of Fanny and Freddie, representing over $5 trillion in mortgages, which I think is some 80% of all mortgages on the books today.
We have SEEN these huge banks fail, and the bank failures are just beginning. Some silly person wrote “8 bank failures. Yawn.” This is like Robert E. Lee watching the morning skirmish at the Seminary at Gettsyburg and saying, “we lost 8 men. Yawn.” As if all the banks that will fail have already done so. The failure of hundreds of local banks that are not labelled “too big to fail” is only just beginning. There will be a wave of local bank failures.
I know you don’t believe this, but I can only state my view, I can’t provide proof in advance to what is to come that will be obvious in hindsight.
There is a severe SEVERE liquidity crisis. Collapsing home prices are resulting in waves of foreclosures that have ravaged both the total expected profits from mortgages as well as the highly leveraged securities on which those mortgages were based. Banks and investment firms have hidden the losses on their books because they don’t want to be held to account for those losses until they are forced to. Worse still, many banks have no clue what the street value of much of these investments is. They don’t know whether most of the mortgages are sound or only a few, until the defaults come rolling in. As long as the defaults don’t come rolling in, they are still terrified that they will come rolling in and ruin the value of these investments.
By hiding invesments they know are worthless, along with other investments they have with completely unknowable value, healthier banks are afraid to lend to any to anybody, for fear that they will be lending to insolvent banks that will just consume their money. Healthy banks don’t want to put their good money down a black hole.
In the meantime, all banks that have had losses are forced to lend way less than they used to be able to, because the losses are reducing their cash reserves and they are only allowed to lend in multiples of the cash they have on hand. So if a bank loses one billion dollars, they have 10 billion less they can lend, so businesses that might want that money lent to them are SOL.
The effect of this crisis will be the same deflationary effects of bank failures, stock market crashes (40% from peak is a bonafide crash), business failures, layoffs, rising unemployment, reduced tax receipts, reduced standard of living and increased pain for those living deep in debt.
That is what I mean when I agree with those who predict this will be the worst financial crisis since the great depression.
The overall affect of this leveraging of mortgage paper is described in Eugene Linden: Collapse of a Fiat Currency: The AAA-Rated CDO Tranche.
The first couple of steps in this financial alchemy are nicely explained in the YouTube video: subprime derivatives.
I don't know the numbers exactly (I doubt anyone does), but my recollection is that there is over $100 Trillion of this toxic paper, built in a Ponzi scheme on roughly $10 Trillion of mortgages. Our national debt is a similar $10 Trillion, and our Gross National Product (GNP) is perhaps $14 Trillion. The total unfunded liabilities of the U.S. government for future Social Security, Medicare and Medicaid is (my memory is fuzzy here) perhaps $50 Trillion.
The size of this Everest of toxic paper dwarfs all.
People like you and Travis McGee are among a small handful of Freepers even more bearish than I am. You make me feel like a raving optimist! LOL.
I am in denial to the extent that I can’t let myself believe in the possibility of an outright depression or a complete collapse of the currency or of the bond market, or of the dollar being abandoned as the world’s reserve currency, or of foreign money completely dumping treasuries.
Any of those would ruin us and I am just in denial over the possibility of any of them, even as I have various heartfelt beliefs that some of them just aren’t likely. China is not going to hurt itself by dumping our treasuries for example. What currency could be used as the world’s reserve today? For all of the Euro’s strength, I just don’t see it being up to the task as the world’s reserve currency. America’s financial empire is still more dynamic, more cohesive, more stable, less corrupt and more transparent than Europe is.
Anyway, at my bearish, it is always nice to hear from you and it makes me feel positively like a Freepyanna. Thank you! Somebody is more bearish than me!!!
Oh, and I REALLY REALLY hope you are dead wrong. EVERYBODY hopes you are wrong.
If Hydroshock was still on the forum, I bet he would be just as bearish as you are. So that’s 3. You, McGee and Hydroshock. I’m not sure where NVDave or Ex-Texan or TigerLikesRooster come down. We need a Bull vs. Bear poll. LOL.
The only rational explanation I've found for their behaviour is that they hope I'm right.
Of course, trying to apply rational analysis to the Left is a fools errand.
Must be where I got my 80% number off the cuff. I defer to your statistics. Point is, they are bigger than all other mortgage lenders combined, so their insolvency or impending insolvency was castastrophic.
A day without the Cow is like a day without Sunshine!
It would fit the LibDemCom’s overall agenda of divide and conquer and socialize. A tasty deep depression would vastly advance Socialism in the USA. We are so soft now, most people would wake up to a depression begging the government to take away all their freedom if only they will provide all their basic needs. Back in the USSA.
The same sorts of computerized financials that make possible the recent rapid growth in Electronically Traded Funds (EFT's) that enable me to conveniently trade, long or short, all manner of specialized markets, currencies, commodities and precious metals is also enabling the big money players to trade and hedge between multiple currencies in a highly liquid market.
Currencies will become just like another commodity; I'll use copper to wire my house, copper or PVC for the pipes, and dollars to pay my butcher. Those in London will use pound sterling to pay the butcher, rather than dollars, but otherwise trade in the same world wide markets as do I for any significant transaction.
I anticipate that baskets of currencies, perhaps viewed as S&P 500 indexed mutual funds have been viewed by investors for the last 50 years, will become the new currency for any significant amount of money. Whereas the mutual funds traded once per day, with limits on trading frequency to perhaps once or twice per quarter, these baskets of currency will trade in real time, around the clock.
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