Economics/share prices/recession

[limerickman]

Been watching the data roll out telling us that the markets (stocks/shares) are tumbling.
In the real economy, things Stateside look to be even more precarious than usual.
The Federal Budget deficit now stands $856 billion for 2006, according to the US Commerce Dept.
You have jitters about the US sub-prime lending market and rumours that bankruptcy for some sub-prime lenders is imminent.

We had the Shanghai market dip last week which wiped between 1-2% off all share valuations worldwide.

In Britain, we have venture capital firms looking to buy and then asset strip well known firms such as Boots, ICI.

Strange days.

 

[Bro Deal]

You have jitters about the US sub-prime lending market and rumours that bankruptcy for some sub-prime lenders is imminent.

It is more than jitters. The sub-prime market has been operating on pure fraud for the last two years. There has been no consideration given to whether the home buyer has the means to actually pay back the loan on a house that has a wildly inflated price in the first place. In places like Clownifornia they spent last year giving out loans to illegal immigrants, so you know they are scraping the bottom of the barrel as far as greater fools in the Ponzi scheme goes.

As the loans have performed much worse than they were supposed to, the buyers of the mortgage backed securities have started forcing the sub-prime companies to buy back the loans by pointing out the fraud. The companies are often thinly capitalized so they don't have the means to buy their garbage back. I think we'll see a full blown crisis within six months, and then it starts moving up the food chain.

The most shocking thing is that it is not confined to the bottom economic class. Instead of buying a $300K house while making $30K, the middle class has been just as enthusiastic about buying a $600K house while making $60K or a $900K house while making $90K. Then there are the idiots whose houses shot up in value by two or three hundred grand, so they decided the smart thing to do was take the money out with a HELOC and buy a boat, his and hers BMWs, and spend a hundred Gs remodeling their kitchen, almost as if they would never have to pay the money back.

There is some serious pain coming down the pike.

 

[wolfix]

It is more than jitters. The sub-prime market has been operating on pure fraud for the last two years. There has been no consideration given to whether the home buyer has the means to actually pay back the loan on a house that has a wildly inflated price in the first place. In places like Clownifornia they spent last year giving out loans to illegal immigrants, so you know they are scraping the bottom of the barrel as far as greater fools in the Ponzi scheme goes.

As the loans have performed much worse than they were supposed to, the buyers of the mortgage backed securities have started forcing the sub-prime companies to buy back the loans by pointing out the fraud. The companies are often thinly capitalized so they don't have the means to buy their garbage back. I think we'll see a full blown crisis within six months, and then it starts moving up the food chain.

The most shocking thing is that it is not confined to the bottom economic class. Instead of buying a $300K house while making $30K, the middle class has been just as enthusiastic about buying a $600K house while making $60K or a $900K house while making $90K. Then there are the idiots whose houses shot up in value by two or three hundred grand, so they decided the smart thing to do was take the money out with a HELOC and buy a boat, his and hers BMWs, and spend a hundred Gs remodeling their kitchen, almost as if they would never have to pay the money back.

There is some serious pain coming down the pike.

Right on. My two best friends are in that business to a degree. So this very same conversation occurs on a daily basis with us over coffee. My one friend is an appraiser, and the fact is that he not making money because he refuses to over-inflate the homes value for the lenders. My other friend worked for a broker when he was young that specialized in sub prime loans for a year before he realized what was happening.....
we are gearing up to take the foreclosed homes off the bankers hands in a few years. The bankers may be trying to pass the buck right now, but they knew exactly what was happening. they deserve to get what they are going to get...

 

[lyotard]

right, er, confused on yer part, wolf...
you just got done spelling it out for alla us rubes how the economy is so good all 'round, as you seem so tirelessly bent to do.
remember, you cited how everyone and their brother where buyin' up the mcmansions, chasing the american dream bro deal spells out, and you offered this up as the telling example of how stellar both these here times and the economy are. you can't opine both views you present here without risking coming across as either wishy washy as it suitable for agenda purposes, or, hypocrital.

as for the home values in what the other poster so jealously terms "clownifornia" takin a big dip, do not count on it, the supply and demand driven exclusivity of living on the west coast comes at a price that will stand these bogus economics.

some good ridin' too.

Right on. My two best friends are in that business to a degree. So this very same conversation occurs on a daily basis with us over coffee. My one friend is an appraiser, and the fact is that he not making money because he refuses to over-inflate the homes value for the lenders. My other friend worked for a broker when he was young that specialized in sub prime loans for a year before he realized what was happening.....
we are gearing up to take the foreclosed homes off the bankers hands in a few years. The bankers may be trying to pass the buck right now, but they knew exactly what was happening. they deserve to get what they are going to get...

 

[Bro Deal]

as for the home values in what the other poster so jealously terms "clownifornia" takin a big dip, do not count on it, the supply and demand driven exclusivity of living on the west coast comes at a price that will stand these bogus economics.

Yeah, sure, dude. Everyone in a bubble market has some reason why their piece of heaven will be spared: Everyone wants to live here. The weather is great. The Fed will lower interest rates. But the mathematics are inescapable. You cannot have a continuing situation where the median house is unaffordable to the median income when using a financing product that will eventually result in repayment of the loan. Sorry, Alt-A ARMs don't work long term. They were nothing but fuel for the Ponzi scheme.

Prices have to revert to the mean, and there are only a few ways that can happen. 1) Prices drop precipitously, probably over over a span of about three years, and end up at a 2001 level, maybe overcorrect to a 2000 level. This is most likely and is the usual end for a bubble. 2) Prices stay the same, nominally, or slowly decline and a slow process of currency inflation eventually brings them in line. This is unlikely in this case because the loan products people are carrying were not written with repayment in mind; as ARMs adjust a significant portion of the population will not be able to make their mortgate payments. Currently, foreclosures are rocketing upward all over the country. 3) Rapid inflation essentially wipes out the debt burden. This would be a doomsday scenario that would wreck the whole economy. The Fed cares a lot more about preventing a collapse of the dollar than they do about bailing out people who were stupid enough to grossly overpay for real estate.

Good old Clownifornia, where an 800 square foot shitbox costs $700K. http://marinpos.blogspot.com Yeah, I would much rather live there than where I do.

 

[wolfix]

right, er, confused on yer part, wolf...
you just got done spelling it out for alla us rubes how the economy is so good all 'round, as you seem so tirelessly bent to do.
remember, you cited how everyone and their brother where buyin' up the mcmansions, chasing the american dream bro deal spells out, and you offered this up as the telling example of how stellar both these here times and the economy are. you can't opine both views you present here without risking coming across as either wishy washy as it suitable for agenda purposes, or, hypocrital.

Big differece between sub-prime lending and conventional loans for McMansions. As cold and unethical as it sounds, the sub-prime problems are not a sign of a bad economy. It is a sign of poor lending practices. When the foreclosures are a result of poor lending practices to people who never really qualified for them in the first place, instead of loss of jobs as we witnessed in the 80's , it does not necessarily even mean it's bad for the economy. Bad if you are a sub-prime lender..Good if you are a remodeler,conventional loan institution, and possibly even for some real estate agents......

Nothing wishy washy about that.......or hypercritical.
I think you need to get a job.

 

[limerickman]

For what's it worth, I can see both sides of the discussion.

I reckon that houses located in locations that would be in demand - those house prices are less elastic (ie: houses in certain areas will always be in demand, therefore their price is less likely to fluctuate as drastically).

The kernel of the problem as far as I can see is not the house price fluctuation - it's more to do with the policy of banks extending credit on the basis of a house price valuation.
They call it equity release on this side of the pond.
If your house price value is growing and your mortgage is decreasing (because you're repaying your mortgage) - your bank offers you the difference between the current valuation of the house and the outstanding value of the mortgage.

And it seems that a lot of Americans have availed of these offers (1 in all 5 American mortgages are of the sub-prime variety).
Throw in the fact that many of these mortgages have been taken up by people who were under a certain financial strain anyhow, this could spell trouble if these people default on their repayments.

Bit like the dotcom bubble - banks gave credit to firms in the hope that "future profits" and "future cashflow" would repay those loans.

 

[limerickman]

The latest edition of the Economist magazine has a very good series of articleson the US mortgage/housing sector.

One article highlights the case of the guy in the USA who Casey Serin the 24 year old web designer who has debts of $2.2m.
He bought 7 houses in five months - and has had three of those houses repossesed because he cannot repay either the capital or the interest on the loans for those houses!
He has opened his own blog at Iamfacingforeclosure.com -

There are $10 trillion dollars of sub-prime loans at present in the US mortgage market.

The Chairman of the Fed, yesterday warned that the sub-prime debacle could be wider than first thought.

I notice that HSBO and some other English banks have managed to get themselves caught in this market as well.

 

[Bro Deal]

There are $10 trillion dollars of sub-prime loans at present in the US mortgage market.

The Chairman of the Fed, yesterday warned that the sub-prime debacle could be wider than first thought.

I notice that HSBO and some other English banks have managed to get themselves caught in this market as well.

What will be interesting is how it spreads to the rest of the world. There are huge amounts of foreign money invested in U.S. mortgage backed securities, much of which has had its risks grossly misrepresented. It reminds me of when the Japanese were riding high at the end of the 80s, buying up all sorts of U.S. properties and businesses at inflated prices only to have the bottom fall out and much of their money disappear. This time it will be the Chinese left holding the bag.

I guarantee this is much larger than the Fed and the Street will currently admit. We are at the tail end of the largest scale fraud in the history of the U.S. No matter what class people belonged to, funny money has been used to appear richer than they are.

 

[djrocker257]

Remember the financial scandal around 20 yrs ago when all the 3rd world loans were in danger of default. Then we had the savings and loans scandals in the middle 80's.

Names/Institutions change, but evidently risky loans keep occuring.

 

[Bro Deal]

Names/Institutions change, but evidently risky loans keep occuring.

True dat, but this time instead of just total lack of regulation, the government has encouraged the practice as a way of fueling consumption to keep the economy above water in the aftermath of the dot con melt down.

 

[wolfix]

One of my best friends is an investigator of fraudulent practices of real-estate appraisers fot the state. He has been telling us for at least 3 years that this would happen. We have a few friends that are sub-prime brokers that are starting to downsize fast....... .

Some of the consumers are to blame too. This situation is a case where the finger can be pointed at everyone involved....... Im surprised that it has taken this long for the government ot wake up. They are the ones [taxpayers] that are going to be left holding the bag. ...

 

[Bro Deal]

With bargains like the one below I am convinced that real estate has hit bottom and will not go further down.

 

[Hypnospin]

Bro,
in los gatos, ca, i rode by a home that would rival this in terms of modesty, but it did not quite equal your listing, as it had the selling point of "room to build a garage on property", i did not see were this garage could be built, unless perhaps a one car...
it was 795k, and this was almost ten years ago.

With bargains like the one below I am convinced that real estate has hit bottom and will not go further down.

 

[Bro Deal]

Bro,
in los gatos, ca, i rode by a home that would rival this in terms of modesty, but it did not quite equal your listing, as it had the selling point of "room to build a garage on property", i did not see were this garage could be built, unless perhaps a one car...
it was 795k, and this was almost ten years ago.

You'll have to excuse those of us in flyover-land that see things like this, which might pass as a shed you would build with materials from a few trips to Home Depot, and laugh our asses off.

The larger issue is that ten years ago you needed the financial version of a rectal exam to get a home loan. Up until two months ago you just needed to fog a mirror; and if you could not manage that trick, the broker would fog the mirror for you.

There is good news, though. As all the morons who flunked out of math go bankrupt or walk away from their obligations, there is going to be a lot of money to be made.

 

[Wurm]

And it seems that a lot of Americans have availed of these offers (1 in all 5 American mortgages are of the sub-prime variety).
Throw in the fact that many of these mortgages have been taken up by people who were under a certain financial strain anyhow, this could spell trouble if these people default on their repayments.

aka: predatory lending.

 

[Bro Deal]

If anyone wants to kill some time, these two threads on a real estate investing board are pretty amusing. The first starts in 2005 as a would be real estate mogul (recently fired from his job as a Taco Bell manager) buys fourteen houses in fourteen months. Seasoned investors try to warn him of how risky his strategy is, but he won't listen to any of it. The second is the same guy losing his shirt and wondering what to do.

http://www.websitetoolbox.com/tool/post/sdcia/vpost?id=444014

http://www.websitetoolbox.com/tool/post/sdcia/vpost?id=1854186