fleckenstein: the houisng bust is here
Face it: The housing bust is here
Missed in last week's 'Fed is done' euphoria was more stark evidence the housing bubble has burst. Growing numbers of homeowners can't make their payments.
back on June 12, 2005, Time Magazine chose this headline for its cover: "Home $weet Home: Why We're Going Gaga Over Real Estate." I did not share the euphoria, as I believed that the housing bubble was about to peak.
In fact, in my column two months later -- the headline of which, "It's RIP for the housing boom," stood in stark contrast -- I said that Time's cover would be shown in retrospect as basically having marked the peak. That real-time view little more than a year ago has been validated, regrettably.
The fabled engine of our economy is clearly unwinding. The sobering implications, however, were lost on the stock market last Tuesday. That's when a weaker-than-expected PPI number incited the umpteenth Fed-is-done rally. What folks ignored that day: News from the National Association of Homebuilders that its Housing Confidence Index fell to the lowest level since early 1991. immobilienblasen: Home builders' confidence plunges to 15-year low
When 'adjustable' becomes unsustainable
But the bigger picture is becoming increasingly harder to ignore. What we'll soon be seeing on a regular basis was portrayed by The Wall Street Journal last week, in a story titled "Homeowners Start to Feel the Pain of Rising Rates" (subscription required). The subtitle nicely summarizes the thrust of it: "Payments on Adjustable Loans Hit Overstretched Borrowers; 'Budgets Are Out of Whack.'"
It begins with the story of a Detroit accountant who was looking to lower her monthly payments. In 2004, she refinanced a $312,000 mortgage via an option-adjustable-rate mortgage that offered various payment choices, as do so many of these plans. Her (introductory) rate of 2.3% is now up to 8.75%, and her loan balance has grown to $324,000. She claims that the terms weren't clearly spelled out. But if she actually read the documentation, as accountants often do, and didn't get it, you can imagine how many people truly understand their mortgages. (Hint: The number rhymes with "hero.")
Since she's unable to refinance (in part, due to a nasty prepayment penalty), she must sell her house. The problem: Because everyone else is pretty much in the same boat and Detroit's economy isn't so swell, she can't -- even with having reduced her original asking price of $470,000 to $270,000. (Note: That would leave her $54,000 in the hole.)
To share some numerical dimensions of the problem: People who have ARMs are "all of a sudden finding their budgets out of whack because their house payments went up 25% or 30%," according to a Pasadena bankruptcy attorney whose comment serves as the Journal story's subtitle. According to Credit Suisse: "The portion of adjustable-rate mortgages that were at least 90 days past due has climbed 140% this year. And, according to a UBS study: About $137.5 billion face resets this year and about $524 billion face resets over the next four years."
Aftertaste of an open spigot
The story states the problem precisely: "Yet, the downside of the lending boom (my emphasis) is starting to show." And that is what it has been: a lending boom.
As I have been saying: Although the abdication of responsibility in lending showed up in housing prices, this mania, at its heart, has been a lending mania. (If we'd had a bull market in houses that produced stupid prices -- but we didn't have folks buying homes they patently couldn't afford -- it wouldn't have to end in the absolute debacle we are headed toward.)
Ghosts of Volckers past
It's a topic at the heart of another Wall Street Journal piece last week: "How the Fed Lost Its Groove" (subscription required) by economist Henry Kaufman. He notes the explosion of liquidity and debt that has occurred in the last handful of years (though it's been going on longer than that.) Though the federal funds rate has risen from 1% to 5.25%, he points out, this hasn't slowed down a debt expansion or credit availability: "Non-financial debt in the U.S. expanded at a rate of 6% in 2001, grew by 10% in 2005, and has been swelling at an even faster rate this year. At this pace, debt is growing at an astounding 50% faster than GDP." immobilienblasen: us kreditproduktion l�uft amok
Kaufman also notes that credit-derivative contracts increased from roughly $4 trillion at the end of 2003 to $17 trillion at the end of 2005. This growth -- in what Greenspan and the Fed think are so wonderful -- "is not just about reducing risk; it is fueling speculation."
No safety in transparency
Kaufman cited the downside of the Fed's insistence on transparency, that being the explosion of footings on the balance sheets of financial institutions:
"How can this be? The Fed policies of measured response and transparency have improved the capacity of financial intermediaries to gauge the market impact of central-bank actions. In this kind of environment, financial intermediaries employ a variety of 'value at risk' analytical techniques, along with a wide range of credit instruments, to quantify risk within narrow bounds. Ironically, the predictability borne of the Fed's measured response and transparency encourages (my emphasis) risk-taking and speculative trading. As the Fed lowers uncertainty about the near term, investors grow bolder."
At some point (sooner, rather than later), there will be a housing-finance-related "accident," due to an incendiary combination of housing debt and derivatives. That is what lies ahead. What remains to be seen is exactly when the financial bomb gets detonated. (meiner meinung nach gab bzw. gibt es diesen unfall schon bei faennie mae immobilienblasen: faennie mae / fnm. einen anderen grund kann es für eine seit mehrere jahren überfällige bilanz nicht geben)
Meanwhile, though this mess has just started, the end game is (and has been) very predictable, as the story states: "Some borrowers are opting to sell homes they can no longer afford." Unfortunately, folks like the accountant from Detroit are going to find that as this occurs, there won't be enough buyers, as many people will need to sell. The inevitable scenario: "Some California brokers say they are beginning to see a return of 'short sales' -- transactions in which the sales price isn't large enough to cover outstanding loans." Soon, this term will be replaced by "jingle mail," which I described in my Aug. 7 column. (wie in australienimmobilienblasen: trouble in down under)
Ringmaster of this disaster
hat, ladies and gentlemen, is how Alan Greenspan managed to make folks' lives ultimately even worse, in attempting to bail out his equity bubble with a real-estate bubble. Let's never forget who the un-indicted architect of this mess was: Alan Greenspan and the other merry pranksters at the Fed.
Of course, those folks who didn't learn anything from the equity mania, and who will turn out to have gotten themselves trapped in the housing mania, really have only themselves to blame. As I have been warning for at least a couple of years now, all of this was going to be wonderful until it wasn't. That moment in time is upon us.
dem ist wenig hinzuzufügen.