Tuesday, March 27, 2007

Grim Reality / PIMCO

bill gross is right that the credit tightening will lead to real trouble for the us.

i´m not so sure about the other conclusion he is drawing (only 20%?). it´s also unusual that he uses the shiller and nar data and in the official pimco housing outlook they use the ofheo data http://tinyurl.com/29n2gg

bill gross beschreibt genau richtig das die eingentliche probleme die verknappung von krediten ist.

was die weiteren schlüsse und berechnungen (20%?)sind die er zieht bin ich mir da nicht ganz sicher. zudem ist es ungewöhnlich das er die shiller und nar daten benutzt während pimco im offiziellen housing outlook auf die ofheo daten zurückgreift http://tinyurl.com/29n2gg

Life, it seems, has become one giant reality show – or is it vice versa? Which is truth and which is the illusion or have both simply morphed into a uni-consciousness that feeds off information from different computers – one the living kind with two arms and two legs, the other more stationary with a plasma and keyboard. My Apple screensaver for instance features a stunning series of pictures of our galaxy and beyond, from detailed midnight close-ups of the moon’s craters to spinning supernovas of unimaginable beauty. While everyone “knows” that those objects are really “out there,” it’s possible to admit that they’re also in “there.” ......” It’s only my past experience that commonsensically points to the “out there” as real and the “in there” as an illustration. If I’d been raised and confined in a room with nothing but a computer, the tilt of perception would most likely be in the other direction. .......

Such complexity is also evident in the financing of the U.S. housing market. Long ago and far away there used to be an old “20% down” reality that morphed somehow into a subprime/Alt A cyberspace free-for-all (literally “free for all”).

thanks to http://www.glasbergen.com/

Talk about a second life! U.S. homeownership has expanded from 65% to 69% of households since the turn of the century, in part because it became so easy, and so cheap to finance a home. No avatars in that bunch – they were living, breathing U.S. citizens who yes, might knowingly or unknowingly have taken advantage of “low doc” or “no doc” applications, who might have taken out a “liar loan” in the face of “full disclosure” documentation required of their mortgage lenders, or who simply might just have jumped on board the 1% Fed Funds financing train of 2003. No matter. They bought a house, began living the American dream by making money with someone else’s money, and expected to live happily ever after.

Well, not so fast, at least for some of them, it seems. Home prices, as measured by the National Association of Realtors, have gone down by 2% nationally over the past 15 months and there’s fear in the air that it could get worse. It most assuredly will.

The problem with housing, however, is not the frequently heralded increase in subprime delinquencies or defaults. Of course write-offs, CDO price drops, and even corporate bankruptcies of subprime originators and servicers will not help an already faltering U.S. economy. But foreclosure losses as a percentage of existing loans will be small and the majority of homeowners have substantial amounts of equity in their homes. Because this is the reality of our U.S. housing market, analysts and pundits now claim we’re out of the woods: the subprime crisis is or has been isolated and identified for what it is – a small part of the U.S. economy.

It will not be loan losses that threaten future economic growth, however, but the tightening of credit conditions that are in part a result of those losses. To a certain extent this reluctance to extend credit is a typical response to end-of-cycle exuberance run amok. And if one had to measure this cycle’s exuberance on a scale of 1-10, double-digits would be the overwhelming vote. Anyone could get a loan because shabby credits were ultimately being camouflaged within CDOs that in turn were being sold to unsophisticated foreign lenders in need of yield as opposed to ¼% bank deposits (read Japan/Yen carry trade). But there is something else in play now that resembles in part the Carter Administration’s Depository Institutions and Monetary Control Act of 1980. Lender fears of potential new regulations can do nothing but begin to restrict additional lending at the margin, as will headlines heralding alleged predatory lending practices in recent years. After doubling over 18 months between 2005 and the first half of 2006, non-traditional loan growth has recently turned negative, and lenders’ attitudes are turning decidedly conservative as shown in Chart 1.
Bulls and bears argue over websites as to the percentage of all lending that subprime and alternative mortgage loans provide but while important, the argument obscures the critical conclusion that tighter lending standards and increased regulation will change the housing outlook for some years to come. As past marginal buyers are forced to sell their home to prevent foreclosures, so too will future marginal buyers be restricted from buying them. No one really knows the amount that homes must fall in order to balance supply and demand nor the time it will take to do so, but if one had to hazard a conclusion, it would have to be based in substantial part on affordability statistics that in turn depend on financing yields and home price levels in a series of different scenarios as outlined in Chart 2. The chart shows the amount that home prices or mortgage rates (or a combination of the two) need to decline in order to revert back to affordability levels in 2003, a year which might have been the last to be described as a “normal” year for home price appreciation.

>look at the shiller chart and decide if 2003 was a normal year....and what with the years prior to that?

>guckt euch den chart an und sagt mir ob 2003 ein normales jahr war. und vor allem was mit den jahren vorher passiert ist. Since then, 10+ annual gains have been the rule whereas average historical estimates provided by Robert Shiller may have suggested something on the order of 4-5%.

größer/bigger http://tinyurl.com/2d2zxy

By that measure alone, homes are likely 15-20% overvalued (3 years x 5%+ annual overpricing). Chart 2, in addition suggests much the same thing. If mortgage rates don’t come down, home prices need to decline by 20% in order to reach prior affordability levels. If rates do come down, home prices will drop less. größer/bigger http://tinyurl.com/2yq7t3

>to me it looks like he has left out the years prior to 2003. i wanted to add that lots of cities have gone almost parabolic. so even when the 20% for the nationswide level is true very important areas will get hammered. more shiller charts for other big cities via paper money http://tinyurl.com/2ygvb7

>für mich sieht es so aus als wenn er die jahre vor 2003 ausblendet. zudem möchste ich ergänzen das etliche große und wichtige stäfdte/regionen fast parabolisch gen norden geschossen sind so das selbst wenn die 20% auf landesebene korrekt sind diese regionen deutlich crashpotential haben. um mehr regionen im einzelnen zu sehen bitte auf den link von paper money klicken http://tinyurl.com/2ygvb7

>here are the future contracts thanks to macroblog! http://tinyurl.com/247fqe .

looks like the pace is accelerating......

>hier sind die futures / dank an marcoblog! http://tinyurl.com/247fqe

sieht so aus als wenn sich das templo der abwärtsbewegung beschleunigt......

größer/bigger http://tinyurl.com/2fbqfv

Chart 2, while somewhat subjective and time dependent, introduces the critical connection between home prices and interest rates. PIMCO cares about housing and its fortunes, but primarily because of its influence on yields. And while the Fed may be willing to allow U.S. homeowners to suffer a little pain as indeed they have in recent quarters, a double-digit decline would risk consequences that few central banks would be willing to underwrite.

>too bad they have taken the risk of inflating this bubble year after year ......

>zu dumm nur das die fed das risiko der blasenbildung nur zu gerne in kauf genommen hat ....

So a forecast of home prices almost implicitly carries with it a forecast for interest rates. To prevent a double-digit decline in prices, PIMCO’s statistical chart suggests that mortgage rates must decline a minimum of 60 basis points and the sooner the better. The longer yields stay at current levels, the more downward pricing pressure will build as foreclosures/desperate sellers dominate price trends as opposed to prospective buyers. While the Fed, as pointed out in last month’s Investment Outlook must be cognizant of an array of asset prices in addition to housing, homes are the key to future equitization trends, and fundamental therefore to the outlook for consumption.

You may want to take this looming grim reality with a grain of salt or suggest as old worlders do that it’s not real at all if it can’t be touched or if it doesn’t touch you. Not so. Don’t take my word for it though. Investigate the Fed’s own study, written in September of 2005 (Monetary Policy and House Prices: A Cross-Country Study) covering housing cycles in aggregate and individually for 18 countries over the past 35 years. This study’s important conclusion for PIMCO and our clients is that if home prices in the U.S. have peaked, and are expected to stay below that peak on a real price basis for the next three years, then the Fed will cut rates and cut them significantly over the next few years in order to revigorate an anemic U.S. economy. Strong global growth (not part of this study’s assumptions) may temper historical parallels and provide a higher floor than would otherwise be the case.

Nonetheless, prices for houses that I can see and touch every day outside my office are morphing with bond yields inside my computer screen to produce a reality show that speaks to an ongoing bond bull market of still undefined proportions.

>for a foreign investor with currency risk there will be probably no bull market in us bonds....

>für einen ausländischen investor dürfte selbst ein starker bondmarkt dank des $ wahrscheinlich zu wenig jubelstürmen führen

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Anonymous Anonymous said...

mmmmm The numbers are rather thin. Do you not also detect a self interested tone in this Gross commentary? Even a touch of pleading?

Take em up!!!!

3:31 AM  
Blogger jmf said...


to be honest i was surprised by his conclusion.

usually pimco/gross made stronger cases based on more data etc.

takem em up would lead to a shock.

depends on the $......

4:09 AM  
Anonymous Anonymous said...

where has 6 years of no shock got them? Back to square one with the same people who have now "distributed" the risk. Nice work if you can get it....but 15,000 at Citigroup, a few hundred thousand in construction etc. won't be....

4:41 AM  
Anonymous Anonymous said...

re: $ did you read the other PIMCO one on flows and petrodollar.

Interessant and a good attempt at capturing complexity in a flow diagram to make a good basis for analysis. I think some pieces need to be added in.


4:49 AM  
Blogger jmf said...


here is is


one of the best posts i´ve seen.

but it looks like especially the oilrich countries are backing away from buying us bonds.

here some news from norways $ 287 billion funds

and even china is putting up an investment arm

and quatar wants to buy a stake in airbus

so it looks like the us $ isn´t the only place where the money is going to.

but i agree that the higher the oil price the better......

5:26 AM  
Anonymous Anonymous said...

Over at calcuated risk the case is made that a rate cut may take long rates and mortgages out higher due to inflation or dollar fears even though this might allow s-term financing to paper the cracks.

12:07 PM  
Blogger jmf said...


this could be the case.

the tips are already spiking.

3:01 AM  

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