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**Rajiv** · May 03, 2007, 09:06 PM

Re: Housing Bubble Aftermath: Bird's Eye View

See also Mike Whitney's articles Housing bubble boondoggle: Is it too late to get out? and The Harder They Come ... A Stock Market Post-Mortem

from the first

Treasury Secretary Henry Paulson delivered an upbeat assessment of the slumping real estate market on Friday saying, �All the signs I look at� show �the housing market is at or near the bottom.�

Baloney.

Paulson added that the meltdown in subprime mortgages was not a �serious problem. I think it�s going to be largely contained.�

Wrong again.

Paulson knows full well that the housing market is headed for a crash and probably won�t bounce back for the next four or five years. That�s why Congress is slapping together a bailout package that will keep struggling homeowners out of foreclosure. If defaults keep skyrocketing at the present rate, they are liable to bring the whole economy down in a heap.

from the second

The real estate market is crashing faster than anyone had anticipated. Housing prices have fallen in 17 of 20 of the nation's largest cities and the trend lines indicate that the worst is yet to come. March sales of new homes plummeted by a record 23.5% (year over year) removing all hope for a quick rebound. Problems in the subprime and Alt-A loans are mushrooming in previously "hot markets" resulting in an unprecedented number of foreclosures. The defaults have slowed demand for new homes and increased the glut of houses already on the market. This is putting additional downward pressure on prices and profits. More and more builders are struggling just to keep their heads above water. This isn't your typical 1980s-type "correction"; it's a full-blown real estate cyclone smashing everything in its path.

Tremors from the real estate earthquake won't be limited to housing--they will rumble through all areas of the economy including the stock market, financial sector and currency trading. There is simply no way to minimize the effects of a bursting $4.5 trillion equity bubble.

**gvanc** · May 04, 2007, 11:38 PM

Re: Housing Bubble Aftermath: Bird's Eye View

Hello iTulip members. I am a new member, although I have been a diligent iTulip reader since last summer. The analysis of the housing downturn and conclusions about its likely economic fallout presented at iTulip seems compelling to me, though I am not well positioned to determine if the analysis is accurate. I am confused by some of the recent economic news. After the decline housing starts/sales, the sub-prime mortgage losses, and the recent weak quarterly GDP report, it was surprising, to me anyway, that the recent ISM manufacturing and service reports and increase in manufacturing orders suggested a return to economic expansion after a slowdown. So, what�s the deal here? Has the impact of the housing downturn on the broader economy been overestimated? Has the FED successfully executed a bubble swap, boosting economic activity so that equities inflate as housing continues to deflate, thereby supporting further consumer indebtedness? Or, are these recent reports just noise riding on a larger economic downtrend that will continue to be driven by continuing declines in the housing sector? Thank you for your thoughts.

**Tet** · May 05, 2007, 12:58 AM

Re: Housing Bubble Aftermath: Bird's Eye View

Originally posted by gvanc

Has the FED successfully executed a bubble swap, boosting economic activity so that equities inflate as housing continues to deflate, thereby supporting further consumer indebtedness? Or, are these recent reports just noise riding on a larger economic downtrend that will continue to be driven by continuing declines in the housing sector? Thank you for your thoughts.

What is your opinion on rates? Myself I do my best never, ever, ever to bet against the Fed. Looks to me like rates lift a lot of boats here and a good portion of the boats that need to be lifted are already owned by the Fed. I know I'm kind of crazy when it comes to this stuff and maybe only one out of a hundred agree with my point of view, but if I were the Fed I think I'd start painting the picture of lower rates come May 9th.

**SeanO** · May 05, 2007, 01:58 AM

Re: Housing Bubble Aftermath: Bird's Eye View

Originally posted by gvanc

So, what�s the deal here? Has the impact of the housing downturn on the broader economy been overestimated?

One thing that I think is often overlooked is the amount of development that is still required after a housing boom ends. In California we have miles of housing where there was nothing but cornfields just five years ago. So although housing itself is rapidly slowing, we are still building schools, retail shopping, and other infrastructure to support those developments at a frenetic pace - which continues to create considerable economic activity.

Even the housing developments themselves take quite a while to shut down. If you're a developer sitting on entitled, improved and likely financed land, it may be less expensive to build it out, even below cost if necessary, then to sit on it. In fact I think builders in this position are the primary driver behind the price declines we are seeing in a number of high growth areas - which also happen to correlate well with the high foreclosure areas. I'll even go so far as to say that I believe this is the primary driver behind the current wave of foreclosures in California rather than ARM resets or the other oft quoted reasons (which may, or may not, be still to come).

Bottom line is that the economic activity generated by the housing boom will continue to outlive the boom itself for some time. It may take another year or more for this infrastructure work to be completed. And it may simply be unrealistic to expect to see clear signs of a broader impact on the economy until then.

**Uncle Jack** · May 05, 2007, 07:46 AM

Re: Housing Bubble Aftermath: Bird's Eye View

Originally posted by SeanO

In fact I think builders in this position are the primary driver behind the price declines we are seeing in a number of high growth areas - which also happen to correlate well with the high foreclosure areas. I'll even go so far as to say that I believe this is the primary driver behind the current wave of foreclosures in California rather than ARM resets or the other oft quoted reasons (which may, or may not, be still to come).

Bottom line is that the economic activity generated by the housing boom will continue to outlive the boom itself for some time. It may take another year or more for this infrastructure work to be completed. And it may simply be unrealistic to expect to see clear signs of a broader impact on the economy until then.

Excellent points. I'm seeing the exact same things here in Florida. Just down the road (that's being expanded by the way) from my house is a massive development that continues to roll out new houses complete with a new elementary school backed up to the Florida Turnpike. Just a year ago this entire area where I live was nothing but orange groves.

Adding to the competition for buyers are not only existing homes, but projects that will not simply stop on a dime because of an economic downturn.

**grapejelly** · May 05, 2007, 09:07 AM

Re: Housing Bubble Aftermath: Bird's Eye View

The major causes of the increased foreclosures, I agree, presently it is builders competing with existing homeowners in order to recover their stranded capital.

In the past two downdrafts I've been a part of, outlying areas with a lot of new home supply fell out of bed first. As has happened this time around.

But this time there is something far more powerful. That is the huge supply of homeowners who, going in, had near zero or zero equity.

When times get a little tough, no equity or little equity turns into negative equity and then why should the homeowner continue paying a mortgage for a home that is under water?

This is the inevitable, enormous moral hazard that is taking this particular housing boom down.

It's negative equity. I never remember anything like it in the past -- first mortgage lenders would not lend 100% to a new homeowner, let alone one with poor credit.

**FRED** · May 05, 2007, 01:22 PM

Re: Housing Bubble Aftermath: Bird's Eye View

Originally posted by SeanO

One thing that I think is often overlooked is the amount of development that is still required after a housing boom ends. In California we have miles of housing where there was nothing but cornfields just five years ago. So although housing itself is rapidly slowing, we are still building schools, retail shopping, and other infrastructure to support those developments at a frenetic pace - which continues to create considerable economic activity.

Even the housing developments themselves take quite a while to shut down. If you're a developer sitting on entitled, improved and likely financed land, it may be less expensive to build it out, even below cost if necessary, then to sit on it. In fact I think builders in this position are the primary driver behind the price declines we are seeing in a number of high growth areas - which also happen to correlate well with the high foreclosure areas. I'll even go so far as to say that I believe this is the primary driver behind the current wave of foreclosures in California rather than ARM resets or the other oft quoted reasons (which may, or may not, be still to come).

Bottom line is that the economic activity generated by the housing boom will continue to outlive the boom itself for some time. It may take another year or more for this infrastructure work to be completed. And it may simply be unrealistic to expect to see clear signs of a broader impact on the economy until then.

Housing permits fell off a cliff, so you won't see a lot of new construction after completion of currently permitted building that's too far along to abandon. Those projects will be completed by late summer to early fall. Housing construction jobs are just starting to roll over. Rising unemployment feeds into declining housing prices per the iTulip Jan. 2005 housing correction model. The iTulip Dec. 2006 US economy model says recession by Q4 2007.

**bill** · May 05, 2007, 05:14 PM

Re: Housing Bubble Aftermath: Bird's Eye View

The builders will continue to build what has been financed by take out construction loan commitments and the only way to get the commitment from the bank is to have a firm sales contract in place that took place 3-6 mths ago. The construction loan liquidity has tighten since Q4 06 as reflecting on Freds chart with permits falling off the cliff. Builders have walked away from millions of dollars of option money on land deals with entitlements in the last 6 mths.
The reason you see public municipality development taking place it was a front end cost of the developer, and agreed upon in the development agreement when entitlements were granted by the city prior to construction.
The land deals that were put together in the last few years are unraveling today like I have never seen before, not even close to match that of the RTC debacle. The real estate disaster show is just started and the opening act is shown in the chart �permit plunge� .

**SeanO** · May 05, 2007, 05:55 PM

Re: Housing Bubble Aftermath: Bird's Eye View

Originally posted by bill

The builders will continue to build what has been financed by take out construction loan commitments and the only way to get the commitment from the bank is to have a firm sales contract in place that took place 3-6 mths ago. The construction loan liquidity has tighten since Q4 06 as reflecting on Freds chart with permits falling off the cliff. Builders have walked away from millions of dollars of option money on land deals with entitlements in the last 6 mths.
The reason you see public municipality development taking place it was a front end cost of the developer, and agreed upon in the development agreement when entitlements were granted by the city prior to construction.
The land deals that were put together in the last few years are unraveling today like I have never seen before, not even close to match that of the RTC debacle. The real estate disaster show is just started and the opening act is shown in the chart �permit plunge� .

Stockton, CA currently has the highest per capita rate of foreclosure of any MSA in the country. Yet new subdivisions are still springing up and retail development continues full tilt. The new subdivisions have altered their product to hit a lower price point, and by offering new product below the price of existing homes they are continuing to sell. Until there are simply no buyers left, builders will continue to build. It is what they do. Much like GM continuing to run a factory even when they have to sell the cars below cost... it is often cheaper to sell the car at a loss than to close the factory.

My point above was not to say the housing downturn won't have an impact, just that gvanc shouldn't be surprised that we are not yet experiencing it. Q4 may be dead on, but I don't think it will be any sooner.

**gvanc** · May 06, 2007, 10:41 AM

Re: Housing Bubble Aftermath: Bird's Eye View

Originally posted by Tet

What is your opinion on rates? Myself I do my best never, ever, ever to bet against the Fed. Looks to me like rates lift a lot of boats here and a good portion of the boats that need to be lifted are already owned by the Fed. I know I'm kind of crazy when it comes to this stuff and maybe only one out of a hundred agree with my point of view, but if I were the Fed I think I'd start painting the picture of lower rates come May 9th.

Tet: I believe the consensus of what I read lately has the FED leaving the rates unchanged (as you certainly know). But, as you suggest, the question is whether there will be a shift in bias toward a future lowering of rates. If they do, of course, it�s likely off to the races for the market indices. Do the weak job growth and GDP numbers cause enough of a concern at the FED to shift the bias? Or, are the other reports suggesting that the economy is emerging from a slowdown given greater weight? To what extent do FED concerns about the dollar strength with respect to the EUR, pound, etc. figure into this? I certainly do not understand how it all fits together. Any thoughts I have on this are based the analysis of others. Maybe, as I think I have read on iTulip, the FED is constrained from lowering rates so that non-US holders of dollar denominated securities do not significantly reduce their holdings of these securities. In that case, maybe the FED stays put and does not change the bias/rates until it is forced to do so by what they perceive as a significant trend in the economic data, such as a strong recession indicator or a large inflation rate increase. This would be my guess anyway.

Originally posted by bill

The real estate disaster show is just started and the opening act is shown in the chart �permit plunge�.

I guess that has been what's hard for me to internalize because it seems like it has been a steady stream of bad housing news since last summer and yet the economy and markets seem to be holding up, although multiple iTulip articles have made the point that the effects of the housing downturn propagating through the economy are likely to unfold much more slowly than the effects of the 2000 stock market slide did. Here are some Buffet thoughts on the sub-prime and housing situation.

May 5 (Bloomberg) -- The subprime mortgage crisis won't be ``any huge anchor'' to the economy, though lenders and borrowers will have ``plenty of misery,''

Berkshire Hathaway Inc. Chairman Warren Buffett said today.

``It will be a very big problem for those involved, but I think it is unlikely that factor alone triggers anything in the larger economy,'' Buffett, 76, said at the company's annual shareholder meeting in Omaha, Nebraska. That assumes unemployment doesn't increase ``significantly'' and interest rates don't go up ``dramatically,'' he said.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aS1KgkM4aE2c&refer=home

His other statements seem in line with iTulip thinking.

Housing, Derivatives
Buffett said Berkshire units related to home construction have been hurt by a housing slump in the U.S. economy he expects to continue for ``quite a while.'' He also used the meeting's question-and-answer platform to warn about the dangers of financial derivatives, legalized gambling, and overpaid corporate executives.
The Federal Reserve's efforts to regulate the use of credit to purchase securities have been made irrelevant by derivatives, he said. The instruments are derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
``The introduction of derivatives just made any regulation of leverage a joke. It's an anachronism,'' he said. Because of them, ``there will be some very unpleasant things that happen'' in the financial markets. ``We may not know exactly where exactly the danger begins and at what point it becomes a super danger.''

**mtnrunner2** · May 09, 2007, 12:10 AM

Re: Housing Bubble Aftermath: Bird's Eye View

[QUOTE=SeanO]One thing that I think is often overlooked is the amount of development that is still required after a housing boom ends. In California we have miles of housing where there was nothing but cornfields just five years ago. So although housing itself is rapidly slowing, we are still building schools, retail shopping, and other infrastructure to support those developments at a frenetic pace - which continues to create considerable economic activity.

So you think that the overbuilding is causing the price drops, which then in turn cause the foreclosures? I agree with that. That is what my research shows too: rising supply and lower demand cause price drops, and as prices drop then foreclosures rise.

I see foreclosures as a lagging indicator, and economists that I have read, agree with that.

In San Diego, prices softened in Spring 04, and foreclosures rose in June 06, two years later.

I also liked ForeclosureRadar.com,and I bought a subscription. It's much better than foreclosure.com. It has a lot more properties, and it shows properties owned by banks and those in postponement, which are often better deals.

Schahrzad Berkland
http://www.californiahousingforecast.com/

**Rajiv** · May 20, 2007, 09:52 AM

Re: Housing Bubble Aftermath: Bird's Eye View

To see the impact of so called "Easy Credit" on a couple's life, see the very good New York Time article Couple Learn the High Price of Easy Credit

Ms. Moellering, and her husband, Mark, 39, earn average salaries for their age (together about $66,000 a year), live in an average-priced home and have an average cost of living. But like many other households these days, they have found that their day-to-day economic life has come to depend not just on how much they earn or spend, but also on how well they shuffle what they owe among a broad array of credit cards, home equity loans and other lines of credit.

jk · May 20, 2007, 10:28 AM

Re: Housing Bubble Aftermath: Bird's Eye View

Originally posted by Rajiv View Post

To see the impact of so called "Easy Credit" on a couple's life, see the very good New York Time article Couple Learn the High Price of Easy Credit

i read the article and noted that when they got married they decided to spend $50k they didn't have on the wedding and adding [or remodeling- the article isn't clear] a bathroom. i don't have much sympathy for their plight now.

**Rajiv** · May 20, 2007, 02:14 PM

Re: Housing Bubble Aftermath: Bird's Eye View

I don't have any sympathy for them either. However, it WAS the lure of "Easy Credit" that they succumbed to. When credit cards, and easy credit are being offered -- without adequate checks for credit worthiness, I also have little sympathy for lenders, whose "Investments" then go under.

What I didn't understand was their logic when they said

In the last two years they have managed to cut their credit card debt by $20,000, Ms. Moellering said, and have built a savings of about $5,000, thanks to a Christmas gift from a relative. Ms. Moellering contributes to her retirement account at work. Both say they could manage better if they only had the time.

To me, if your debt is greater than the cash you have sitting in the bank, there are no savings! They are probably better off using the $5000 to repaying loans. The retirement plans are another thing -- because of tax implications. But even there, with a joint income of $66,000 the taxes are not likely to be large.

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Housing Bubble Aftermath: Bird's Eye View

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