Is housing really getting this bad?

[RKC]

Are things bad enough to make this bailout more than remotely possible? Or is this just the hyperactive media?

http://money.cnn.com/2008/04/21/news/economy/fannie_freddie/index.htm?postversion=2008042105

[competentone]

The banking/lending-institution situation (including what Freddie and Fannie are facing) is pretty serious, no matter how you slice it.

The problem is much greater than the "sub-prime" lending already discussed heavily in the mainstream media. The problem extends into the entire mortgage market (and the entire lending market for that matter, but I'll limit my comments here to primarily mortgage lending).

Many "prime" mortgages are a problem on the balance sheets of the lending institutions because the collateral (the houses) have declined so drastically in value. Even those who had 30%-40% equity in their homes just a couple of years ago, may now, in some markets, be "up-side-down" -- owing more than the market value of their homes.

This puts the banks in a bad situation. The bank was able to lend at a low interest rate because the institution not only had the "promise to repay" from the borrower, but also had the collateral -- the value of the home/property -- to protect its loan if the borrower defaulted.

With the collateral worth only partially what is owed on the loan, the "rating" on the mortgages (or "re-packaged instruments" the mortgages might have been rolled into) is not as high as it was when the collateral was worth more than the amount owed under the loan.

Banks/lending institutions have certain standards they need to meet in order to be considered "solvent." With the "ratings" on their loans (or mortgage-backed securities) dropping, due to the declining value of the collateral underlying those loans, the banks can quickly enter a position of technical insolvency.

The government, primarily through the actions of the Federal Reserve, is trying to "pump" money into the financial system with the hopes of keeping housing prices up -- in order to protect the value of collateral supporting all the outstanding mortgage loans.

The problem with the government's actions is that it is inflationary. If the new money pumped into the economy pushes all prices up (as it will) the banks may return to a safer position of "solvency," but the inflation then creates new problems.

The banks/financial industry has trillions in outstanding loans at very low interest rates. An up-tick in inflation can easily make those low-interest rate loans poor quality investments. Imagine a bank that had lent money on a mortgage at 5% and the inflation rate is now running at 10%! That loan is losing money.

The Federal Reserve is "hoping" to walk a "very fine line" and pump just enough liquidity into the system to keep home prices from declining and "save" the banking system, but not put too much liquidity into the economy to create a situation where price inflation turns all the outstanding loans into declining assets -- which would then push the banks back into a position of insolvency!

My opinion: The Fed cannot succeed in saving the banking system. The credit bubble was just too big. Its collapse is going to take a lot of banking institutions with it.

It is going to be a mess.

---------

An interesting footnote is that the "credit bubble" was actually created by the Fed when it kept interest rates below the levels the marketplace would have set them. The credit bubble was literally decades in the making; its collapse will take just as long no matter what actions the government/Fed tries to take now. In fact, the more actions the government tries to take to "keep things going" the longer full recovery will take. A "hands off" policy by the Fed (I know it won't happen, but theoretically speaking) would allow market forces to correct the problems a lot quicker.

[Porsche-O-Phile]

And what's worse, everyone knew this was going to happen, but said "aww f*ck it, we'll deal with it later" anyway.

Well. . . it's later.

[turbo6bar]

Fannie and Freddie have been tightening lending guidelines. I am certain they aren't doing it for the hell of it.

It is safe to say the worst in housing is still ahead.

[red-beard]

Originally Posted by Porsche-O-Phile

And what's worse, everyone knew this was going to happen, but said "aww f*ck it, we'll deal with it later" anyway.

Well. . . it's later.

Social Secutiry anyone?

Bueller? Bueller?

[Jims5543]

In the last 6 months, I have seen a trend of 4 out of 10 homes sold belong to banks go to 6 out of 10.

The word short sale is on everyones mouths around here and to be honest, I am seeing investors buying up houses again for the first time in probably 2-3 years now.

A house around here that went for 250-300K two to three years ago is not fetching in the 100K range.

Its very interesting to watch.

[competentone]

Originally Posted by competentone

The banking/lending-institution situation (including what Freddie and Fannie are facing) is pretty serious, no matter how you slice it.

The problem is much greater than the "sub-prime" lending already discussed heavily in the mainstream media. The problem extends into the entire mortgage market (and the entire lending market for that matter, but I'll limit my comments here to primarily mortgage lending).

Many "prime" mortgages are a problem on the balance sheets of the lending institutions because the collateral (the houses) have declined so drastically in value. Even those who had 30%-40% equity in their homes just a couple of years ago, may now, in some markets, be "up-side-down" -- owing more than the market value of their homes.

This puts the banks in a bad situation. The bank was able to lend at a low interest rate because the institution not only had the "promise to repay" from the borrower, but also had the collateral -- the value of the home/property -- to protect its loan if the borrower defaulted.

With the collateral worth only partially what is owed on the loan, the "rating" on the mortgages (or "re-packaged instruments" the mortgages might have been rolled into) is not as high as it was when the collateral was worth more than the amount owed under the loan.

Banks/lending institutions have certain standards they need to meet in order to be considered "solvent." With the "ratings" on their loans (or mortgage-backed securities) dropping, due to the declining value of the collateral underlying those loans, the banks can quickly enter a position of technical insolvency.

The government, primarily through the actions of the Federal Reserve, is trying to "pump" money into the financial system with the hopes of keeping housing prices up -- in order to protect the value of collateral supporting all the outstanding mortgage loans.

The problem with the government's actions is that it is inflationary. If the new money pumped into the economy pushes all prices up (as it will) the banks may return to a safer position of "solvency," but the inflation then creates new problems.

The banks/financial industry has trillions in outstanding loans at very low interest rates. An up-tick in inflation can easily make those low-interest rate loans poor quality investments. Imagine a bank that had lent money on a mortgage at 5% and the inflation rate is now running at 10%! That loan is losing money.

The Federal Reserve is "hoping" to walk a "very fine line" and pump just enough liquidity into the system to keep home prices from declining and "save" the banking system, but not put too much liquidity into the economy to create a situation where price inflation turns all the outstanding loans into declining assets -- which would then push the banks back into a position of insolvency!

My opinion: The Fed cannot succeed in saving the banking system. The credit bubble was just too big. Its collapse is going to take a lot of banking institutions with it.

It is going to be a mess.

---------

An interesting footnote is that the "credit bubble" was actually created by the Fed when it kept interest rates below the levels the marketplace would have set them. The credit bubble was literally decades in the making; its collapse will take just as long no matter what actions the government/Fed tries to take now. In fact, the more actions the government tries to take to "keep things going" the longer full recovery will take. A "hands off" policy by the Fed (I know it won't happen, but theoretically speaking) would allow market forces to correct the problems a lot quicker.

I thought I'd bump this up.

In case you haven't noticed, the "mess" is here.

Pay attention to those (like me) who are warning about the risks of price inflation now. Just as I was right back in April, you will see that I'll be right about the price inflation coming to the economy.

Got gold?

[Porsche-O-Phile]

Gold will be worthless. It's ultimately just a conventional "commodity currency". It has very little practical use or purpose other than it's shiny and looks pretty in jewelry and it's reasonably good for certain types of electrical connectors and dental products. If things really get bad, food, water, guns, ammunition, gasoline, portable generators and safe/secure places to sleep will be infinitely more valuable than gold. Do I think this could happen in the USA in 2008/2009/2010? Damn right I do. I doubt there'd be open civil war, but there most definitely could be widespread looting and civil unrest unless things calm down soon - which I don't see happening.

I actually think we're headed right for stagflation - a recession combined with very high inflation. Just like the 1970s. Where that leads (in terms of civil strife) is anybody's guess, but I'm preparing for a "worst case". If I'm wrong then fine. If I'm right... well... at least I'll be prepared for it.

[onewhippedpuppy]

Originally Posted by Jims5543

In the last 6 months, I have seen a trend of 4 out of 10 homes sold belong to banks go to 6 out of 10.

The word short sale is on everyones mouths around here and to be honest, I am seeing investors buying up houses again for the first time in probably 2-3 years now.

A house around here that went for 250-300K two to three years ago is not fetching in the 100K range.

Its very interesting to watch.

That's just so weird. We've had several houses sell in our small neighborhood this year, only a few months on the market, and for good prices. Foreclosures are still pretty rare. I know that the crisis is real, but it's like two different worlds.

Of course, decades of 6% appreciation doesn't lead to any housing bubbles to pop.

[competentone]

Originally Posted by Porsche-O-Phile

Gold will be worthless. It's ultimately just a conventional "commodity currency". It has very little practical use or purpose other than it's shiny and looks pretty in jewelry and it's reasonably good for certain types of electrical connectors and dental products. If things really get bad, food, water, guns, ammunition, gasoline, portable generators and safe/secure places to sleep will be infinitely more valuable than gold. Do I think this could happen in the USA in 2008/2009/2010? Damn right I do. I doubt there'd be open civil war, but there most definitely could be widespread looting and civil unrest unless things calm down soon - which I don't see happening.

I actually think we're headed right for stagflation - a recession combined with very high inflation. Just like the 1970s. Where that leads (in terms of civil strife) is anybody's guess, but I'm preparing for a "worst case". If I'm wrong then fine. If I'm right... well... at least I'll be prepared for it.

If fiat currencies collapse, a new "money" is needed in the economy -- gold can play that role effectively (as it has historically).

I don't disagree that certain goods may appreciate in value even greater than gold (being used as a substitute for fiat currencies) -- especially if complete civil unrest occurs.

Assuming we have what you expect, stagflation, without significant amounts of civil unrest, you can expect precious metals to be an excellent fiat currency substitute.

[GDSOB]

Originally Posted by onewhippedpuppy

That's just so weird. We've had several houses sell in our small neighborhood this year, only a few months on the market, and for good prices. Foreclosures are still pretty rare. I know that the crisis is real, but it's like two different worlds.

Of course, decades of 6% appreciation doesn't lead to any housing bubbles to pop.

I'm sure if you go to the "wrong side of the tracks" in Witchita you'll find plenty of FC's. Also more in any of the new construction areas on the outskirts of town. Pretty much true anywhere, that's where the marginal borrowers were concentrated.

[911Rob]

Garbage in, Garbage out.

So here's your challenge and it's been an ongoing challenge for ever 'n a day...... YOU have to figure out how to stay positive through all the negative! The wave of negative coming from the US economy has been so flipping negative that it will effect most everyone, but the winners will be the ones that figure out how to stay positive throughout the ordeals.

I've gone through some personal negative challenges in the past; I would spend ONE day with my accountants, lawyers and staff focusing on the challenges of my companies; then I would spend SIX days focusing on the solutions, dreams and goals of the company. Period.

Take my advise and do the same. Figure out how this effects you personally, plan around it and get to work! Be positive and don't get wrapped up in all the "other peoples" negative crap. The last few years were very positive energy years, but now we're back to the same 'ol negative crap; the sky is falling syndrome. Rise above it, set your goals and attack the future.

Cheers,

[JeremyD]

when the hurricane blew through here in 2004 - you could have used gas, batteries, generators and plywood as currency. You have to remember that the barter system was around before currency.

You guys need to take a rest - in the weather business they call it a wishcast. wishing something would happen so you could say I told you so.

There are some fundamentals that are still pretty solid. not every part of the country suffered a housing bubble. Not every area has rampant foreclosures. Unless you are buying a house or selling a house this probably will not effect you (except for the emotional aspect)

Unless you are planing on retiring soon - and you had all your money in mutual funds - this may not effect you either. Many even in the market had diversified risk so their effects may not be extreme.

Me personally - I think all the politicians should be voted out. All this crap happened on their shift. Who's chairman of banking and oversight - lets start the criminal charges. These ceo's that took millions going out the door while thousands lost their jobs - seize their assets.

I think inflation is going to be curtailed. Gas is already dropping - if the demand for good drop you'll see prices slashed (try buying a car today - the discounts will shock you) retail will be ugly this year - but that means bargins.

[turbo6bar]

Agree with 911Rob. I was positively elated to sell of numerous rentals from 04-06 at peak prices, go to cash, and wait for better days to come. The better days are here, and it is almost time to go on a shopping spree. My advice to others is rise above the "RE always goes up," mantra and think for yourself.

[strupgolf]

And remember, around 95% of all homeowners in the US are still paying their mortgages on time each and every month. Thats pretty darn good. Now next month, uh, I'll get back to 'ya.

[Porsche-O-Phile]

Originally Posted by strupgolf

And remember, around 95% of all homeowners in the US are still paying their mortgages on time each and every month. Thats pretty darn good. Now next month, uh, I'll get back to 'ya.

And that actually is the scary part. It just goes to show what a knife-edge our economy exists on at any given time. Just like most people in their personal finances, our economy and our government is budgeted to the last dime - sometimes overbudgeted. It doesn't take much to send it careening out of control.

This is the direct result of a consumption-based economy rather than a savings/wealth accumulation based economy. If we were the latter, we'd be much more able to absorb cyclical variations and even the effects of stupid decisions (like housing in the last few years).

[HardDrive]

Originally Posted by Porsche-O-Phile

This is the direct result of a consumption-based economy rather than a savings/wealth accumulation based economy. If we were the latter, we'd be much more able to absorb cyclical variations and even the effects of stupid decisions (like housing in the last few years).

I will be teaching my children about buying on lay away.

[HardDrive]

Article about family budgeting:

http://www.navytimes.com/money/financial_advice/military_sgtshopper_070723w/