Ominous Events in the Mortgage Markets This Past Week
Metastasis
By blackhedd Posted in credit crisis | Economy | federal reserve | Interest rates | mortgage — Comments (73) / Email this page » / Leave a comment »
Several very important things happened in the market for mortgage-backed securities (MBS) this past week. They're technically arcane and hard to reduce to sound bites, so they didn't make a big ripple in the news. But the effects will be far-reaching.
Many published reports (here's one) at midweek had it that UBS (the Union Bank of Switzerland) had dumped a $24 billion portfolio of securities backed by Alt-A mortgages, which are intermediate in quality between prime and subprime.
According to the whispers, UBS received 70 cents on the dollar for the position. (The rumored buyer is interesting too. More on that in a moment.)
You know what happens when the guy down the block sells his house. The price he gets becomes a "comparable transaction" that affects the perceived market-value of your own house. Same thing happens with illiquid securities like MBS.
Read on...
The market for securities backed by mortgages other than subprime mortgages had been reasonably orderly until this week. UBS changed the dynamic by choosing to abruptly exit. But in an effect that you may find strange, their action suddenly reduced the valuation of similar securities in portfolios around the world.
When they do their accounting, institutions nowadays are required to mark their financial assets to market (this derives from a risk-management methodology called VAR, or Value At Risk). Since there is no secondary market for most MBS securities, there are no market prices you can use to report the value of your holdings on any given day. So for many of these securities, comparable transactions become the valuation reference.
Thus, the move by UBS had several effects. For banks, it means that regulators may force many of them to re-classify large chunks of their portfolios into a lower "tier" of the VAR liquidity model, which could endanger their credit ratings.
For hedge funds and Wall Street firms that buy securities with leverage (borrowed money), it means they will face margin calls. And they will be forced to either come up with more cash to hold their positions (which most of them won't be able to do), or start holding their own fire sales in an already-down market.
And in fact, two institutions (Thornburg Mortgage Inc. of New Mexico, and a mortgage-bond fund run by Carlyle Group of Washington DC), immediately got hit with large margin calls that threaten their survival. There will be more.
The bottom line is that a great many financial institutions have begun a process of "de-leveraging" that will cause them to shun much of the ordinary commercial and retail lending that makes the economy work.
You're already seeing this in the market for home mortgages. One would have thought that massive interest-rate cuts by the Federal Reserve would result in lower mortgage rates. Instead, mortgage rates have gone up in recent weeks.
Part of this is because the 10-year Treasury note has fallen in value compared to a month or two ago. But much of it can be seen in the interest-rate spread between 30-year securities issued by Fannie Mae and the 10-year Treasury note. Fannie's bonds are yielding over two percentage points more than the 10-year T (which is used to hedge them). That's the biggest spread in over twenty years. And it suggests that banks have suddenly become much more reluctant to lend money to homeowners.
That's going to make houses harder for people to buy, even at a time when the market value of houses is falling. And it will further exacerbate the "negative wealth-effect" that is believed to be putting pressure on consumer spending.
So people are off the mark when they tell you that the Federal Reserve is to blame for the mortgage crisis. It turns out that the interest-rate policy lever may be powerless to induce banks to start lending again.
Now it's absolutely, positively, unequivocally true that the massive markdown in the value of mortgage-backed securities is being way overdone. Many, perhaps most, of the current transactions are taking place far below the long-term stable value of the securities.
And who benefits from that? Well, I've long suspected that people like Bill Gross, Warren Buffett, and Alan Greenspan (who works for Gross these days) were talking out of both sides of their mouths when they've loudly called for non-intervention in the MBS market.
Turns out that the rumored buyer of the 25 million swiss-franc UBS portfolio this week was PIMCO Funds, the California-based bond mutual-fund owned by German insurer Allianz. PIMCO is run by none other than Bill Gross.
The effect of panics in financial markets is always to move assets from weak hands to strong hands. This is how the world works, there's nothing wrong with it, and the end result (years from now) will be a stronger financial system.
The problem is that this perfect storm is having massive disruptive effects in ordinary people's lives. Over long periods of time, credit unavailability retards economic growth and causes recessions.
And that has major spillover effects on our politics.
After the Presidential election, there will be a huge push to overhaul the regulation of the banking and financial industries, to introduce greater "transparency." (No one ever wants to again be in the position of having to ask "Why the hell didn't you all see this coming?!")
The financial world will be totally reshaped next year by people like House Banking Committee Chairman Barney Frank, Ways and Means Chairman Charlie Rangel, and the Treasury Secretary named by whoever becomes President. And the uncertainty surrounding this is itself a reason for banks to avoid making any new loans.
Finally, much of the discussion has been about asking "who screwed up?" I suppose the thinking is that if you can find someone to blame for causing the mess, you can hang him from a tree and everyone else can move on.
But like a metastasizing cancer, or a garbage fire next to an oil refinery, you can't solve this problem by disciplining the people who caused it. It's way too big for that now.
-Francis Cianfrocca ("blackhedd")
Ominous Events in the Mortgage Markets This Past Week 73 Comments (0 topical, 73 editorial, 0 hidden) Post a comment »
...so long as we're not referring the state of the economy next year as Great Depression II.
...is the practice of the knocking down the stable after the horse has bolted. Any then banning keeping horses in stables.
Thereafter all the horses are shipped over to London and new stable-hands hired over there.
Except for the analogy to work you have to assume the regulator hasn't much of a grasp on what a horse is, or for that matter a stable.
When I heard Hillary talk about an interest rate freeze it scared the bejesus out of me. My opinion is that the government has at best a 50/50 shot of fixing anything in this mess. It's at least equally likely that they will make it worse.
I've read your previous comments and I suppose you're right that the fed is doing the most reasonable thing it can do by putting lots of liquidity into the market - maybe more is needed.
It's certainly quite telling that UBS would take such a writedown to unload MBS's. I would hope that their skepticism is unfounded but I've found it's unwise to bet against the smart folks who are running the show.
Your post also makes me realize that these problems are more global than I had previously realized. Maybe the falling dollar will soften the blow to foreign holders?
Thanks for the commentary.
...practically from the start. The crash in the actual subprime mortgage market happened in February and March last year. When that pair of Bear Stearns hedge funds blew apart in June, everybody was saying it was an isolated problem.
When the liquidity crisis finally exploded in August, it was concentrated in London and Paris.
Turns out that many, perhaps most, of the affected mortgage-backed securities had been sold to Europeans.
The falling dollar is caused primarily by lower policy interest-rates. I think rates will be cut all the way to 2% this week or next. But I'm far from convinced that lower rates will solve the problem.
then have the effect we thought they did, over the last 20 years? Or, were they themselves, a bubble? Were the markets moving along in spite of the Fed's rate management?
As for the housing market, what does this mean for homeowners (depreciation) and non-homeowners (houses for sale, but no money to finance)?
...having over the last 20 years?
The world economy generates over $30 trillion a year. We do $14 trillion of that here. The currency markets alone trade two or three trillion dollars every day.
I suppose everyone thinks of the Fed funds rate as the instrument by which the economy is managed, but that's like saying that the ignition key is what makes your car go.
The rate-policy lever is a tiny little thing. As Paul Krugman (who is a darned sharp economist, even if politically he's a nutcase) recently pointed out, rate policy strongly affects the monetary base of the country but little else.
....while the state of the dollar says raise them. The Fed is in a tough spot.
The writedowns will be painful, but these banks need to mark their books to the market and take the losses.
“.....women and minorities hardest hit”
I have center around this: are we - globally - entering an economic shift, not unlike what happened from the 19th to 20th centuries, as agriculture moved into industrialism?
10 years ago, with the Internet/Tech boom, all the rage was "New Money" and "New Economy" which all turned out to be wishful thinking. The old standby's by and large, won out.
I'm not meaning to make this about the Internet, because, that's just one piece of the puzzle. I think, what I'm trying to ask is this: is the economy as a whole undergoing a metamorphosis? What's fueling this change? What's creating the wealth and where is the wealth drying up?
Long answer: you'll have to wait for my book.
“.....women and minorities hardest hit”
The bottom line is that a great many financial institutions have begun a process of "de-leveraging" that will cause them to shun much of the ordinary commercial and retail lending that makes the economy work.
We could see the writing on the wall back on November 8th. Even though we're not directly connected with mortgages and credit, we were printing for large homeowner's insurance companies and when the depth of the crisis began to manifest itself, those companies didn't just "hit the brakes" they threw out the boat anchors, deployed the flaps, fired the retro-rockets, and popped their parachutes. Full stop.
And since then, the possibility of getting loans for capital equipment has been nonexistant. In order to get the equipment we need to function through the spring and summer we've been forced to take lease agreements at usurious rates -- over 20% per year. The banks don't even want to take our calls.
The only thing that is saving us right now is that our exposure is limited to one machine, and that we're in a line of business that traditionally does well in economic downturns as companies try to cut expenses.
We're doing our best, and ironically I'm optimistic about this Spring and Summer. We're very lean here in terms of our exposure because we were forced to be frugal before this crisis hit, meaning that we sourced most of our equipement at low prices and we own almost all our equipment outright, so our monthly outflows are low.
It pays to be frugal if you can, even when times are good -- because as this crisis proves, you never know what's really just around the corner. The main reason we could do that is because my father is an Electrical Engineer/Industrial Engineer and we can repair our own equipment. Otherwise we'd be in the soup if we had to purchase everything new.
They bought up huge piles of used manufacturing equipment from Europe. Relatively low capital costs and super-low marginal costs.
Is your market such that you can get a "breakup fee" from your customers if they sign a purchase order and then cancel it?
We didn't stipulate that in the contract because when we started the work on it, the job was growing so quickly and the reports were so glowing that we didn't think to stipulate that. We will be including that in any large contracts we do in the future, you can be sure of that, especially in this environment.
I really think this took a lot of people by surprise, including us. In August and even into late September, the problem was that we couldn't get the work out fast enough -- we literally couldn't produce fast enough. By early November, the problem was that we couldn't shed the extra costs fast enough.
We're not going to sue anyone. We had to swallow about $5,000 in printing costs but going after the customer for that money isn't worth it for us. However, on the next large job that will be a part of the contract.
That's how long it took to feed back into the real economy. Back in the summer, people like me were raising the flag and looking like idiots in the process. On this site, remember, we were still fighting the Ron Paul wars at the time. Plenty of people (now mostly banned) were saying we needed to get rid of the Federal Reserve, at a time when they were the only thing preventing a full-scale meltdown.
And still, the jobs and economic-output data kept coming in strong, strong, strong. Revised GDP growth in the third quarter was an incredibly high 4.9%. That's about the time people were accusing me of talking down the economy to benefit the Democrats.
It really wasn't until early this year that the crisis started showing up in the economic stats from the real-world economy. And that's about the right timing to reflect the things you started seeing in November.
Wait until you read the story about my large-format printer...
Heh. It's a good one. Coming in the next few days. The capsule version is that right in the middle of all of this, we bought a good workhorse of a large-format printer with a nice collection of ancillaries and supplies at a very good price, but the idiot shyster who sold it to us took $475 to crate it for shipment and decided that "a crate" really means "three $5 pallets strapped to the front and back with $0.20 worth of cellophane."
That printer went 1800 miles across the country and arrived here shattered. I spent the next two weeks taking it apart, fixing it, recalibrating it, etc. Now it works perfectly again. But we were out the insurance money because the bill of lading said that the machine had been crated and because it was used equipment the freight liability was only $0.50 PER POUND. We paid a man in Texas $475 who we thought we could trust to crate the machine and he gave us $15 worth of old pallets and plastic and our printer arrived here looking like it had been through a WWE cage match.
I was angry. But I found the service manual online, took it all apart, fixed the broken pieces, and made it work like new again. The good part is that the ancillaries in the deal were worth as much or more as the printer itself, so in the end we came out ahead, despite the fact that the seller was a charlatan. Otherwise we would have had to throw it away and take the hit. Wait until you see the pictures...
Was our "Black Thursday." We had just purchased two extra printers to handle the anticipated volume of the jobs we were doing as per the production schedule we thought was going to continue through June of this year. My father and I were in the shop at 5:30 in the morning setting those machines up when the call came:
"Don't do anything on the [xxxx] job. They've put an indefinite hold on it."
Shock. Horror. Apoplexy. We're sitting there with a quarter of a million pieces of blank paper and $50,000 in new printers, and no work to do with them. We still have more than 50,000 preprinted envelopes that we paid for and have been forced to eat.
My grandparents lived through the Great Depression and even though some of the stories sound superficially similar, I know that nothing Americans are doing now is even close to what they did to survive that time.
My grandmother used to make all of her own clothes, they grew their own food in their garden, my grandfather made all the furniture after coming home from the steel foundry, etc., etc. Americans are whiners. This is a rough patch and although a lot of people are hurting it's only in comparison to boom times that they're crying about. It's nothing in comparison to the Great Depression, it's not even in the same Universe.
Is that Americans have become more incompetent at coping with even brief hardship without statist intervention. That's what's worrisome to me. Nobody saves money, so how can they be expected to cope?
your industry is in the tank, and it is going to get uglier towards summer.
" Got to love the Lord for making things like that."
Morally Compromised
Because traditionally in down markets, cost-effective service bureaus like the one I'm running do very well, particularly as companies try to cut costs.
you and your pop started the business. Don't get me wrong, I think it's great. But from my perspective(paper), this industry is nuts, and getting worse.
How about those prices going sky high?...Got to love the postal rates going thorugh the roof...
It appears that you have found a niche, hopefully storm resistant. That is good to hear, not many are that lucky.
" Got to love the Lord for making things like that."
Morally Compromised
Postal rates are a function of how much you can save for the client as a result of your experiencing in processing their data to conform to the Direct Mail Manual to achieve the best price regardless of what is being mailed. The Direct Mail Manual is an 1800 page, 20MB PDF download from the U.S.P.S. and one of the things we have done in more than 30 years of experience is understand that "bible" from one end to the other.
The way you save people money on postage is understanding and realizing all of the nuances of that enormous piece of government regulation and doing targeted mailings to the exact demographic they want to advertise to. That's one of our areas of specific expertise. We can produce entire mailings for people -- including the paper, the folding, the inserting, and the printing and mailing, for less money than they could do it themselves just for the postage in many cases.
I'm talking industrial mailings here, not sticking stamps on letters.
I know what you you're saying, it's a tough business to be in, but we've been doing it for more than 30 years.
like you have a nice little niche.
I understand "industrial" mailings all to well...and as I said, it's getting worse, and will continue for some time to come.
" Got to love the Lord for making things like that."
Morally Compromised
Right now we do small business mailings with industrial-strength expertise and background. Our value to the customer is that we give them the prices on even short run mailings that compare favorably with what they could expect if they were mailing ten times as much. We're taking the hard-earned lessons of large, million-piece+ mailings and making them available to the small business customer. Wish us luck!
I think one of the things people are really worried waaaaaay too much about is the idea that Atlas is Going to Shrug. From where I'm sitting, Atlas is a little bemused and concerned about the follies he's seeing, but he ain't shrugging. It's more like he's just sitting here wondering: "What should I do next?"
But one of the things you do to combat that is get your discard rate down as close to 0 as possible. You do that through applied operations research. In most printing businesses, it's common to overprint runs by as much as 10% to handle the inevitable discards that occur when you process the pieces and they get spindled, folded and mutilated by machinery during the run.
We have got our processes down to a point that we can mail nearly 100,000 pieces with an almost-zero discard rate, which means we don't have to print the extra pieces. We discard as close to zero as possible.
We also have a few other proprietary tricks up our sleeves for reducing cost... ;)
I always get excited when I see you have posted a new entry. Your skill at making the financial sector understandable to the masses never ceases to amaze me.
I don't really want to buy another house (I owe $125K on this $250K (probably less) house that I own now) and my wife will kill me if I buy another one.
So is there a stock or a security that I can buy into that will benefit from this whole thing.
I am a buy low kind of guy and I've got a tax rebate check headed to me (less tithe and $250 for John McCain).
...so start by squeezing your rocks good and hard with your left hand. With your right hand, write an eleven or twelve figure check to the next large European bank that has mortgage-backed securities they want to dump way below the market.
But Warren Buffett, George Soros and a clutch of Saudi princes will be trying to get in ahead of you, so you'll need to use your elbows.
If some organizations have adopted policies that are forcing them to be fleeced, doesn't that signal somebody that something needs to change in the policies?
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"If we want to take this party back, and I think we can someday, let’s get to work." – Barry Goldwater
...isn't a matter of policy adopted by specific organizations. It's a matter of compliance with laws and banking regulations in their respective countries, which is a relatively minor point. It's also a matter of retaining the confidence of their customers, which is an all-important point.
I did a cursory analysis the other day and got these results(rough numbers). Here is how the S&P 500 has behaved in each decade the last 60 years:
1950-1960 Tripled
1960-1970 Doubled
1970-1980 Flat
1980-1990 Tripled
1990-2000 Quadrupled
2000-2008 Flat to down slightly
So, the last time the S&P was flat for a 10 year period was followed by an extended period of unprecedented growth. A $10,000 investment in 1980 was worth $1,000,000 just 20 years later.
I am a contrarian so I am looking at some of the most beat up stocks. But I also like quality names. I am thinking about Lehman Brothers, General Motors, and Google, for example.
Warren Buffett has said, "I get nervous when other people get greedy. I get greedy when other people get nervous." He is the richest guy in the world so maybe he knows something we don't.
At my daughter's swim meet this weekend one of the teams wore shirts that said, "Don't be a nancy!" with nancy being someone who is afraid. So, I am not going to be a nancy.
It never ceases to amaze me that highly trained/highly paid Wall St financial gurus are shocked when financial intruments, whose underlying value is based on a guy with a $50,000 income getting a mortgage for $500,000, go bad.
In aggregate, how may years of education at business schools like Wharton and Harvard have gone into constructing this paradigm? Look, I know that you play the game with the rules in place when you get there, but to be caught off guard by this simply strains credulity. The game was rigged from the outset and now they are "shocked, shocked gambling was going on in here"? There's enough blame to go around from the unscrupulous mortgage broker, to the greedy lender to the idiot borrower whose seen too many episodes of Flip This House, but to not know where this was all heading?
Household debt has gone from a very high 96% (debt vs income) in 1997 to %136 in 2007. That is the fastest rise in history. Led by an example of a free spending gov't whose real obligations are not only the 9 trillion on the books, but the $45-53 trillion we are commited to by contract. We run a yearly $750 billion import trade deficit (all borrowed) while we have a surplus manufacturing jobs export (yes I know unemployment is still 4.8%, but manufacturing literally creates wealth, service jobs only move it around. Oh and by all means, let's add another destructive Green Fee in the form of Cap & Trade while we're at it. No way that would drive even more manufacturing to China, India or Mexico - whole other topic).
Look, I think it's time to own up to the mess we have gotten ourselves into. The longer it takes, the worse it's going to get. The Fed has already indicated it's OK with just monetizing the debt. DeNial ain't just a river in Egypt. And don't even get me started on what's going to happen (already underway) to food prices this year because of the moronic PC ethanol program. The consumer is completely unable to spend the economy out of this situation ('stimulus' package not withstanding).
For some very interesting analysis and explanations, go to http://suddendebt.blogspot.com/
His politics seem a bit left of center, but his analysis is very good.
Just for fun, add a democrat Executive and Legislative gov't to this mix who will make FDR will look like a conservative.
It's going to be an interesting few years.
Just curious, perhaps others here remember....
Didn't Bush, at one of his first SOTU speeches, call for the government to help low income families by LOANING them the down payment needed to buy their first home?
I would ask what political worldview Bill Gross, Warren Buffett, and yes, even Alan Greenspan hold? It seems to me that all three are liberal Democrats who have no problem at all with the Democrat Party "straightening" out the mess that they have had such a hand in making.
Or, am I far off base?
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Greenspan is a self-professed "lifelong Republican" who has also been a Washington insider for at least thirty year. He's pretty close to the vest about his politics but I suspect he's a liberal.
I don't know Bill Gross, but I wouldn't be surprised if he's just a bond geek with no particular politics. The kind of guy who doesn't pay attention to politics because he knows that markets are vastly bigger and more powerful than governments.
what do you think can be done to strengthen the dollar? Every time the dollar falls, oil goes up and we lose ground against world currencies. Should the Fed begin to raise interest rates?
(she is daily glued to the new Fox Business Channel and CNBC)
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At least at this point in time. Let's get the credit panic washed out before we talk about higher interest rates.
Tell your significant other that a top hedge-fund operator of my acquaintance once made the point that he and his peers pay essentially no attention to Fox Business and CNBC.
They do read five to ten newspapers every morning though.
I believe he has expressed his support for Hillary but I am sure would support Obama if he got the nomination.
I think Buffett is strictly a democrat partisan, typical limousine liberal. He is a useful tool for them when he trots out there and says "the rich" like him should be paying more taxes. Unfortunately, "the rich" to Democrats are most people with a job not people with $60 Billion. Also, those "foundations" he set up for his kids so they wouldn't inherit his money are a scam too. Didn't he ever see Godfather III? The Mary Corleone Foundation was a scam just like his foundations are a scam. Noone should ever trust someone with $60 Billion.
Reportedly he was a devotee of Ayn Rand during the 50's but is married to the uber-liberal Andrea Mitchell.
Not sure how to square that. I have always believed that men have a tendency to morph into their wives politically. Pretty sure it has something to do with getting sex.
He and Andrea have been quietly close for a good twenty years. I don't think his private life inappropriately affects his policy judgment. Even if you do think so, you shouldn't say so.
Ask who benefits from this. Just advance knowledge they were going to do this was immensely valuable. Somebody else just picked up a boatload of securities that are worth 10-30 percent more than what they paid for them.
Now there are a bunch of businesses scrambling because they have had their underpinnings knocked out from under them.
Not to be paranoid but I'd like to see just how much UBS really lost on the deal when it washes out.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
Thank you for your dispassionate analysis, free of the taint of any partisan blame or axes to grind. This information is much appreciated.
If I can tap into your expertise, would you say then that this is a good time to buy a house if you do have the means to do so? As you pointed out, theres a surplus of housing out there already, and if it's also hard to find buyers who can qualify for loans, presumably then a buyer who does qualify should be sitting pretty.
Of course, if that same buyer might want to move again in two years, then are they screwed, or will all of this blow over by then?
(we are movin to Madison in July and debating whether to buy or rent. We will only be there for two years.)
--
Dean Nation is now Nation-Building: Purple politics, muscular liberalism, principled pragmatism
...I can't say anything specific about your situation. But I will say this:
People who have the ability to buy a house with cash are probably in a very good position right now.
With an expectation of living in the house for 2 years, buying is a gamble. And that doesn't apply to just now, but every time. Five years ago the gamble would have paid off and probably made you a very good profit. Two years ago, the same gamble would probably be considered a disaster today. Basically you're flipping a coin in trying to predict what the housing market will do in the next few months to a few years. Right now, the prices appear to be falling. At some point this will turn around and prices will rise again. The problem is picking the point when this trend will reverse. It could be tomarrow, a month from now or 3 years from now (beyond your time horizon). Much depends on where you live as even though there are national trends, all real estate is still local and some areas will be hit harder than others and some areas will recover faster than others.
So the answer is, for a short term like 2 years, flip a coin. You might buy and get very lucky and catch the low of the market, but you might not....
There may be other reasons to buy instead of rent so making a profit on the house isn't the only consideration. For example, appartment living is not as quiet or private as a house in the burbs. And if you do decide to buy and the market doesn't favor you, you could choose to become a landlord instead of selling it.
Now if you said you planned to live there 10 years, I'd give a different answer. It's very likely a house purchased today will sell for more in 10 years or so. Two years is just too short a time horizon to make such a prediction.
Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.
I (was) with Fred!
I would recommend if I could.
And on another note, (and you know the caveat: anecdote, plural, data, etc.) it seems that mortgage rates take a little hop every time some wag in Washington says something to the effect:
"I don't think mortgage contracts should be enforceable instruments," except in much more populist, gentle terms. Examples include Bernanke, Pelosi, Bush, etc.
I meant what I said and I said what I meant. An elephant's faithful 100 percent.
I'm suprised UBS would dump an alt-A portfolio for that much of a discount but maybe they felt like it was only a matter of time until someone did and they decided to be the first.
As for Bill Gross, Warren Buffet etc. Its a pure economic power play whether you agree with it or not.
They have tons of cash; nonintervention likely means a continued downard spiral in Mortgage portfolio values which in many cases will not be deserved; this in turn allows cash heavy funds and investment companies to be picky and choose great bargains with even better long term return. Just wish I had the cash to do it myself.
Not to turn this into an investment advice thread, but I would caution anyone here from investing in housing. I believe that the reason that banks are liquidating their MBS's has as much to do with their worthlessness as much as the need for cash-on-hand.
I'm at work so I can't link the graphs now, but anyone with free time should look up the historical relationship between income/housing price - as well as rent/housing price. I think we have a long way to go in asset deflation, and forclosures as well. Perhaps Bill Gross and friends are about to get mopped up by folks like me. :)
-freedom
That the recommendation to buy a house above was not meant for housing investors but for housing consumers.
They're having a fire sale (in certain parts of the country) so it's a good time to buy (especially if you're a renter) but a bad time to sell.
I'm also trying to figure out who should do well when housing does poorly. So far I haven't figured anything out.
I recently read an expectation that bonds are the place to invest in this market but I just don't understand why?
The relative overvaluation of residential real estate started in 2000, according to most analysts. (Declaring the point at which it turned into a bubble is partly a matter of taste.)
Overvalued by what metric? One of the important ones is the total cost of ownership vs the cost of renting. (Most analysis of home ownership, including what the IRS does, considers the house to be a capital asset that you own, and you theoretically "pay yourself rent" to live in the asset.)
So I could make a case that between 2000 and at least 2006, living in a home that you own has been relatively more expensive than renting a home from someone else, compared to the historical trend.
And that overvaluation persists today, although it's not as high as it was.
You have to make your own decision whether you think housing prices have bottomed, and that's how you'll decide whether it's better to rent or own at this point in time.
Investing in times of extreme stress: for most people, this isn't a time to think about making money. It's a time to think about how to lose as little as possible.
Bonds, even risk-free bonds issued by the Treasury, have been extraordinarily volatile lately, along with every other asset class. Get a well-recommended fee-based investment advisor to help you decide what to do.
______________________________
"Those who expect to reap the blessings of freedom must, like men, undergo the fatigue of supporting it."
-Thomas Paine: The American Crisis, No. 4, 1777
Just in the last two weeks we have been hearing the problems dramatically spreading to corproate balance sheets - Q1 filings may be a disaster. I've been batting around the idea (and by that I mean circulating a draft request) with a few major banks and corproates here of asking banking regualtors to suspend mark to market requirements for asset bases that are clearly illiquid right now, even if occasional sales occur. Add to all this the confusion among corproates on what is required of them by the SEC under FAS 157/159 and this may get even uglier.
The most disturbing part of all this is it appears as though Spain's banking regulators are going to come off looking like geniuses...
By "corporate balance sheets," I assume you mean of non-financials? Or are you talking about banks and Wall Street?
Because what I see of the larger non-financials (including adjacent industries like re-insurance) is that their balance sheets are just overflowing with cash. Just busting with it.
That makes all the sense in the world for a CFO to do if their expectations are for lower growth ahead. And needless to say, it's usually self-fulfilling too.
As you say, temporary and tacit forbearance on marks-to-market by regulators is a time-honored and useful tool to give people a chance to stop dumping assets in fire sales.
And you are right that there has been some shoring up of the balance sheet ahead of expected lower growth - what I meant was unexpected changes on the balance sheet as a result of erratic fair valuation on the verge of bankruptcy (though some pensions may be suddenly severely underfunded) but that investors are going to see dramatic, and unexpected, shifts that will lead to more volatility in stock markets.
It actualy seems like very unfortuante timing for non-financials to be applying FAS 157/159 for the first time.
I assumed you were talking about cash and equivalents as opposed to long-term holdings.
It seems like loads of non-financial companies are de-leveraging their balance sheets all at once and moving leftward on the yield curve.
Ultimately a good thing, but really kind of bizarre in an environment of extremely low and falling policy interest rates. We live in strange times.
It might be a reflection of growing risk averseness, which would not be in the long term interests of teh economy as a whole but may be in the short term survival interests of many a CFO
In regards to the accounting rules - Tier Three securities we're allowed to be "marked to market", or in the absence of recent trading activity of comparable securities, they were allowed to "mark to model" - basically, the securities are worth what we say they are. Obviously, when the holder of the secrity is able to set the price, and that price becomes value for a publically traded company, there may be just a little conflict of interest.
I would support hearings on this practice, and some sort of revised oversight on how this process takes place. I think a lot of shareholders of publically traded companies were shocked to find out that these institutions held BILLIONS in these portfolios, only to find out said portfolios were not anywhere near as valuable as had been represented to the shareholders on the public balance sheets.
Mark-to-model valuations in the lower-tier securities are exactly one of the things that will be put under a microscope by Congressional Democrats next year, after the election is out of the way.
This is of course an international thing as well, as the liquidity standards for assets under VAR are set in Basel, among other places. But look for Congress to impose new "transparency" requirements that will have the ultimate effect of making less-liquid securities harder than ever to hold.
The ultimate effect will be to cut down quite a lot on the amount of capital available for economic growth.
And if you believe that we've had too much capital (as I've been saying for 10 years now), this isn't altogether a bad thing.
Companies avoid Level 3 valuations if they can - the required documentation and scrutiny is severe. There is plenty of oversight and the more things that are being fair valued now, while arguable from a theoretical stand point, are not helping from a practical stand point.
In brief, the models have to be well documented along with all assumptions and comparison numbers, these models are signed off by auditors and have been heavily scrutinized by SEC in recent quarters (as the rules for their documentation and use changed).
http://calculatedrisk.blogspot.com/
Some of it is technical. Although Tanta has good explanations to simplify (although they are wordy)
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caution... They're ugly.
http://www.irvinehousingblog.com/wp-content/uploads/2008/03/national-pri...
and....
http://www.doctorhousingbubble.com/wp-content/uploads/2008/03/chart20050...
-freedom
I am curious as to what message you would suggest a Conservative candidate would send to the electorate this year about housing and the economy.
Thanks
Or are they worried about US currency value and dumping as a way to get out of dollar denominated assets?
Either scenario seems to be an attempt to avoid a doomsday event.
Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.
I (was) with Fred!
...but there are any number of good reasons why they may have wanted to reduce their exposure to this asset class.
They might be facing quiet regulatory pressure to improve their capital ratios. Or they may have simply decided they prefer sleeping at night. All rank speculation on my part.
If we can believe the Feds are serious about the teeth in Sarbanes-Oxley, the Executives within these companies better be honest about their assessment or they can end up in prison.
Yes, I know, it will be seen if there is any real teeth in Sarbanes-Oxley but the way the statutes are written, they face long Federal prison time if they misrepresent financial estimates/anouncements.
I personally feel it is worse than they are saying (I've been in Financial Induatry 25 years-from Mgr Trainee to CEO) and I wpuld accept nothing but truth from my VP's and Department Heads. I will not go to jail for them trying to soft sell a problem.
...compliance because it's a financial entity within the meaning of the Investment Company Act of 1940.
I can't remember the section of the statute that specifies this (somewhere in Title 3?) and I don't have time to look it up.
If I'm wrong, I welcome your corrections, LittleL.
From what I've heard recently, the bloom is starting to coming off the SOx rose. Congress has yet again postponed full applicability of the law to companies smaller than $75 million in marcap. And surveys of larger companies seem to indicate a recent slowdown of spending on SOx compliance and related activities.
Again, disagreements welcome.
The comfortable position in this horror show is held by Frank, et al. Congressmen love being able to rail at scapegoats. It's like howling at the tree that fell on your car, but I'm sure it'll make for C-Span that will prove a balm to the hearts of socialists everywhere.
I rank the Congressional Hearing right up there with professional wrestling in terms of being grounded in reality.
When all else fails, simply revel in the absurdity of it all.