Monday, May 22, 2006

Housing Bubble Bailout

The speculative episode that is the housing market has created huge excesses in the lending industry and banking system. The US financial system has become increasingly unstable in the past few years due the housing boom. Already we have seen the collapse of some sub prime lenders including Acoustic Home Loans and the massive layoffs that are happening in the lending industry including at Ameriquest Mortgage.

Foreclosure rates have risen significantly since 2005 and will continue to rise as an increasing amount of ARMs adjust to their higher interest rates. Meanwhile, consumers are getting squeezed on many fronts as the price of gasoline, electricity, food, medical costs and other consumer goods and services are increasing much more then people's salaries.

As the housing market continues to decline many financial institutions will be hurting. Some financial institutions may ask for a federal bailout. Perhaps, a large group of individual home purchasers may also demand a bailout in a few years as they are underwater on their mortgage loans and facing a lifetime of debt.

Will there be a massive federal bailout like the S & L crisis which culminated in the 1980's?

The Bubble Meter Blog stands strongly against any federal bailout of the excesses of the housing boom, unless there is solid evidence that the US financial system is facing likely collapse. At this point, it appears very very unlikely that the US financial system will collapse as the boom turns to bust. The speculative nature of the housing market should have been curtailed by the federal government a few years ago.

34 comments:

  1. "Will their be a massive federal bailout like the S & L crisis which culminated in the 1980's?"

    Another question.....can this government bail us out from this mess?

    George W is cutting even more taxes from the rich and corporations, Gulf war is dragging on, Katrina bailout, building the Mexican border security system....basically spending more and cutting taxes? A recurring theme in this blogsite is GETTING INTO MASSIVE DEBT. Should a bailout occur it is nothing more then passing debt from speculators to the innocent middle class.

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  2. As ususal, Davis has a hardon for a complete economic meltdown. Pathetic.

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  3. fritz,

    Read what i wrote: "At this point, it appears very very unlikely that the US financial system will collapse as the boom turns to bust"

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  4. Wow. Thanks for standing strongly against a federal bailout for the excesses of the housing boom. Ummmmmm, yeah, like that's a necessity or will ever be needed. More factless claptrap.

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  5. Just found your website by searching results for "penn quarter dc condos" after noticing somebody found my website (statcounter) using that phrase. You offer a good service and info on this topic that helps people have more info when making decisions that involve $100,000s.

    I wrote a columnn on this last year and my conclusion was that investing in new construction condos is not a good idea right now with 10,000s of more being built in next few years.

    I do not see a significant bubble for single family homes in the DC metro area--at least not on the VA side with more jobs coming than new homes being available. It will now take much longer to sell a home though and there has been a correction (may not be over) from the summer 2005 peak. But a retraction of 5% after 3 years of 20%+ appreciation is nothing to horrified about.

    As far as bailouts are concerned and real estate, by principle, the the government needs to stay the hell out of our lives and the markets--it's called liberty.

    jay
    JustNewListings.com

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  6. not on my dimeMay 22, 2006 10:16 AM

    NO bailout, pleeeeeze. Let the greedy banks lose. Fanny and Freddie ditto, no bailout.

    Just say NO!

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  7. "I do not see a significant bubble for single family homes in the DC metro area--at least not on the VA side with more jobs coming than new homes being available. "

    I think you are overlooking one important detail..are the salaries that come with these jobs sufficient to cover the 300K+ cost of housing? A rough guess is a majority of the saleries are from 50-100K. If you do some math you will come to the conclusion that demand for these new units will not be large until prices go down substantially. In other words a bubble burst.

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  8. David, stop playing semantics. It's pretty clear what you mean.

    "huge excesses in the lending and banking system"

    "US financial system has become increasingly unstable"

    "foreclosure rates have risen significantly and will continue to rise"

    "consumers getting squeezed on many fronts"

    "housing market continues to decline"

    "many financial institutions will be hurting"

    "some financial institutions may ask for a federal bailout"

    will their [sic] be a massive federal bailout like the S&L crisis"


    After all this gloom and doom, you issue a silly "stand" by the blog against a federal bailout, "unless there is solid evidence that the US financial system is facing likely collapse." That's patently sophomoric and ridiculous.

    Stop being intellectually dishonest and simply state your desire to see a total economic meltdown. It's what many of the lunatic fringe of flying monkeys on this site want (you know you're part of the lunatic fringe if: you sit around saying that you're not going to buy until the listings price drops by 50%; you say that a featured property should only be worth X amount of dollars and that you would never pay that amount of money for a property; you view the housing situation as the results of a Bush-Greenspan conspiracy; you argue that the current housing situation is on the verge of collapse, yet can't sustain a discussion of basic economics. If you have done at least one of these things, you are part of the lunatic fringe.).

    Is there anecdotal evidence of excesses in the housing market? Of course. Does this anecdotal evidence strung together mean there is imminent danger? No. Is there factual support for many of your asserted claims? Very few are provided.

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  9. "Stop being intellectually dishonest and simply state your desire to see a total economic meltdown"

    I do NOT wish this. In fact if people continue to accuse me of this I will delete their post.

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  10. From what I read this morning over at Ben Jones site, Florida is having a meltdown in housing. Sales have slowed drastically, and builders have almost stopped. It seems the stock market smells something is wrong- with flight to bonds and drug stocks. Commodites continue to fall- and instead of 'growth' their is a 'flee to safety'.

    An 'implosion' in housing appears to be happening- Florida will oead the way, followed closely by Arizona, Nevada, California, The Washington DC area, NYC and Boston. Florida looks like wall street October 1929-

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  11. "Another question.....can this government bail us out from this mess? "

    Helicopter Ben will save the day! Free money for everyone!

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  12. "Florida looks like Wall Street October 1929"

    A contender for the Lunatic Fringe Posting of the Day.

    Please send us updates on all the builders and sellers leaping off Florida buildings.

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  13. Wah! Someone made fun of me on my blog! I'm gonna take my marbles and go home! Wah!

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  14. Looks like Fritz wears rose-colored glasses 24/7. The economy is doing not well for many Americans--you know, the ones that are not in the top 5 percent of income and wealth brackets.

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  15. I'm all for a bail out.


    Just as long as the government rewards me for waiting to buy.

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  16. ihateyuppies:

    Please show me a time period in modern American history when the economy WAS doing well for ALL Americans.

    Otherwise, I see nothing of value in your statement. It's sort of like saying that the weather outside is not sunny weather for most Americans. Yeah. And, so what?

    If the economy were truly hurting most Americans, then you would expect discretionary consumer spending levels to be falling precariously. Yet that is not occurring.

    It's much easier to spout bumper sticker slogans than to actually do some thinking and research.

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  17. Some housing bubble updates from Florida. “According to Barbara Raney, North Port Building Department manager, in the fiscal year ending in September 2005 the department issued 4,114 permits for new residential housing. Raney said, ‘On the average, there are 350 permits issued each month.’”

    “In March, 344 permits were authorized, but in April only 88 permits were issued. ‘They’ve stopped building,’ Raney said.”

    “Earlier this month, David Lereah, chief economist for the National Association of Realtors, said the boom is winding down to an expansion, one in which 2006 is a ‘down year’ and 2007 will be up. ‘Where [Lereah] and I may differ is more on extremes. He calls ‘the bubble’ a balloon. But the next time a housing bubble slowly deflates will be the first time a housing bubble slowly deflates,’ said (economist) Joel Naroff.”

    “Unlike Lereah, Naroff expects ’significant price cuts in some markets.’ Looking at West Palm Beach and other Southeast coastal markets, Naroff said many new condominium projects were targeted by speculators. ‘Those are areas that at first glance, run the potential for being under real pressure for the next six months,’ Naroff said.”

    David sorry to cut and paste from Ben's site
    but since I was called living 'on the fringe of lunacy'
    I decided to give anedotal evidence that Florida is in trouble- big trouble.
    Fritz-go back to listening 'Fringe Element News' at FOX.

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  18. “In March, 344 permits were authorized, but in April only 88 permits were issued. ‘They’ve stopped building,’ Raney said.”

    So the number of building permits issued in a place I've never heard of in Florida means an implosion in Florida, which will undoubtedly move onto DC??

    If anything, shouldn't a decrease in permits work against your argument of disaster in Florida, I see this as the market decreasing the future inventory, which leads to less inventory and higher prices. Or at least this is how it works according to those people who watch inventory numbers, and then post the long list of daily or weekly numbers on the bubble blogs (Of course those people think rising inventory equals lower prices, if you accept that (and I think its part of the bubblehead creed) than decreasing inventory would likewise equals higher prices).

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  19. Skytrekker:

    So your proof that "Florida looks like Wall Street October 1929" is that 88 building permits were issued by the North Port Building Department in Sarasota County?

    Color me unimpressed. But rest assured that your post remains a strong contender for the Lunatic Fringe Posting of the Day.

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  20. fritz,

    We "the lunatic fringe" finally have a place where people share our disbelief at the excessive debt being taken on by average homeowners to "keep up with the Joneses." Disagree with us - fine. But if you want someone to cheerlead your convictions about the current housing prices being substainable and/or growing please go to the NAR site. Long term "investor" insanity does not mean we are wrong. The bubble will disappear. And like all RE bubbles it will do so slowly and over many years. If you disagree -please, please, please go buy some investment property during this "buyers market" (as the NAR says.

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  21. "Perhaps, a large group of individual home purchasers may also demand a bailout in a few years as they are underwater on their mortgage loans and facing a lifetime of debt".

    I thought that the Fed bailed out banks and financial institutions during the S&L crisis and not individual home owners...could some one help clarify this?

    Thanks.

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  22. Fritz,

    You have the typical heard mentality that adds to the creation of asset bubbles, like the housing bubble that currently exists. You can fiddle while Rome burns, but to deny that the inventories in many parts of the country are skyrocketing shows a lack of credibility on your part. Look on Craigslist and witness the 100k off offerings buy builders http://washingtondc.craigslist.org/rfs/163670881.html Yeah, posts like this happen before a meltdown. I personally do not want to see a crash, but I am properly hedged for it in the event that it happens.

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  23. (sp)Herd, by, lol typing too fast.

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  24. Not only are those condos $100K cheaper:
    "Builder will pay $10,000 Closing cost and Loan Origination Fee with preferred lender."

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  26. Fritz


    I have no idea how old you are- but throughout history some of the biggest periods of 'economic excess' have ended tragically. That is an historic fact- which is objective and verifiable. Look no further then to what one Harvard economist said in 1929 'Stock Prices have reached a permanently high plateau'......compare that with David Lereah and his misguided progastications.

    The state of Florida is in real trouble with housing- and will likely be the 'leader' in the upcoming economic slowdown- which I call a 'slowdown' as not to be called a 'doom and gloomer nut' living on the 'lunatic fringe'.

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  27. Are there markets that have out-of-whack valuations? Yep. Will those valuations change as mortgage rates increase? Absolutely. Does evidence of overbuilding in certain markets mean the entire real estate market is overvalued and due for a major correction? Only in the minds of the lunatic fringe. Is it realistic to expect housing prices to drop 50% in the short term? Once again, only in the minds of the lunatic fringe. Are there folks out there hoping for such a massive real estate drop because then they will be able to afford to buy - and not realizing that if such an unprecedented drop were to occur, the US economy would collapse and such gloom and doom folks would likely be out of jobs? Of course. Read some of the comments on this site.

    So, what have we learned today?

    1. There are some pretty self-centered and childish people hoping for a crash without realizing what such a crash means for their own livelihood.
    2. The chances for a massive drop of 25%, 33%, 50%, etc. are incredibly low, barring some sort of catastrophic event (e.g., terrorist attack on a city, act of God, etc.).
    3. Before buying a home, each person needs to do their own due dilligence and not listen to the pronouncements of either anonymous Internet posters or spokespersons for realtors groups.
    4. Many people who say "I would never pay X amount for a house" will still be saying that in 5 years' time.

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  28. "Many people who say "I would never pay X amount for a house" will still be saying that in 5 years' time."

    That's true.... I do not expect my max price to change much in five years, except for small inflation adjustments (weighed against depreciation of the homes).

    However, my max price for most houses in the DC area is usually 30-50 percent of the asking price. This would take these houses back to their real prices of 5-6 years ago. I fail to see why the skyrocketing prices of the last 5-6 years is somehow so natural that expecting it may give back some (or all) of those gains is somehow unrealistic.

    A Redskins fan

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  29. It would be a wonderful world if we could pay for something based on its value of half a decade ago.

    Unfortunately, life just doesn't work that way.

    If averages real estate prices did drop 30-50%, then either a) a terrorist attack has just occurred in DC or b) we are in a recession and it doesn't matter what the listing price is since you will be out of a job.

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  30. This comment has been removed by a blog administrator.

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  31. A terrorist attack did occur in DC, and prices continued to move up. I agree that a terrorist attack could be blamed for falling home prices, but it would not be the catalyst.

    In Arlington, VA, I am seeing inventory increases from an average of 200 a year ago to now 1200 and rising about 100 per month. Simple supply and demand - before there was no supply and heavy demand, now there is heavy supply and much lighter demand. If you took Econ 101, you know what happens next. 10, 20, 30, 40% drops? It will take time to see who is right, but for now, I say that Fritz is no more correct than the "lunatic fringe." These facts are irrefutable.

    I don't blame the guys in their early 20's who never had a chance to buy for being excited about what they are seeing. Their chance to transition from have-nots to haves is in view. I consider myself lucky to have been in a buying position in early 2000.

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  32. "It would be a wonderful world if we could pay for something based on its value of half a decade ago."

    Ummm... I can buy shares of MSFT or CSCO for their nominal value of more than half a decade ago.

    I guess it's a wonderful world.

    Of course, half a decade ago, the mantra was "stocks never go down." Sound familiar?

    A Redskins fan

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  33. Fritz,
    There is a fine line between brilliance and lunacy. You seem to think I'm a lunatic.
    Prices will drop big in some markets and not at all in others. I live in San Diego and sold my home for a healthy profit in 2005. I'm waiting for the reversal. I feel bad those who will get hurt but their loss will be my gain. I've been warning all my friends not to buy right now.
    Fritz, please start buying. May I suggest Florida, DC and Sothern California?

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  34. Aside from the bailees, no one likes a bailout. I happen to think, though, that sometimes it's necessary to prevent even worse damage.

    These bailouts tend to be followed by regulation "to make sure this never happens again." In the case of mortgage finance, that essentially means restructuring the system. Obviously there would be winners and losers in such a restructuring, both inside and outside the financial sector, but are current lenders so sure they'll be among the winners?

    I'm one of those who thinks that the bailout of housing won't wreck the American economy. I think this because I think a bailout is impossible. I think the ATTEMPTED bailout will wreck the American economy. Whereas, say, Chrysler or the S&Ls were "too big to fail," the mortgage mess is "too big to bail." I realize I'm not the first to say that, but phrasing this in easy-to-grasp slogans might be the only way to get through to Joe and Jane HELOC.

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