It was the Wallace-Wells article that got me looking into historical rent/martgage ratios in my area in late 2004. Since that time, the estimated value of the property I rent has fallen by over $60K. (Of course, I've spent about $45K in rent since then). Looks like values are still falling, and I suspect they will continue to drop until about 2011, with the total percentage drop in coastal areas about 40%. Anyway, this is just a thank you note to Washington Monthly for publishing a well-researched minority view, and potentially saving me about $100K.

Like most economists, Greenspan favors property-owners. Lenders are property-owners, and borrowers usually aren't. This way the finance industry was able to squeeze a few last dollars from the rabble, and maybe a few of them will be able to stay in business a bit longer that way.

Maybe Mr. Mitchell was desperate, but that doesn't mean he didn't have any other choice.

Are you kidding, Kevin? This is why paying attention to the news pays off. 2010 looks to be a great year to buy a house off some idiot who made the biggest purchase of his life with no money down. Buy as much real estate as you can afford to maintain and pay the tax on, sell it off in five years or so, and you can turn a tidy profit.

"Oops. But the bigger question is, why did Greenspan make such an odd pronouncement? It's not as if he wasn't aware of the dangers of irrationally exuberant bubbles driven by over-optimistic lending practices."

Wallace-Wells is exactly right. Greenspan was just trying to keep the economy going long enough to retire "honorably".

Greenspan is a cheap swindler in an expensive suit. Don't forget that this is the guy who engineered a deal under the Reagan Admninistration where we Boomers would raise our taxes significantly to fund both the previous generations Social Security benefits and our own. He then, under the Bush Adminstration, signed off on the tax cuts, and gave our money to the millionaires, leaving the country so badly in debt that we may never see those benefits.

The people who are getting hurt by risky variable-rate mortgages are people who didn't do their homework and borrowed more than they can afford without throughly understanding the type of mortgage they chose.

There are millions of Americans out there who are financially illiterate (partially due to lousy math skills and the fact that most high schools do not require economics any more), and they are the ones getting killed.

There are millions of Americans out there who are financially illiterate (partially due to lousy math skills and the fact that most high schools do not require economics any more), and they are the ones getting killed.

Yes, because I count on the training I received from the government at 17 to make financial decisions. Even basic primers on finance are available at any bookstore for less than $20. People who go into loans they have no hope of paying off have nobody but themselves to blame. We already have very stringent laws on disclosure. What more could we have, without infringing on the freedom of people to enter into financial transactions?

Someone should go through his trash and figure out which foreign market he's currently investing in.

I thought the common explanation of Greenspan's remarks had to do with trying to spread some of the the interest rate risk FROM the institutional sector ONTO consumers (since it would only be going up from 30 year lows).....IOWs, save the big banks by letting consumers take the hit. And it's not necessarily evil.

Ah, yes--I remember it well. I went right out and locked in my 4.385% 15-year loan. And then after the 2004 election I started upping the proportion of my 401(k) going into the international fund option too, since it looked like we were going to be digging ourselves into some really major ditches. That's also worked out pretty well.

Can't go wrong betting against the Republicans--ain't that a change?

As if anyone needed more proof that Greenspan is a cultist corporate whore.

He was ruining people's lives, knowingly telling them to get screwed, to soak out another 6-12 months of the pyramid game.

Something from NYT article:

Meanwhile, investors wait to see whether the spring home selling season will shore up the mortgage market. If home prices do not appreciate or if they fall, defaults will rise, and pension funds and others that embraced the mortgage securities market will have to record losses. And they will likely retreat from the market, analysts said, affecting consumers and the overall economy.

Realtors like saying this also. It's usually BS but someone always pays for BS.

I think Greenspan gets too much credit for when things are going good, and too much blame for when things are going bad. His "Irrational exuberance" comment ultimately didn't stop the stock market bubble, and I'm sure his comments about ARMs, however irresponsible, didn't cause the real estate bubble to go up any more than it has. The Joe Sixpack who gets the ARM pushed on him probably doesn't pay attention to speeches by the Fed Reserve chairman anyway. But it will get ugly, as anyone who lived through the Los Angeles RE crash in the 90s will tell you, when prices droped by 1/3.. and it's already starting to happen in places like Arizona. The one thing that will precede the bottom dropping out is a recession, and we could get that by the year's end..

He was ruining people's lives, knowingly telling them to get screwed, to soak out another 6-12 months of the pyramid game.

Yep.

'lahke' posted:

"Can't go wrong betting against the Republicans--ain't that a change?"

Actually, it's not.

As Barron's, Forbes, BusinessWeek, and others have documented quite well, conventional wisdom is wrong, as it's Democrats and not Republicans that are historically and repeatedly far better for the national economy and the financial markets. The smart money always bets against the Republicans.
.

Quite a long time ago, Paul Krugman announced in one of his columns that he'd changed his home mortgage from flexible rate to fixed rate, on the assumption that interest rates were far more likely to go up than down. In the event, they stayed down for quite a while, and Greenspan made his pronouncements.

Oops. But the bigger question is, why did Greenspan make such an odd pronouncement? It's not as if he wasn't aware of the dangers of irrationally exuberant bubbles driven by over-optimistic lending practices.

Wallace-Wells is surely correct: Greenspan wanted to hold off the next recession until well after he had left office.

Still, his pronouncements weren't totally crazy, and I noticed he was careful to couch his statement with the word "might." It's just that the consumers who could possibly be better off with an adjustable mortgage over the long term are wealthy consumers. The idea is not as whacky as it sounds. I once heard a big league Manhattan money manager say that he recommends that his clients stick with variables, because, over the long term, the real interest rate they're going to pay is likely to be lower (one pays a premium, after all, for the "security" of a guaranteed rate).

The problem is that this theory doesn't work for people with bad credit, because the initial rates they get truly are teaser rates, and the rates they eventually have to pay reflect their poor credit scores.

If it's any comfort regarding "liar loans", when they compared people's incomes on their tax returns to what they reported on their loan applications, it's pretty likely that they underreported their taxable income by at least as much as they overreported their income on the loan application.

Anecdotally, I have a chance to move from what has been a relatively slow R/E market (of course I bought in just before the peak of its very short lived bubble) to one that has been fairly hot for many years. As much as I am put off by the prices that are 3 times higher, and the interest rates that will be at least 1% higher, I am most afraid of being stuck in a bad market when my house finally sells (houses on my street are taking 1-2 years to sell, and this is not considered a slump yet). I'd rather watch my nice very liveable $165K investment lose 40% of its value than move to that nicer city, buy a much inferior house for a much higher monthly payment, and watch that lose an even bigger chunk of its value. If only this city didn't suck so bad!

If I had to sell that next house, I think I'd probably go bankrupt paying off the loan (and god knows it's only a matter of time before the R's + Biden, Liebermen, Reid, Schumer, et al, let the banks go after out retirement savings to make good on those loans). If I take a hit on the house I've been in the last 2.5 years, at least I can absord it eventually.

It's always nice to hear American Hawk find the silver lining to every dark cloud. Preying on the stupid and/or uneducated and/or unfortunate for profit - what could be more American!?!? Those people deserve it for believing their regulated bankers and finanical advisers. Suckers! Let's hope they die in shame and rags.

Rothschild said the best time for investment is when there is blood running in the streets. Unless it's you doing the bleeding.

Seriously, are you really a rightwinger, or are you just parodying them? They/you don't need any further parody. You know that, right? I know hardly anyone takes you seriously, but I'd just like to know. It's Sunday, God is watching, be honest about whether you are a fake liar or a real one.

"...people who didn't do their homework and borrowed more than they can afford..."

I think the bulk of it is the good old bubble mentality. The irrational belief that prices will continue to go up... and they will go up forever. The common folk are always late to the game so when they get in, the smart money gets out.

Real estate debt was being used to float the economy to provide the 'Bush Recovery'. Last fall at the trailing edge of the housing boom, the 'early money out' floated the stock market up into it's own little bubble.

Now the well is dry... so fasten your seat belts. look for a 40% drop in real estate and ditto the stock market.

No matter how much people want to believe it, over the long run, you don't get something for nothing.

Yep, and Greenspan spoke out not long ago about a pending recession and the market plummeted drastically after his remarks.

And this: from marketoracle.co.uk/Article383

"...Congress is now looking into the shabby lending practices that shoehorned millions of people into homes that they clearly cannot afford. But their efforts will have no affect on the loans that are already in place. $1 trillion in ARMs (Adjustable Rate Mortgages) are due to reset in 2007 which guarantees that millions of over-leveraged homeowners will default on their mortgages putting pressure on the banks and sending the economy into a tailspin. We are at the beginning of a major shake-up and there’s going to be a lot more blood on the tracks before things settle down.

The banks and mortgage lenders are scrambling for creative ways to keep people in their homes but the subprime market is already teetering and foreclosures are on the rise.

There’s no doubt now, that Fed chairman Alan Greenspan’s plan to pump zillions of dollars into the system via “low interest rates� has created the biggest monster-bubble of all time and set the stage for a deep economic retrenchment. Greenspan’s inflationary policies were designed to expand the “wealth gap� and create greater economic polarization between the classes. By the time the housing bubble deflates, millions of working class Americans will be left to pay off loans that are considerably higher than the current value of their home. This will inevitably create deeper societal divisions and, very likely, a permanent underclass of mortgage-slaves.

A shrewd economist and student of history like Greenspan knew exactly what the consequences of his low interest rates would be. The trap was set to lure in unsuspecting borrowers who felt they could augment their stagnant wages by joining the housing gold rush. It was a great way to mask a deteriorating economy by expanding personal debt.

The meltdown in housing will soon be felt in the stock market which appears to be lagging the real estate market by about 6 months. Soon, reality will set in on Wall Street just as it has in the housing sector and the “loose money� that Greenspan generated with his mighty printing press will flee to foreign shores..."

Those people deserve it for believing their regulated bankers and finanical advisers. Suckers!

I have to admit that when I bought my house some years ago, I could make little sense of the inch-high stack of paperwork that "explained" the transaction. (Insert boilerplate here about how smart I am.) I doubt I'm alone.

Here comes inflation.

Banks and mortgage institutions always can go to the fed and ask for an inflation hike to 5% if they need it.

What is the fed going to do? Let the system fail?

The 5% inflation fee the fed wants will move us into higher tax brackets. (We have been moving up at 3% a year since 2000)

Everything will balance out for a moment, but once the middle class has moved into the higher tax brackets, the conservatives will think:

"Oh boy, government is cheap, lets subsidize big business"

The woman in the LA Times article bought a $700,000 house with no money down? How in the hell did she get approved for that? Seriously, who in their right mind would underwrite a loan (in this case, two loans) to cover that?

Will the taxpayer be left holding the bag, again?

LA Times article says,

"Wall Street investment banks had been voracious buyers of sub-prime loans, packaging them for sale to investors via mortgage-backed bonds. Those same banks now are forcing lenders to take back bad loans, devastating the lenders' finances."

What does that mean? That the investment banks set it up so they can profit from the trade, but if it blows up the mess gets shoved back at federally insured (taxpayer insured) lenders?

Hey Hawk,

How do you expect to sell those houses with the disease-raddled bodies of starving women and children lying in the front yard?

700,000 with no money down? My sister sold her million dollar house to someone who already owned one, and the buyer financed 100% of it as well. When I sold my townhouse for $320,000 to a single income buyer who needed assistance for closing costs, it seemed practically sane by comparison (I had to be convinced the loan would go through, it seemed so crazy to me).
I'm staying out of the market until 2010, at the earliest.

Hawk owns real estate in an area that is safer than Detroit. Baghdad, Iraq.

Working Harder for the Man
By BOB HERBERT

[snip]
'There are 93 million production and nonsupervisory workers (exclusive of farmworkers) in the U.S. Their combined real annual earnings from 2000 to 2006 rose by $15.4 billion, which is less than half of the combined bonuses awarded by the five Wall Street firms for just one year.

“Just these bonuses — for one year — overwhelmingly exceed all the pay increases received by these workers over the entire six-year period,� said Mr.[Andrew] Sum [Center for Labor Market Studies at Northeastern University in Boston].

[snip]

It's like Krugman pointed out, Greenspan was willing to lie for Bush administration.

$700K for a home, $4000/mo payment, bad credit rating?

Oh silly fuddy-duddy me, in my Midwestern 2- bedroom with $700/mo mortage payment, no other debt, and an income in the top tenth percentile.

I'm not crowing, but geez, what the hell are people thinking? No wonder we let Bush take us into Iraq.

Decline and Fall, baby. That's what time it is. The American people can't afford their lifestyle but have to keep up appearances.

No, I'm not channeling American Hawk. Yes, the borrower is ultimately responsible for his own decision making, but who the hell was teaching Americans? With as much power as the top central banker, doesn't he have an equal amount of responsibility?

No, this was all about politics, not letting the regime of Wall Street collapse.

I'm always flabbergasted by "smart" mortgage holders who smugly castigate "dumb" mortgage holders who are now in dire straits. It may well be that they failed to do their due diligence, or that they might choose differently if they knew then what they know now.

The problem is that if enough people are making bad choices in the mortgage market, you become less and less able to protect yourself by making good choices. If writing bad loans drives up prices in a bubble, then when prices collapse you can end up upside-down even if you have a fixed-rate loan with a down payment. If you bought at the top of the market and prices fall 40%, you could be upside-down for years. And what's worse, if the shock is big enough, we could go into a recession which might make your job less secure or drive incomes down, either of which make holding an upside-down mortgage a serious exposure. You can say "Am I my brother's keeper?" but the reality is that we're all in the same boat.

(Not to mention the opportunity cost of throwing a ton of money at interest payments on an investment that wont even break even relative to inflation for a long time to come.)

The woman in the LA Times article bought a $700,000 house with no money down? How in the hell did she get approved for that? Seriously, who in their right mind would underwrite a loan (in this case, two loans) to cover that?
Posted by: Old Hat on March 11, 2007 at 3:36 PM |

700,000 with no money down? My sister sold her million dollar house to someone who already owned one, and the buyer financed 100% of it as well. When I sold my townhouse for $320,000 to a single income buyer who needed assistance for closing costs, it seemed practically sane by comparison (I had to be convinced the loan would go through, it seemed so crazy to me).
I'm staying out of the market until 2010, at the earliest.
Posted by: Buckbuck on March 11, 2007 at 4:03 PM

OMG. And to think that we may tangle with Iran and push oil prices through the ceiling... while STILL running big government budget deficits. Not only are the McMansion adjustables resetting, imagine the cost of heating and cooling it in the near future? I wonder how long the gesticulating yes!yes!yes! adverts on WaPo for cheap mortgages will be up and running. Great darkness ahead.

Greenspan was the most politically oriented Fed Chair in history. His political favor to Bush was to transfer billions and billions of dollars from our children to the current generation of home owners. By making the cost of borrowing 0 or close to 0, the trade in houses went thru the roof, and the prices for houses followed. This resulted in a totally artificial increase in the money in house stocks.

Yet another birth tax produced and promoted by these assholes.

But the bigger question is, why did Greenspan make such an odd pronouncement?

Sorry no learned mumbo-jumbo here.
Just the truth:

Greenspan is a repug.

That's all you need to know.
That's all you will ever need to know.

'nuf said.

"Oops".

what's the oops for? he said "...are willing to manage their own interest rate risks...". variable rate mortgages can be an excellent deal if you understand the risks and manage accordingly. for example suppose you knew you'd only own the house a couple of years, why not take advantage of it? all those borrowers whining because the rates went up, as expected, don't deserve any sympathy.

I once heard a big league Manhattan money manager say that he recommends that his clients stick with variables, because, over the long term, the real interest rate they're going to pay is likely to be lower (one pays a premium, after all, for the "security" of a guaranteed rate).

This is exactly right. I have an adjustable, and have had for a long time. But even after the interest rate hikes of the past few years, I am further ahead than I would have been with a fixed rate over the same period.

I was re-reading Galbraith's history on the Great Crash of 1929 today. If anyone has a copy, the last chapter is an instructive read for our times. Galbraith tries to puzzle out the reasons why the 1929 stock market crash led to the Depression (or in fact IF it did, because the economy was trending down before the crash itself). The factors that Galbraith cites as possible causal connections. written in 1954, have an ominous ring in 2007. They include a concentration of GDP in the upper-income brackets and a new breed of investment "trusts" that used leverage to amplify modest gains for shareholders. It does not take much imagination to see the parallels.

I sold most of my US-based mutual funds last week. Overseas funds and cash for now.

And we have been renting for almost two years now.

Excuse me, but I don't understand one tiny point...

...Why are we giving the adjustable rates to the risky loans and the lower fixed rate to the safe loan?

That just seems like a formula to... Not make much money. Because when the market shifts one way... Both still pay. And when the market shifts the other... One who might have failed is instead certain to fail.

This makes sense?

Ah, Kevin.

Something's popping around here, but it ain't a weasel.

Is it popcorn?

give me a hint.. what is it?

Oh, nevermind. I'll start a new one: I spy something under a bridge.

Now really, what did you expect? Everything that this administration has touted as an accomplishment (such as, in this case, increased home ownership) has turned out to be a steaming pile of crap. Lies from day one until today, policy distorted by politics. Remember, they were creating reality, not just following it. Unfortunately about half of the people bought into the "reality" that they created. How many people think that history will justify this administration's policies? How many people think that this administration will be viewed as the one that crippled this country's economic, political, administrative, defensive and social structures for the next generation or two?

I don't know what kind of income the lady with the $700K had, but when I moved to California I was making $41K/year back in 2002. The realtor said my credit score was 838, about the highest she'd ever seen, and she got me preapproved for a $250K loan in a snap. Even then, the bottom of the market houses were $225K. I asked what my monthly payment was to be. Answer: Over 90% of my take home pay. I asked how she thought that was possible for me to live on a couple hundred dollars a month, and the answer was that I was going to save all sorts of money on taxes and I had excellent credit (Duh. I was too slow to figure out that I was supposed to live on more loans). I was due for a big raise a year later, so I waited and hoped for things to cool off. By that time those same houses were pushing $400K. If I had bought a house, I would have made a killing if it didn't kill me first. But it seemed insane already, and I couldn't imagine that it would go on for another 4 years. So here I am back in Red States of America, a bit richer, no wiser, and I can sleep at night because don't have my ass hanging out with a quarter million dollar loan exposure secured by a 800 sq ft shanty in the ghetto. Unless you've got a job lined up in an affordable market (i.e. a market where good jobs are not so easy to come by), most people are stuck where they are and have to make the best decisions they can based on the rents and mortgage options available to them.

I was tired of my rent going up 20% every year, and it seemed like I could never get ahead because housing was going up almost as fast as my income. I wanted to get a house before my income levelled off, and have the mortgage paid off before I retire. Was that so foolish? I was especially anxious to get my loan rate locked in before the 2004 election because I was so darn sure the Fed was only propping things up long enough to lock up congress and the whitehouse for another 4 years, and afterwards rates would skyrocket. I guess I was too cynical for my own good.

To paraphrase someone upthread, if and when the turds hit the turbines we'll all be covered in the brown stuff. So it made sense to get in the game and hope the gamble would pay off.

The unemployment rate just dropped to 4.5% this week. And all the Dems can do is whine, because whining is what they do best.

Frequency Kenneth: Pretty thin soup you have to sell these days-a number invented out of a black box is the best you have.

Well, Neal, he's got more than that.

FK has the distinction of being broadly recognized as one our more obtuse, ham-fisted & illiterate trolls.

So, he can take some pride in that.

2010 looks to be a great year to buy a house…American Zawk at 1:59 PM

… smugly castigate "dumb" mortgage holders who are now in dire straits… Melissa O at 4:39 PM

Greenspan is a repug…. ROTFLMLiberalAO at 5:05 PM

The unemployment rate just dropped to 4.5% this week…F K at 6:21 PM

The American economy is nearing collapse, thanks to six and a half years of complete mismanagement by the deeply criminal George W. Bush and Richard Bruce Cheney. If the mortgage market tanks, which is entirely possible, with a federal deficit that is out of control and a trade deficit that is astronomical, the results could be catastrophic.

I hope everyone on this blog lives somewhere where you can live off the land, because it may come to that...

what's the issue here? Is it risky borrowers or variable rate mortgages?

Bad loan underwriting, Matthew. Shaky borrowers is another way of saying it. Interestingly, one of the things Bush is always citing as evidence of how great the economy is, is the high rate of homeownership. That's because these fly-by-night organizations like New Century have been giving loans to people that didn't deserve credit. Any guesses on which political party the New Century managers contribute to???

the first time I was in the market I looked at a condo on capital hill in Washington DC. I thought it was overpriced at $160,000 for a condo that had been abandoned for about 2 years and needed at least $40,000 in repairs to make it livable. Last year while my wife and I were looking for our current home I saw the same unit in the paper with an asking price of over a million. In less than 7 years. That made me real nervous. We sold her condo for an unreal profit, and bought a townhouse 20+% down payment, fixed rate loan with a livable payment. I now "proudly" own the most expensive house in the neighborhood and somehow managed to buy at the top of the market. If you don't think that makes me nervous at night, think again. I really hope that the market doesn't tank, but if it does we can stay here quite a while.

God bless you, JD.

If memory serves, he made this speech a full month before the Fed--as everyone who followed their workings knew was coming--began a prolonged sequence of interest rate rises.

I remember reading this at the time and thinking: "It's settled. This man, and his industry, are purely socio-pathic thieves. He knows all these people, especially young people, are going to get stripped of these houses down the road and all the money they threw in will be lost. Bastards!"

You'll probably never see my comments here, buried beneath all of these blogs.
However, let us not forget that it was the fed's continous increase in interest rates that killed the housing market. Perhaps it WAS a bubble but it was sustaining the economy and THEY burst it, not the market. No one even talks about that anymore or the "soft landing" they talked about later.
Why did they do it? Because the "powers that be" wanted more investment in the stock market so they could once again take it. After all, where does the money go that is "lost" in the stock market?
They also wanted to improve "our" savings rate(read banks), but has real estate not been the best savings average people had in recent years?
I suppose average Americans were not supposed to benefit from the real estate market, only from insider traded low or negative return stocks and 1% +/- cd returns.
They reap what they sow but we reap less.

The problem is that if enough people are making bad choices in the mortgage market, you become less and less able to protect yourself by making good choices. If writing bad loans drives up prices in a bubble, then when prices collapse you can end up upside-down even if you have a fixed-rate loan with a down payment. If you bought at the top of the market and prices fall 40%, you could be upside-down for years. And what's worse, if the shock is big enough, we could go into a recession which might make your job less secure or drive incomes down, either of which make holding an upside-down mortgage a serious exposure. You can say "Am I my brother's keeper?" but the reality is that we're all in the same boat.

Posted by: Melissa O on March 11, 2007 at 4:39 PM

So reasonable people with good credit who just need a house to live in end up getting shafted because they wound up in the net cast by rich speculators to snare middle-class speculators who were banking on working-class people with bad credit to boost the feeding frenzy. It's a Wonderful Life isn't it? It is a Federally Sponsored Loan Shark mentality.

craigie: I have an adjustable, and have had for a long time. But even after the interest rate hikes of the past few years, I am further ahead than I would have been with a fixed rate over the same period.

That has been my experience since my first ARM in 1984. Adjustable rates are not the problem, though that is what the Greenspan quote is about.

'Frequency Kenneth' posted:

"The unemployment rate just dropped to 4.5% this week"

It dropped because the national workforce got smaller, with fewer workers employed, not because there was less unemployment. Every time the Unemployment Rate has dropped from about 6.5% in 2003, it has meant MORE unemployment, not less, with more and more jobless workers relegated to the ranks of the no longer counted 'Long-term Unemployed'. The National Labor Participation Rate over the past six years has been lower than it was in 2000.
.

http://bigpicture.typepad.com/comments/2006/11/bls_margin_of_e.html

Reliability of the estimates

Statistics based on the household and establishment surveys are subject to both sampling and nonsampling error. When a sample rather than the entire population is surveyed, there is a chance that the sample estimates may differ from the "true" population values they represent. The exact difference, or sampling error, varies depending on the particular sample selected, and this variability is measured by the standard error of the estimate. There is about a 90-percent chance, or level of confidence, that an estimate based on a sample will differ by no more than 1.6 standard errors from the "true" population value because of sampling error. BLS analyses are generally conducted at the 90-percent level of confidence.

For example, the confidence interval for the monthly change in total employment from the household survey is on the order of plus or minus 430,000. Suppose the estimate of total employment increases by 100,000 from one month to the next. The 90-percent confidence interval on the monthly change would range from -330,000 to 530,000 (100,000 +/- 430,000).

These figures do not mean that the sample results are off by these magnitudes, but rather that there is about a 90-percent chance that the "true" over-the-month change lies within this interval. Since this range includes values of less than zero, we could not say with confidence that employment had, in fact, increased. If, however, the reported employment rise was half a million, then all of the values within the 90-percent confidence interval would be greater than zero. In this case, it is likely (at least a 90-percent chance) that an employment rise had, in fact, occurred. At an unemployment rate of around 5.5 percent, the 90-percent confidence interval for the monthly change in unemployment is about +/- 280,000, and for the monthly change in the unemployment rate it is about +/- .19 percentage point.

Ferd, [Click name to see original message.]

When the mortgage lenders receive a set of mortgages they organized them by class and expected return, then package them into large investment packages to sell to the really big money investors. After that, the mortgage lender merely services the payments on all the loans in the package (for a fee, of course.)

But to sell the package of mortgages to investors, the original mortgage lender has to guarantee that the mortgages that make up the package will remain the same class and productive. When mortgages in the package fail, the investors give the failed mortgages back to the mortgage lender who must replace them with another mortgage of the same type and profitability as those in the overall bundle of mortgages that was sold to the investors.

Then the mortgage lender works out the mortgage or absorbs the loss.

What does that mean? That the investment banks set it up so they can profit from the trade, but if it blows up the mess gets shoved back at federally insured (taxpayer insured) lenders?

Think about another development currently working against the housing market. It's called a home equity loan.

The prudent borrower will take one out, use only some of it for necessary repairs to the property & leave the rest of it aloe. Trouble is, his equity is tied up in this loan that, as I understand it, does not pay interest

The person who has always paid the Visa bill with the Master Card gets really desperate. Then he takes out a home equity loan to bail out. He keeps spending like a sailer because he hasn't had to face the consequences, loses his home & every thing else he owns. RE prices have dropped already because of this character.

Then we have the smart investor who puts his spare change into a money growing account of some kind. Only after he figures the housing market bottoms out will he invest in real estate. And what drives those prices into the basement is when the banks get desperate enough to sell at half or less of their true values. Then he & the big money guys buy in wholesale lots, which drives prices back up again. They sell at a profit, & the little guy gets screwed, again. The rich get richer & everyone else suffers.

Add another factor. Coastal properties along the Atlantic & Gulf coasts have seen insurance rates triples or more in the last 3 years because of the unusually heavy storm damages of 2004 & 2005.

And guess what? It was excesses of credit that created the Depression. If we don't learn from history, it repeats itself.

Business Week summarized our current predicament saying:

“Today’s housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low rates of a weak economy. Either the economy’s long-term prospects will get worse or rates will rise. In either scenario, housing will weaken.�

'Ultimately, the Fed will be forced to make one of two choices; either lower interest rates and forgo foreign investment ( $2.5 billion a day) or keep interest rates where they are and accelerate the collapse of the housing market. There is no “third� option.' The Fed’s role in the Housing Crash of ‘07 by Mike Whitney http://www.smirkingchimp.com/node/4574

Are U.S. Bonds Safe for China's Central Bank?

Those who have been following the news know that China's central bank is planning to set up an investment fund to diversify its assets and increase its returns. The reports invariably describe the U.S. treasury bonds, which comprise much of the fund's current holdings, as "safe," but low yielding.

Let's play with some arithmetic here. The dollar has fallen by more than a third against the euro since 2002, which means that each dollar purchases one-third less in euro land than it did five years ago. Back in the summer of 2003, the interest rate on the 10-year treasury bond bottomed out at 3.05 percent. Today, it stands at around 4.6 percent. This means that the bonds China held back then have lost approximately one-third of their value. (The price of the bond is inversely proportional to the yield. The actual calculation of the bond price is a bit more complicated, since it does matter when they reach maturity.) If the yield on 10-year treasury bonds rises back to its avearge rate for the decade of the 90s (6.8 percent), then the value of the bonds would drop by another 30 percent.

The point here is that if "safe" means that you cannot lose money, then U.S. treasury bonds are not a safe asset for the Chinese central bank. This is important because the central bank's motivation in holding treasury bonds was not to find a safe asset in which to store its wealth. It was to prop up the dollar against the yuan and to keep long-term U.S. interest rates low (that's why they bought long-term bonds) to keep the U.S. economy growing. This in turn sustained the huge growth in China's exports. While this helped to spur China's extraordinary growth over the last decade, it was inevitable that at some point the country would no longer need the U.S. export market to sustain its growth. It seems that this day is now approaching.

--Dean Baker

Remember I told you more than a year ago: Your houses are not appreciating; your dollar is depreciating. A lot of the hot money speculation in US housing markets has been a currency arbitrage - using appreciated euros which made even very expensive housing in Miami a relative bargain.

And, of course, in a pinch a Miami or Las Vegas condo is a good bet for kleptocrats for when they've stolen everything possible in their own home country. At least until the water rises or vanishes respectively...

All the Fed has done is churn out IOUs like there was no tomorrow.

“Lenin was right. There’s no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.� - John Maynard Keynes

The Fed, in effect, has become a serial bubble blower.�
-- Stephen Roach, chief economist, Morgan Stanley

'Oil prices don't cause inflation. Nor do wages, even though you'd never know it from discussions on the subject. The Fed causes inflation all by itself, creating too much money relative to the supply of goods and services.' - Caroline Baum, Bloomberg

I'd like to bring a little light to this subject. I almost want to gag but essentially A Hawk is right. These loans have been available for over 15 years the fact that they're going bad now should give you a real indication of how weak the economy really is. Ut is encumbent upon a borrower to pay attention to what kind of loan they're getting on a house. If you want to bitch about something go after credit card companies that change rates at will and penalize otherwise good borrowers for negligible indiscretions.

I have an adjustable, and have had for a long time. But even after the interest rate hikes of the past few years, I am further ahead than I would have been with a fixed rate over the same period.

Well, yeah, if you've had an adjustable rate mortgage for a long time, that's what you'd expect. It's the people that bought with an ARM while interest rates were at their lowest, as Greenspan urged, that are (or are going to be) worse off not too long after they start floating, particularly if they weren't fixed for very long.

Gandalf misses the underlying issue and its effects. These ARMs were for people who were the latest victims of a typical get-rich-quick scheme. They weren't always taking down this financing because they were living in the house. Florida, for example, saw as much as 40% of sales to people who were holding the house (or condo) for as long as it took to resell it for a tidy profit.
The sales slow-down and the defaults, while there will be numerous sob-stories, will hit speculators and especially those who don't think of themselves as speculators. They bought both for need as well as the desire to turn a quick (in real estate terms this could be several years) profit.
Don't cry for me, Argent Mortgage.
BTW,I've seen reports of cancellations in parts of Arizona of 100%+ and in parts of Florida of 60%+.

Three years ago, we were house-hunting after selling the 108-year-old Kansas City Shirtwaist we were occupying at that time to a developer.

The house we settled on was a lovely ranch with a huge back yard, mature trees, just a lovely little place. But we also had three kids in college and needed about seven thousand more dollars for a down payment than we had at that time to lock in a fixed mortgage.

The realtor had a NovaStar loan officer contact me (NovaStar is one of the companies in trouble now) and the loan was approved and closing was scheduled, but something didn't set quite right. I couldn't quite pin down what was bothering me about it, but I was uneasy enough that we pulled out of the deal, and rented until we bought this coop unit the first of this year. With sufficient down money that we bought at a fixed rate.

TJM I hardly missed the point.If you bought a house with an arm and were unable to sell it befor the rate begins to foat than maybe you are not as svvy as you think you are as a speculator.The other thing is arms don't adjust to there max rate immediately.Every 6 mos is the norm ewith a raise in rates of a fixed amount. If florida isn't an exampe of an underlying weak economy what is. If you buy a house and don't make a killing in a normal situation you should still be able to resell it for what you paid for it.

OT -

Toyger, Toyger, burning bright: Life magazine reports on designer cat sensation the Toyger, "a house cat bred to look like a toy model of the largest member of the cat family" that, if perfected, could end up "fetching prices as high as $4,000." Of course, Franken-breeding is responsible for creating lines with horrible, debilitating side effects, and Toyger critics will rightly say that you're more apt to find a more genetically balanced -- and healthy -- cat from your local shelter. But boy, they sure are cute. And among their personality traits: "Unlike most cats, they adore water. In the summer, some of [the breeder's] tomcats splash around for hours in a plastic kiddie pool."

- Salon

As if the 'designer dog' mania wasn't bad enough.

'The industry's muscle is no surprise when you consider that the NAR [National Assoc of Realtors] contributed more money to candidates in federal elections last year (almost evenly split between Democrats and Republicans) than any other donor, even ahead of the trial lawyers and teachers unions. In fact, the NAR has been the biggest donor to these campaigns every year since 1997. At the state level, the National Institute on Money in State Politics says the real estate industry contributed $43 million to campaigns in 2006.'

- Real Estate Ripoff
by Michael Crowley - Reader's Digest cited at http://themessthatgreenspanmade.blogspot.com/2007/03/
even-readers-digest-hates-realtors.html

'Oil prices don't cause inflation. Nor do wages, even though you'd never know it from discussions on the subject. The Fed causes inflation all by itself, creating too much money relative to the supply of goods and services.' - Caroline Baum, Bloomberg

That's an interesting perspective, but just as wrong as the ones it rejects. Oil prices and wages affect the supply of goods and services. The Fed controls (to a degree) the supply of money. The combination of those (and other factors influencing both sides of that equation!) cause inflation, or not, not any one of them acting alone. Where the blame for any particular bout of inflation lies depends, really, on who did what to cause which inputto change, and whether or not that was reasonably forseeable and should reasonably have been counteracted by changing some other input.

The Fed controls (to a degree) the supply of money. The combination of those (and other factors influencing both sides of that equation!) cause inflation, or not, not any one of them acting alone. - cmdicely

Indeed. No argument from me. But any time the tiniest trickle makes it to the paychecks of actual workers, as opposed to their own compensation, Wall Street screams bloody murder.

'In the US today, government employs 7.7 million more people than does manufacturing. Little wonder we have an $800 billion annual trade deficit when the government sector is larger than the manufacturing sector.

American economists are yet to face up to the fact that offshoring high productivity, high value-added jobs that pay well and replacing them with waitresses and bartenders is a knife in the heart of the US economy.' - Paul Craig Roberts: 'Artificial recovery, real job losses'
http://www.smirkingchimp.com/article.
php?sid=27414&mode=&order=0

'For the month, categories showing improvement were Government (+39K), Leisure and Hospitality (+31K), Education and Health Services (+31K), and Professional and Business Services (+29K). Construction declined sharply (-61K) along with Manufacturing (-14K).'

http://themessthatgreenspanmade.blogspot.com/2007/03/
fewer-drywall-nailers-more-baristas.html

New Century's woes deepen, spread
Troubled mortgage lender on the hook for $8.4 billion as financing vanishes. Top Wall Street firms, home prices could take hit.
By Chris Isidore, CNNMoney.com senior writer
March 12 2007: 12:17 PM EDT

NEW YORK (CNNMoney.com) -- Embattled mortgage lender New Century Financial Corp. warned Monday of a series of serious financial problems that cast its future in doubt - and cast a pall over much of the nation's financial sector.

The problems at New Century, No. 2 in lending to borrowers with weak credit, could also weigh on the nation's struggling housing market - and home prices - as a major source of mortgage financing dries up. Overall, lenders in the so-called subprime sector made $640 billion in mortgage loans last year, nearly double the amount from 2003.

Irvine, Calif.-based New Century said that all of its own lenders are cutting off financing, that it has been found in default of many of its financial agreements, and that it does not have the funds necessary to meet its obligations, which could reach $8.4 billion. The company's market value has shriveled to only $178 million.

The smart people have been warning that the good times couldn't last forever. It seems the good times are unraveling, even if a bit slowly right now.