Editore"s Note
Tilting at Windmills

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April 17, 2007
By: Kevin Drum

THE FORECLOSURE BOOM....This sure looks scary: foreclosures are up 800% in California. Reaction within the industry seems to range from mild fear to all-out panic.

On the other hand, housing prices aren't falling much, as you'd normally expect. In fact, they went up a bit in March. Very weird.

Offhand, my guess is that the problem isn't that this will push the economy into recession. Rather, the problem is that this is happening even though the economy is reasonably strong. But strong economies don't last forever, and if the economy starts to go south even a little bit while foreclosures are still rising, it could start a pretty vicious chain reaction. Keep your fingers crossed.

Kevin Drum 2:18 PM Permalink | Trackbacks | Comments (70)

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Posted by: egbert on April 17, 2007 at 2:41 PM | PERMALINK

There's some very suspect data here. Not in this century have there been only 2000 foreclosures in a quarter in California, or anything close.

http://www.foreclosurestogo.com/statelistings/californiaforeclosurelistings.html has something closer to reality for whats in foreclosure now; for historical stats try NAR,

Posted by: downpuppy on April 17, 2007 at 2:43 PM | PERMALINK

It only looks scary, Kevin, if your money is tied up in the housing market. Now is the time to save money, invest it in a low-risk place, and then pull it out to buy a [i]very[/i] nice property on foreclosure. Some morons have dug themselves into a hole; that's their problem, not yours. Take advantage of the situation. It's the smart thing to do.

Posted by: Al on April 17, 2007 at 2:44 PM | PERMALINK

The *shape* of that curve over the last several years is pretty viscious-downright parabolic. It would be interesting to see the table that was used to generate it.

Posted by: Doc at the Radar Station on April 17, 2007 at 2:45 PM | PERMALINK

Can't wait to read Drexel Hill Dimbulb say that they are only one and two car garage types - Never the threes and fours.

Posted by: thethirdPaul on April 17, 2007 at 2:46 PM | PERMALINK

The explanation of this apparent paradox is to look at the actual numbers. Yes, foreclosures are nine times as high, but the actual number -- 11,000 in a quarter -- isn't that big. It's a tiny percentage of all the millions of homes in California.

If the number of foreclosures continues to skyrocket, then there could be a problem. Banks would wind up owning a lot of homes. The increased supply of homes for sale would drive prices down. But, as of now, the number of foreclosures is still small.

Posted by: ex-liberal on April 17, 2007 at 2:46 PM | PERMALINK

Kevin Drum: But strong economies don't last forever, and if the economy starts to go south even a little bit while foreclosures are still rising, it could start a pretty vicious chain reaction. Keep your fingers crossed.

In other news, there's a continuing drought and wind blown soil erosion problem in Oklahoma. Nothing to worry about folks.

Posted by: alex on April 17, 2007 at 2:48 PM | PERMALINK

Meanwhile the dollar continues it decline. Losing ground to even the Pound.

"Reasonably strong economy'? Oh, please.

'Of course, the higher stock market may just be due to the irrational exuberance of people who control lots of money, as happened in the nineties. This is also not obviously good news. In this case, a higher stock market will shift wealth to those smart enough to get out, from those stupid enough to get in.'
-- Dean Baker

'When the era of shared growth ended, so too did much of the growth: the U.S. economy slowed down and recessions were deeper, more frequent, and harder to overcome. Growth spurts that did occur left most people out: the bottom 60% of U.S. households earned only 95 cents in 2004 for every dollar they made in 1979. A quarter century of falling incomes for the vast majority, even though average household income rose by 27% in real terms. Whew!' - James M. Cypher
Who's Gorging and Who's Getting Roasted in the Economic Barbecue?
http://www.alternet.org/workplace/49374/

Posted by: MsNThrope on April 17, 2007 at 2:52 PM | PERMALINK

alex,

Right on - Last time that happened, Route 66 became rush hour traffic, thugs were throwing fellows off Santa Fe box cars, and many ended up burning Steinbeck books in the San Joaquin Valley and downtown Bakersfield. Thought "Grapes" had struck too close and might upset The Man.

Posted by: thethirdPaul on April 17, 2007 at 2:54 PM | PERMALINK

egbert: "all the econmic(sic) indicators are stonger than ever". please enumerate the indicators you include in "all" or take your ball and go home.

kevin: the numbers aren't normalized so I'm not sure how true this picture is. for example in 1900 the number of foreclosures would have been zero, but there were no outstanding housing loans then. if the number of outstanding mortgages is double that of 1996 then the number would look pretty good. can't tell by looking at this though.

Posted by: supersaurus on April 17, 2007 at 2:56 PM | PERMALINK

What's interesting is that in the early 90s, with lower levels of foreclosures, housing prices were in a steady decline continuing until well after the peak. It would be interesting to see on the same axes, foreclosure rates, sales volume and housing prices. I've been keeping track of housing sale prices in a broad swatch from the miracle mile to venice beach looking towards my own home purchase. I don't have as good of data as I'd like (I'm working from the dataquick listings that show up each month in the L.A. Times), and with 5 months of data, single family home prices are flat (but still high), while condo prices have started to dip precipitously. It will be interesting to see how this continues to develop.

But all the people who've been insisting that the rules have changed and that housing prices will continue to skyrocket forever sound just like the people touting internet stocks in the 90s. I'm thinking that they're probably wrong (and it's a bit moot anyway: We're at least a year away from being able to seriously considering buying a house unless either we win the lotto or there's a dramatic drop in housing prices).

Posted by: Don Hosek on April 17, 2007 at 2:57 PM | PERMALINK

Al's right. Too many people have confused owning a house with "homeownership", and conflated the investment purposes of owning a house with the warm fuzziness of a home.

I sure as hell hope that we taxpayers aren't going to be expected to bail out those who made poor investments on this basis. But I expect that we will, once the mortgage industry gets done painting its sorrowful picture of "newly homeless" grandmas and single moms.

Posted by: Tom Ames on April 17, 2007 at 2:58 PM | PERMALINK

In my city, there are about twice as many homes in the $250,000 and below level listed for sale than usual. Homes listed over $400,000 are at about normal levels. I think the large quantity of lower level priced homes for sale are all of the borrowers trying to get out from their ARM's before their interest rates go up or before they are upside down on their mortgages.

Posted by: Brojo on April 17, 2007 at 3:01 PM | PERMALINK

A rise in foreclosures likely foreshadows a slowdown in new housing starts. This by itself could have a significant impact on employment even if the broader economy remains strong.

Looking down the road, the concern has to be with the degree to which consumer spending has been supported by actual and anticipated increases in housing values. Housing values don't need to collapse or even decline for homeowners' spending decisions to be reconsidered; if it appears they won't increase, consumers will eventually stop looking on spending as they do now -- as a portion of their net real savings -- and start to look on it as a decrease in their wealth that won't be made up later. In the long run this could be looked on as a healthy thing, at least from some points of view, but in the short run the impact on the economy would likely be strongly negative.

Posted by: Zathras on April 17, 2007 at 3:01 PM | PERMALINK

OK- found some data -

http://money.cnn.com/2007/03/23/real_estate/february_foreclosure_fall/index.htm

California had 16,273 filings in February alone, and about 9100 in February 2006.

DataQuick has some 'splaining to do.

Posted by: downpuppy on April 17, 2007 at 3:02 PM | PERMALINK

This graph needs some splaining. What happened int CA in 1996? Was there some sort of crisis then? How does this compare to the nation?

Posted by: jussumbody on April 17, 2007 at 3:02 PM | PERMALINK

The reason the stock market is climbing (and the reason for the housing bubble in the first place) is that there is excess liquidity in the world, with no good places to park it. Global labor arbitrage is generally holding prices down, so the money sloshing in the system is showing up in housing and stock valuations. It also led to lowering lending standards. The ultimate problem is that housing prices are far too high for incomes. The only way houses have been bought in the last few years is with loans that are simply unaffordable, with the hope of appreciation and refinancing bailing them out. Prices will have to fall to the point that the median homebuyer can afford the median house. Things that can't go on forever, don't.

Posted by: Alistair on April 17, 2007 at 3:02 PM | PERMALINK

Just once I'd like to see one of these Drum posts on the housing market address something besides California.

Yes, I know I'm being hard on Kevin today. But sometimes his total insularity and inability to look beyond his own experiences is just astounding.

Posted by: shortstop on April 17, 2007 at 3:07 PM | PERMALINK

You guys have been predictig a Bush recession since 2001.

Accurately, since Bush gave us a recession in 2001.

Posted by: Gregory on April 17, 2007 at 3:09 PM | PERMALINK

Zathras wrote: Looking down the road, the concern has to be with the degree to which consumer spending has been supported by actual and anticipated increases in housing values.

And while we're at it, let's consider the extent to which historically low interest rates -- and not the so-called "trickle-down effect" of bush's tax cuts -- were responsible for the consumer spending that propelled the economy. Bush's tax cuts are there (for now); ultra-low interest rates, not so much. And we're seeing the effect.

Posted by: Gregory on April 17, 2007 at 3:13 PM | PERMALINK

re: "On the other hand, housing prices aren't falling much, as you'd normally expect. In fact, they went up a bit in March."

It's probably a result of the changing mix of houses actually selling.

More high end houses sell to affluent buyers (even including high-end non-owner occupied homes bought for speculation that are being sold at a loss), while fewer moderate or low-priced homes sell because a) sellers of existing homes owe more than the house will sell for, and are thus unable to sell, and b) stricter loan qualification standards affect low end new home buyers more than high end buyers.

US housing states don't adeduately differentiate between the types of houses in the mix, thus changes in the mix aren't detected.

Posted by: Jesse on April 17, 2007 at 3:15 PM | PERMALINK

Close to home indeed. I live in the city that is home to NovaStar -- You know, the subprime lender that is in bankruptcy. The Kansas City Star has been doing a lot of excellent reporting on this issue. (But they have stepped up their game all around since McClatchy bought them.)

Posted by: Blue Girl, Red State (aka G.C.) on April 17, 2007 at 3:21 PM | PERMALINK

Here is a link to a Star article from last week.

Posted by: Blue Girl, Red State (aka G.C.) on April 17, 2007 at 3:29 PM | PERMALINK

Gregory: since Bush gave us a recession in 2001.

It's hard to blame the 2001 recession on Bush, because

1. The recession began almost immeiately after Bush took office.

2.Bush hadn't made any changes in economic policy.

Posted by: ex-liberal on April 17, 2007 at 3:33 PM | PERMALINK

On the other hand, housing prices aren't falling much, as you'd normally expect. In fact, they went up a bit in March. Very weird.

Kevin:

The expectation should be that prices trail the market. Housing is about 22% above trend relative to rent, and about 28% above trend relative to cpi. But owners always think their house is unique, and without the daily mark to market effect that a ticker tape provides, they tend to clutch to that illusion longer than one would expect. The market peaked in September of 2005, and given an 18-24 month lag before the realization that market clearing prices have fallen hits, I'd expect that you won't be making the statement I quoted above come the summer.

Mean reversion is a cruel reality of finanical markets, and it would be astonishing if house prices didn't fall back in line with their long term trends.

Posted by: Scott Frew on April 17, 2007 at 3:34 PM | PERMALINK

But all the people who've been insisting that the rules have changed and that housing prices will continue to skyrocket forever sound just like the people touting internet stocks in the 90s.
Posted by: Don Hosek

Because in many cases it's the same snake oil salesmen. Same pump and dump ehtics.

90,000 people piled into the mortgage business in the last 5 years. Not to mention count all the R/E sales people.

Posted by: MsNThrope on April 17, 2007 at 3:39 PM | PERMALINK

It's hard to blame the 2001 recession on Bush, because 1. The recession began almost immeiately after Bush took office.

The 2001 recession began in November, 2001. Bush took office in January, 2001. Ten months later is not "almost immediately after."

Posted by: Stefan on April 17, 2007 at 3:44 PM | PERMALINK

From the LAT story:"For a moment, everything was fine. Then housing prices stopped going up ..."
How did the prices stop going up? Who decided?Market forces? Like what? Or did the appraisers who work for the banks trying to close the loans find data no one else had?
Listing data?
Existing homes account for roughly 85% of the housing market. These are reported when closed.
New home sales are reported at contract signing and are reported gross (gov't doesn't track cancellations).
Outside of median sale price,what gets reported in Ca. that led the consensus to the conclusion that "housing prices stopped going up?"

Posted by: TJM on April 17, 2007 at 3:45 PM | PERMALINK

The scariest part of this is that only a small portion of adjustable rate mortgages have reached the reset rate yet so we are not yet seeing the full effect of mortgae unaffodability. The peak of resets will not be reached for another six to 12 months and will continue for a year or more. This graph shows an amazing rate of change-and, if one can believe the Bushites, this is occuring in a "strong" economy with "rising" wages, "record low" unemployment and "low" inflation rates. Wait for a year and see what the rate looks like then. It is very easy to find record foreclosure rates almost everywhere in the country. Now lets say we had an economy with stagnating real wages, inflation in the 7 to 10% range, more low quality jobs and falling house values. Who would be able to refinance out of an ajustable mortgage?

Posted by: Neal on April 17, 2007 at 3:47 PM | PERMALINK

they peaked during the Clinton administration? Is that a stain on his record? I don't remember a lot of worries back then.

Posted by: MatthewRMarler on April 17, 2007 at 3:49 PM | PERMALINK

From the Washington Post today, "The number of U.S. homes entering foreclosure doubled in the first quarter from a year earlier as property prices stagnated and owners struggled to refinance mortgages. Owners of 168,829 homes in 2007's first three months were notified that lenders had filed for foreclosure because of failure to pay loans or liens, up from 83,154 homes in 2006's first quarter, Foreclosures.com said. The firm's announcement came as the National Association of Home Builders/Wells Fargo index of homebuilders' confidence fell to the lowest level of the year."

Posted by: Neal on April 17, 2007 at 3:52 PM | PERMALINK

No, Stefan. The 2001 recession ended in November. It began in March.

From USA Today The 2001 recession began in March that year, so today's announcement makes it an eight-month downturn. http://www.usatoday.com/money/economy/2003-07-17-recession_x.htm

Posted by: ex-liberal on April 17, 2007 at 3:57 PM | PERMALINK

"ex-liberal" wrote: It's hard to blame the 2001 recession on Bush

But it's easy to point out how idiotic and dishonest you Bush apologists are.

Posted by: Gregory on April 17, 2007 at 3:57 PM | PERMALINK

As to the first part, a good portion of Calif. had a housing slowdown that started in the early '90s and peaked roughly as the graph shows. Many parts of the state (i.e., outside the Bay Area and other high-cost/low supply regions) sat out the entire decade, with median prices not reaching their early '90s levels again until the end of the decade.

Likely clouding these foreclosure numbers are the many "short sales" that also occurred. I'd be interested to see those numbers rolled in, as they're effectively equivalent events.

As to the second part, there's a nation beyond California? ;-)

This graph needs some splaining. What happened int CA in 1996? Was there some sort of crisis then? How does this compare to the nation?

Posted by: Trollhattan on April 17, 2007 at 4:07 PM | PERMALINK

One reason for the high foreclosure rate is the rampant fraud in the sub-prime lending market. Another reason is the rise of 100% financed Option-ARM loans. In such loans borrowers are lured with low payments, many not even realizing they are negatively amortized. The interest rate goes up and the negative amount goes over 115% and this means the loan must be paid as a fully amortized loan. Of course, the borrower can't afford the payments.
Another thing that leads to the confusion regarding home prices not going down while the foreclosure rate is going up is the rise of inflated price home sales. The seller can't sell his house at the listed price and lowers the price. The "buyer" comes in and offers the original listed price, but with an addendum to the contract indicating the overage will be paid back to the buyer for "repairs" or "closing costs". The addendum is not disclosed to the lender. The "buyer" walks away with the money leading to a first payment default. The home sale price is recorded at the inflated amount.

Posted by: Robert Forman on April 17, 2007 at 4:09 PM | PERMALINK
On the other hand, housing prices aren't falling much, as you'd normally expect. In fact, they went up a bit in March. Very weird.

It is not at all clear that "housing prices" have gone anywhere: the median prices of homes that have actually sold went up, but that doesn't mean "housing prices" went up, unless you assume the profile of homes sold is constant. It could just as easily mean that, say, the people buying homes now are those that are, on average, more wealthy. Or, looked at a different way, people with less money aren't able to get credit to buy homes.

Which, given the widely reported crisis in subprime lending, is almost certainly the case.

Posted by: cmdicely on April 17, 2007 at 4:11 PM | PERMALINK

http://www.latimes.com/business/printedition/la-fi-wrap12.2apr12,1,2995384.story?coll=la-headlines-pe-business
WALL ST. ROUNDUP
Warning is issued on private-equity deals
From Reuters

April 12, 2007

This won't make investors in high-yield junk bonds feel warm and fuzzy.

"Frankly, we are all feasting off the imprudence of our lenders," said Steven Rattner, managing principal of private-equity firm Quadrangle Group, at a forum on hedge funds and private-equity investing in New York on Wednesday.

Speaking of the boom in private-equity-led takeovers of public companies — deals often financed with junk bonds — Rattner said investors and lenders "are subsidizing our transactions and are allowing us to make deals that wouldn't have made any sense" otherwise.

He called the surge in private-equity deals "an accident waiting to happen." And of the lenders and investors providing credit for the deals, he said: "Of all the bubbles, the bubble in the credit market today is one of the greatest. It is beyond any rational measure."

Posted by: MsNThrope on April 17, 2007 at 4:12 PM | PERMALINK

Kevin: "Rather, the problem is that this is happening even though the economy is reasonably strong."

Yeah, but you forgot to ask for whom.

Real wages for the labor class are stagnant at best, the purchasing power of the middle class hand the working poor has eroded markedly, the defined benefits pension plans of both public- and private-sector workers are woefully if not fatally underfunded, and American consumer debt is at overall record levels.

This isn't a "great economy" -- rather, it's an economic house of cards, held together by wires connected to a fiscal time bomb.

Posted by: Donald from Hawaii on April 17, 2007 at 4:31 PM | PERMALINK

This housing thing is scary, but it depends a lot on where you are. AFAIK, the market is pretty strong here in SE Virginia - am I right?

Posted by: Neil B. on April 17, 2007 at 4:33 PM | PERMALINK

You have to be very, very careful in using housing prices -- especially those from realtors.

These prices are straight unadjusted averages and can be massively distorted by changes in composition. Usually what happens when the real estate market heads south is that the bottom end of the market closes down first. Consequently, in a weak housing market the average for last year will include many more relative low priced homes then the average for this year. So the average value you are using is comparing two very different samples and because of this in a weak market the average is biased higher.

Posted by: spencer on April 17, 2007 at 4:46 PM | PERMALINK

robert forman your full of it. subprime loans have been offered in close to there present form for almost 20 years. Rampant fraud is a myth created by feckless politicians and an ignorant media not letting facts get in the way of a good story. Look at the statistics. The vast majority of people buy houses to live in them. There relly isn't a horde of Carlton Sheets zombies running around making a killing in real estate. If you really want to know what the deal is it's an underlying weakness in the economy as a whole.

Posted by: Gandalf on April 17, 2007 at 4:49 PM | PERMALINK

MsNthrope, geez, I hope he's right. The last 2 years have been the most boring I've been through in the last 25.
Of course, the bankruptcy profession has been forecasting that credit bubble would burst for the last 2 years,too.
That guy sounds a bit like a private equity guy who got outbid on his last acquisition. He's speaking at a conference, not to his investors.

Posted by: TJM on April 17, 2007 at 4:53 PM | PERMALINK

The main reason for foreclosures is that the borrower cannot afford the house. For many of the borrowers the only way they took possesion of the house was through a minimum payment option, with the hope that either their income would go up significantly by the time the reset occurred, or that the value of the house would rise so much that their apparent equity in the house would rise enough so that they could refinanace and use a cash withdrawal to make payments. During this time, speculators moved big time into the real estate markets with the idea that real estate would always go up in value by double digit percentages every year. They bid up the price of houses as an investment, because no matter what they paid for it, it would be worth more next year. Now that prices are falling, the speculators are either staying out of the market (decreasing demand leading to falling prices) or trying to dump properties (again leading to lower prices). Home builders have large stocks of inventory, they are cutting prices to sell. Meanwhile, individual resident home (borrowers)are finiding that the re-sale value of their house is falling, making it more difficult to re-finance or to sell without having to come up with cash at closing. And, given that many of the low payment mortgages have pre-payment penalties, a chunck of cash will have to be brought to the re-financing. Right now, a large part of the real-estate market and mortgage market is frozen, with the majority of sales happening for those people who can qualify for more standard mortgage products (the reason for average sales prices not falling -fewer houses but higher end houses. Just wait a year and see how bad it will be. And, speaking of credit cards, more and more is being put on them because home equity loans are getting harder to get (fewer people have equity). The only problem is that the equity loans had a multi-year fuse whereas credit cards have about 4-6 months to implosion.

Posted by: Neal on April 17, 2007 at 5:30 PM | PERMALINK

I spoke briefly with a friend about the interaction of the housing bubble with the decline of the dollar over the past couple years some weeks ago. He thought that the decline of the dollar was supporting housing prices because foreign dollar owners invest in US real-estate (along with US stocks and bonds). US real estate is in part a global commodity, and its price has been declining in everything but dollars.

That idea does offer a partial explanation for the seeming contradiction between prices and foreclosures. Maybe americans aren't able to afford the debt on these homes while simultaneously foreign investment by people with excess dollars continue to hold prices up at least in terms of the falling US dollar.

I wonder what the total foreign ownership of real estate has been doing lately?

I think this explanation would predict that it should be increasing.

Posted by: jefff on April 17, 2007 at 5:39 PM | PERMALINK

That graph's a little weird. Forclosure's were goind down during the early 00's recessin ??

Posted by: swio on April 17, 2007 at 5:45 PM | PERMALINK

alot of the stuff i have been reading indicates these foreclosures are from the 2005 period; so the zillions of 'exotic' loans from 2006 to last week when the standards were tightened all have yet to reset.

and it's not only those to come, there's also a tremendous oversupply of housing. there's also the problem of half-started developments and the builder has suddenly pulled out, leaving one or two occupied homes on a partially-built block.

once you begin reading articles from across the country, you get a better sense than anything yet provided in the national media of what a fucked up mess this is -- in addition to all the other fucked up messes.

Posted by: linda on April 17, 2007 at 5:49 PM | PERMALINK

Who else has been betting the housing market? A bubble this size draws sharks from all over the world.

I put this up on the counterfeiting site but it has relevance here as well:

From the US Treasury web site:

'March 7, 2007
HP-300

Treasury Designates Two U.S. Companies Acting as Fronts for Colombia’s North Valle Drug Cartel

The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) today added two U.S. companies to its list of Specially Designated Narcotics Traffickers (SDNTs) for their ties to Colombia's North Valle drug cartel.

"This is the latest in a series of OFAC actions targeted at the financial underbelly of the North Valle cartel," said Adam Szubin, Director of the Office of Foreign Assets Control. "We have designated the cartel's companies in Colombia, the Caribbean, and elsewhere, and today we have frozen the assets of two front companies here in the United States."

These U.S. companies are owned by individuals who act as front persons for North Valle drug cartel leaders Raul Alberto Grajales Lemos (Raul Grajales) and Carlos Alberto Renteria Mantilla (Beto Renteria). This action is the seventh designation against the financial network of Raul Grajales and Beto Renteria, who have both been indicted on narcotics trafficking charges in the United States.

Today's action named two Florida partnerships, C.W. Salman Partners and Salman Coral Way Partners, as SDNTs. These two partnerships, which were created to hold real estate and other assets in the United States, are owned by previously-named SDNT individuals, Abdala Saieh Jassir, Moises Abdal Saieh Muvdi, and Carlos Ernesto Saieh Jamis. Each of these Colombian individuals has been a front person for Raul Grajales and Beto Renteria for over ten years. Moises Abdal Saieh Muvdi and Carlos Ernesto Saieh Jamis are in the custody of Colombian authorities on money laundering charges.'

Posted by: MsNThrope on April 17, 2007 at 5:51 PM | PERMALINK

Is it just me or are those some very strange Columbian names?

Re: bankruptcy lawyers:

After the Buyouts, Lawyers Prepare to Wrap Bandages
By PETER EDMONSTON
http://dealbook.blogs.nytimes.com/2007/04/04/after-the-buyouts-lawyers-prepare-to-wrap-bandages/

AS the chiefs of private equity pull off one highflying buyout after another, bankruptcy lawyers are beginning to get their safety nets and first-aid kits ready.

Many Chapter 11 casualties are expected to come from the dozens of companies that have been taken private in the last few years in debt-financed transactions. Anticipating that the long lull in corporate bankruptcies may finally be over, law firms are bulking up their bankruptcy and restructuring groups.

Harvey Miller, perhaps the nation’s pre-eminent bankruptcy lawyer, said in March that he would leave the investment bank Greenhill & Company to return to the law firm Weil Gotshal & Manges. Later, four Weil Gotshal bankruptcy partners jumped to Cadwalader, Wickersham & Taft, the counsel to Northwest Airlines in its Chapter 11 case.

Skadden Arps Slate Meagher & Flom, adviser to some of the biggest companies in bankruptcy, including Kmart, Polaroid and US Airways, is also hunting for restructuring talent. J. Gregory Milmoe, a co-head of Skadden’s corporate restructuring group, said he thought a bankruptcy surge was coming soon. “We are hiring people and training them with the expectation that it is going to be happening this year,” he said.

[snip]

Italics mine.

Posted by: MsNThrope on April 17, 2007 at 5:55 PM | PERMALINK

I got a Hamilton sez you're wrong, Kevin. The mortgage problem is:

A. Creeping beyond subprime mortgages;

B. Within subprimes, expanding to greedier ppl who used a subprime to buy a 3,500 sq footer instead of a 2,200 with a conventional mortgage.

Posted by: SocraticGadfly on April 17, 2007 at 6:49 PM | PERMALINK

I seem to have read that inventory goes up and sales go down while price declines come later when people have to sell. Also, builders give a lot of other incentives for people to buy as long as they do not cut prices and piss off the early buyers. Watch out when price decline start to accelerate.

Posted by: Carl on April 17, 2007 at 7:02 PM | PERMALINK

I sure as hell hope that we taxpayers aren't going to be expected to bail out those who made poor investments on this basis. But I expect that we will, once the mortgage industry gets done painting its sorrowful picture of "newly homeless" grandmas and single moms.

I sure as hell hell hope not, too.

One thing to remember is: helping out overextended mortgage borrowers may sound like a program to help Americans of modest means, but it will almost certainly hurt large number of Americans of modest means: namely, those priced out of the current market who need a dip in prices to get on the housing ladder. Propping up prices with tax dollars is a big, giant "fuck you" to everybody who has patiently been saving pennies and paying rent, hoping for the right opportunity to buy.

My own back of the envelope math, though, tells me the numbers are too vast for even the mighty US government to do much about. There may be some nibbling at the edges here and there to prop up the odd mortgage lender or two, but I doubt the government will be able to afford a wide-scale, massive effort to stave off large number of foreclosures if that in fact is what it's the cards.

Posted by: Jasper on April 17, 2007 at 7:04 PM | PERMALINK

There are effectively two different economies in this country.

The numbers are good for the economy of the rich; the stock market, the financial statistics, these all point to moderately healthy growth.

But many, many people in this country do not partake in that economy. Their economy, the economy of the middle class and poor, is doing lousy. They're the people whose homes are being taken, and they're the people who are suffering the most from rising prices for gas and food.

When the bottom drops out of the poor economy, will this cause a recession? Don't know. I think it's almost as likely to cause a revolution, myself...

Posted by: Remus Shepherd on April 17, 2007 at 7:09 PM | PERMALINK

Good news! Foreclosures up 800% in California! Liberals are very curious people.
Posted by: mhr on April 17, 2007 at 5:41 PM

You know less about California than you do about real estate, mhr.

Posted by: Jeff F on April 17, 2007 at 7:10 PM | PERMALINK

Good news! Foreclosures up 800% in California! Liberals are very curious people.

Yeah, we're curious as to why you think an 800% increase in foreclosures is good news.

Posted by: Repack Rider on April 17, 2007 at 7:33 PM | PERMALINK

Sleeper story of the year, the housing market is near collapse where I live.

Posted by: ALINE on April 17, 2007 at 9:13 PM | PERMALINK

shortstop writes:

Just once I'd like to see one of these Drum posts on the housing market address something besides California.

Although California is the center of the universe, it's true that real estate is dependent on local conditions. It's going to take a serious recession for real estate to drop significantly in places like Los Angeles. I know a co-worker who's been looking for a place for the last 6 months, and he's been outbid on several homes, and they weren't in great neighborhoods. I think he's resigned to either buy really far away, or just keep renting for the foreseeable future.

Posted by: Andy on April 18, 2007 at 1:15 AM | PERMALINK

If the dollar sinks, stinks to foreign shores, then real items rise to match the fall. Stocks reflect making bucks, and if they're cheap-ass bucks, all inflated and defecit laden dollars, then the stocks will make more of them and be worth more of them.
Why is any old coastal CA house still worth $900K? ( OK, prices did fall, it's hard to sustaion the mental Million DOLLAr House ... ) Why? because money that still is confident says it would rather have that real estate than 900,000 of the weak bucks.
Why not owe someone funny money when acquiring ownership of something real?
That's why you can't measure our lousy economy from stocks or housing.

Posted by: Richard W. Crews on April 18, 2007 at 3:10 AM | PERMALINK

Andy

It may be sooner than your friend thinks.

I remember the early 90s property slump in Southern California-- I believe prices fell about 40%.

The argument is that with a strong economy, prices cannot fall. But they did in Sydney-- about 20%, since 2004.

Housing slumps are silent, in that it takes a long time for homeowners to accept that their houses are worth less than they were. The market just dries up, for a long while.

But housing prices, as a multiple of income, cannot rise forever. Prices cannot grow faster than real income, infinitely.

In certain places in the country (southern California, Bay Area, Boston, NYC, DC) I think it is the case that property is *always* a higher multiple of income than the country as a whole, but even in these markets, it does move within a band over the cycle.

And when the slump does start, the lenders cut the lending multiple (multiple against income which they are comfortable lending). So the effect is a bit like an accordion contracting, as the cheap mortgage credit that fuelled the fire, gets cut off.

I highly recommend reading the introduction to the SECOND edition of Robert Shiller's 'Irrational Exuberance'. Good stuff on housing prices-- very eye opening. As I say, the second edition.

Posted by: Valuethinker on April 18, 2007 at 3:52 AM | PERMALINK

'The news [mortgage defaults] was softened by a report from the Bureau of Labor Statistics (BLS) which claimed that 180,000 new jobs had been created in March. But that’s all baloney. The country lost another 16 thousand manufacturing jobs in the same period and construction labor has been falling for a year. Chuck Butler of the Daily Pfennig noted that the fantastical numbers were conjured up by using the BLS “Birth-death model” which creates “ghost jobs” out of thin air (much like the way the Fed creates credit) In other words, the BLS job figures are nearly as unreliable as the core rate of inflation (CPI) which excludes food, energy (as well as) modifying rising housing costs.' Sell the Farm and Buy Gold/by Mike Whitney
http://www.smirkingchimp.com/thread/6865

Italics mine.

Gold hit $700/oz yesterday. The dollar hit its lowest exchange rate against the £ in 26 years and approached record lows against the Euro.

Here's Warren Buffett on what this means:

“Through the spring of 2002, I had lived nearly 72 years without purchasing a foreign currency. Since then Berkshire has made significant investments in several currencies. …To hold other currencies is to believe that the dollar will decline….Our trade deficit has greatly worsened, to the point that our country's "net worth," so to speak, is now being transferred abroad at an alarming rate.

More important, however, is that foreign ownership of our assets will grow at about $500 (currently $800 billion) billion per year at the present trade-deficit level, which means that the deficit will be adding about one percentage point annually (now 1.5% annually) to foreigners' net ownership of our national wealth. As that ownership grows, so will the annual net investment income flowing out of this country. That will leave us paying ever-increasing dividends and interest to the world rather than being a net receiver of them, as in the past. We have entered the world of negative compounding -- goodbye pleasure, hello pain”. (Warren Buffet, “Thriftville versus Squanderville”)

Posted by: MsNThrope on April 18, 2007 at 7:40 AM | PERMALINK

OT:

According to the Citizens for Tax Justice, New Research Shows Wal-Mart Rigs the System to Skip Out on $2.3 Billion in State Taxes

WASHINGTON, April 16 /PRNewswire-USNewswire/ -- Wal-Mart appears to be skipping out on its fair share of taxes that most Americans have to pay to help support state governments. New research conducted in part by a leading non-partisan, non-profit tax organization reveals that Wal-Mart avoided $2.3 billion in state income taxes, cutting its payment to state
governments almost in half between 1999 and 2005

Posted by: MsNThrope on April 18, 2007 at 8:32 AM | PERMALINK

'...Offhand, my guess is that the problem isn't that this will push the economy into recession...'

Uhhh, we're already IN a recession. How is this news?

Foreclosures are up, and people are losing their shirts trying to get out of the housing market within their first year of making payments, because property taxes killed them from the inflated property values they bought into when they stepped into the market.

This is before we get into the variable rate multiple mortgages that are backfiring, as well as the 'interest only's that are now demanding payments towards the principal.

Posted by: sara on April 18, 2007 at 10:10 AM | PERMALINK

The coward Pat, in his blind obedience to the Democratic Party, supports the Democratic Senators and Representatives that voted for the Republican laws that reduced bankruptcy protection for average Americans. Some of those Democrats are now running for president and will receive Pat's unwavering support without question, while he does everything possible to smear those who recognize the Democratic Party is filled with the same kind of people that are in the Republican Party: corporate weasels. Pat does not have the cognitive ability to compare actions of politicians. Pat can only determine a politician's worth by their party affiliation, despite the fact those politicians are doing the same thing that the members of the party he loathes are doing.

Senators Clinton, Kerry and Edwards voted to give W. Bush the war powers needed to invade Iraq. I am not certain if they all voted for the bankruptcy protection reduction law, but many Democrats did. Green Party politicians would not have voted for either, but if Gore had still been a senator he most likely would have voted for them, too. Al Gore is an automaton of Tipper's, much like Pat is an automaton of the DLC, and a Senator Gore, much like the Murthafucker from Pennsylvania, owes a great deal to both the defense and finance industries. Tipper goads Al to smear recording artists and threaten to eliminate their first amemdment rights. This is reminiscent of the power Cathherince de Medici had over Charles IX, who ordered the St. Barholowmew Day massacre at the insistence of his mother. (I wonder who Tipper would have insisted be massacred if she had become First Lady. Probably some hip hop clubbers.) These things do not bother Pat, he does not care what Decmocrats actually do, he only cares what party they belong to and if they are loyal to its leadership. A leadership that felt threatened by Dean's 2004 candidacy for the presidential nomination.

What did the Democratic Party leadership do when it felt threatened by Dean? It anonymously smeared him with a TV advertising campaign featuring the image of Osama bin Laden. Pat was extremely proud of his party for taking out Dean in this way and hopes to silence me with smears of being responsible for Bush's presidency for not voting for his Democrtaic twin. But I remember Tipper co-founded Parents Music Resource Center with James Baker's wife. Her fawning husband then lent his senatorial privilages to the censoring Philistine, who tried to end First Amemdment rights of artists like Frank Zappa and James Joyce beacuse they used words she did not like. I knew Al Gore was a weak suck and so did many liberals in 2000. We know Clinton, Kerry and Edwards are weak sucks too, who caved in to Republican political pressure and did the wrong thing when they voted to give Bush war powers to destroy Iraq. Pat does not care, what matters most to this DLC coward is party loyalty and receiving its share of corporate graft, like the Murhafucker does.

Posted by: Brojo on April 18, 2007 at 11:59 AM | PERMALINK

the decline of the dollar was supporting housing prices because foreign dollar owners invest in US real-estate

It seems unlikely to me, that outside of a few unique markets (South Florida comes to mind), foreign buyers would be investing in single-family houses. Certainly not to the extent that it would move the market very far one way or the other.

Posted by: Jenna's Bush on April 18, 2007 at 2:19 PM | PERMALINK

Cowardly Pat, you sure are a lame adversary. You are about as lame as Gore's 2000 predidential campaign was.

I used the term Murthafucker to describe Democratic politicians who are as corrupt as Republicans. I didn't call you a motherfucker. You are so fucking illiterate, I am surprised you know how to post comments on the intertubes. Just another reason why you are such an inept adversary, just like your brow beaten hero, Al Gore, was to W. Bush in 2000. Could you really expect well read and informed people to vote for someone as stoopid as you?

Please let me know which Democrats voted for the partial abortion ban the Supreme Court upheld yesterday. I want to hang their votes around your neck like Coleridge's Ancient Mariner hung an albatross around his. (That's from another poem you probably never heard of.)

Posted by: Brojo on April 18, 2007 at 4:40 PM | PERMALINK

Where do deleted comments go?

Thank you moderator. I pledge to ignore Pat from here on.

Posted by: Brojo on April 18, 2007 at 4:42 PM | PERMALINK

U.S. California foreclosures up 183% year-on-year

U.S. foreclosures up 47% year-on-year

U.S. March foreclosures up 7% vs. Feb.

Looks like California is not an anomaly but an indicator. U.S. economy is going down. This just in: retail sales for the week just ended are down 15% year-on-year from same period in 2006. Only fed and its FOMC are allowing the stock markets to defy gravity.

Posted by: DevilDog on April 18, 2007 at 4:55 PM | PERMALINK

I am worried DevilDog. Should home owners sell now before they lose all of their equity to falling prices?

Posted by: Brojo on April 18, 2007 at 5:07 PM | PERMALINK

"Rather, the problem is that this is happening even though the economy is reasonably strong."

The "strong economy" is really a misnomer. Most households now are leveraged to the hilt, and any misstep spells fiscal doom.

It used to be that a strong economy strongly indicated financially healthy households, broadly speaking. Those days are gone.

Posted by: zak822 on April 18, 2007 at 5:22 PM | PERMALINK

Brojo, I sold mine in July. I believe I'm better off renting for the time being. My state has a strong economy (lowest unemployment rate in the nation) and housing prices are falling, while foreclosures have double YoY. If you want to see if you would be better off taking your gains now and renting until prices finish falling, check out this interactive table from the NYT:
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=1&oref=slogin

Try calculating it with a falling rent rate and negative housing price appreciation rate, which is the case in most places.

IMO the national and most local markets have a long way to fall, despite what the realtors say ("There's never been a better time to buy"). As zak822 noted, households have taken on record levels of debt. There's a huge inventory of houses and condos and a dearth of buyers. More importantly, with equity disappearing and refinancing dried up, consumption based on home appreciation is disappearing as well. Not a good time to be carrying a lot of debt, like a mortgage.

Posted by: DevilDog on April 18, 2007 at 9:47 PM | PERMALINK

Thanks. The experts think they can avoid a correction.

Posted by: Brojo on April 19, 2007 at 12:18 AM | PERMALINK




 

 

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