If a homeowner buys a home for $400,000, got it appraised during the silliness for $500,000, takes out a $100,000 HELOC, blows that on say, cocaine and hookers, and now the home is truly worth only $400,000, isn't that HELOC now truly unsecured?
And are we about to see massive bankruptcies, commoditized credit write-offs and bank failures?
August 27, 2006
HousingPanic Stupid Question of the Day
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27 comments:
a $100,000 HELOC, blows that on say, cocaine and hookers
Now that is an investment hahah~!
KEITH here is a great post to make!
sorry about the length..but great post non the less
NIZE NOTES: OT:
Roubini:Eight Myths and The Coming Ugliest Housing Bust Ever
Nouriel Roubini has been out front in understanding the current problems in the housing market. He now writes: ".. the housing slump is now undeniable – and rather than a slump it looks like a really ugly bust." In his latest blog post, he details eight myths promoted by those who fail to understand the depth of the housing crisis:
Spin #1: Housing prices are not falling, have never fallen and will not fall
Some folks are still deluding themselves that home prices have not fallen yet and that they will not fall in the future. Indeed, since the Great Depression of the 1930 we have not had a year-on-year fall in median home prices, as opposed to some quarters in which home prices were falling. But now median existing home prices are only 0.9% up relative to a year ago and new home prices are only up 0.3% relative to a year ago. Worse, actual median home prices are falling – on a y-o-y basis - in every US region with the exception of the South. They are even falling in the Mid-West where, allegedly, there was not housing bubble to begin with.
Spin #2: We have never had in US history a recession that was initially triggered by a housing bust. So, it cannot happen this time around
...the effects of the housing bust will be more severe and intense than those of the tech bust because the aggregate demand, wealth and employment effects of housing are much larger than those of the tech sector. So, this will indeed be the first housing-led recession and the second-in-a-row bubble-led recession in six years. Also, as in all the US recessions since 1973, this investment bust – in most cases first in non-residential investment and consumer durables – in this case first in residential investment and consumer durables – will be the combination of three similar factors: 1. shocks that hit investment, be it bubbles or other factors; 2. a monetary tightening; 3. an oil shock. This has been the pattern in every recession since the 1970s and it will be the same pattern in the recession of 2007
.
Spin #3: In spite of the housing slump, the levels of activity in the housing market are still very high relative to a few years ago. So, there is now housing bust, only a healthy correction.
These arguments are total nonsense for various reasons:...if an indicator that is at a high level is falling at an annualized rate of 10, 20 or 30% - as many housing indicators are now - there is still a housing bust regardless of the previous level: when first and second derivatives show an accelerating fall, this is a bust and levels may, in due time, go back to the previous lower level of a few years ago.
Spin #4: If the housing bust gets ugly, the Fed will ease rates and rescue us from a recession.
...that the Fed cannot rescue housing and the economy is clear. First, Fed policy in 2001-2004 fed an unsustainable housing bubble in the same way in which the Fed policy in the 1990s fed the tech bubble. Now, like then, it payback time: with huge excess capacity in housing (then in tech capital capacity) even much lower short and long rates will not make much of a difference to housing demand. Real investment fell by 4% of GDP between 2000 and 2004 in spite of the Fed slashing the Fed Funds rate from 6.5% to 1.0%. Does anyone believe or can show that a 50bps or even 100bps easing by the Fed will undo the housing investment bust that is coming in the next two years? No realistic way: when there is a glut of excess supply of capital goods or housing stock or consumer durables, the demand for such durable consumption or investment becomes interest-rate insensitive. When there is a glut of capital goods or consumer durables or housing as there is one now, easing monetary policy becomes ineffective as it is like pushing on the proverbial string.
Spin #5: Credit conditions in the housing market are not tight. Credit growth is still perky and there is no credit crunch. So, unlike the past, there will be no hard landing
Using a core measure of inflation, real rates are not so low for borrowers – even in comparison to conditions in 2000. And for homebuilders now facing falling prices of the goods they are selling – i.e. homes – the real borrowing rate is now extremely high as home prices are now falling. Thus, the reduction in the real price of housing is a severe credit crunch for homebuilders and contractors who are facing a fall in the relative price of what they are selling at a time when there is a glut of new homes: no wonder that building permits housing starts are in free fall (-21% and -13% respectively relative to a year ago).
More importantly, you do not need a credit crunch in order to get an investment bust; if an investment bubble has led to an excess supply of an real asset relative to its fundamental demand, eventually the bursting of such a bubble will lead to a fall in the speculative and fundamental demand for such an asset, regardless of a credit crunch: a modest monetary tightening is enough to burst such a late-stage bubble (a bubble at the late stage when overpricing is so excessive that small shocks are enough to prick the bubble) and trigger a sharp fall in the real investment in such a capital good. The perfect example was 2000-2001 when a 175bps tightening by the Fed between June 1999 and June 2000 was enough to first prick and then burst a tech stock price bubble – that had led to the overinvestment in tech capital goods - and lead to a sharp fall in real investment (by 4% of GDP between 2000 and 2004). The same is happening now with housing: the 425bps tightening by the Fed has finally burst an overinflated housing bubble that was getting out of control with ever rising rate of increase of housing prices.
Spin #6: Given the increase in housing prices there is still so much net wealth (equity) in the housing sector that most households are richer, will keep on feeling richer and will keep on spending more.
...for households with meaningful amounts of untapped home equity, the slowdown and then outright fall in home prices together with higher debt servicing ratios and flat or falling real wages and negative savings, the ability and willingness to further extract home equity will sharply shrink. Indeed, for US households to continue to consume at a rate that is 2% higher than their incomes – as they have done on average since 2005 - implies a significant persistent reduction over time of their remaining home equity; obviously, this Ponzi game of running down one’s own assets to finance an excess of consumption over income cannot go on forever and is not even a optimal path that rational households will take. More rationally, with the housing bust and falling prices, households are been pinched by a negative wealth effect and are starting to cut back on consumption and reduce the rate at which they are dissaving. Indeed, based on the experience of countries such as the UK, Australia and New Zealand, it is enough for home prices inflation to slow down – let alone to outright fall as they are now in the US – for HEW to sharply fall
Spin #7: Banks and mortgage lender are still very sound and there is no risk of systemic banking crisis.
The reality is quite different and much uglier: the housing bubble of the last few years may have planted the seeds of another nasty systemic banking crisis that could be more severe and costly than the S&L crisis of the late 1980s. First, notice that the housing boom of the last few years has led to a credit boom that is quite unprecedented for the US in recent history. Credit boom and excessive overlending episodes – based on cross country experience – often lead to credit busts that cause both banking and financial crises as well as economic recessions...One cannot even exclude systemic risk consequences if the housing bust combined with a recession leads to a bust of the mortgage backed securities (MBS) market and triggers severe losses for the two huge GSEs, Fannie Mae and Freddie Mac. Then, the ugly scenario that Greenspan worried about may come true: the implicit moral hazard coming from the activities of GSEs - that are formally private but that act as if they were large too-big-to-fail public institutions given the market perception that the US Treasury would bail them out in case of a systemic housing and financial distress – becomes explicit. Then, the implicit liabilities from implicit GSEs bailout-expectations lead to a financial and fiscal crisis. If this systemic risk scenario were to occur, the $200 billion fiscal cost to the US tax-payer of bailing-out and cleaning-up the S&Ls may look like spare change compared to the trillions of dollars of implicit liabilities that a more severe home lending industry financial crisis and a GSEs crisis would lead to.
Spin #8: Housing may be getting into a slump but such a limited sectoral slump cannot and will not cause a broad economy-wide recession.
...the fall in real residential investment and its effects on aggregate demand will be larger than the 2000-2001 tech bust; the employment effects of the housing bust will be larger than the tech bust as – directly or indirectly – 30% of recent employment growth has been housing-related; the wealth effects of a bust in housing will be large and larger than those of the tech stock bust as homeownership is widespread and housing is a significant fraction of households’ wealth; a housing-related recession can occur if triggered by a housing bubble bursting in the same way in which the bursting of the tech bubble in 2000 led to a recession in 2001; households are now at a tipping point and in a foul mood (as evidenced by the sharply falling consumer confidence level) being buffeted by slumping housing, high and rising oil and energy prices and the delayed effects of rising policy rates while experiencing falling real wages, negative savings and high and rising debt and debt servicing ratios; and Fed attempts to prevent the recessions via a cut in interest rate in the fall or winter will fail to avoid the recession as an unprecedented glut of housing and of consumer durables – starting with cars, home appliances and furniture – will make the demand for housing and durables insensitive to changes in short term and long term interest rates; the housing bust may lead to a banking and financial crisis that may be more acute - and cause a more severe credit crunch – than the S&L crisis of the 1980s and early 1990s that led to the 1990-1991 recession.
We could nit pick some minor differences of opinion we have with Roubini on how the economy works, but for the most part Roubini nails it. But do note that Roubini tends to spend most of his commentary on the recession, downturn side, of the mess created by the Fed. There's another side, price inflation at the consumer level. This economic dragon is a two headed dragon: recession and inflation.
That, Keith is the question of the day. . .although most of my friends took out HELOCS for Granite Countertop Kitchens. My neighbor in NorCal who got an appraisal of 500K, and took out a HELOC for a kitchen, owes more than his place is worth - current units are priced at 439K and aren't sold yet! BTW - the question I have wanted to know - WHAT comes next after Granite Countertops are the Acocado Green Refrigerators (Think Brady Bunch)of the early 21st century? I was at a design center in LA this week and found the answer - frosted glass Italian countertops with lighting from below - kind of glows in dark. . .really neat. In 10 years, people will tear out the dated granite for frosted Italian Glass!
Sweet. Every open house I go to that has granite I can tell the RE agent that the kitchen is very 2005.
Yes, yes, and yes. The ugliest bust ever, other than Barbara Bush that is.
Here is a nice little article I found while doing a little research....Ill take just the interest.. Oh and anonopuss pass this on to the Homeland People they should enjoy the read
http://tinyurl.com/hcegg
Blow and Hookers! Let's all put on our Members Only jackets, a gold chain, throw in a beta tape of Miami Vice and pretend we're all somebody else!
The HELOC is still secured if:
The buyer of the cocaine has cut it, repackaged it and has upped the street value by raising inventory and book value.
And if he pimped his ride and the hookers are working for him, not on him.
Boycot - great read - thanks for posting.
30% employment crash -
Wonder if this includes immigrants hanging rock or landscaping.
This is gonna cut deep.
"This is gonna cut deep."
Ballz deep!
Home equity lines of cocain?
Hookers earned lots of cash?
I beleive some of this housing price run-up has come from the REIC convincing people that they are rich. There are an amazing number of people I know out there from friends to co-workers and aquaintances who beleive they are "rich". They are in fact slightly upper middle class or middle class or lower middle class. This run up has foolishly made people beleive that they are the upper 1%. They bought too much, too big, too fast.
Richard is right...this is gonna cut deep.
Farm Girl
lots of dot-com millionaires used to run around Phoenix too in 2000. And we all know what they ended up doing
Getting their real estate license.
The "wealth effect" is disappearing so hard and so fast, the new emotion will be the "f*ck I'm in over my head" effect
Seriously though, what are the prospects for sin trades in the comming depression? If you look at VICEX, you will see that it got
nailed in May too. I guess the excess $$ has lifted all boats equally. I havent checked since the 70's :( but what has the price of coke done durring Bush's tenure? Is it high or is a good buy now? What is its relation ship to the dollar?
-El Maha
takes out a $100,000 HELOC, blows that on say, cocaine and hookers
You make it sound like that's a waste of money.
Consider it supporting your local Columbian!
They're not making anymore land!!!
They making even fewer buyers!!!
In Miami Beach, 70% of homeownwers, legal and illegal, pulled huge equity from their casa.
Now? They are all crying "foul."
It will be a blood bath soon.
Is there any way we can pitch in for a few hundred billboards with all the bloggers comments from housing panic?This stuff is not only hallarious,it's all true.The ignorant ,uneducated,sheep need it all"RUBBED IN".BTW I am waiting for housing to drop,and meet rising gold,and will purchase one of the sheeps homes for about an ounce(thats 31.1grams for cocaine/hooker people)
I think the question of the day should be where are all these sellers going to live? You have to live somewhere and you probably won't be living in your car so where do all these sellers plan on going. You would think homes would be a zero sum game. Someone moves from NY to Fl but then another moves from FL to NY. So theres equilibrium in the marketplace. How can everybody be selling at once and to go where? It seems to me we'll still have as many people living in the same houses except many will have lost a bundle from this credit binge ultimately causing them to be poorer through bankruptcies and foreclosures but then getting into a home much cheaper based on realistic lending standards and house prices once again based on values relative to incomes.
Well... this one would've been a good short candidate... who knew they hand their grubby mitts in mortgage as well?
http://www.nydailynews.com/business/story/446722p-376114c.html
Block's taxing day
Mortgage losses send stock cratering 8.7%
On the Fortune article, I stopped reading at this:
In the Northeast, they dropped 2.1 percent from July of 2005, at the same time prices nationwide rose around 3 percent, meaning that houses lost over 5 percent of their value adjusted for inflation.
Can somebody explain how relative housing prices = inflation adjusted appreciation? Lost me.
p.s. Kudos to the Anons with the hooker cocaine comments. Guess everything is in the perspective you take!
Here's the deal on 100% unsecured HELOC'c. Section 1322(b)(2) of the bankruptcy code says a chapter 13 debtor can modify the rights of holders of secured claims, except claims secured only by the debtor's residence. If there is a "penny's worth of equity," the HELOC lender gets to keep his lien, for whatever it is worth. If the lien is 100% unsecured, the debtor can blow it off in a BK court filing. In a close case, there might be a courtroom battle of the appraisers, but in a Southbound market, some seriously underwater homeowners could squeak through and keep their homes. There are variations on this theme.
Another subplot to our unfolding drama.
BTW, I've always called it the Mortgage Industrial Complex. Free money is responsible for the boom more than any other factor.
"Free money is responsible for the boom more than any other factor."
You've hit the nail on the head. Others would like to blame the Feds. Truly, it is the mentality of the many who have no regard for the consequences of their actions. Their reckless borrowing founded on greed and impatience drove us to where we are now.
Had we parhaps used that low interest rate then to finance or start up a small business, where the goods can be exported or just simply boost productivity of an existing business, the outcome may have been different. Instead, we've abused the system. It is the easy borrowing and the temptation of spending it in lavish vacations, boats, SUVs, plasma TVs, etc., that doesn't generate a "squat" of revenue.
The Chinese only makes 1/15 of what we make (personal income), but yet they are able to save 30 - 40% of their earnings. Us, we don't save anything. Maybe they don't get to enjoy what we have enjoyed. Wrong, because they are patient, they save and save and then buy (in cash) the same "toys" that we've enjoyed through borrowed money. There's a big difference.
Whitetower,
Interesting point. So how does that equate to a foreclosure, whereby there's a difference between what you owe to the bank or lender and the highest bid of your property at auction. Are you still responsible for the difference under the new BK law?
Whitetower, I think you're confusing chapter 13 with chapter 7 BK. There is no income cap for chapter 13. My theoretical underwater debtor would be in BK for three years or more, but he would be able to keep his house if he completed his plan of reorganization.
The HELOC lender would be just another unsecured lender and would have to accept pennies on the dollar, just like a credit card lender.
Consumer bankruptcy hasn't gone away, it is just on vacation. It will be back for all the reasons that people talk about on this blog every day.
Whitetower:
Thank you very much. I've heard about the debt forgiveness. I've been trying to explain this to some distant relatives, who unfortunately, are in this predicament. It's now clear to me. If I tell them this, I'm afraid they may not be able to sleep or eat. Too bad. They got what they've asked for.
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