June 22, 2007

HousingPANIC Stupid Question of the Day

Who was the most ignorant and irrational market player during the Late Great Housing Ponzi Scheme? In other words, who's gonna be in for the biggest shock of their lives as this all caves in?


1) Homedebtors, who didn't understand P/E ratios, historical norms, interest rates, toxic loan terms, how home prices are achieved or how rampant REIC corruption was

2) Realtors, who didn't understand that it's never different this time, that the good times couldn't last, and that once the crash started, it wouldn't stop until its natural and fitting end

3) Corrupted appraisers, who didn't realize that their fraud will be some of the easiest to trace once the authorities wake up and start doing their jobs

4) The mainstream media, who took NAR press releases and printed them as gospel

5) The federal reserve, who thought blowing a new bubble to replace the NASDAQ bubble was a fine idea

6) China, who thought we would pay back those silly bonds and loans

7) Homebuilders, who wildly overpaid for land, who based their business model on illegal labor, who will be arrested by SEC authorities for cheerleading their stock while dumping it, and who destroyed yet another American industry for short term gain

8) Freespending mortgage brokers, who flamed out as fast as drkoop.com

9) Wall Street Analysts, who must have gotten their degrees at Arizona State, who evidently never read Manias, Panics and Crashes, and who were surprised by the downturn month after month after month after month

10) George W. Bush, who encouraged people to buy homes regardless of the price or fundamentals


Others: CDO holders, hedge funds, David Lereah, Sheeple, Flippers, Congress, illegal immigrants, Harvard JCHS, Brits, home retailers, local and state governments,

36 comments:

decaffeinated said...

Easy: all of the businesses who feed (fed) off the refi/flipper boom. Think Red Robin, Lowes, Olive Garden, IHop, Best Buy, KFC, etc.

When the ARMs explode and the HELOC faucet is shut off, all of these businesses will be begging for customers...right before they take a meat cleaver to their payrolls.

This is, of course, a classic negative feedback loop.

If you work in retail right now, it sucks to be you.

concerned said...

The owners/investors/flippers........they are the one's that will be left holding the bag.

fEm said...

the TAXPAYER will get shafted as usual.

i dont see flippers getting burned unless they put downpayments down(ha!)

just wait till next year all these 1.5 million dollar flip/granite/stainless homes i see will be flops and on the block.

Anonymous said...

Of course we will pay the Chinese (and other creditors) back - with more paper money. They don't like that? Tough luck.

Anonymous said...

renters who missed out on the greatest financial opportunity of thier lifetimes (assuming they sold at the peak).

Come on Keith gotta admit renting 2002-2005 in a bubble city was pretty stupid. With a minimal or even $0 down investment they could have made hundreds of thousands in tax free returns by buying and selling after 2 years.

Anonymous said...

Good god man ihop does not live on helocs. Ihop lives on hung over college kids and that isn't going away.

Get some grip on reality.

Anonymous said...

Any idiots, I mean homeowners, who purchased their first home in the last five years, or anyone who sold a home and simply increased their debt by buying a McMansion which will now deflate significantly below anything they will ever recoup from it in the next 15-20 years.

keith said...

renting in 2002 - 2005 in a bubble city would have been stupid

owning in a bubble city 2007 - 2010 will be stupid

any other stupid questions?

Anonymous said...

keith,

renting 2002-2005 was stupid. Admit it man, that was an opportunity that will never be here again. You could have bought a house for $0 down and sold it 2 years later for $200K more in many cities. That is a $200K tax free return on $0 investment. Not doing so was a huge missed opportunity.

Has nothing to do with owning 2007-2010, which I agree is as stupid, yet irrelevant to the 2002-2005 time period.

Paul E. Math said...

Baby boomer homeowners and the short-sighted local governments who represent them. Here in Massachusetts, homedebtors and their local governments have a Not In My BackYard mentality toward the development of new homes. Local supply of homes is restricted, contributing to a temporary rise in the price of homes beyond the reach of their own children. Their educated children, the lifeblood of the economy, are forced to move across the country in order to have a decent standard of living. Baby boomer homeowners in Massachusetts will not be welcome in their children's guest rooms. Enjoy that retirement, boomers. You'll be spending it alone.

Anonymous said...

Paul Math,

That's way over simplified. People have been moving away from Mass and Ny for decades. It it wasn't for foreign immigration NY and Boston would be ghost towns by now. Maybe the lack of affordable houses has accelerated that trend in the last few years but it by no means the cause of it.

What's next blaming the housing bubble for the loss of manufacturing jobs in New England?

It's getting to the point now where any social issue will be blamed on the housing market. Divorce rate up? Well it must be the housing bubble. Teenage pregnancies up? Yep bubble's fault. Increase in drug use...you know who to blame don't you, Mr. Bubble.

Housing Bubble: the new Jew

Anonymous said...

The homedebtors are still in denial:

http://news.yahoo.com/s/nm/20070621/us_nm/usa_economy_housing_dc

kitchenstove said...

This is a tough one. They're all in big trouble. I'd have to say the homedebtors will feel it the most though too since they are at the bottom of this food chain and some of those other groups (realtors, appraisers, media) likely include FBs. A lot of people will be getting it from all directions if they fit into not only the homedebtor group, but one of those other groups as well.

Flagg707 said...

The FED was the most irrational - they are paid NOT to make collosal mistakes that threaten the banking system.

The homedebtors will be hurt the worst. They stupidly bought into what the "experts" said and, when it gets even uglier, will support legislation and actions that actually hurt the ability to own property in the future.

Anonymous said...

CNBC

They spend most of the day focused on the NYSE. Yet the derivative market is huge compared to the NYSE, and is where a meltdown will come from.

Anonymous said...

You the taxpayer will be screwed to death. Also the home owners who aren't in trouble and just get to watch their home values drop like a stone and also get to bail out the flippers.

If I owned a home and I don't anymore I would just mail the bastards a key. When they called to say we haven't recieved your lsat payment my response would be YES YOU HAVE

Sequoia512

Anonymous said...

A new study out today shows that housewives have developed a severe case of "Cheerleader Syndrome", from watching daytime talk shows like The View, Ellen, Oprah, and others. The study goes on to conclude that women with the psychological disease know as "Cheerleader Syndrome", have been rendered powerless to think for themselves.

Anonymous said...

Yes, Mr. Magoo, aka greenspan, will go down in history as a crazy ole koot that led the masses of sheeple off the cliff; with repeated babble and doublespeak, and the sheeple praised him just before the fall, calling him the maestro over and over and over again. And party they did, just like it was 1999, until the music stoped...

sam said...

Answer: the aggressive homedebtor, likely still delusional.

2:46 (Dow Jones) A 55% majority of Americans surveyed tell Boston Consulting Group they believe they could sell their homes for more now than they would have received a year ago. 74% say they're confident they could sell their homes within the next six months at a price they think it's worth. 85% believe their homes will be worth more five years from now than it is today. 63% still think real estate is a good investment. (JJM)

Anonymous said...

BIGGEST LOSERS:

1- Homeowners that purchased 2005-2006.

2- Investors in Mortgage backed derivatives.

Contrary to some comments the banking system is minimally affected by the meltdown as they simply do not own any of this toxic waste (or insignificant amounts). Lenders as often refered to in this blog and most articles for the most part are not banks. Lenders are the conduits to wall street. Banks may, however, be affected by a recession, as will the rest of use, if one were to occur due to the housing bust.

All of the other industry players are already hurting due to the drop in mortgage/sales activity. Those that engaged in fraud may need to start looking over their shoulders. However, a recent FBI report indicates that "hard" (i.e prosecutable) mortgage fraud is probably only about 1% of the total.

K.W. - Southern Ca. said...

The market ... not baby boomers or anyone else with an over inflated sense of importance ... drives pricing.

Besides, many of these these boomers (and the like) will be down-sizing to something smaller.

Hence, more houses on the market.

Cheaper and cheaper house pricing.


Paul E. Math said...
Baby boomer homeowners and the short-sighted local governments who represent them. Here in Massachusetts, homedebtors and their local governments have a Not In My BackYard mentality toward the development of new homes. Local supply of homes is restricted, contributing to a temporary rise in the price of homes beyond the reach of their own children. Their educated children, the lifeblood of the economy, are forced to move across the country in order to have a decent standard of living. Baby boomer homeowners in Massachusetts will not be welcome in their children's guest rooms. Enjoy that retirement, boomers. You'll be spending it alone.

Anonymous said...

Homedebtors and flippers....everyone else was part of the ponzi scheme.

Anonymous said...

"Others: CDO holders, hedge funds, David Lereah, Sheeple, Flippers, Congress, illegal immigrants, Harvard JCHS, Brits, home retailers, local and state governments"

Brits? It's a bit unfair to tar us "monkey islanders" with the same brush as you bunch of financial losers in the U.S.!

Anonymous said...

Franklin Raines of FNM.

http://en.wikipedia.org/wiki/Franklin_Raines

Stephen said...

"Come on Keith gotta admit renting 2002-2005 in a bubble city was pretty stupid."

-----------------------

Well, with the benefit of hindsight, it would have been a great idea to buy and sell within that timeframe in a bubble city.

However, without the benefit of hindsight, it was a gamble. For some, it was a gamble that paid off very well, but for others who did not get out in time it was/is a financial disaster.

The thing is, there was just no way to know exactly when the tipping point would occur.

no payments for how long? said...

Furniture stores that give you "no interest for 2 years and no payments for one year" kind of deals? A lot around here seem to have closed this last year.

z said...

>renting 2002-2005 was stupid. Admit it man, that was an opportunity that will never be here again.
-------------

What you really mean is that buying low and selling high is a good strategy. Thanks.

Since you can time markets perfectly please enlighten us on the next bubble so we can all time it perfectly. Much appreciated!

Anonymous said...

Anonymous said...
keith,

renting 2002-2005 was stupid. Admit it man, that was an opportunity that will never be here again.

Oh please, that's like looking at todays winning lottery numbers and saying it was stupid not to play them yesterday. It was not stupid to rent in 2002-2005 unless you had a crystal ball that told you that the prices were going up.

Anonymous said...

Hi. Love the blog.

Why the mad hate for ASU?

I graduated ASU and be all super good edumacated and stuff.

Back off man!

GO SUN DEVILS!!!!

SPARKY RULES!

Anonymous said...

Great explanation!
The Mark to Market Iceberg

John Succo on Minyanville is writing Bear Stearns Fund Reveals Tip of the CDO Iceberg


Earlier this year I was struggling to figure out exactly what I was missing with respect to Collateralized Debt Obligations (CDO) structuring. Specifically, I wanted to know why is the market so sanguine in the face of deteriorating collateral values in the mortgage market? One of my firm's theses has been that as the mortgage market deteriorates, investors holding CDO as an investment would realize losses and this would feed into other risky asset classes. Why aren't losses being seen when the market is so clearly deteriorating?

So I asked a large broker firm to send over its smartest math person on CDO structuring. The team that came over was headed by a very smart gentleman. He was very good at math and very straightforward. Working for a broker, I was prepared for some sugar coating. I didn't get any.

The answer is simple and scary: conflict of interest.

He explained that due to the many layers of today's complicated credit products, the assumptions used to dictate the pricing and outcome of CDO are extremely subjective. The process is so subjective, in fact, that in order to make the market work, an "impartial" pricing mechanism must exist that the entire market can rely upon. Enter the credit agencies. They use their models, which are not sensitive to current or expected economic activity, but are based almost entirely on past and current default rates and cash flow to price the risk. This, of course, raises two issues.

First, it is questionable whether "recent" experienced losses over the last few years really represent the worst of the credit market (conservative). But, even more importantly, it raises a huge conflict of interest: the credit agency's customers are the very issuers of the tranches they rate. The credit agencies, therefore, need to compete for business based in part on the ratings they are willing to give these tranches. As a result, they will only downgrade when forced to by experienced losses; not by rising default rates, not a worsening economy, but only actual, experienced losses. Even more disturbing, they will be most reluctant to downgrade the riskiest tranches (the equity tranches), since those continue to be owned by the issuers even after the deal is sold.

So even though the mortgage market has deteriorated substantially, mark-to-market losses by those holding the CDO paper have generally not been realized, simply because the rating agencies have not changed their ratings for all of the above reasons. Accounting rules only require holders of the paper to mark prices according to the accepted model, not actual prices.

I asked them what would force the rating agencies to change their ratings. The response was, "it's just a matter of time. If the market continues to deteriorate, the agencies at some point will be forced by the cumulative losses to acquiesce." Because these losses have been compressed, any re-adjusting of ratings by these agencies is likely to result in a massive repricing of risk. We may be there now.

Three Words: Mark to Market

Kevin Depew was also talking about Mark to Market in Thursday's Five Things.
Three Words: Mark to Market
Read them. Learn them. Know them.

CDO's are so illiquid - meaning they trade so infrequently - there is no market to mark them to.
OK, then how are they valued?
With models that the major credit agencies use based on past and current default rates and cash flow.
Wait a minute, if the models are based on past and current defaults, what happens if there is a sudden surge in defaults... like we are experiencing right now?
Nothing.
And doesn't this raise conflict of interest questions between the credit agencies and their customers?
Yes.
In fact, this is an issue Minyanville Professor John Succo wrote about more than a month ago and again today.
The bottom line is that even though the mortgage market has deteriorated substantially, mark-to-market losses by those holding the CDO paper have generally not been realized because accounting rules only require holders of the paper to mark prices according to the accepted model, not actual prices.
The bottom line is that even though the mortgage market has deteriorated substantially, mark-to-market losses by those holding the CDO paper have generally not been realized because accounting rules only require holders of the paper to mark prices according to the accepted model, not actual prices.
There is much more to kevin's post including charts of BBB rated tranches. Thanks John and Bart and Kevin. I'm happy to pass on what people need to know.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Anonymous said...

Q: Who's gonna be in for the biggest shock of their lives as this all caves in?

A: The middle class. It's over, the American dream is dead.

Frank@NeverColdCall.com said...

"Come on Keith gotta admit renting 2002-2005 in a bubble city was pretty stupid."

Well duh, yeah, but this blog isn't about that. It's about the fact that renting post-2005 is smart. In case you haven't bothered to read the comments on this site, it's full of people who sold in 2005, pocketed the money, and are now renting for pennies on the dollar.

Frank@NeverColdCall.com said...

Biggest losers:

Homedebtors in bubble markets, especially places like Phoenix and Vegas and San Diego where people's entire lives were being paid for with HELOC money that's not only gone now, but that needs to be paid back.

Realtwhores and mortgage peddlers are getting burned bad too. I know plenty of both back in Scottsdale who are waving goodbye to the BMWs as the repo men tow them away. I'm talking about people I know who were making $300k a year, went into debt based on that income continuing forever, and are now either unemployed or making $20k a year tops.

I see local governments getting screwed too, because thanks to the nonsense in DC, cities and towns will now lose big bucks in property tax revenue and they won't have the cash to pay for services and schools.

flop that shack said...

No doubt it was the mortgage brokers because they are the ones going bankrupt and hurting the most. New Century and several others are six feet under. NovaStar and Accredited both saw their stock prices drop 75% or more. Most flippers didn't put much money down if any at all. The Fed doesn't car because they will just print more money. Bush can't possibly have any lower poll ratings, so it doesn't matter for him. The Wall St fraudsters will weasel their way out with a bailout as usual. Taxpayers will have to fight stagflation for the next few years.

hep me lawdy said...

Anyone who bought in 2004 was probably too late to the party. Flippers wait two years to have tax free gains. In most places 2006 was a little too late to reap profits. Most of the people who profited bought their homes long before 2002. Most of them ended up buying even bigger, more overpriced homes and are right back deep in debt. Most flippers plowed their money right back into the market and got creamed. Other idiots got HELOCs and didn't profit at all. All in all, very few people really profitted from the ponzi scheme. Most of them were the criminals and everyone will pay for those crimes.

Paul E. Math said...

Anon 12:15, I'm not blaming the housing bubble for everything. This isn't the kind of forum where you can list out all the contributing factors to a particular phenomenon - there just isn't the space and the visitors to this blog aren't going to bother to read it all.

I'm just pointing out the contribution of local governments to the housing bubble, identifying who those local governments represent and describing one of the consequences. And trying to do so clearly and succinctly. This is a housing bubble blog.