The Root Cause of the U.S. Housing Bubble Has Yet to Be Addressed [View article]
The entire article may be true but it leaves out an enormous part of the housing equation - discrimination.
We have entire segments of the population who experience discrimination in renting homes. The scope of the problem is too big to address with legislation or any oversight. We have entire classes of people who live month-to-month in apartments with their families with little or no security that the landlord may evict them next week.
It's very easy to appeal to millions of Americans that they have an opportunity to own a home with a yard without having a landlord snoop around you and your family. This is a mindset that millions of Americans relate to and an equal amount of Americans don't even acknowledge this mindset exists. These are the same people who say things like "These deadbeats could never pay a loan back!" but then you ask a question like "Would you ever rent a 2 bedroom apartment in a crowded city with 3 kids?" and they say "Of course not! Are you nuts!" No, I'm not nuts, its just that everyone can't live in their brother's investment property like you do, dude. "What these people need is a stable family unit with family who lends them the 20 percent down payment and a good union job to support a 30 year mortgage, blah blah blah!". Try running that on the campaign trail! Instead, candidates hear "people need yards!" and its hard to run on the opposite platform. I'd love to see that campaign stop in the church where the candidate addresses a congregation through the mike "YOU CAN'T AFFORD TO OWN A MORTGAGE! MY UNCLE OWNS A BOARDING HOUSE, HERE'S HIS NUMBER, THE TOILETS HAVE BEEN FIXED."
While the article could very well be true in all respects, the political reality is that our federal and state governments are using the banking sector to widen the amount of eligible people to have an opportunity to cash in on an "option" as the author describes, also known in some financial circles as an investment. It may shock some readers of this site but only a tiny percentage of people have the faith or discipline to invest in the stock or bond markets. Honestly, do you think people have time to price difference annuity plans?
Most people just buy houses in order to pass them along to their kids, in a forced savings plan as traditionally equity wasn't that easy to tap. The internet and the secondary market made these underwriting loan products for homes much easier and portable (securitized). But even if job growth and home prices have decreased, we still don't have an alternative for average Americans to build wealth.
We can write about banning Fannie Mae and Freddie Mac as much as we want, it's a free country. But it makes not a lick of difference, because the financial markets expect a certain amount of defaults in mortgages as banks are semi-public utilities by participating in the creation and destruction of money as the transmission of monetary policy. The price of this franchise as well as the ease of borrowing from the discount window involves underwriting many loans for social justice, loans which will never succeed which will require a lot of government underwriting. These banks will pay the taxes and overhead of these foreclosed loans to protect their assets, keeping the municipal governments alive. This is what we call in the grownup world as "the cost of doing business."
Who is losing in this equation anyway? The banks? No one loses if you are allowed to hide your losses with unrealistic projections as to your nonperforming loans - and if you get bailed out. The taxpayer? Not if you are the taxpayer who lived in a crummy neighborhood and now your kids go to a better school! The only people getting the short end of the stick are the retired, whose CD returns are shot with rates being kept low, but most retired are loaded anyway, and they usually get screwed over in politics anyway. We can keep griping about the GSE debt and we can also gripe about the relative "value" of farm subsidies or trade quotas but we are always going to sacrifice economic ideals for doing the act which gives an immediate political benefit, as long as it has some decent underlying social aim. To assume the government would stop underwriting home loans which provides a ton of patronage jobs and campaign contributions to both parties while the CEO of Fannie Mae made more than 3.5m last year seems farfetched, to be diplomatic. Maybe a more poignant question would be "how can the average American make money off of this dysfunctional system"?
Housing and the End of Upward Mobility in the U.S. [View article]
JohnBinTN
The problem with your analysis is that it ignores the opportunity cost of payments for a home which could go into an investment, which, although may yield less, is more liquid or guaranteed (such as treasuries, CDs or insurance products which get cash value).
Lets assume two sixty five year old people have accumulated wealth - one in the form of home equity and the other in the stock market. Both of them are told that they have an inoperable brain tumor and have months to live. Maybe the homeowner could have refinanced his house quickly in 2006 but not so quickly in 2008 or later. Maybe the values of the houses in his neighborhood have gone down and no one is willing to buy at the price his family needs in order to tap the equity. The homeowner in the stock market can just liquidate their portfolio, and even if the market goes down, the portfolio can be liquidated at the press of a button. Anyone who has tried to sell a house in a down market understands the illiquid nature of a home as an measure of household wealth.
High Frequency Friday: The WSJ Finally Catches On [View article]
Investors aren't putting money into the stock market because everyone has been banging on them for the last 2 years to rush out and buy a home while the prices have dipped. Meanwhile, no one has reminded them that owning a home means they have to pay an oil bill, an electric bill, the insurance bill, the mortgage . . . and the sound of the toilet breaking upstairs in the sound of the investment money being flushed down the drain. In 2000 everyone was worried about the NASDAQ being a crowded trade. Now we're all worried about no small investor contribution? Is this what a Goldilocks recovery is - if its not too hot or too cold, we don't like it?
Housing and the End of Upward Mobility in the U.S. [View article]
I think this article leaves a lot off the table.
First. home prices are still too high. Remember that home ownership is more than equity and tax breaks - its also assuming perpetual liabilities which increase faster than the rate of capital appreciation of the asset. When you buy a house, you are also handcuffing yourself to a water, electricity, property insurance and home heating bill. Higher municipal salaries and pension obligations also translate into steadily increasing property taxes. Add onto that burden the ordinary maintenance and major improvements, and you are leaving very little room for error. You will notice I have not even mentioned mortgage rates or interest. These obligations need to be met by wage-earners who have seen their liabilities outstrip their income growth, in a society where job security is becoming increasingly rare. Let's not even talk about the real rates of inflation of consumer staples and goods.
There really isn't any "solution" to the problem except to face the reality that under these prices, home ownership is a white elephant which brings more problems than it creates. Price stabilization does not mean continuing to artificially inflate the market. It means allowing home prices to fall further until it reaches the trend line of 0.6 percent increases per year from the 1890s to today. If there is to be any meaningful correction from the inflationary bubble, the price target will have to overshoot. It may mean that the equity of your home will not be easily accessible as it used to be, but yes, theoretically your house could be worth half a million and theoretically, you could have graduated Summa Cum Laude from Harvard. But we don't live in theory, we live in reality, and the correction in home prices will mean that millions of Americans who have been shut out of the housing market for the last ten years by refusing to purchase houses at speculative levels, will be allowed to purchase homes when the last of the excess has been shaken out.
Even the college degree part of the first sentence of this article no longer applies. The young people today are wising up to the fact that even higher education is overpriced, and basing their decisions on where to go to school on the amount of financial aid available and the earning power flexed by the recent graduates as opposed to the brand name,
Yes, having a college degree and owning a home used to be the sign of upward mobility. Having electricity, running water and a working water closet in your home was also a sign of upward mobility. The new sign of upward mobility is creating self-sustaining careers which will withstand economic recessions and diversifying wealth through various means such as insurance policies, retirement accounts, real estate, profit sharing plans and good old fashioned savings.
If anything, the evaporation of this phantom equity which never really existed anyway (except in the eyes of some bold real estate appraisers and some speculative lenders) may bring the debate back to the lack of fair housing, which forced many poor people to purchase homes when they were not allowed to rent in better neighborhoods. Or better yet, it may address wage stagnation, or even the stem what appeared to be the inevitable growth of municipal and government workers through tax revenues on these inflated assets. I wouldn't bet on it. You'll probably just see a lot of outrage as this generation of seniors have their savings cut out from these ridiculous low interest rates and the next generation of seniors flounder as Social Security entitlements are cut or eliminated.
Home ownership is more of a politician and Wall Street dream - that is, they would like to dream that we want homes more than we need them.
I said it once before, I'll say it again: Jason correctly called the bubble in oil prices when everyone was climbing over their mothers to buy stock in every dinky NatGas company and OIH component. When prices were at triple digits, he called $35. Ignore him at your peril.
Something Strange Happening in Pimco's PHK [View article]
All this jibberjabber and PHK is climbing back up where it was before. It means that the fund may have been writing covered calls or someone dumped a load at the end of the year for tax reasons. Either way, you missed the boat if you didn't buy the dip.
Something Strange Happening in Pimco's PHK [View article]
Here's the Bloomberg article. Mystery solved. Here's another tip - if you are missing a sock, check the dryer. If you're in need of any other blinding glimpses of the obvious, feel free to contact me.
Something Strange Happening in Pimco's PHK [View article]
Doesn't anyone read Bloomberg News anymore? There was an article on both DPO and PHK reducing their dividend because PHK was trading at a 50% premium to its NAV. DPO cut its dividend as well in order to lower its premium. Joe Eqcome has been writing articles on how the "dividend" is really just the returning your capital, Ponzi-like, for several months now, but most people aren't going to understand the finer points of how CEFs aren't the dividend churning investment vehicle that they are marketed as.
PHK’s Semi-Annual Review: Distribution Reduction Long Overdue [View article]
Joe, you're probably one of the very few contributors who actually took the time to research a position rather than regurgitating something you heard at the racetrack. I hope your shorts paid off. Congratulations. I bought some shares of PHK today after they fell off the cliff and I'll sell out of it after the January money piles back into it but even with the distribution cut, it's still overvalued!!!
Junk Bonds: 2010 Will Be a Challenging Year [View article]
Mr. Morris is correct. I clearly remember his article last spring/summer when he pointed out spreads over Treasuries were at historic highs and assumed an unrealistic scenario where every single issuer could default.
We know the rest - subordinated debt issued from Ford, Genworth Financial and Avis Rent-A-Car were trading at around 35 cents on the dollar. They are now trading at 90 to 95 cents with tight bid-ask spreads. This is due from investors fleeing equities into bonds but unwilling to accept low yields and from companies taking advantage of the fragile credit markets to retire their debt either through drawing down on revolver lines of credit from banks or other measures to buy back their own bonds at low prices.
After Labor day, high yield prices had no where else to go and have bobbed around a range. Volatility is reflected in wider bid-ask spreads for low credit companies but even corporations on the brink of bankruptcies are bidding more than fifty cents on the dollar which suggests demand outstripping supply and lowering of standards. Moreover, as the retail investor looks at the YTD performance of a high yield fund, money flows into mutual funds which are obligated to purchase high yield debt, which makes the supply even scarcer, a market based on investor inflow, not on fundamentals of the underlying companies or lien priority. High Yield debt is beginning to resemble an asset bubble in itself due to scarcity of issues and investor demand rather than fundamentals. A raise in interest rates would indeed push returns to zero or negative in some portfolios.
A lot of things would have to go perfectly right - high 4Q growth, and moderate growth in 1Q10 and 2Q - to justify a repeat of 2009 high yield performance. Prices may go up farther into the surge of January buying but from a total return perspective, as the bid-ask spreads widen and the number of defaults increase, and relatively high prices, now would be a good time to sell high, as the investing manual oft instructs.
Please refer to the prospectus of DBV where it states, in boldface, in several places, in the beginning, middle and end, that it cannot short USD in its basket of currencies.
Why Dick Bove Is Wrong About Citigroup [View article]
I could see it going lower in the near term but Citi did have to jump the good ship TARP with everyone else.
Jason Schwarz was the first guy who called oil to hit $35 and he got slammed by 150 commentators telling him he was nuts when it was hitting $125. He was right then. He's probably right now too.
Has President Obama's Mortgage Modification Plan Failed? [View article]
The biggest problem with the mortgage modifications is that they shave off payments for a period of time and stick it on the end of the loan capitalized as extra principal or paid in a balloon note. This has the effect of driving the mortgage rates higher pushing the home deeper underwater. When the modification period ends, the borrower is right where they were in the beginning unless they manage to drastically increase their income to manage the original payment. Worse yet, this increases the true cost of borrowing and probably removes any equity which may be in the home by the end of the loan. Until serious efforts are made to reduce principal by federal subsidy guaranteed personally by the borrower and non-dischargeable in bankruptcy will any true progress be made in granting relief to homeowners.
What's Next for Fannie and Freddie? [View article]
Freddie paid back 1.1. billion dollars to the government this quarter, otherwise, they would have posted a profit. Put next to each other, Freddie loans default at a lower rate than Fannie loans and consequently, Freddie has had to post less capital reserves. I was disappointed the author did not distinguish between the two GSEs,
The Root Cause of the U.S. Housing Bubble Has Yet to Be Addressed [View article]
We have entire segments of the population who experience discrimination in renting homes. The scope of the problem is too big to address with legislation or any oversight. We have entire classes of people who live month-to-month in apartments with their families with little or no security that the landlord may evict them next week.
It's very easy to appeal to millions of Americans that they have an opportunity to own a home with a yard without having a landlord snoop around you and your family. This is a mindset that millions of Americans relate to and an equal amount of Americans don't even acknowledge this mindset exists. These are the same people who say things like "These deadbeats could never pay a loan back!" but then you ask a question like "Would you ever rent a 2 bedroom apartment in a crowded city with 3 kids?" and they say "Of course not! Are you nuts!" No, I'm not nuts, its just that everyone can't live in their brother's investment property like you do, dude. "What these people need is a stable family unit with family who lends them the 20 percent down payment and a good union job to support a 30 year mortgage, blah blah blah!". Try running that on the campaign trail! Instead, candidates hear "people need yards!" and its hard to run on the opposite platform. I'd love to see that campaign stop in the church where the candidate addresses a congregation through the mike "YOU CAN'T AFFORD TO OWN A MORTGAGE! MY UNCLE OWNS A BOARDING HOUSE, HERE'S HIS NUMBER, THE TOILETS HAVE BEEN FIXED."
While the article could very well be true in all respects, the political reality is that our federal and state governments are using the banking sector to widen the amount of eligible people to have an opportunity to cash in on an "option" as the author describes, also known in some financial circles as an investment. It may shock some readers of this site but only a tiny percentage of people have the faith or discipline to invest in the stock or bond markets. Honestly, do you think people have time to price difference annuity plans?
Most people just buy houses in order to pass them along to their kids, in a forced savings plan as traditionally equity wasn't that easy to tap. The internet and the secondary market made these underwriting loan products for homes much easier and portable (securitized). But even if job growth and home prices have decreased, we still don't have an alternative for average Americans to build wealth.
We can write about banning Fannie Mae and Freddie Mac as much as we want, it's a free country. But it makes not a lick of difference, because the financial markets expect a certain amount of defaults in mortgages as banks are semi-public utilities by participating in the creation and destruction of money as the transmission of monetary policy. The price of this franchise as well as the ease of borrowing from the discount window involves underwriting many loans for social justice, loans which will never succeed which will require a lot of government underwriting. These banks will pay the taxes and overhead of these foreclosed loans to protect their assets, keeping the municipal governments alive. This is what we call in the grownup world as "the cost of doing business."
Who is losing in this equation anyway? The banks? No one loses if you are allowed to hide your losses with unrealistic projections as to your nonperforming loans - and if you get bailed out. The taxpayer? Not if you are the taxpayer who lived in a crummy neighborhood and now your kids go to a better school! The only people getting the short end of the stick are the retired, whose CD returns are shot with rates being kept low, but most retired are loaded anyway, and they usually get screwed over in politics anyway. We can keep griping about the GSE debt and we can also gripe about the relative "value" of farm subsidies or trade quotas but we are always going to sacrifice economic ideals for doing the act which gives an immediate political benefit, as long as it has some decent underlying social aim. To assume the government would stop underwriting home loans which provides a ton of patronage jobs and campaign contributions to both parties while the CEO of Fannie Mae made more than 3.5m last year seems farfetched, to be diplomatic. Maybe a more poignant question would be "how can the average American make money off of this dysfunctional system"?
Housing and the End of Upward Mobility in the U.S. [View article]
The problem with your analysis is that it ignores the opportunity cost of payments for a home which could go into an investment, which, although may yield less, is more liquid or guaranteed (such as treasuries, CDs or insurance products which get cash value).
Lets assume two sixty five year old people have accumulated wealth - one in the form of home equity and the other in the stock market. Both of them are told that they have an inoperable brain tumor and have months to live. Maybe the homeowner could have refinanced his house quickly in 2006 but not so quickly in 2008 or later. Maybe the values of the houses in his neighborhood have gone down and no one is willing to buy at the price his family needs in order to tap the equity. The homeowner in the stock market can just liquidate their portfolio, and even if the market goes down, the portfolio can be liquidated at the press of a button. Anyone who has tried to sell a house in a down market understands the illiquid nature of a home as an measure of household wealth.
High Frequency Friday: The WSJ Finally Catches On [View article]
Housing and the End of Upward Mobility in the U.S. [View article]
First. home prices are still too high. Remember that home ownership is more than equity and tax breaks - its also assuming perpetual liabilities which increase faster than the rate of capital appreciation of the asset. When you buy a house, you are also handcuffing yourself to a water, electricity, property insurance and home heating bill. Higher municipal salaries and pension obligations also translate into steadily increasing property taxes. Add onto that burden the ordinary maintenance and major improvements, and you are leaving very little room for error. You will notice I have not even mentioned mortgage rates or interest. These obligations need to be met by wage-earners who have seen their liabilities outstrip their income growth, in a society where job security is becoming increasingly rare. Let's not even talk about the real rates of inflation of consumer staples and goods.
There really isn't any "solution" to the problem except to face the reality that under these prices, home ownership is a white elephant which brings more problems than it creates. Price stabilization does not mean continuing to artificially inflate the market. It means allowing home prices to fall further until it reaches the trend line of 0.6 percent increases per year from the 1890s to today. If there is to be any meaningful correction from the inflationary bubble, the price target will have to overshoot. It may mean that the equity of your home will not be easily accessible as it used to be, but yes, theoretically your house could be worth half a million and theoretically, you could have graduated Summa Cum Laude from Harvard. But we don't live in theory, we live in reality, and the correction in home prices will mean that millions of Americans who have been shut out of the housing market for the last ten years by refusing to purchase houses at speculative levels, will be allowed to purchase homes when the last of the excess has been shaken out.
Even the college degree part of the first sentence of this article no longer applies. The young people today are wising up to the fact that even higher education is overpriced, and basing their decisions on where to go to school on the amount of financial aid available and the earning power flexed by the recent graduates as opposed to the brand name,
Yes, having a college degree and owning a home used to be the sign of upward mobility. Having electricity, running water and a working water closet in your home was also a sign of upward mobility. The new sign of upward mobility is creating self-sustaining careers which will withstand economic recessions and diversifying wealth through various means such as insurance policies, retirement accounts, real estate, profit sharing plans and good old fashioned savings.
If anything, the evaporation of this phantom equity which never really existed anyway (except in the eyes of some bold real estate appraisers and some speculative lenders) may bring the debate back to the lack of fair housing, which forced many poor people to purchase homes when they were not allowed to rent in better neighborhoods. Or better yet, it may address wage stagnation, or even the stem what appeared to be the inevitable growth of municipal and government workers through tax revenues on these inflated assets. I wouldn't bet on it. You'll probably just see a lot of outrage as this generation of seniors have their savings cut out from these ridiculous low interest rates and the next generation of seniors flounder as Social Security entitlements are cut or eliminated.
Home ownership is more of a politician and Wall Street dream - that is, they would like to dream that we want homes more than we need them.
3 Reasons Not to Panic and Sell [View article]
Banks Issuing 79.9% Interest Rate Credit Cards? Yes, They Can [View article]
www.nycourts.gov/repor...
Something Strange Happening in Pimco's PHK [View article]
Something Strange Happening in Pimco's PHK [View article]
www.bloomberg.com/apps...
Something Strange Happening in Pimco's PHK [View article]
PHK’s Semi-Annual Review: Distribution Reduction Long Overdue [View article]
Junk Bonds: 2010 Will Be a Challenging Year [View article]
We know the rest - subordinated debt issued from Ford, Genworth Financial and Avis Rent-A-Car were trading at around 35 cents on the dollar. They are now trading at 90 to 95 cents with tight bid-ask spreads. This is due from investors fleeing equities into bonds but unwilling to accept low yields and from companies taking advantage of the fragile credit markets to retire their debt either through drawing down on revolver lines of credit from banks or other measures to buy back their own bonds at low prices.
After Labor day, high yield prices had no where else to go and have bobbed around a range. Volatility is reflected in wider bid-ask spreads for low credit companies but even corporations on the brink of bankruptcies are bidding more than fifty cents on the dollar which suggests demand outstripping supply and lowering of standards. Moreover, as the retail investor looks at the YTD performance of a high yield fund, money flows into mutual funds which are obligated to purchase high yield debt, which makes the supply even scarcer, a market based on investor inflow, not on fundamentals of the underlying companies or lien priority. High Yield debt is beginning to resemble an asset bubble in itself due to scarcity of issues and investor demand rather than fundamentals. A raise in interest rates would indeed push returns to zero or negative in some portfolios.
A lot of things would have to go perfectly right - high 4Q growth, and moderate growth in 1Q10 and 2Q - to justify a repeat of 2009 high yield performance. Prices may go up farther into the surge of January buying but from a total return perspective, as the bid-ask spreads widen and the number of defaults increase, and relatively high prices, now would be a good time to sell high, as the investing manual oft instructs.
3 ETFs to Make the Grinch Smile [View article]
Why Dick Bove Is Wrong About Citigroup [View article]
Jason Schwarz was the first guy who called oil to hit $35 and he got slammed by 150 commentators telling him he was nuts when it was hitting $125. He was right then. He's probably right now too.
Has President Obama's Mortgage Modification Plan Failed? [View article]
What's Next for Fannie and Freddie? [View article]