The MSM in SoCal Gets it… Finally
Chuck Ponzi March 15th, 2007
After nearly 2 years of calling that we have a credit bubble fueling our housing bubble, the North County Times (San Diego) finally admitted that we have a, well, credit bubble.
For years now, North County residents have been wondering how high home prices could climb. Were we seeing a housing bubble?
It turns out, however, that we weren’t asking quite the right question. As the real estate market cools off, it’s becoming apparent that our sky-high housing prices are due in part to a credit bubble.And that bubble has started to pop, as companies offering riskier loans —- typically in the subprime market to borrowers with poor credit —- are experiencing a meltdown. A major subprime lender, Accredited Home Lenders of Rancho Bernardo, has seen its stock price fall by almost 75 percent in less than a year.
Is it any surprise that home prices soared when lenders loosened their credit requirements? Mortgages once termed “exotic” became commonplace in the last three years:
- The no-down payment loan, which let folks buy a home with little risk, borrowing 100 percent of its value.
- The zero-interest loan, which cuts monthly payments by half of that for a traditional mortgage, but which must be refinanced in full after several years.
- The stated-income loan, also known as a “liar loan,” which allowed borrowers to exaggerate their incomes so they could qualify.
- The negative-amortization, adjustable-rate loan, known as a “neg-am ARM,” whose initial interest rate can rise sharply and whose principal loan amount rises rather than decreases over time.
And now, with higher interest rates and a chilling housing market, is it any surprise that some borrowers are struggling to make their payments? Or that lenders who lowered their standards when they screened borrowers are now tightening them and shutting off the subprime spigot?
Although, it’s not clear whether the MSM will really inform anyone who really wanted to know what was going on.
On the other hand there are plenty of people who didn’t want to know who have been trying very hard to cover their eyes, ears, and nose to keep the senses from realizing what most every average person already knew… that it was a bubble and that was no way to rationalize it other than happy-talk and self-delusion. A sweet, sweet delusion that kept them from thinking about their declining purchasing power, sinking wages, and economic malinvestments.
There must have been at some point, a moment when the people of Noah’s time finally realized that the water was getting too deep. Even if you don’t believe the literal story of the great flood, you must see the allegory of how human pride and filtering of information keeps us from saving ourselves. Just like in the great flood, there were prophets (Shiller and Krugman et al.) who warned us early enough to take action well in advance of the end of the bubble. Later on, when the rains came down and the water began to rise (with amatuer bubble bloggers), people laughed and pointed at Shiller and company and bubble bloggers. “You’ve told us this for years, and you were wrong all along”. It is only at the point that water is neck-deep that there is a cry that, yes we there was a bubble.
Sadly, many still cannot admit that there was a bubble and that it is bursting. However, the numbers speak for themselves:
Foreclosures in San Diego County nearly tripled in 2006, to 13,246, from 4,541 in 2005
and
In North County, the company reports, hundreds of properties are in default and heading to foreclosure. In Escondido, 385 properties are in default and 63 are set to be sold at auction. In Oceanside, the figures are 490 properties in default, with 72 going to auction.
What’s startling about many of these pending foreclosures is how many involve loans taken out within the last two years, during the subprime surge.
Many of the loans in default were in the $400,000-$700,000 range. But one is for $1.7 million and another for $1.2 million.
So now what’s George EmptyChamberHead going to say??? How’s he going to spin this going forward??? The NC Times was his RE soapbox. Looks like he should start searching for a new gig…no credibility left…nada…zip.
This credit bubble really scares me.
Like many people, I was late in understanding the credit bubble game and what the consequences may be. I hadn’t seen the big picture until recently, since I was so focused on absurd housing prices. But the credit bubble is the real game, and inflated housing prices is just a symptom of a far more dire worldwide problem.
It seems clear now that Greenspan and the US government effectively delayed what sould have been a rather severe recession starting in 2001. After all, we’d just experienced one of the greatest economic expansions in US history, and contraction always follows expansion. It’s an immutable fact of economics. The cycle never stops. Balance is always restored one way or another.
The economy needed to correct, work off the excesses, and in fact had started to do just that when it was short-circuited by the massive infusion of low rates and high liquidity.
It’s like having a nasty cold, so you take some Nyquill to hide the symtoms. But Nyquill makes you drowsy, so you drink some Redbull to keep from feeling tired. The result? You feel great for a day or two–practically cured. (I’ve actually done this, by the way, and it works like magic!) But then the cold reasserts itself with a vengence and is much worse than it would have been.
We were just getting sick in 2001 when Greenspan slipped us the Nyquil/Redbull cocktail. It worked like a charm, and we partied bigtime! But now the cocktail’s wearing off. And the big question is: now what? A monster recession, or depression? Massive inflation? Personally I think we’re headed towards a nasty worldwide recession, maybe with some 70’s style stagflation thrown in for good measure. Falling housing prices will be the least of everyone’s problems. There is a lot of pain coming for a lot of people–and soon.
Greenspan didn’t act in a vacuum, so he is not solely to blame, but we must pay now for the 90’s expansion, and pay double or triple because we skipped out on the bill 6 years ago.
I’m really afraid the government will try to do something drastic (like a triple Nyquill/Redbull fix). Of course ultimately the Fed, and the government have no power to stop the economic cycle, but another massive liquidity infusion, government mortgage bailout, or something like that may just delay it for a while longer. It may not be possible, and whether it worked or not, it would almost certainly trigger inflation, hyperinflation, a dollar collapse or a combination of the two, or any number of consequences I’m incapable of forseeing.
The credit bubble is only now revealing itself to the general public, and there still isn’t much widespread panic, or even worry. But say that changes and things start getting ugly. Politicians are notoriously short sighted. If the choice is pain now or disaster later, they will usually chose the latter. Few have the forsight and courage to choose what’s right. Does anyone honestly think Bernake will do the right thing?? With a presidental election coming up in 18 months, I wouldn’t put it past politicians to try ANYTHING to hold back the floodgates a little while longer.
I shopped around for home loans in So. Cal. about a year ago. The lenders were bumfuzzled over my insisting on a 30 year fixed. In fact they wouldn’t even give me the numbers unless I insisted. They kept giving my ARMs and balloons and 15 year re-finances, etc. It was as if I was speaking a foreign language to them. I’m so glad I haven’t purchased a home yet. Still waiting, because I haven’t seen the price drops that I think are inevitable with the credit issues so clearly explained above…
The likely reason that they were insisting on showing you the more exotic loans was a) they paid the broker a higher commission, and b) once rates started up you’d be a repeat customer.
Will Friday be an economic doomsday?
http://infohype.blogspot.com
China is raising rates. I think this will put more deflationary dollar fears in to the Fed. Hopes for a rate cut should go down.
Looking at the ARM reset schedule over on OC flip. The wave will roll for a while. I think that some of those people will fall out well before the resets. The option arm people are probably going to find it cheaper to hold on till they go under though.
I’m still waiting on sellers in Oceanside to realize the “water is too deep”… geez, all these problems and the only 3/2 sfh I can find under $450k are mobile homes (crappy alternatives well above $200k, no yard and $400 a month lot rent, no thanks) and houses in the worst neighborhoods?!
I can’t wait for the bottom to drop out and pick up a house in a decent neighborhood for 300k or less.
South Riverside is down to low $300’s for 3/2 sfhs and they have the BEST schools! But that commute is a bi-atch!
Patience.
It will be a bumpy ride though.
Let the summer burn away and invest your money.
Let the second wave of ARM resets hit.
Then let them burn for another summer.
Then the long winter
Think 2010… put your mind at ease because you will be saving up money, returns will probably be going up, prices going down. Your 15K in the bank is only a 2.7% downpayment (550K home) is going to get leveraged up as housing falls.
The price drops to 300K your cash has leveraged its self into a 5% downpayment. Wow, you own twice as much of the house! Think in percentages… it helps.
So its like your paying off the house with out all the trauma.
Its also the magic of leverage the housing guys are talking about.
Best of best is to put the money in to a Roth so you are disciplined to wait 5 years. In five years we should be near bottom and thats when you can pull out those gains for a home purchase.
I’ve noticed the rate at which NODs convert to foreclosures has been rising steadily, but now expect perhaps a geometric jump. As soon as a few hit the comps, there will be lots more because so many “owners” are completely dependent on refinancing to stay in “their” homes. Perhaps it’s already happening: http://www.centralvalleybusine.....1/?ID=4599