Wednesday, July 8, 2009

Its All About Housing

As we watch this house of cards come tumbling down, its very easy to get sidetracked from focusing on what caused this economic disaster.

You need to constantly remind yourself that "It's all about housing". I say this because:

Our economic nightmare was triggered by housing and will not be over until housing stabilizes!

Folks, I can't stress this enough! Housing prices MUST completely collapse and fall back to affordable levels or this nightmare will live on. We will all sit here and suffer as long as these assets continue to be propped up by the government.

There is only one way for this housing price adjustment to occur: All of the toxic assets on the banks balance sheets must be ripped apart and sold for market value(most likely pennies on the dollar).

The problem we have here of course is the banks will not allow this inventory to clear at realistic prices because they know it will put them out of business!

I say TOUGH ****! The government needs to grow a pair and force these banks to sell their assets at market prices and take their losses! THEY ARE RISKING AN ECONOMIC COLLAPSE IF THEY DON'T DO SO! If a bank goes under as a result then so be it. The Feds can then guarantee the deposits of the insolvent banks, and allow the FDIC to do its work of merging them with stronger banks.

Once this is achieved, banks will lend again because they will not be sitting on a pile of crap that's the equivalent of a 50lb weight tied to a swimmers ankle. Housing prices will then be allowed to come down to around 3 times income which is where they NEED to be in order to sell. This is how you recover from a meltdown.

Continuing to attempt to sell homes at prices no one can afford will only guarantee failure. Creating bad lending products in an attempt to keep housing inflated(which we are doing now) does nothing but create future problems and "kick the can" a little further down the road.

Unfortunately, as you can see below, we continue to ignore the 100lb gorilla in the room.

Take a look at this short video around jumbo loans from CNBC's David Faber(one of the few guys on there who has a clue):

My Take

The numbers here are flat out frightening. Keep in mind that this massive $8 billion pool of jumbo loans that was downgraded in this piece was originated from 2002-2004 which was before the housing bubble really got going.

You need to ask yourself: If these pools of these loans are going bad, what in the hell is going to happen to the pools of loans that were guaranteed from 2004-2006 when the housing bubble turned into a TOTAL FEEDING FRENZY? Can you say nightmare?

Folks, honestly, sometimes I just wanna hide under a chair when I read this stuff.

What's even uglier are the 60+ day delinquency rates on jumbo prime and conforming prime loans. The jumbo delinquency rates have jumped a staggering 600% from 1% up to nearly 6% since 2007. Conforming loan delinquency rates have tripled from 1+% to over 3%.

PEOPLE, THESE ARE PRIME LOANS!!! These are your BEST borrowers with the HIGHEST credit scores.


Its that simple! The home buyers with low incomes bought cheap houses that they couldn't afford. The richer with larger incomes bought jumbo houses that they couldn't afford.

As a result, they are defaulting at a rate that no bank could have ever imagined! Inventories for houses over 750k(which is not uncommon in the bubble areas) has now reached almost 4 years! What a joke. Ths doesn't even include the retards who took their house off the MLS thinking that the market will come back. HA! Good Luck! SOLD TO YOU!!!!!

Anyone thinking that this economy will recover without solving the housing affordability issue is smoking dope. Most ofhese jumbo houses will never sell until they collapse 50% or more in value. No one can afford a loan let alone a jumbo loan these days.

I mean Christ, landlords can't even fill rentals these days:

"July 8 (Bloomberg) -- U.S. apartment vacancies rose to their highest in 22 years in the second quarter as job losses cut tenant demand and more units came to market.Vacancies climbed to 7.5 percent from 6.1 percent a year earlier, New York-based real estate research firm Reis Inc. said today.

The last time landlords had so much empty space was in 1987, when vacancies reached 7.6 percent as the Standard & Poor’s 500 Index plummeted 23 percent in the last three months of that year."

A 22 year highs folks! Why is this occuring? Because no one is working and families are being forced to move in with one another. Who on earth do they think is going to buy these McMansions when no one even wants or can afford to rent?

Folks, watching this country be torn apart by such stupidity drives me absolutely insane!

Bottom Line:

The fraud needs to stop right now! Right this very second before its too late.

There are rumors now swirling around out there that Goldman was able to read trading data before the trades were committed. Zero Hedge, The Market Ticker, and The Daily Kos(Not a fan of radical left wing idiots but the article is important) are all over this.

If this is true then run as fast as you can from the market until it is trading with full transparency. The word is traders on the floor have completely gone to the sidelines as a result of the crazy trading we have seen over the last few months. What does that tell you if even they don't wanna play? Look at the pathetic trading volumes. It renforces whats being talked about on the trading floors.

The pricing action has made no sense to me for weeks so I am not at all surprised by the Goldman accusation. In fact, it actually makes a lot of things make sense if this is true. I find it interesting that the market has sold off violently since these allegations rose. Perhaps Goldman realized they were busted and stopped the games? Kudos to Zero Hedge for getting the ball rolling on this one.

Goldman needs go the way of Enron if there is any truth to this accusation. It appears this" rogue trader" who supposedly "stole" their trading platform may have actually been the guy that taught Goldman how to do this. If any of this turns out to be true you this will go down as the largest fraud ever seen in the history of Wall St.

Folks, just when you think there is no way this fraud can get any worse: Somehow, Someway, Wall St finds a way to outdo itself. Unbelievable.


Tom said...

wow great post Jeff. Thanks for keeping thngs clear. I really enjoy the blog.

Tom said...

there is a great French expression "ignore nature and it returns at the gallop."

snood said...

I think the problem with apartment vacancies is due to the large "shadow" market of houses/condos that are being leased by reluctant landlords trying to hold on a few years until the market recovers.

I agree that the housing bubble must be fully played out before the economy can heal itself. Foreclosure moratoriums are just delaying the inevitable collapse of housing prices.

snood said...

Oh and i couldn't get the video to play. :-(

Jeff said...



I know this gets old but I think its an important reminder.

It all comes down to fundementals once at some point.

Futures are up. The bulls appear to be trying to hold 880.

this battle should be fun to watch tomorrow. If this doesn't hold 810-830 is on the table.

If that doesn't hold we could very well test the lows.

Jeff said...


Thats how I see it too bud.

The shadow inventory is nothing but the banks trying to hide losses.

We all need to remember they are the best in the world at spinning financial webs.

You can't underestimate the pigmen. They are toast but won't go down without a fight. Wall St is by far the best in the world at spinning things positive.

I love how Alcoa "beat" expectations after seeing sales drop 41% from a year ago.

How many businesses could afford a 40% drop in sales?

These idiots have rocks in their heads.

John Maynes said...

These idiots have rocks in their heads.

No, it's sand. :-)

Toney Brooks said...

On April 10, Zero Hedge ran a piece titled, The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans.

Here's the tiny url. It's a good and still timely read. Great post, Jeff.

Minton Mckarkquey said...

Fantastic post - lots of good info. There are so many debt pools hitting the fan - credit cards, student loan, jumbo, subprime, prime, etc. - that it's a wonder if anything will be left standing.

SPECTRE of Deflation said...

"As a result, they are defaulting at a rate that no bank could have ever imagined! Inventories for houses over 750k(which is not uncommon in the bubble areas) has now reached almost 4 years! What a joke. Ths doesn't even include the retards who took their house off the MLS thinking that the market will come back. HA! Good Luck! SOLD TO YOU!!!!!"

Oh the banks did imagine it, and "it" is called securitization. As an example, they were taking BBB- from various pools, and creating AAA SHIT over and over again. The point was they didn't care, and judging from what's happened so far, why should they?

They also shorted their own pools while selling them to suckers by way of CDS.

Minton Mckarkquey said...

SPECTRE - lol, so true. This type of financial engineering needs to be banned. I'm starting to think all of the math/derivative/quant bullshit needs to be banned to.

Hey Jeff - that GS code theft story has legs. I read the patent and their attorney's complaint and it could well be the biggest financial fraud in world history. This was an algorithm that picked up traffic to the exchange about 100ms before it appeared to anyone else... holy f***** Jesus could this blow up if there's anyone out there investigating whom we can trust...

SPECTRE of Deflation said...

In fact the banks are about to restart the machine per Bloomberg:

Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds

By Pierre Paulden, Caroline Salas and Sarah Mulholland

July 8 (Bloomberg) -- Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

snood said...

Stimulus #2 is coming out of the gates:

"I think that a second one may well be called for," Warren Buffett, the CEO of Berkshire Hathaway, told "Good Morning America" today. But, he added, "you hope it doesn't get watered down in many ways."

Toney Brooks said...

So far, only 7% of the current stimulus has been spent. And now, talk of more debt to cure a crisis caused by too much debt? What kind of upside down world are we living in?

Minton Mckarkquey said...

Tony - I'm asking the same question. Either I need medication or the rest of the world has gone nuts. Ann Rand is spinning in her urn, seriously.

snood said...

How do you know only 7% has been spent? I thought the Fed refused to say who got what money? (hence Ron Paul's amendment to audit the Fed)

SPECTRE of Deflation said...

Great piece by the way. Until all the malinvestment is paid off or defaulted on, we will never have a recovery. There is much pain yet to come.

SPECTRE of Deflation said...

No amount of stimulus will work for this problem. We are in a credit/debt death spiral with unemployment leading us to the black hole.

It's like giving a drunk a 1.75 instead of a fifth, and expecting them to get better by doubling down.

We have $1.4 Quadrillion Dollars with 95% being on margin in the OTC and listed derivatives market. No amount of stimulus can save us from the beast of the shadow banking system.

Concerning this Depression, we are at the end of the beginning, and not the beginning of the end.

Toney Brooks said...

Treasury is spending the $700+ billion stimulus, so we may be talking about two different things.

I don't believe Congress could pass a second stimulus package. Americans are fed up with the lies coming out of Washington and Wall Street.

SPECTRE of Deflation said...

The latest figure for what has been spent is a whooping 10%. The FED had nothing to do with the first stimulus package or any other package because CONgress passes these Bills, and the President signs them.

You see, this money must be raised in the debt market which has oversupply now, so they can claim a $787 Billion Stimulus Package while actually spending a scant 10%. I believe it's called a scam.

SPECTRE of Deflation said...

Just like the PPIP was supposed to be a $1 Trillion Dollar Program which actually turned out to be a $40 Billion Dollar Program, these things are bread and circus. These announcements are meant to boost the market when made, but do very little in the end.

Jeff said...

Hey guys

Busy day for me today. I wish I could have chatted some more.

All great points. Guys I the same death spiral. I think it is time for medication Minton!

Wall St has become a 3 ring circus. You are so right SPECTRE they made money all the way up and then shorted this crap as it came crashing down.

Wall St has turnedinto a 3 ring circus of fraud.

The trading story just thickened with Citadel tonight.

I will have a post up later!

CT-Hilltopper said...

Hi Jeff

I'ts all about housing...and debt.

The two are interconnected in ways that people didn't dare to imagine before.

I'll bet before this that A LOT of people didn't connect the dots between the the inflated value of their real estate and the amount of money in their 401k's...the amount of money that their cities and towns have to operate on for school budgets, etc...

Jeff said...



Now they are furiously trying to pay it all back before they lose their jobs.

The keep talking about how the savings rate is soaring! What they fail to explain is its not being saved, its being used to payoff debt.

The savings rate doesn't differentiate the two. Thats a very deceptive number.

SPECTRE of Deflation said...

I agree that the 6.9% savings rate is actually consumers attempting to delever before they lose everything. This is a far cry from actual savings which can add to consumption in the future. This savings goes into the black hole of bank balance sheets never to be seen again I might add. Those SIVs haven't gone anywhere either, it's just that we pretend they don't exist for as long as it lasts.

More good news, Nationwide is doing 125% LTV again now that the GSEs are once again buying the dog shit that will ultimately be paid by you and I. When this blows (we are in the beginning), it will be one for the ages.

Jeff said...


Heard that crap might be coming back. Unreal.

I just hope we have a financial system left once this sucker blows.

Crazy times.

SPECTRE of Deflation said...

Jeff, I hope we have a nation when this sucker is done. Instead of the Roaring 20s, we have several decades of the same BS as back then, unit trusts = mutual funds, which will make the 1930s look like a picnic. Mish had a look at Unemployment numbers using the various extentions through 08 to today. FUGLY! They, the political class are lying their asses off to the American People. They are stealing the last nickel from the American Treasury, and they will say they never saw it coming. We are dealing with two crime syndicates that protect those who pay them tribute, while we get bread and circus while New Rome burns. Wake up America!

snood said...

Don't forget all of the companies that have canceled 401k matches. That is going to be a big chunk of money not flowing into mutual funds.

SPECTRE of Deflation said...

Snood, no problem for them, as I have read where they plan Mandatory IRA and 401K participation. I read the article within the last couple of days. They will do anything in order to prop the market up.

Exactly how does a family living on the edge of poverty contribute to a 401K unless their contributions are paid for by government while a struggling middle class family will receive a frozen shit on a stick bar complements of our milk and honey politicians.

Jeff said...



Check out the Max Keiser video I posted today.

It really is disgusting what has been done to us.

Snood, great point on the 401k's. I get more bearish by the day.

SPECTRE of Deflation said...

Jeff, after watching the video yesterday, "In Goldman Sachs We Trust" is the inscription of the new American Fiat Dollar. They flat out own the politicians who have allowed the sacking of our country by the evil be-atchs! They don't even have to pay back the warrants from TARP at face value thereby screwing the little guy. They are only paying us .66 on the dollar.