U.S. Prime Delinquency Rate Doubles, Alt-A Approaches 10%

The price of homes CANNOT be propped up absent inflation. If you prop up home prices that were paid for by something other than wages (cheap loans, loans you didn’t really have to pay for, cash outs that could be used to make the payments until the next cash out, etc.), when that ends you need wages to rise up to pay for them.
When wages can’t support normal living standards, jobs are lost because employers can’t afford to pay people what they need to live on. As a result, jobs are lost, making inflation difficult to sustain, and causing housing prices to fall when the unemployed can’t make their payments.
Therefore, the government can try to prop up housing prices all it wants, but the bottom line is housing prices will fall to an equilibrium point or more jobs will be lost until they do.
Some jobs might be saved by a stimulus, but what happens when the stimulus ends? When all the roads are quickly rebuilt, and then for seven years, no one needs to rebuild ANY roads, you’re back to where you started – lower jobs that causes lower prices.
It’s the circle of life between housing prices and jobs. You need full employment to sustain high housing prices, but you can’t get there if housing prices are higher than the productivity of the country will allow, unless you basically give money away, which we did for many years.

What do you mean by “Prime” ? It seems as if you mean “sub prime” ? Sorry, but that unraveling began some time ago. It has created a market of its own too … a market that has generated a lot of discussion. Was there a map? I think it’s likely there was. Where are the 803 homes located? That bit is noticeably absent from your post. There is a poster called EBGuy who offers a much more balanced reportage about this, Trip. Your language is rarely balanced.
Also, this: “Lots of people jumped in and got a “bargain” (even a foreclosure sale) only to find themselves underwater and their 20% down evaporated within the next year”
I’d like to see that statment backed up with a news source. Particularly with regard to “Sacramento.”

True, my day job as a lawyer doesn’t allow for it. But your day job as a realtor does.
OK, I said I wasn’t paying any more attention to you because it is an absolute waste of my time. Now I mean it . . .

Oh come on, Trip. You spouted off some unverifiable opinion dressed as fact or at best logical deduction, got called out on it, and you responded with a Realtorbash TM. Prove a single thing that you said. Really man. Too much. You’ve got your opinion. Everybody gets it. But that was sub-terrible.

Moleman,
First, propping up values is not the same thing as attempting to prevent widespread interest rate hikes. There can be numerous correlations between the two, sure. But we both agree that the government is not propping up values. Secondly, why widespread 2012 defaults, at least around here anyway? Those are 20 percent down loans. You forget that people who put 20 percent down are also by and large putting down roots. I’d argue that the majority of defaults on Prime is tied directly to the jobs market. If you think the jobs market is going to suck until 2012 then we are all in for a world of hurt.

All the government folks high enough up to contribute to any of these decisions believe that all they are doing, if successful, is smoothing the harshness of the transition.
True. What matters is that the Gov’t looks compassionate to its constituents. You can’t have exploding unemployment and wealth destruction with people at the top saying “you got screwed on the way up and guess what… you’ll get screwed on the way down”. They have to look busy and throw big numbers at our face to keep everyone hopeful through the pain.
I am no big fan of conspiracy theories but even the worst I could read say 1 year ago from the nuts on the net has proven quite accurate. Eventually Patrick.net, debtpocalypse, optionARMageddon and others will be stuck in their bearish end-of-world talk while the rest of us will move on. It’s just a transition. We’ll come out of this tunnel one day.

Looks like it’s not over yet…

Goodness, annon, Trip cited his source. You countered with…nothing.
Good point Mole Man, but the fact is that the harder they try for a soft landing on housing prices, the more jobs are lost. And some of those jobs get lost to other countries or to replacement technologies. They aren’t coming back.
We’re using the slowdown in business to more fully automate everything. We’re doing things I should have done years ago but didn’t have the time. When things come back, and you can bet that they will SFS, we’ll be ready to contribute to the jobless recovery. We’ll do more while hiring less.
But note that when the dot com bust happened, the only way to get back to that level of prosperity was to inflate another bubble. If the fed/government can’t or won’t do that, I’m afraid that a recovery won’t look anything like the last ten years.

ex SF-er, you and I do not disagree. You’re reacting to others’ characterization of what I said. Note that I pointed out the 51 >$1M defaults/foreclosures in SF as some indication of trouble in the “prime and Alt-A” sector (consistent with the Bloomberg article showing these areas are exploding). I have no idea how to find out which of those two categories the bulk fall into (a pure guess is Alt-A), but I’m fairly certain there were not a lot of subprime loans handed out for a million bucks even during the peak of the madness.

I imagine there will be a lot more pressure on the BA prime market as long as high end jobs (IT workers in the SV averaged $97K in 2008) continue to be lost at a faster rate than they are being created.
http://www.techcrunch.com/2009/04/03/dicecom-shows-45-drop-in-tech-jobs/
“Dice said that of the ten reported metropolitan areas, Silicon Valley was hit worst, with available tech jobs down 57.7% year over year. Chicago (down 55.3% y/y) and Boston (down 55.3% y/y) also posted large declines. The Conference Board’s Online Help-wanted Index suggests that monthly job demand dropped 100K in March, down 31% year over year.”

@ Trip:
sorry. you’re right.

Fact or opinion — this is a pretty bleak article with some unfavorable consequences. I love how these articles tend to gloss over key issues and relate everything to economic trends. With things like this:
What they wrote:
“Dugan said higher re-default rates are likely related to stressful economic conditions and new loan plans are not producing significant reductions to make mortgages sustainable.”
Translation:
Owners continue to be unable to keep up with loan payments that were unsustainable based on income levels on homes that were overvalued based on long term income to home value ratios. Further, owners have little incentive to make these payments when faced with market values well below the net equity and loan balance of their homes. Government policies, combined with a massively over-burdened foreclosure system are enabling families in these situations to remain in their homes much longer.
Honestly, it’s tea leaf articles like these on subprime in 2007 that started to creep up only to ‘blind-side’ the markets in mid 2008. Except this time: “Prime mortgages, considered the least likely to fail, account for two-thirds of all mortgages.”
Anyone that thinks home values have bottomed are likely to get the same ‘surprise’ the rest of the general population got when things started to really go south last year.

“Those considering buying now in this “buyer’s market” would be smart to wait a bit as you will do much better a year from now. You might take a look at how things developed in areas that are a year farther through the cycle — Miami, Sacramento, Las Vegas. Lots of people jumped in and got a “bargain” (even a foreclosure sale) only to find themselves underwater and their 20% down evaporated within the next year. And prices continue to fall even in those hard-hit areas.”
With the entire world focused on propping up prices, and SF’s limited housing supply, I don’t see that happening. I see next year being the same as this year. If you have a great job and find a perfect property at a “reasonable” price, I would advocate buying now. If you see a marginal property, or a nice property where the seller is asking 2008 prices instead of 04 prices, I would wait. There is certainly no rush to buy, that’s for sure.

BTW — Outsider’s comment at 11:16 AM is precisely the situation. He probably makes no more or less than your standard person, but clearly could not afford to buy his house at today’s prices. The thought that today’s prices are long term stable is to assume that there are enough buyers able to afford these levels in perpetuity. The reality is that outsider can sell his home for a healthy gain even if the market drop 30-40% from today. Who cares about the Apples and the people living in them, or selling them. It’s 85% of homeowners that bought pre-2005 that are going to set the true comps for years to come. Mean reverting.

Re: Jobs / Home prices
I enjoy reading most of the comments, particularly those that seem linked in fact / sound logic / economic theory – so thanks to all of those who contribute. I learn a lot from you.
From the less than glam world of mgt consulting – a few facts from what we’re seeing.
– Every retailer I’ve talked to / heard about (call it 5-10 Fortune 500 off top of head) is actively planning 1. store closures of 10-20% of network. 2. Layoffs of at least that 3. For awful 2009-2010.
– Every tech client I’ve talked to (computer OEMs, chipmakers, etc…) are all contracting and planning similar layoffs, and have dramatically cut investments
– 20-40% of malls in the country are near bankruptcy…
So… latent demand, and realtor(R) vs. bear aside, I have no idea why people think prices are going to go up anytime soon. If major layoffs are still coming, and companies are actively shutting space (1,000’s-10,000s of retail doors will close this year) – how are prices anywhere close to a bottom?
Maybe I’m missing something – but until the P/E multiple for property in SF remotely makes sense, and the economic wreckage stops (2011?) – why are prices going to do anything but go down?

“Maybe I’m missing something – but until the P/E multiple for property in SF remotely makes sense, and the economic wreckage stops (2011?) – why are prices going to do anything but go down?”
Simple: prices will go up because, in spite of the fact that mortgages aren’t being handed out like candy, and jobs are being lost at the rate of 700,000 per month, when people lose their jobs, they generally move. That is excellent for SF because it is a smaller city than most other major cities.
SF has less than 1% of the nations population, around 800,000 people. Let’s assume 10% of the people nationwide become unemployed and move. If 10% of the people move OUT of SF, that’s 80,000 people, but that means 10% of the REST of the country moves IN to SF, so the SF population will explode! That’s 30 Million people who will move IN to SF in the next two years.
Sure. they’ll all be broke, but with that many people moving IN to SF, rents will skyrocket, and the rent vs buy will come back into line for the OTHER 90% of SF residents who did NOT move out. All of THEM will quickly buy, causing home prices to go up. So, the fact that things are getting worse actually has the effect of benefiting SF just by its natural shortage of land.
Check out my prediction from one year ago (it’s for real – A powerpoint slide of a presentation I made) by clicking on the link below. I’m telling you, it’s gonna be BIG!! You just wait! I mean, don’t wait! NOW is a good time to buy and sell real estate TM.

Totally agree that the vocalbears dominate the forums… but I also think its mostly b/c they’re right. That said – its good to get both side of story, so appreciate the reply.
From the sources I’ve seen, both anecdotal and publicly avail – I’m not sure how the argument that SF is only down 5-10% holds up. C-S for the area (not perfect obviously) shows down 30%, property after property listed for 2004 prices… and sitting there unsold, landlords unable to rent property at 2006 rents (2 units avail in my building)… but anyway – thats not my main question.
I’m just a bit mystified by the logic of buying a house in market where the P/E ratio is really out of whack, given all of the macro and micro economy headwinds that SF real estate seems to face. I was in a townhall discussion with Martin Baily the other day about the broader and two things that he said that hung with me:
1.) The US economy has to deleverage – the current stimulus package is not focused on changing this fact, but rather smoothing the transition as opposed to having us fall off a cliff.
2.) For consumers, deleveraging has to happen in the top 10% earners of US households (who own 60%+ of the debt).
If overall leverage is reducing, and the top 10% of HHI earners are being most dramatically affected – it seems like a city like SF who’s run up was created off of the leverage of top earners has many points to go before it hits bottom (back to traditional P/E, or Case-Shiller type levels)
And just FYI – all of this is blatantly self-interested as I decide whether to buy now (seems silly), but in a year (also seems sorta silly), or just bank the rent / buy spread, and then buy after economy gets rolling a bit (3-4 yrs)

Clay,
I think the current administration hopes to keep home prices from dropping too much by offering cheap credit to slow downward price movements while they wait for inflation to meet it half way in a few years. Unfortunately, most citizens will miss the hidden inflation tax and hail the price stabilization as good economic policy.
What the government plans to do at that point will pretty much determine whether we see hyper-inflation or not, as they control the market on lending rates at that point. If they raise rates to match inflation, housing prices will drop significantly again. If not, hyper-inflation is back in play. We’ve set ourselves up for a lose-lose proposition in my opinion, but unfortunately this has been baking for the last 20 years.

What’s hilarious is that the people saying that the declines are constrained to subprime areas haven’t identified that the cause of those declines was artificially cheap mortgages resetting that could not be supported by the incomes of the borrowers.
Yet this is exactly the situation that has been set up in the other areas, with one major difference: the resets on those loans happen much later. When the loans reset, many, though not all, of the borrowers incomes won’t be able to support the payments and the exact same thing will happen. Some will, just like some o fthe subprimes did. But enough will not be able to.
It’s like saying “sure your kid has strep throat, but my kid, who spent all the time playing with your kid, just got a slight fever. I’m sure he’ll be fine.
No he won’t, he’s going to be just as sick. He’s not a super kid, he’s a later kid.
The future of D7 is staring you in the face in D10. And those problems in D10 started *before* any layoffs, when the economy was healthy. The economy is far from healthy.
So your calls of “it’s only down 5-10%” may be true in some areas, but it’s just getting started in the others. They all have the same source of problems, just different timing.

I guess I did say that I hope the jobs market did not continue to get worse through 2012. And I mean, I hope we all feel that way
Interesting point.
My rationale for 2012 is as posted above, that’s when the current crapola loans finally finish resetting. It only indicates one aspect of this issue- that RE is under pressure due to previous unsustainable pricing.
the jobs picture is less clear. It is unlikely that the jobs picture will get worse through 2012, although it will likley get worse the rest of this year and maybe into next.
I haven’t heard any bear speak about progressive worsening job market through 2012. If that were to happen it would make the last depression look like a cakewalk. and then most cities would look like Detroit.
the real issue with jobs is that we may have a jobless recovery… in other words, we may lose 5-10 million jobs that don’t come back.
typically, new job growth makes up the employment lost during a recession in under 4-6 quarters. it took 3 years (and a RE bubble) to do it after the 2001 recession.
People keep thinking that getting back to “normal” means going back to life in 2005-2007. that was the BUBBLE, in fact it was life under the biggest credit bubble in modern history. normal was more like 1995-2000 (and some would argue normal was more like the 1970s before we started our unprecedented credit expansion).
The govt is trying to blow a big bubble. they have no choice. it is the only way our economy “works” these days.

Shza,
yes, it’s snark. The premise was that unemployed people move, and so 10% of the SF population would move out of SF.
However, if the premise was true, the unemployed 10% of the rest of the country would move to a different area in the rest of the country, i.e. dispersed across the country.
The fact that the rest of the unemployed would all move was a plausible argument. However, the faulty part of the argument was that instead of dispersing across the country, they would all move to the same exact city: SF, driving up rental rates, which is, of course, ridiculous.
Sorry I didn’t do a better job of making that clear when I posted as Lawrence Yun.
You should realize that all of the other arguments used to predict why prices will never fall as much are based on just as faulty arguments. And by the way, different seemingly plausible arguments like that are made by Realtors in EVERY city, to justify why THEIR cities won’t decline as much as the average in the future. Obviously, they cannot all be right.

“My rationale for 2012 is as posted above, that’s when the current crapola loans finally finish resetting.”
They never finish resetting. They reset over and over again. If they reset in 2011 at a low interest rate, they can reset again in 2013 at a higher one.
The people who have them might be able to keep the loans through one or two reset periods, only to lose them as the loans reset higher when they can’t qualify for a fixed loan because they are underwater on the existing one.
This isn’t going to stop in 2012, I’m afraid.

“the 5 years of payments will weed out much of the crap.”
There are two sets of people we are talking about. The first set can’t afford any mortgage: they can’t manage their finances and will default sooner or later no matter what. Most of these people have bad credit to start with, and so they were classified as subprime loans. Those loans go bad before they reset.
The second set of people are people who can afford their loans, but can only afford subsidized loans. They took out the Alt-A or option arm loans that had initial rates that were very low. They knew full well they couldn’t afford a resetting loan, but figured that they could just refinance into another subsidized loan.
The initial subsidy was courtesy of the Chinese government and other investors. Now the subsidy is the Fed. For many of the Alt-A crowd, the initial reset is going to be lower or the same.
Now, you are right, in this second set, there are a subset of people who not only require a subsidy, but also require high home values, to keep paying their loans. They are the ones who stretched to get into the loan and are barely making it. When the home value drops significantly under the loan value, they walk. And you are right, that many of these people will do so early.
But as home values continue to fall, and interest rates start to rise, the number of people in the subset increases. So as interest rates tick up, the people who needed subsidized loans and subsidized housing values to keep paying will no longer have either of those things and will stop paying. The fact that they didn’t stop in the first 5 years will have no bearing: they are the same people with the same value judgments. They will find it harder and harder to pay (especially with wage deflation, and the baked-in everything else inflation that will shrink even a constant paycheck) and easier and easier to walk away as housing values decrease when loans are more expensive.
So I don’t see how the same person you freely admit will walk if these things happen in the first 5 years won’t do the same in the second five years if conditions warrant. And people normally move after 7 years anyway: the same forces that would have caused them to move will cause them to want to walk.
The people who just need subsidized loans to make their payments are going to bail when loan rates go up. People who need subsidized loans and high home values will bail too. And if inflation occurs without wage inflation because the government printed too many dollars, even people who aren’t on the edge will get there, and there could be an entire set of people who take off just because they can’t afford the mortgage payment with the price of everything else rising while their wages are flat to down.

It’s like saying “sure your kid has strep throat, but my kid, who spent all the time playing with your kid, just got a slight fever. I’m sure he’ll be fine.
No he won’t, he’s going to be just as sick. He’s not a super kid, he’s a later kid.
That analogy is to crud as gala is to granny smith. But I’ll tell you one thing. It paints a vivid picture of where you fancy yourself in all of this. You imagine yourself rather paternal and condescending.
Yeah. Not really. Get a better hobby.

“The Trip/tipster disaster scenario where we have wage deflation combined with high interest rates is exceedingly unlikely.”
All it takes is foreigners getting sick of loaning us money they’re never going to see again. I would say its inevitable but I’m not going to hazard a guess as to when it will hit.

NVJ, we already had this discussion. SF is not “different” or “later” than anywhere else, particularly within our own MSA. Parts of SF were hit earlier with the subprime wave and parts are coming now and later with the Alt-A wave. Same goes for Vallejo, Walnut Creek, and anywhere else you have a heterogeneous borrower profile and housing stock. Others (not you) have tried to define “SF” by excluding huge geographic areas and housing classes (see debate on “Real SF”), and I guess if you do that then I accept that “SF” is “different.”

“If people are willing to lend money to the US Government at 3% and they turn around and lend it out at 4.25% how is that a subsidy?”
Since people are not willing to cut out the middle man and lend for housing directly at 4.25% we can conclude that the government’s implicit backing of the loan is worth more than the 1.25% difference. That is the subsidy.

I am sure that either interest rates will stay low or that inflation will pick up. The Trip/tipster disaster scenario where we have wage deflation combined with high interest rates is exceedingly unlikely.
out of curiosity, why do you say this? I would say that it is actually NECESSARY so long as we have globalization(at some point, could be near or long term).
I’ll start with the idea that lower wages is distinct from interest rates. I’ll take them one at a time.
1) interest rates. Our govt has lowered and HELD interest rates too low twice now this decade. From 2002-2005 they did it. And now they are doing it again.
The problem: it causes massive dislocations to an economy (for example: caused the RE bubble)
right now there is NOBODY who doesn’t recognize that interest rates are being purposefully held lower than where “the market” would set them. this is done by the Central Bank (the fed). this is a tool of the Fed. However, it cannot be done forever. (this is fact. a more detailed explanation about fed operations would be boring, so I’ll assume that everybody recognizes that the Fed cannot hold interest rates at artificially low rates forever without consequences).
Foreigners help hold our interest rates down as well as they buy our debt (Treasury Debt, Agency Debt, etc). if we hold interest rates too low too long, they won’t buy our debt (in general). so at some point FCB’s and foreign investors will demand higher interest rates. even if foreigners don’t buy our debt the Fed can hold interest rates low but then the mechanism severly damages the dollar (we risk inflation/hyperinflation)
Japan is able to keep low interest rates because
1) its populace is savers… so they use National buyers (not foreign)
2) they ran up tremendous debt
the US will have a harder time (not impossible) doing this as we don’t have good national savings. (we’re a debtor nation).
—-
second aspect:
REAL wages in the US MUST come down, so long as we have globalization. one of THE problems is that Americans make “too much” given their global contribution to the economy. Thus, we are uncompetitive globally. the only way to address this is to eventually have wages come down so that we are more competitive with our trading partners.
the real wage can drop either by devaluing the dollar (creating money supply or monetary inflation) or by reducing nominal wages, or by a combination.
but as the auto industry found, you can’t pay an American Worker $X per year with $Y benefits per year, when a Japanese worker will make the same product for 3/4 of that. other manufacturing employees have found that out over time. more and more employees will figure it out over time.
this process has been brutal for over 10 years, but was hidden by the fact that Americans could BORROW money making them look (and spend) more than they made. But the charade is up. we are not competitive on a global stage (overall. proven by our current account deficit). thus we must make less. (in real terms)
=====
thus overall:
The American wages MUST come down (if we have globalization)
Interest rates going forward have a high likelihood of rising from current manipulated levels (but I agree this is far from insured). if they do not then we face inflation/hyperinflation and a currency crisis. probably much like the Argentina crisis. less likely Weimar Germany
inflation vs deflation is a slightly different topic, which weaves in to my above argument, and depends in part on what our central bank does.
and lastly: if we have huge protectionist measures then perhaps wages can stay the same or go higher (as we won’t have global wage arbitrage). but then prices will be higher (no cheap goods from china).
lastly lastly: clearly our Fed is using many tools to keep rates low. such as all th

out of curiosity, why do you say this? I would say that it is actually NECESSARY so long as we have globalization(at some point, could be near or long term).
Well, for one thing it has never happened before. You can bet that something that has never happened has a pretty low probability of happening. 🙂
Perhaps you can find some historical example outside the US, but I am not aware of one.
I don’t disagree that US real wages are going to go down, but if the inflation rate is 7% and wages are going up at 6%, then this does not qualify as “wage deflation” to me. I hope we are using the same terms here.
For all the sabre rattling the Chinese have made about their concern with the US dollar, you notice that they have continued buying treasuries. And the rate that the USG has to pay to borrow long term is still at what historically is a very low rate. Sure it is up from the panic lows of a year ago, but still much lower than any time since the Great Depression. This is hardly the sign of a currency on the brink of collapse.
The Chinese have reduced their currency inflows, but if you notice, we have reduced the rate at which we import from them as well. Since we are sending them fewer dollars, they are sending fewer back to buy bonds. How this can be a surprise to anyone is beyond me.
I think “hyperinflation” is a remote possibility, even less now that the G20 has made it clear that there is going to be a coordinated to preserve the status quo, with the dollar as world reserve currency. Hyperinflation in the US Dollar would mean a total reordering of the current world order and the collapse of US demand for Chinese exports would probably lead to domestic instability in China. I know we are in agreement on this. So China will continue to grumble, but continue on their present course.
I expect inflation to pick up but stay below 10%. The Fed is claiming to target 2% and I am sure they will continue with the QE until they hit that rate, but it is hard to imagine how the US (Government but also businesses and consumers) can repay all the debt we racked up the last two decades without using inflation to devalue the amount, so I expect The Fed to keep the overnight rate “too low” and therefore fuel inflation.
The real test will be when we do get to 2% inflation. At that point I will be watching The Fed very carefully to see if they decide to nip inflation — and the first signs of a recovering US economy — in the bud by raising rates.

The numbers you threw out there — which I know were completely made up — would indicate a total and utter collapse of the US economy, worse even than the Great Depression. I just don’t things can possibly be that bad. For one thing, this would cause domestic unrest in the United States.
I don’t see how we can have real wage declines of 4-10% without a corresponding drop in GDP, can you?
Last year we did see inflation peak at 5.6% mid-year while average wages grew much more slowly at 2.5%, for a real wage decline of 3.1%.
I can just barely imagine that condition continuing for an extended period of time.
And you have stated (and I agree) that housing costs are unlikely to go up anytime soon. This is about 1/3 of the component of inflation. Are you expecting gasoline prices to go up 25%/yr for an extended period of time? It really doesn’t take long for gasoline to cost $20/gallon under that scenario.
I do agree in the general direction that you think we are headed though: being forced to consume less resources because of the growth of the rest of the world, mostly India and China, leading to smaller cars and houses. But I think we can have a growing economy even in that situation, with more and more of the economy devoted to things like entertainment and services.
Less bread and more circuses, basically.

NVJ;
Unfortunately, I do think things are that bad. I used to be more optimistic, but my optimism has failed me watching the policy response from Washington.
thus far we have done little to nothing to heal our economy. instead we are throwing good money into insolvent institutions. we thus won’t have the money when we need it most. For goodness sakes, we just proposed a program that puts the FDIC first in line for MAJOR losses through the PPIP. they don’t have that kind of money (they’re almost out of money as it is). where is the money coming from? taxpayers of course.
our leaders still refuse to recognize the problem, that we have INSOLVENT (bankrupt) banking institutions. they still either pretend or lie to us that these banks are illiquid.
I try not to speculate too much about our future, because our trajectory to some extent really does depend on the actions of a very few number of people.
However, American standard of living MUST come significantly down going forward. We simply can’t afford to live the way we did in the late 1990’s/2000’s. this is obvious by our trade and govt deficits, as well as the surging per capita debt situation. we lived too high. thus, we must retrench.
the only alternative is another bubble, which IS possible. that’s what our govt is trying furiously to produce. they seem to want to get back to “normal” with “normal” being the largest bubble we’ve seen in modern history. and they have this pipe dream that next time will be different some how… that people will play by the rules and be smarter. Of course that’s not true.
It reminds me of bumper stickers from the 1980s in Texas that said: “Lord, please let me have another oil boom, and I promise not to blow it this time”
I don’t use the word depression vs recession much, because the words are unclear. But it is clear that this is by far the worst situation we’ve been in economically since the 1930’s, and it is also possible that this is the worst since 1873 (the so called ‘long depression’). regardless of severity however, we appear to be in for a LONG downturn, as we are zombifying our banks right now (most recently/famously done by the Japanese). we are also increasing opacity of the sickness in the financial system. the duration of this recession looks to be breathtaking (all in my opinion of course… but backed by historical precedence I BELIEVE)
there are other things that could have been done. but both bush and obama’s administrations are clearly captured by the financial industry (Goldman Sachs, all the big banks, etc).
if you are interested, here are ideas that I thought would have come from Obama’s camp under Volcker. I weep that it is Summers and Rubin instead. (also, note how Hussman uses Ivy Zellman’s chart that I often discuss)
this is an excellent synopsis of part of what I thought “should” have been done. the only thing is he doesn’t address the Credit Default Swaps problem that I often harp upon. I also quibble here and there. but the following plan is 100,000x better than the crap we’ve been force fed.
the biggest theft in modern history is happening, and the victims (taxpayers) don’t even understand it. they understand a few hundred million dollars of bonuses, but miss the $10+ TRILLION that was just stolen. Makes me want to puke.
highly recommended reading:
http://www.hussmanfunds.com/wmc/wmc090330.htm

ex SF-er, the hussman funds link is fantastic. A bit technical, as I am not a finance/econ guy, but figure 1.7 (2/3 way through) regarding mortgage reset schedules is frightening.
From the explanation below the graph, it seems that the mortgages that are most dangerous (or likely to default) are the option adjustable rate variety (option ARM). When the “option” of intereset only payments expires at the recast, people will suddenly be forced to pay interest AND principal AND any negative amoritization that has accrued. As per the article, this could cause monthly payments to “go up significantly.” How many people can afford such “payment shock”? People will be forced to sell, shortsell, or foreclose.
The option adustable rate mortgages will start to reset en masse in early 2010, then peak at mid 2010 and early 2011. Thus it appears that we have not yet begun to feel the financial pinch of these toxic loans, (or the likely resulting negative pressure on real estate values).
Thank you for the educational link and the macro-economic overview. For me, the germane question is: How does this effect my housing choices? After looking at this data, at least on the macro level, it would seem that I should continue to rent through the expiration of my lease in October 2009, then perhaps rent month to month for another year. Then, when the typical seasonal real estate price doldrums arrive in winter of 2010/2011, consider purchasing a SFH.
Cheers for the insights and providing a framework for personal real estate/financial decision making.
-HPR
PS: It’s links like these that make me think I am not completely wasting my time reading socketsite and obsessing on real estate, though my fiancee might disagree… 😉

But this is not a concern or even an issue for San Francisco. The “proof” is that a few realtors have said so on this site. Everyone here put 20% or more down and took out a conventional loan.
Where will you be when this does or does not happen, “anon” ? Nowhere accountable, that’s for sure.
I have an adjustable rate mortgage. Do you?

“anonn,” you clearly do not understand the relevant concepts. The adjustable rate component of these toxic mortgages is all but irrelevant. It is the IO and neg-am aspects that is the catastrophe waiting to happen, and already beginning to happen.

Yeah, I meant real GDP, I guess I did not make myself clear. We are in agreement then that real incomes cannot drop severely over a period of time without a corresponding real GDP change. The component of GDP that is income has been dropping, but it is still something like 50%.
GDP is falling right now, but I don’t think it will do so for an extended period of time. We might see slow growth, but I doubt it will be negative much longer than six to twelve more months.
Wage loses of even 2% a year would be very painful to people and 5% catastrophic. The entire trade deficit is $700B, compared to an overall economy of $10T, so it would only take a couple of years at that rate to wipe out the entire trade deficit and turn us into a creditor nation.
Why would you expect it to take longer than that?

Wage loses of even 2% a year would be very painful to people and 5% catastrophic
Yes. But it is necessary at some point. (real wage losses). Remember, some of it will be tempered by the fact that there will be real wage losses, but inflation will “hide” that. Inflation is insidious and most people don’t really understand it deep down inside. Most will see their nominal checks rise, but then have a harder and harder time with their bills. they won’t make the link… it is doable, but will be very painful, especially for the poor and working classes.
GDP is falling right now, but I don’t think it will do so for an extended period of time.
I agree that nominal GDP won’t fall long. Again, however, it is likely that real GDP may fall. We recently went through a massive worldwide credit bubble. Some (much?) of the recent economic activity only makes sense during bubble times, and it must now go away, unless we can blow another bubble.
I hate using Mish as an example, but he often uses the point: “How many more Home Depots do we need? How many more Starbucks? How many more Walmarts?” it even goes further “how many more iPhones and Laptops, how many more flat panel TV’s?” in the end, we overbuilt a lot of commercial enterprises using bubble financial analysis and projections… those inputs will not come to pass. thus, we will need to contract.
but I’ve never really sat down and pondered a duration of needed GDP contraction. I’ll leave that to others. I just know we need some contraction.
so it would only take a couple of years at that rate to wipe out the entire trade deficit and turn us into a creditor nation. Why would you expect it to take longer than that?
a few things
1) it’s not enough to wipe out the trade deficit. We must do that AND we must start paying off our debt (in theory… it is more likely that we will default on our debt at some point)
2) we also have our federal debt to worry about
3) the asian tigers peg to our currency. it doesn’t help us to lower our wages if the Chinese/peggers drop along side of us. Thus, at some point (1-100 years from now) the Chinese will need to depeg (or revalue their currency higher), or we will need protectionist measures.
however, it is not in Chinese interests to depeg, nor current American goals to enact protection. The Chinese at this point “need” the American consumer to help pull their 700 billion impoverished people out of destitute poverty, and the Americans need the Chinese to help fund their Federal deficit and to help keep goods prices down.
everybody wants to be an exporter. thus everybody will start doing things trying to export. (given recent Japanese exporting numbers, my guess is that you can count the days until we see Yen Intervention to drop its value). averting a trade war will be difficult.
===
I’m actually tired now so will go to bed and stop posting, or I’ll post incomplete/inaccurate ideas.
but we are in a conundrum, with competing interests. and what “needs” to be done is both politically and practically difficult (not impossible). politically, it looks like we will need more pain before the obvious needs to be done (weak banks dealt with one manner or another).
and the debt is just too large, world wide, to be dealt with. I see no solution to that except to reduce the debt through inflationary measures over long periods of time. thus, I foresee coordinated currency devaluation (all fiat currencies devalue vs commodities/assets/gold, etc)… it’s already begun. but will accelerate IMO.
but it’s the only way I can think of to get us out of this, by making the nominal debts we have cheaper in real terms.

“I think one useful step is to move towards a more flexible debt model, similar to the one used in Islamic banking. I.e. instead of fixed payments, payments will be denominated in terms of fractions of profits.”
I’ve always thought that a good idea for student loans would be if the student was required to pay back two dollars for every one borrowed without any compounding interest and payments fixed at 10% of gross income. Make the loan more of an equity investment in the students future career.

There are a lot of fun ideas in the posts above, and I don’t have too much to add. The idea that “progress” is not necessary linear (to say nothing of the practically exponential growth we’ve seen since early 19th century) is of course one that I’m very fond of.
Diemos, I think your positing that fossil fuels is the primary driver (almost sole, from your post) is probably a stretch. We obviously can’t back test history to isolate exogenous factors in growth rates, and there’s no question that extracted fuels have been an enormous part of the growth since the late 1700s. First, coal and steam engines, followed by derived electricity generation, and then the internal combustion engine (and variants) is probably a reasonable broad brush history of some of the progress “tailwinds” that we’ve enjoyed. I’m not sure where we’re going; clearly, you don’t believe the Russian abiogenesis theories of oil 😉 (neither do I really)!
Robert, about your idea of moving towards a different debt financing model, we have it, and it’s called “equity”! (I know you know that, but I couldn’t resist ;)) Aside from the issue of cost of financing (investors would likely demand a higher prospective return in the absence of fixed payments), which should be no big deal as for much of US corporate history equity financing carried dividend rates higher than interest rates on corporate debt, corporates trying this today face the huge tax distortion: very basically, interest payments on debt are deductible while dividends are not. This distortion has only grown since the mid-80s revisions to the Code. We’d have to start with reforming the tax code if we really wanted to move towards this sort of model. I’d support such a change, and removing corporate taxation would be a good start. (If taxation of income received by individuals from corporates were to be retained, I’d want to see no differential between interest and dividend taxation rates.)

“the primary driver”
That phrase doesn’t quite catch what I was trying to get across, think instead “limiting factor”. It takes a combination of both primary energy and capital equipment to create wealth. One cannot substitute for the other.
During the first half of the industrial revolution there was as much energy as people cared to dig out of the ground and the limiting factor was capital equipment. This made investments in capital equipment highly profitable.
The second half of the industrial revolution will begin when energy availability becomes the limiting factor. At that point the profitability of investments in capital equipment will fall to zero as there will be no spare energy to run them. Instead we’ll enter a period where it will require enormous investments in new energy infrastructure just to keep the capital equipment we’ve already got running. “Growth” as we know it will be over until we’ve completed the transition to a new energy infrastructure.
From what I’ve seen recently I think that transition period begins now, +/- 5 years.

“Wow. Not a single person has mentioned nuclear”
I did in my original post and said it was a solution but it requires a large investment.

That’s exactly what I thought, dub dub.
I’m far from an expert on energy, but a few things seem pretty clear to me.
1) Energy (in real terms) is probably as cheap as it has ever been in the history of the world (at least on average).
2) While peak oil is no doubt a likelihood at some point in the future (maybe now?), after which increasing extraction costs will collide with increased demand and cause skyrocketing oil prices, I wouldn’t trust any data coming out of mideast or Russian oil fields to get any handle on when this might be. Whether by design or just incompetence, I doubt there’s any reliability in the data.
3) If oil were truly limited on anear term basis by cost or by reserves in places like the Continental Shelf (or other offshore locations) there would not be the highly political moves to limit exploration and development. Companies simply would not do it, and there would be no need to expend political capital to prevent it. (I’m assuming that the whole “offshore ban” is not just political theatre for consumption by the sheeple, but I guess it could be.)
4) Although I’m no expert on nuclear fission, given that uranium is so abundant, I have to believe that the cost-benefit analysis in nuclear power is compelling. Perhaps not for the US, in which because of political concerns/ideology the environmental/liability costs are prohibitive, but I bet there won’t be any issues there in China, India, Middle East, etc. Without pax americana anyway, there would be no way to enforce any sort of global order with regard to these costs, and so there won’t be any global order. I wonder how high the investment is if the liability/environmental issues are ignored by governmental command? (I really don’t know the answer to that, and I’d defer to people on the board who have a better handle on it.)
So, I hear you diemos, but I’m not so sure how to position for it. As I mentioned in another thread, just in case you’re right on oil and we’re just about at the tipping point (+/- 5 years) I’m going to take some of my ill gotten trading gains made (largely) from betting against the US private credit/equity markets and exchange them for a 450HP+ supercar. There might not be too much time to have fun left, and as diemos is fond of saying, “it’s only fiat” anyway 😉

LMRiM, if Fiat makes a 450 HP supercar, I suggest you pass on it in favor of a Porsche or Ferrari 😉

LOL, Trip.
I was actually talking about fiat currency (I suspect you knew that), but the funny thing is, Fiat owns Ferrari! (It’s actually a shared ownership structure – back in my hedge fund days, the Agnelli family was one of our largest investors, and we even part sponsored a F1 driver for a time.)

For sure Tony. And then after that once we get the even more efficient magnetic propulsion devices down that Gene Rodenberry conjured, we’ll be in even better shape.

Since we are ruminating:
Last … buying something and then selling it within two, three, four years without enterprising to make fundamental improvement is really only an investment worth of minute dissection on Scoketsite. In the real world people by and large know they’re likely to take a loss.
Wise words, but then again…
Robert, about your idea of moving towards a different debt financing model, we have it, and it’s called “equity”!
Yes, and I rent! But, to make the flexible lease-to-own model work, I would be happy for tax reform: the tax code should be agnostic as to sources of income and independent of uses of income. I’ve never understood why money received from a dead uncle, from a capital gain, or from payroll should be taxed at different rates. For households, add it all up into a big pile, called “money received” and tax it at a (mildly) progressive rate (say with the highest federal rate = 1/3 or so) with a cutoff for low income households.
No deductions of any sort — nothing is exempt, including muni debt, “savings” accounts, charities, medical expenses, etc. The only subtraction from the “money received” pool that would be the cost basis for asset sales.
The “money received” tax would be the only tax — no property, sales, payroll, Pigou, excise taxes, or anything else. No special “assessments”.
As different cities/states have different tax/service preferences, people could vote to add local rates to the federal rate, and the income would be diverted to them by the treasury.
I would also favor abolishing any taxes on business or corporations with two caveats.
For certain structures such as sole proprietorships or captives, You can deal with the tax haven issues by imputing unappropriated profits as revenue/income to the equity holders.
For cross-border money flows/repatriation, I would tax any net outflows at the “money received” rate for individuals, and would not tax any inflows. The principle is to leave money untaxed until it is paid to households or leaves the country, at which point it is all taxed at the same rate.
The second half of the industrial revolution will begin when energy availability becomes the limiting factor. At that point the profitability of investments in capital equipment will fall to zero as there will be no spare energy to run them.
I agree that clean energy and medicine may play a role similar to highway construction and aerospace in the 50s, but I don’t see them as “game changers”. Then again, I’m a global warming skeptic, and think household recycling is, for the most part, an expensive form of self-righteousness (I would instead recommend purchase of indulgences, as printing the certificates consumes fewer resources :). There is plenty of energy out there, the main risk is not running out of energy, but price-shocks and discoordination, which tend to be temporary.

Mostly for Diemos, and perhaps Fluj, JIC you didn’t see the US’ latest solo thinking on fusion, here’s what’s new at LLL:
http://news.yahoo.com/s/space/20090408/sc_space/friendlydeathstarlasertorecreatesunspower
Basically (in case this link rots), LLL will be testing a fusion reaction initiated by lasers, using a containment model based on the reaction produced vs magnetic containment.

Thanks, but I was aware of the US fusion program. They’re still trying to create a gizmo that will produce as much fusion energy as it takes to run the gizmo, “breakeven”, as they say. Even if they get that they still have to convert it to electricity with some efficiency, scale it up to power plant scale, etc. I picked solar, wind and nuclear because they exist and are known to work here and now.