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No Housing Bottom As Case-Shiller Declines For 4th Consecutive Month; Misses YoY Expectations

Tyler Durden's picture




 

Not like it matters considering it is pretty much November, but back in August, the Case Shiller index once again missed expectations. The overall index declined 3.8% compared to an expectation of 3.5%, but more importantly, to all those calling for a bottom to housing, we draw your attention to the Composite Top 20 Seasonally Adjusted index, which declined for a 4th consecutive month, in August dropping to 140.56, a decline of -0.05%, following a revised drop of -0.15% in July. No good news were to be found in the prepared remarks either: "The 10- and 20-City Composites posted annual returns of -3.5% and -3.8% versus August 2010, respectively. At -8.5%, Minneapolis posted the lowest year-over-year return, but has improved in each of the last three months. Detroit and Washington DC were the only two cities to post positive annual returns of +2.7% and +0.3% respectively." Here is the bottom line: the seasonally adjusted data has posted 4 consecutive declines; and 14 out of 15 consecutive drops. The Top 20 SA index is now at 140.56, the second lowest in years, and better only than the 140.39 in March 2011. In other news - there is no housing bottom.

And the attempt to spin by Goldman:

BOTTOM LINE: House price growth slightly weaker than expected in August, but nationally prices still broadly stable.

KEY NUMBERS:
Case-Shiller 20-city index -0.05% (mom, sa) for August vs. GS +0.2%, median forecast +0.1%.

MAIN POINTS:

1. The Case-Shiller 20-city house price index unexpectedly declined in August, falling by 0.05% (seasonally adjusted month-over-month). On a year-over-year basis the index was down 3.8%, a larger decline than the consensus expected. In addition to the slightly weaker August reading, earlier months were revised down. That being said, the decline in August and revisions were relatively small, and house prices continue to look broadly stable. [TD: sure - look at the chart above]

2. Results were quite mixed across regions, with six states reporting month-over-month increases and the other fourteen reporting declines. Washington DC continued to outperform other regions, with a 1% increase in August (mom, sa). Atlanta, Las Vegas, and Phoenix saw sizable price declines

 

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Tue, 10/25/2011 - 09:31 | 1807771 trav7777
trav7777's picture

Detroit, bitchez

Tue, 10/25/2011 - 10:01 | 1807922 redpill
redpill's picture

The misguided tax credit from the federal gov't distorted the data last year, so it's only been in the last few months where the year-over-year comparisons have been in the post tax credit expiration period and there are some signs of a weak bottom. But there are still many obstacles which will prevent a substantive housing recovery from occurring any time soon. While foreclosure rates have abated in most areas, it could be a temporary trend, and there is still a substantial pipeline of distressed housing in many markets that needs to be worked through before a healthy housing equilibrium can be achieved. There are also a number of aspects of this downturn that are unique. In previous recessions, housing has been a leading industry in the recovery period. But that is not as likely this time around.

 

Typically in a non-boom housing market, construction naturally slows as a recession hits, and because consumers become cautious there is some pent up housing demand during the recession which fuels an expansion as the recessionary conditions ease. This time around, though, we have so much excess housing already, so many people underwater on their mortgages, etc., that it will be much harder for housing to see rapid improvement. A tangent to that though is that multi-family rentals have been expanding as many people have gone back to renting for a variety of reasons. As a result, instead of new construction being a leading force driving economic recovery, this time it will likely be the caboose and depends on improvements in the job market and broader economy (which aren't likely to happen soon), as well as just being a matter of time before all the excess housing units built during the boom are finally absorbed in a sustainable way.

Tue, 10/25/2011 - 10:42 | 1808161 WonderDawg
WonderDawg's picture

The real estate market is still way overvalued. We have another 40% down before a bottom can even be detected. Schiller said it earlier this year, 25% to 40% further down to go, and that's optimistic in my view. The only thing keeping the market propped up right now is legalized accounting fraud for the banks. Take that away and look out below.

Tue, 10/25/2011 - 11:41 | 1808461 Smiddywesson
Smiddywesson's picture

Yes, it is very difficult for the housing market to bottom until the jobs situation improves and the banks disgorge all the shadow inventory and it is dealt with.  Dawg's estimate of a further 40% drop in prices is conservative.  Markets are made at the margin, meaning nonparticipants don't affect the price, just those buying and selling. 

So let's look at the sellers.  Those who don't have to sell will sit on their houses and not sell.  The remainder have to sell and will accept lower prices.  Therefore, most of the houses on the market cannot be sold at top prices because their owners cannot bargain effectively.  Also title problems, foreclosures in nearby areas, bankrupt cities and towns, and bankrupt community funds contribute to lower prices. 

How about the buyers?  In this environment you basically have people out looking for deals.  Yes, the ones who are sitting it out waiting for the bottom are not engaged in price discovery either, but there has to be some promise of a bottom to get them to act, and nobody sees that now.  After three years of hype, it is going to be increasingly difficult to lure these people into the market. 

I see a multi-year death spiral for housing that brings us down 80% from the top.   

Tue, 10/25/2011 - 12:27 | 1808654 redpill
redpill's picture

Won't happen.  Even in the hardest hit areas the average price per square foot of distressed properties has stabilzed over the last few quarters because people snap them up in the chase for yield, and the rental market is doing quite well.

The Fed and the feds will never allow the big banks to go belly up, and with an infinite monetary backstop there will always be a slosh of money to prop up prices.  We may give up another 5-10% but that's about it.

Tue, 10/25/2011 - 13:16 | 1808956 boiltherich
boiltherich's picture

Red any perceived stabilization is part illusion and part the stabilization of unemployment claims at 400,000 per week, for the moment.  It is illusory when the government (FHA, VA, Fanny, Freddie, USDA rural development ETC.)  takes homes but is not reporting or selling them as foreclosures, as well as many banks refusing to sell at a few dimes on the dollar, not to mention states like Oregon where I am that is now in a moratorium on foreclosure sales. 

Of course some areas are more immune than others, and mind you if it were not for a few red state pockets of oil/gas boom drilling to skew the data the numbers would have looked far worse than they have. 

Most of us agree, and I believe the wider US population knows that we are the verge of the next leg down, it will be a rocky Christmas and 2012?  I do not even want to think about it.  That leg down will see yet another 50% off the already 50% off people like me have experienced in house values.  Just as before though there will be a lag time after the new leg down for prices to manifest lower.  Six moths to a year I think. 

A massive Greater Depression lasting many years, a generation, could be a good news bad news situation for us, nobody will be unscathed.  Whether in the end we have more realistic expectations, more sustainable lives, fairer commerce, and more enlightened citizens, or devolve into class war and perhaps global warfare which would in effect sterilize the planet is worth a debate keeping in mind none of us has unique knowledge of where we are headed.  The best you can do is construct a vision of your own future in your mind and strive to reach for it.  Just don't feel bad when your reach is greater than your grasp. 

Tue, 10/25/2011 - 14:10 | 1809228 Clark Bent
Clark Bent's picture

Fannie is working hard to create the illusion that housing values have not dropped by, IMHO, issuing blow-them-out-of-the-water exaggerated appraisals. I have seen them over-appraise a MC Mansion by about 30% and in the process torpedo the only short sale bid received in 14 months. Seems they would rather have a worthless empty house than have to adjust their perspective to accept that their portfolio of assets is massively overvalued. Recognizing their assets are worth-less than what they are pretending would probably interfere with the plan to own all residential property in the U.S. 

Tue, 10/25/2011 - 11:40 | 1808452 ZeroPower
ZeroPower's picture

lol. Who the hell wants to live there? Are people actually moving to detroit?

Wed, 10/26/2011 - 04:41 | 1811439 o2sd
o2sd's picture

No. They are knocking down houses and building urban farms. I shit you not. When you can buy 5 houses for 5 bucks, it's good business.

The problem in Detroit (and most of MI) is the absurd property taxes, state income taxes etc. The County/State flushes money down the crapper at a frightening rate, and they've always got their hand in your pocket for more.

Of course, if there is a financial collapse/reset, and the land titles office survives, one could become a large landowner if you had the coin to pay the leeching bureaucrats until the implosion.

 

 

Tue, 10/25/2011 - 09:32 | 1807774 achmachat
achmachat's picture

honestly... Detroit and DC. who would have guessed?

Tue, 10/25/2011 - 09:59 | 1807882 Archimedes
Archimedes's picture

Well come on, in Detroit you can buy a home for $700. And DC is where all of the Political maggots live and they are the only one's that still have jobs....for now.

Tue, 10/25/2011 - 10:04 | 1807938 redpill
redpill's picture

DC has been a consistent performer over the last couple years, so it's no surprise.  Detroit is less intuitive, but things got so bad there that even the modest improvement in the auto industry can make a positive impact.

Tue, 10/25/2011 - 10:10 | 1807967 kridkrid
kridkrid's picture

Detroit isn't less intuitive.  Detroit never enjoyed the fake rise in housing values during the fed induced housing bubble.  When housing crashed, Detroit crashed right along with everyone else.  Detroit likely is at their bottom.  Everyone else has another 20-30% to fall, just to get back to a reasonable trend line.  If the Greater Depression pushes us below the long term trend line, the market will go down another 30%+.  If we go mad max, all bets are off.

Tue, 10/25/2011 - 10:50 | 1808197 trav7777
trav7777's picture

Detroilet is at zero.  Literally, there is no recovery in a lot of those houses.  The city went 365black and it became just like africa.

The police have announced that they will no longer respond to a lot of crime calls, such as burglary even.  Much of the city isn't patrolled or even inhabited and they are bulldozing neighborhoods back to greenspace.  Downtown a couple years ago, ALL skyscrapers except the RenCen appeared to me to be uninhabited and were in most cases boarded up at the front doors or otherwise sealed.

Detroit will come back when the white people do.  As for DC, the level of gentrification is eyepopping now.  People who go to Howard are even going wtf.  I saw white people riding bicycles at 1am near there the other day and there's a Sunday morning Farmer's market a few blocks away.  DC is on fast-track to increased livability and viability as a result.  The ghetto edge continues to be pushed eastward and now even Capitol St isn't holding the line.  When I got here it was at 14th.  Places that I can remember were no-goes are now totally yuppied.  High end restaurants, condos, you name it.  Sort of like what has happened in the Bronx, Times Square, and even Harlem.  Tax payers and non-SNAPs are being given the keys because let's face it, they pay taxes and don't commit crimes.

Tue, 10/25/2011 - 11:44 | 1808475 riley martini
riley martini's picture

 DC is where government money gets spent first . The same thing happened during the Reagan years. Regan spending helped ease some of the 80's recession along with a little mini housing boom . The real game changer was the computer - internet revolution . Regan-Obama debt spiral.

Tue, 10/25/2011 - 09:48 | 1807775 GeneMarchbanks
GeneMarchbanks's picture

Detriot is in a housing bubble.

Afghani refugees and damn artists! with their huge inflated salaries are bidding up housing.

Tue, 10/25/2011 - 09:33 | 1807777 firstdivision
firstdivision's picture

Why would anyone want to pay for a place in Detroit? 

Tue, 10/25/2011 - 09:44 | 1807828 afdestruction
afdestruction's picture

Certain "investors" think that the dirt cheap housing (comparatively) is a good investment. They don't realize they're buying properties in a ghost town

Tue, 10/25/2011 - 09:47 | 1807852 Yamaha
Yamaha's picture

Just more Muslims..............

Tue, 10/25/2011 - 10:19 | 1808030 Snidley Whipsnae
Snidley Whipsnae's picture

"ghost town' or war zone?

Wed, 10/26/2011 - 02:13 | 1811363 Yamaha
Yamaha's picture

Obama Zone!

Tue, 10/25/2011 - 09:46 | 1807846 disabledvet
disabledvet's picture

it's not free anymore. it's 2 dollars and 34 cents.

Tue, 10/25/2011 - 10:09 | 1807956 dwdollar
dwdollar's picture

So true...

...but the math would be more like from $1.00 to $1.03.

Tue, 10/25/2011 - 09:34 | 1807783 pendragon
pendragon's picture

qe3 mbs = must buy shit

Tue, 10/25/2011 - 09:35 | 1807786 Enceladus
Enceladus's picture

The price of a house in Detroit went from $1 to 1.027

Tue, 10/25/2011 - 09:42 | 1807814 Snidley Whipsnae
Snidley Whipsnae's picture

LOL... excellent Enceladus!

Tue, 10/25/2011 - 09:35 | 1807787 warchopper
warchopper's picture

Houses are almost like cars now. As soon as you take ownership, they begin to depreciate. My spouse routinely freaks out about our home value, but I bought my home because I like it, not because I'm trying to flip it or make a profit out of it. Although I would hope the value doesn't slip to $0, I'm o.k. with that because I knew what I was getting into, and it's a great spot for my family...plus I retire in 2 years (I'll be 39).

 

 

Tue, 10/25/2011 - 09:40 | 1807803 Clueless Economist
Clueless Economist's picture

Retire in 2 years at age 39?  Impossi....oh wait I get it you are a suburban cop. 

Tue, 10/25/2011 - 10:47 | 1808176 spanish inquisition
spanish inquisition's picture

Definition of an optimist - Someone who is planning to retire with a pension that will support them for the next 30 years

Tue, 10/25/2011 - 09:44 | 1807838 Snidley Whipsnae
Snidley Whipsnae's picture

Warchopper... In Argentina during the financial debacle/depression people were trading houses for cars.

Cars had the utility value of getting one to work/home...while an extra home was an added financial burden. 

Tue, 10/25/2011 - 10:21 | 1808037 boiltherich
boiltherich's picture

To quote my real estate agent when I bought my first house in 1999 "houses NEVER go down in value." 

The only way to make your house depreciate then was to put a rusty old Camaro up on cinder blocks in the front yard.  Even then flippers would usually compete to buy the place. 

I hope it works out for you, it didn't for me, and though my house did not drop to zero it did lose half it's value in less than two years making any solution to the problem of needing to move other than selective default impossible.  Since the bank is unwilling to sell at a loss, and now a court ruling has essentially suspended all foreclosure sales in Oregon I find I am still owner of an empty defaulted foreclosed house that will likely still be fucking up my credit for years to come unless I file chapter 7 to foreswear any further debts from the place. 

It is a zombie nightmare from which there is no waking till the collapse comes and levels the playing field.  And I had waited till housing fell below the cost of replacement to buy, I knew there was a bubble and I waited till it popped.  In the run up to the housing collapse people used their houses to extract as much as $20,000 per month in equity like a giant ATM, and renters who were responsible watch for years as the rest of society got all the new toys and went to Europe on vacations we could only dream of, by being responsible and waiting I found my house to be a negative ATM where I was pushing thousands per month into it with no returns.  It is not that I am jealous, because having done the right thing is enough for me, who here has not gotten burned trading stocks in the past?  Sometimes you try to catch a falling knife and get cut. 

Tue, 10/25/2011 - 09:36 | 1807790 RobotTrader
RobotTrader's picture

XHB from $12 to $17, a year's worth of gains in 3 weeks.

Tue, 10/25/2011 - 09:37 | 1807793 Irish66
Irish66's picture

No wonder it wasn't on the tv

Tue, 10/25/2011 - 09:37 | 1807794 Dick Darlington
Dick Darlington's picture

Ain't no love in Ireland either...

Oct. 25 (Bloomberg) -- Irish house prices fell in September
from the previous month as a four-year property slump persisted,
the Central Statistics office said.
     Home prices declined 1.5 percent from August and dropped
14.3 percent from a year earlier, the Cork-based statistics
office said in a statement on its website today. That compares
with an annual drop of 13.9 percent in August.
     Irish house prices have fallen 44 percent since peaking in
2007 as the ending of a decade-long property bubble was
compounded by the global credit crisis and tighter lending
criteria by banks. Ireland’s economy contracted about 15 percent
in that period and unemployment almost trebled.
     “Given weak labour market conditions and the continuing
lack of available bank credit, it is hard to be optimistic on
the prospects for the property market in the immediate future,”
Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin,
said in an e-mailed note. “The level of any rise over the next
few years is only likely to be in the low single digits.”
     Home prices in Dublin fell 15.6 percent from a year ago and
are down 49 percent since the 2007 peak, the statistics office
said. On the month, home prices fell 2.1 percent in the Irish
capital.

Tue, 10/25/2011 - 10:24 | 1808056 boiltherich
boiltherich's picture

And the kicker is that housing there is still wildly unaffordable.

Tue, 10/25/2011 - 09:37 | 1807795 topcallingtroll
topcallingtroll's picture

$100 down buys you a house!
No credit check!

I thought we all learned where loose underwriting leads.

Tue, 10/25/2011 - 10:54 | 1808219 trav7777
trav7777's picture

$100 could buy you a whole block in Detroilet

Tue, 10/25/2011 - 09:38 | 1807798 Sudden Debt
Sudden Debt's picture

According to eurostat, the US has 4% inflation so everybody's down

Tue, 10/25/2011 - 09:40 | 1807805 RobotTrader
RobotTrader's picture

GDX and GLD getting hammered with EUR, tick for tick.

Tue, 10/25/2011 - 09:57 | 1807905 Snidley Whipsnae
Snidley Whipsnae's picture

Gold $1657.50... trading in a narrow range recently. Nice try.

http://finviz.com/forex.ashx

Tue, 10/25/2011 - 10:56 | 1808229 trav7777
trav7777's picture

gold just went $30 vertical, you fuckin idiot

Tue, 10/25/2011 - 11:02 | 1808268 uranian
uranian's picture

anyone else suspect that robo is actually one of the tylers taking the piss for shits and giggles?

Tue, 10/25/2011 - 09:40 | 1807807 Snakeeyes
Snakeeyes's picture

Case-Shiller sends false signal:

http://confoundedinterest.wordpress.com

NO HOUSING RECOVERY.

Plus, misery index is on the rise!!!!!!!!!! See chart.

 

Tue, 10/25/2011 - 09:44 | 1807829 riley martini
riley martini's picture

 Trillions of  dollars spent by the gov.  to make housing cost more . What do you get ? Making homes affordable program at the expense of the worker .

Tue, 10/25/2011 - 09:46 | 1807845 John Law Lives
John Law Lives's picture

"Detroit and Washington DC were the only two cities to post positive annual returns of +2.7% and +0.3% respectively."

That is pretty sad when two of the most crime-ridden cities in America are looked upon as bright spots in the housing market.

Tue, 10/25/2011 - 11:08 | 1808302 trav7777
trav7777's picture

Violent crime is down 50% in the past decade and a half in DC.  The white population is increasing dramatically...city on verge of losing black majority.

http://en.wikipedia.org/wiki/Crime_in_Washington,_DC  you can see where all the crime is...it's (drum roll) in the black areas.  As DC whitens further, crime will continue to drop.  This phenomenon is so ubiquitous and inexorable that I marvel that anyone can't seem to figure it out still.

Of course, the DWLs will spin it that the neighborhoods got "economically revitalized" but all that means is that white people moved in and cleaned the place up and rebuilt civilization.  Let's recall that every single housing project was a FIRST RATE building and facility when it was constructed and systematic abuse by its residents turned 100% of them into decrepit shitholes with 0 recovery value.  Some of the worst slums in the US, like Cabrini Green in Chicago, were absolutely spectacular when erected.  Of course they had to be the best, because nothing less than the best will do for the shiftless, lazy trash that they housed there, right?  Just like those Katrina refugees were demanding something better than water after being bused out of the hell they created.

And, like night follows day, the residents of those places destroyed them.  There was a recent landmark study, which the DWLs in the media are trying to underreport and bury, that plotted Section 8s on a map and then plotted crime on a map, with a longitudinal study (meaning over time, as section 8 facilities moved around), and lo and behold they could have been the same fucking map.  In fact, the two maps were so close that initially they assumed it was some kind of a practical joke.  Bottom line, you do NOT want diversity in your neighborhood or anywhere near you.  Tell the DWLs on the fuckin city planning boards to put that shit in their whitopia neighborhoods if they love it so much.

Tue, 10/25/2011 - 12:09 | 1808582 Iam_Silverman
Iam_Silverman's picture

"Violent crime is down 50% in the past decade and a half in DC.  The white population is increasing dramatically...city on verge of losing black majority."

Let's hope that the Heller decision helps even more!

Tue, 10/25/2011 - 09:49 | 1807869 disabledvet
disabledvet's picture

where this will get interesting is the next fed created bubble in apartment REITS. if there's a sudden move out of single family homes and into apartments (and given the collapse of incomes and the creation of this new bubble how can there not be?) what will happen to the value of single family "McMansions" that are all over the North American continent? I say their value will plunge like the Victorians of New York.

Tue, 10/25/2011 - 10:13 | 1807984 Snidley Whipsnae
Snidley Whipsnae's picture

"I say their value will plunge like the Victorians of New York."

Of course they will. The Victorians had servant staff of ~ 25 people. Even what we think of as 'the very wealthy' today would struggle with supporting such a staff and their food, shelter, clothing, medical, etc. Victorian was pre income taxes and most other taxes were much lower than today. Those huge mansions required constant maintenence, groundskeepers, etc.

If you are into boats check out some of the racing yachts owned by the Victorians. Many of them owned multiple yachts, some for pleasure crusing, some for racing, etc. All hand built from real wood by the finest shipwrights. 125 foot racing yachts were not unusual. Megabucks.

The 'big' homes of today are built of pressed wood and Chinese dry wall... that crap isn't going to last very long, even with a vibrant economy and proper upkeep. I'm surprised more of them haven't been burned for insurance purposes.

 

Tue, 10/25/2011 - 09:57 | 1807906 Seasmoke
Seasmoke's picture

DC and Detroit.........very bullish for GM

Tue, 10/25/2011 - 10:05 | 1807944 PulauHantu29
PulauHantu29's picture

Dr Housing Bubble:

 

<<Yet some are pricing homes as if all they needed was some delusional sucker and a Countrywide mortgage broker to get the deal going and a $2,950,000 price reduction was somehow ordinary.  In today’s market you actually need some cash and resources to buy and not made up paperwork by some mortgage garbage pusher. >>

 

http://www.doctorhousingbubble.com/manic-real-estate-pricing-huntington-...

Tue, 10/25/2011 - 10:05 | 1807947 Tsar Pointless
Tsar Pointless's picture

In Pittsburgh, of course, we've been blowing a bubble, post-bubble collapse.

Lots of folks going $200,000 in debt for houses that were only worth a quarter of that prior to their renovation.

Lots of folks going to be experiencing debt shock in the years and decades to come.

Me? I bought a house for $57,000 in early 2010. All brick, hardwood floors, built-in garage, fenced-in back yard, full basement. Utilized the first-time homebuyer program, the extension, which doesn't make you pay back the 10% you received in tax benefits, if you stay in the home for three years. Used the proceeds of the tax rebate to upgrade all of the house's windows, which were nearly all the original windows on a 50-year-old structure.

Two years will have passed come this January. One more year to go and I am clear for lift-off!

Tue, 10/25/2011 - 10:07 | 1807955 grid-b-gone
grid-b-gone's picture

My neighbor realtor thinks Oct will print a new low for the year at their local midwest office. Prices are not dropping much, though. Sellers seem more willing and able to hold out longer rather than give in to price - less desperation on sellers' part.

Tue, 10/25/2011 - 10:14 | 1807978 dwdollar
dwdollar's picture

I have gotten the same impression just being a casual observer. After awhile the seller just gives up and pretends his house is what it appraised for and everyone else is wrong.

Tue, 10/25/2011 - 10:17 | 1808015 kridkrid
kridkrid's picture

Anecdotal information from someone who is trying to find a pony in a pile of shit.  Not saying your neighbor is lying, only that your neighbor is seeing what he wants to see.  My disclaimer: real estate is certainly all local... so it doesn't have to suck just as bad everywhere, but I bet your neighbor realtor will revise down his optimism month over month.

Tue, 10/25/2011 - 11:11 | 1808325 trav7777
trav7777's picture

well there is no mad rush by the bank to take the REO on their books so the sellers are without consequence at present.

If/when they start letting the market actually clear or else the seller decides that the cash burn is destroying him (it is), look out.

A LOT of "homeowners" are having that "can't lose" investment burn a cash hole straight the fuck through everything they work for...and for years.

Tue, 10/25/2011 - 10:11 | 1807980 PaperBear
PaperBear's picture

F**CKING HOLY MOTHER OF GOD !!

QE3, QE3, QE3, QE3, QE3, QE3, QE3, QE3, QE3, QE3.

Tue, 10/25/2011 - 10:20 | 1808033 Archimedes
Archimedes's picture

Really good video from PBS last night on the new Obama plan. Seems the big refinance scheme s really a pea shooter:

http://www.pbs.org/newshour/bb/business/july-dec11/foreclosures_10-24.html

Tue, 10/25/2011 - 11:21 | 1808373 Alex Kintner
Alex Kintner's picture

Have not seen any analysis that details how taxpayers will get stiffed in this refinance deal (as always).

Tue, 10/25/2011 - 11:06 | 1808293 michael_engineer
michael_engineer's picture

Do the following comments possibly explain why there is no housing bottom yet?

 

Consider where we have been on the Hubbert Curve (see curve at http://www.drmillslmu.com/peakoil.htm) for the last 50 years. During that period, there was growth in oil production and a reasonable expectation of continued stable growth for decades to come. Hence it made good business sense for banks to make 30 year loans on housing during that period (especially in the 1950 to 1990 time frame), as there was little risk that a typical loan would default. These 30 year housing loans were very solid investments for decades. However, as we neared peak oil (and surpassed the peak and got onto the downslope of the curve), housing investments and 30 year loans started getting riskier. The implications of where oil production will be in the next 30 years started to get factored into the world economic situation due to higher oil prices. Those higher oil prices caused higher prices for basic necessities and all downstream goods. A combination of higher actual prices for goods and services and a higher awareness of forward looking risks to the economy in the coming decades started triggering growing worldwide unemployment. It may very well be that the rise in oil prices to $147 a barrel triggered higher unemployment and that helped to trigger the subprime and other housing crises, which are now helping to trigger and expose the macro crises of PIIGS, Egypt, Libya, Tunisia, etc, and the food crises too. The banking powers (FED, IMF, ECB, China, etc) have tried with difficulty to address the debt burdens and debt related links to the world economy to preserve the status quo. But structural changes associated with several flavors of resource depletions (for which there are no easy substitutions available) will force changes to the status quo. These changes are first shunted by the government and corporate interests onto the general population with austerity measures and higher government debt levels. As a result there will be higher unemployment and less government services available as we are currently seeing in not only PIIGS, but in China and America too if one has been paying attention to local and regional economic affects.

 

Looking forward to the coming years, what are the reasonable expectations for housing and all other aspects of the world economy if oil production does decrease as projected by the Hubbert Curve? Is the banking business model of providing 30 year home loans at risk? It would seem so. I have seen reasonable projections that expect oil production to decrease by anywhere from 2 to 5 percent year after year after year (again see http://www.drmillslmu.com/peakoil.htm and scroll down some). Do 30 year home loans (or any long term loans of any type) make good business sense under a 2 percent decrease (year after year after year) in oil production which is the worlds most critical natural resource? Would they make good business sense under a 5 percent decrease (year after year after year)? I think the banks are finally starting to "get it" and so are other smart investors too, and long term credit is tightening as a result.

Tue, 10/25/2011 - 11:16 | 1808342 trav7777
trav7777's picture

ah ha, someone else gets it...I've been saying this for years now.

DEBT as an institution makes no sense in the aggregate in the face of contraction.  If a rancher comes to you to borrow against the livestock as collateral and you have basis to believe he will have less of them next year than this, would you lend?  Of course not.  And if he knows that, he wouldn't borrow either.  You could drop the price of credit to 0% and there wouldn't be takers if people KNEW a famine or drought were coming.  And nobody would lend.

That is where we are.  There are many who will deny peak oil but the pricing and supply can't be faked for long.  The market's invisible hand is sniffing this out and even people who don't get or don't know about it are acting as if they do.  It's like how fish school.

When oil supply peaked it was as if the world tipped upside down...now everything that has worked for 400 years seems to not work.  The people in economics can't seem to figure it out because everything they learnt is now backwards.

Tue, 10/25/2011 - 20:05 | 1810483 bakken
bakken's picture

What is so dificult for so many people to understand?  Oil is a finite resource.  Easy oil gets drilled first.   Bakken shale oil costs $60/barrel or so.  Artic oil may cost even more.  At $120/barrel our civilisation grinds to a halt.  We've been there once.  Economically there can not be $150/barrel oil for long, our way of life stops.  End of story.

PS for the Americans, there is a pipeline being built from Cushing, OK to the Gulf.  Guess who the biggest export customer for WTI oil will be?  Oh, and by the way, the Canadian pipeline hoorah, is simply a front for shipping tar-sand oil to China too.  We will be paying more than $4/gal soon and Euro prices in the near future.  At $8/gal what happens to the center of tne Universe, LA???   hahahahahahaha.

Tue, 10/25/2011 - 11:07 | 1808298 slewie the pi-rat
slewie the pi-rat's picture

well, the upswinging employment and manufacturing will just hafta take up the slack while the remaining inventory gets sold off, [sarc] BiCheZ!

now that the REITs have taken advantage of all the great deals & finance, where are the clients & customers?  making popcorn for the next episode of 4 Banksters on Horseback

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