Friday, February 8, 2008

Pent Up Home Loan Demand - It Is Out There

Here we are, my last post for possibly a week or more. It is amazing how much I look forward to writing about the topics that interest me. I especially like all the great feedback I get from both the regular readers (AnonG, Kevin, Jay, Watchtower) as well as the random folks that stop by. As of writing this blog has had 9,600 visits, and 14,500 page views since its inception in September 2007. Countries from all over the world have seen this blog including Singapore, China, Germany, India, Australia, Iceland, and many others. I find it very rewarding indeed to be an outlet that is somewhat useful (I hope) in the current economic debate.

While I may not be able to post, I will be monitoring the comments sections. I would like to ask all the readers here what kind of content improvements they may like to see when blogging resumes. Any and all ideas are welcome. Naked lady pictures are not an option, this is a family blog!

Warren Buffet Basically Says Past 4 Years of Loans Were "Dumb"
I am not one of those people that thinks Warren Buffet walks on water and that everything he does must be correct. I do offer that the man has been wildly successful in all kinds of markets, and further he has never had to go out with hat in hand beggin for handouts like the banks are right now. That said, he really hit the ball out of the park with his comments made in a NY times article:
Buffett Sees ‘Poetic Justice’ in Banks’ Woes
"Mr. Buffett, the head of Berkshire Hathaway and one of the world’s wealthiest people, appeared to see irony in the fallout hitting many of the banks who marketed complex investments that have now crashed.
It’s sort of a little poetic justice, in that the people that brewed this toxic Kool-Aid found themselves drinking a lot of it in the end,” Mr. Buffett said during a question and answer session at a business event in Toronto.
Mr. Buffett also played down worries about a credit crunch by saying that recent interest rate cuts mean low-cost funds are readily available.
Instead, he said, the turmoil that has rocked the nation’s economy in recent months has imbued the markets with a healthy degree of caution, while the rate-cutting response from central bankers has ensured that cheap money remains available for borrowing.
“I wouldn’t quite call it a credit crunch. Funds are available,” Mr. Buffett said. “Money is available, and it’s really quite cheap because of the lowering of rates that has taken place.”
He added: “What has happened is a repricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago.”

Exactly! There are no "liquidity issues" in the market right now. There is a problem with getting credit extended into absurd ventures. The merger mania packed with super premiums all paid for with debt is having a problem. Obviously home loans for unemployed illegal immigrants for million dollar homes on the coasts is having an issue right now. Insurers with over 300 billion dollars in liabilities that have about 20 billion dollars in real cash are facing a headwind. But real borrowers across the entire spectrum should have little problem with liquidity access. I think the moniker "DUMB MONEY" may become the catch phrase for the credit mania of the past 5 years when we look back at this time.

Pent Up Home Loan Demand - It Is Out There
You could almost hear the wild screams of joy and the high fives all around from the real estate complex today now that the GSE's (FNM, FRE) will be allowed to fund mortgages into the $750k range. The so called "Jumbo Market" will now be invaded by the government backed entities. Forget for a moment how bad an idea this is. Instead I want to focus on the "dumb money" theory as it relates to this arena.

The problem facing the housing market right now is that under any reasonable lending criteria, almost nobody can qualify for a home loan due to prices that are ridiculous. It is that simple. Indeed there is a severe "credit crunch" in play for the no document, stated income, overleveraged prospective buyer. The NAR would have you believe that the GSE's will magically fund all these mortgages in California and other high priced areas with the same kind of lax procedures that the private banks used to cause the boom. It is not going to happen.

When I hear about the "pent up" demand for housing, I believe that there is indeed such a thing. The problem is that the kind of demand that is out there is not the kind of demand you want to lend to. I will showcase some easily funded loans of the past few years that are now dead on arrival at any lending institution still with open doors:
  • John the Speculator - Armed with a real estate success book and no cash, John purchases multiple homes in hot markets and flips them inside of 3 months. He has no problems getting loans for all these "primary residences" in Las Vegas and Phoenix, even though his listed address is South Dakota. John has now seen the tide turn, and is unable to sell his homes. He cannot carry the costs and needs both serial refinances for cash and more suckers to unload his inventory on. John has A TON of DEMAND for home loan cash, but he is now SOL.
  • Joan the Part Time Postal Worker - Joan is a bit older, in her 40's and only works part time at the post office, grossing a whopping $25,000 a year. Sick and tired of seeing her friends make a killing on home sales, she decides she wants in. Her coworker just last year that makes the same amount of money was able to buy a $500k home for no money down, no income verification, and no questions asked for his Option Arm. And he was only paying the minimum $400 a month for the home. What a deal! Joan applies and is very angry that she was denied a loan. She goes out on the internet and applies at over 15 loan centers for her mortgage, but is denied everywhere. Joan REALLY WANTS to make this idea fly, she has pent up demand as well. Too late to the party, she will now be saved the disaster of making her big investment move.

That is two examples of what has been going on. Unless the government can mandate a return to silly lending standards (and I am sure Dodd, Schumer, and Frank have ideas to that end) the mortgage meltdown will go on for a while. The problem is not a credit crunch per say, the problem is that there is a severe shortage of quality buyers that want to play. Lop off another 30% from the prices of homes right now, and even yours truly may be interested in playing.

All right! It is indeed Friday and I have a special themed rock blogging session.

In an attempt to make sure I am not forgotten, I will choose songs with that sentiment as the theme of the song.

Simple Minds with the perfectly titled "Dont You Forget About Me":

Hairband Poison with "I Won't Forget You":

While I am not leaving on a plane, here is John Denver with "Leaving on A Jet Plane":

In case any readers here are struck by severe depression while I am away, take solace in Jewel's extremely sad song "Foolish Games". Jewel is excellent.

Have a good night and a good week!


Anonymous said...

Naked lady pictures are not an option, this is a family blog!

Damn, LOL


Anonymous said...

The $168 billion economic rescue package Congress rushed to approval this week includes rebates of $600 to $1,200 for most taxpayers, the hope being that they will spend the money and help revive ailing businesses.

However, just 19 percent of the people surveyed said they planned to go out and spend the money; 45 percent said they'd use it to pay bills. And nearly half said what the government really should do is get out of Iraq.

Forty-eight percent said a pullout would help fix the country's economic problems "a great deal," and an additional 20 percent said it would help at least somewhat. Some 43 percent said increasing government spending on health care, education and housing programs would help a great deal; 36 percent said cutting taxes.

The subject of leaving Iraq shows a sharp partisan divide—65 percent of Democrats think it would help the economy a lot, but only 18 percent of Republicans think so.

In the poll, 61 percent said they think the economy is already in a recession.

Fifty-nine percent said they were worried "a lot" or "some" about seeing the value of stocks and retirement investments drop. Those approaching retirement fretted the most.

Nearly half—46 percent—said they were worried about being able to pay their bills. This is especially a concern for people whose household incomes are under $50,000, and for minorities. Twenty-eight percent most feared losing their jobs; minorities and those with a high school education or less were especially concerned.

Also, 48 percent of homeowners polled worried that the value of their homes would drop

More than half—55 percent—said they have a great deal or some confidence in Fed to turn things around. Forty-one percent said that about Congress, only 28 percent about Bush.

I always find these polls interesting, don't know if they actually reflect reality in all cases but interesting none the less.


watchtower said...

Finally had one of those rare 55 degree, not a cloud in the sky late winter days here. Got the mountain bike out and headed for the trails...what a day, what an incredible day, the kind of day that puts this economic BS in it's place.
I ride with my MP3 player when I'm by myself, was grooven to some Journey (Only the Young, from the Vision Quest soundtrack), Blondie (Union City Blue, from Greatest Hits), Bruce Springsteen (Two Hearts, from The River), etc.
Good high energy music for inspiring "attacks" on my local hills. If you workout (ride, jog, etc.), and don't have to worry about being ran over by a car, I highly recommend an MP3 player for those times when your by yourself.

Anyone here know if this "tax rebate" is going to be subtracted from next years refund, or is it "no strings attached" one time only free money? The "nutter" websites are claiming that it's actually a loan against any future refund you may get in 2009.
I'm just curious, I would probably LMAO if the "nutters" are correct, can you imagine the wailing from the public at large next year if they found out that they had already received their refund in the spring of 2008.
It's probably just BS though.

Anonymous said...

"If you end up freezing (Venezuelan assets) and it harms us, we're going to harm you," Chavez said during his weekly radio and television program, "Hello, President." "Do you know how? We aren't going to send oil to the United States. Take note, Mr. Bush, Mr. Danger."

Chavez has repeatedly threatened to cut off oil shipments to the United States, which is Venezuela's No. 1 client, if Washington tries to oust him. Chavez's warnings on Sunday appeared to extend that threat to attempts by oil companies to challenge his government's nationalization drive through lawsuits.

"I speak to the U.S. empire, because that's the master: continue and you will see that we won't sent one drop of oil to the empire of the United States," Chavez said Sunday.

"The outlaws of Exxon Mobil will never again rob us," Chavez said, accusing the Irving, Texas-based oil company of acting in concert with Washington.

Knew this was coming, I don't know if he will or not but if he does it is going to put a serious hurt on the US. Venezuela is the #5 source of oil imports to the US.
He is right in one respect the US is an empire IMOP.


watchtower said...

I wonder if anybody else but the U.S. can crack that Venezuelan tar?

Anonymous said...

Hey where U at Homie?