Is the Credit Bubble Bursting?

There are several other factors as well. I think some studies have shown that people will go to the upper end of their affordability to get in a school district that's considered "good." Now, call me a Liberal Pinko, but if we had good schools across the board, people wouldn't feel pressure to buy into a particular district or school zone. Our culture places such an emphasis on education that we feel we're failing our kids if we don't give them every chance we can, so some people end up buying in areas that they can't afford... not because of the house, but because of the schools.

Similarly, when you look at high cost areas like CA or most big cities, we have so much sprawl that an affordable house is likely a long commute away. A lot of people pick a more expensive property because they'd rather have time with their family then hours in a car.

Also playing into this is the American Dream where you have a stand-alone house with a yard for the kids and a BBQ grill and a BBall hoop in the driveway. People are willing to go to the edge to get that in a good school district with a reasonable commute.

 

yeah those dumbasses are really getting it from the mortgage companies. they are going bankrupt left and right.....errrrr wait....maybe it's the other way around.

lol I love seeing these mortgage companies get left holding the bag. they are a bunch of jerks. the new century ceo was saying everything was fine to his employees days before they went under. iraqi information ministeresque.

 

A lot of those mortgage brokers escaped with a ton of money in their bank account. A much better situation to be in then the home buyers who now have a foreclosure on their record.

 

pretty good illustration
Here - NYT

 

well they are closing up shop now. that's all i care about. and i really don't have sympathy for the people who got loans without thinking about how they would be able to pay for it when the teaser rates ended. it's a freaking house...you don't just buy those on a whim and if someone does and gets nailed on it then that's all on them.

 

Capitalism passed its sell-by date in the 19th century, and it's now inherently unstable.

 

Dow Falls 387 Points on New Loan Fears
By VIKAS BAJAJ
http://www.nytimes.com/2007/08/09/business/09cnd-stox.html?hp=&pagewanted=print

Stocks on Wall Street today suffered their biggest one-day decline since February after the turmoil in the home-loan market caused renewed concerns about tightening credit worldwide.

The decline began at the opening bell after a French bank, BNP Paribas, suspended operations of three of its funds in the wake of turmoil in the American market for home loans. The European Central Bank and the Federal Reserve injected cash into the financial system because of tightening credit markets.

The Dow Jones industrial average closed at 13,270.68, down 387.18 points, or 2.8 percent. It was the biggest one-day decline since the Dow lost 416.02 points on Feb. 27, another day of a worldwide sell-off.

The Standard & Poor’s 500-stock index was off nearly 3 percent, at 1,453.10, and the Nasdaq composite index was down 2.2 percent, at 2,556.49.

After the Dow dropped 200 points within minutes of the start of trading, the session was volatile, with stocks recovering much of their early losses, then declining anew.

Prices of Treasury bonds jumped as investors fled to the safety of government paper.

Asked at a news conference this morning whether he thought the turmoil in the subprime lending market could put a chill on credit in the broader economy, President Bush said he did not think that the federal government needs to step in to provide more money to the financial markets. “The fundamentals of our economy are strong,” he said.

“Another factor one has got to look at is the amount of liquidity in the system,” he added. “In other words, is there enough liquidity to enable markets to be able to correct? And I am told there is enough liquidity in the system to enable markets to correct.”

The latest upheaval on Wall Street came after a sell-off in Europe, which was prompted after BNP, the largest publicly traded bank in France, became the latest European lender to announce problems linked to the worsening credit market in the United States, where several large companies have already announced losses. Late last month, a group of German government-backed banks agreed to bail out a bank, IKB Deutsche Industriebank, whose investments in American mortgage securities have fallen significantly in value.

With banks pulling back on lending over all, the European Central Bank lent more than $130 billion overnight at a rate of 4 percent after the overnight rates that banks charge to lend money to one another leaped. The Federal Reserve injected $24 billion to the United States banking system to keep its benchmark overnight lending rate at 5.25 percent, after it opened this morning at 5.5 percent.

It is common for central banks to step in to stabilize the financial system when banks are either pumping too much or too little money into the markets. What was unusual about the move today was the size and speed with which the banks acted.

“There is certainly a liquidity crisis in the financial system that the normal players themselves are having a little bit of difficulty working out,” said Jane Caron, chief economic strategist at Dwight Asset Management, a bond firm based in Vermont. “The Fed provided some assistance.”

In the bond markets, Treasury prices were up and the yield on the 10-year note, which moves in the inverse direction of its price, fell to 4.805 percent, from 4.879 percent on Wednesday evening.

The premium that investors demand to hold junk bonds and other riskier assets, which had gone down in the last couple days, increased somewhat today and trading was again light across the credit market.

“It’s just indicative of a lack of confidence, of people really not know what is going on,” said Kingman Penniman, president of KDP Investment Advisors, a research firm that specializes in high-yield debt. “So they react quickly to good or bad news.”

During the recent boom in credit, banks and brokerage firms lent large sums to hedge funds and other investors who drove down the premium on risky assets like bonds backed by subprime mortgages that are made to people with tarnished credit histories and those taking on excessive debt.

Now as defaults on those loans are rising, banks and brokerages are demanding that fund managers come up with more collateral to back up margin loans or sell assets. Investors in these funds are also clamoring to redeem their shares in the funds.

“It’s like popcorn in a kettle,” said James Melcher, president of Balestra Capital, a hedge fund based in New York. “First you have one or two pops, then it turns into a cacophony.”

Most experts believe the nation’s mortgage problems will likely worsen in the coming months as hundreds of billions in adjustable-rate loans reset to higher rates in the next 12 to 18 months. At the end of March, nearly one in five subprime home loans were either past due or in foreclosure.

At his news conference this morning, Mr. Bush said he did not support granting federal government funds to distressed homeowners who are on the verge of losing their homes, but he said the Federal Housing Administration should have flexibility to help borrowers refinance their home loans.

He also said he felt “there needs to be more transparency in financial documents” so that borrowers “know what they’re signing up for.”

The market appeared to react positively to remarks by Mr. Bush that the administration would not favor changing the way partners in private equity firms are taxed. In recent months, several prominent lawmakers have proposed subjecting the investment gains of fund managers — known as “carried interest” — to the ordinary income tax rate of up to 35 percent, rather than the capital gains rate of 15 percent.

Noting that partnerships are a common structure among small businesses, Mr. Bush said he was satisfied with the current tax structure. “We are very, very hesitant about trying to target one aspect of limited partnerships,” he said, “for fear of it affecting small business growth.”

Carried interest has come under criticism because it has allowed managers of private equity firms and hedge funds to pay very little in taxes on income they derive largely from managing their investors’ assets rather than putting their own capital at risk.

 

Well people figured low interest rates would be around for a long time. They also figured they could switch to fixed if necessary.

Also, you can get a bigger loan and a bigger house if you guy with an ARM.

 

I would say yes, the credit bubble is bursting.

I will now laugh at my friends who said it was so obvious that I should buy a house the past 3 years.

 

By the way, where is everyone investing?

I moved a lot of my stuff into bonds, but I'm not sure that will really work out. Anyone think moving to money market is a good idea? Heck, many online savings accounts are even giving 5% returns.

I also have some money in a bear fund.

 

Yeah, though I'm not exactly "happy" about being right in this case. I'm pretty worried about where the economy is going.

 

So what type of effect will this have on the Houston housing market? It seems as though Houston has held up great so far, but can houses sustain their current value with less buyers on the market?

 

The good thing about the Houston market is that it never skyrocketed like California or Florida did, so the crash wont be nearly as bad.

 

in a nutshell....less credit = less demand = lower prices

 

it's not like the market is dead. just stay away from financial and insurance stocks. i say insurance stocks because some of those companies invested in the CDOs and such that are now worthless because of the "smart" models that were engineered so they paid high dividends. furthermore, keep your eyes open for the mortgage lenders/financials that survive this crunch. there could be some very good buys over the next couple quarters after more bankruptcies occur.

also, we need to stop for a second and remember that much of this crisis is being caused by funds that were WAAAAAAAAAAAY over leveraged and now have no way to get out of illiquid debt securities when the margin calls come. so to meet margin calls they are either forced to sell a debt security at an extreme discount due to the illiquidity and no bids being present or they are forced to dump stocks which i have seen occur recently. it's freaking insane to watch happen. the other day a ton of master limited partnership pipeline stocks were getting thrown out the window with no news. the thing these stocks had in common was a high yield. so it led me to believe that it was a fund being forced out due to margin calls because the funds that are having margin call issues are the ones invested in high yield debt securities as well. david faber from cnbc tried to confirm if it was that later but he couldn't say anything for sure.

finally, if you are looking for specific stocks then maybe look at construction stocks with global exposure like KBR and such. many of them have reported excellent quarters this earnings period. you can also go defensive stocks like proctor and gamble and stuff like that but that tends to be a crowded trade when people panic and just jump on PG simply because it is safe thus making it somewhat risky depending where you can buy.

i dunno...i can talk about this stuff for awhile if you are really interested.

 

International stock funds. Eastern Europe has been my best, but others as well. Even if they don't beat the Dow in percentage in their currency, with the weakening dollar they are growing by huge amounts. If I were really bearish, I'd go for international bond funds, but I'm not.

 

taking responsibility means not buying things you cant afford. people just dont educate themselves on buying a house before jumping in and they are getting screwed b/c of it. it is the biggest purchase of your life, and many people just dive in w/out considering the consequences. but as i said, the lending industry takes advantage of people and they are at fault (and immoral) as well for loaning $ to people they know will not be able to make payments.

i hate to see more government regulation, but i dont think it would be a bad idea for the government to require every first time home buyer take a 1 or 2 hour class on the basics of home purchasing. that would just be enough time to cover the very basics, but its probably more than most people know. and take measures to clamp down on predatory lenders (fines or suspension of license).