Why Housing will keep collapsing

Discussion in 'Economics' started by runningman, Mar 10, 2007.

  1. This from a large bank's flagship loan product:
    "Increased monthly and yearly cash flow (see example below)"


    You CANNOT increase your cashflow by borrowing money. The interest keeps accruing on the loan and the law of compound interest is effectively working against you. These mortgage places get a bunch of 23 year olds and pay them huge commissions to sell these loans to unsuspecting people. The customer's brain shuts off after hearing "lower monthly payment" and they sign. Then a few years down the road they realize that they owe $265k instead of $250k and now their rates are increasing as well. Higher rate on a larger balance. Pair this with the subprime meltdown and the constant building of the large homebulders and supply is going to increase exponentially. Many mortgages are a time bomb and the worst part is that the people who have them don't even realize it.

  2. It appears we are not the only country facing a housing meltdown.


    Steps Urged to Prevent Japan-Style Recession

    By Lee Hyo-sik
    Staff Reporter
    The Korea Institute of Finance (KIF) has called upon the government to come out with preemptive measures to prevent the world’s 11th largest economy from plunging into a Japanese-style recession of the 90’s, amid the unstable real estate market and weakening growth potential.

    The state-funded institute on Sunday urged the government to take steps to engineer a soft landing in the property market, as falling home prices could leave families unable to repay their debts, send the financial market into a panic, and drive the economy into a decade-long Japanese-style economic recession.

    After a series of government anti-speculation measures over the past four years, the housing market has recently begun showing signs of weakness as homeowners increasingly face difficulties selling their holdings, while prospective homebuyers are taking a wait-and-see attitude for a further drop.

    It also suggested that the government work out advanced and efficient monetary and financial policies, and make all-out efforts to strengthen the country’s growth potential.

    ``Japan mobilized all possible monetary and other financial measures, including a series of key interest rate hikes and application of stringent lending rules, in the late 1980s to rein in the soaring property market. But such an all-out approach led to a crash in the real estate market, pushing the world’s second largest economy into a recession for more than a decade,’’ KIF researcher Kim Dong-hwan said.

    He said banks should refrain from raising rates too fast to minimize the negative impact on the housing market as a weaker housing loan capability and slowing economy could trigger a financial crisis, adding that implementing monetary and financial measures, aimed at curbing rises in home prices, at a gradual pace is the key to helping the real estate market achieve a soft landing.

    ``Financial regulators should tighten lending rules and apply other regulations slowly to help stabilize the housing market. If such measures do not work, the Bank of Korea then should consider raising its key short-term rate as excessive liquidity stemming from low interest rates has created a bubble in the housing market over the past year,’’ Kim said.

    To nurture next growth engines, he suggested that the government identify a host of factors behind Korea’s weakening growth potential and accordingly introduce new long-term industrial policies to enhance the country’s ability to grow.

    Kim also said the government should make every effort to reduce state debt and maintain a sound fiscal balance, adding that it must search for new source of revenues.

    According to the Ministry of Finance and Economy, government debt amounted to about 283.5 trillion won as of the end of last year, more than twice the 133.6 trillion won debt four years ago. The ratio of debt to gross domestic product (GDP) also soared to 33.4 percent, from 19.5 percent at the end of 2002.
  3. Great articles (the original and the one on Korean housing).
  4. I just wonder when the lawsuits against the mortgage brokers will start? About 9 months after the lawsuits start should be close to a bottom.
  5. i wonder what all this cynicism and negativity *really* means to the markets.

  6. Cesko


    I don't think it means anything, there are people who are going to be expecting "sky is falling" scenario for the rest of their lives (they might even be right eventually). Then there are lots of people who would be extremely happy if U.S. fell hard.For media people negativity sells positivity doesn't. That's about everything there is to it.
    If you know the actual numbers like total debt,total assets, return on assets etc. you will find out U.S. is in better shape then most countries. More importantly it is less taxed then other countries.

    Remember what they were saying about Japan before it fell? Wasn't Japan expected to buy out the whole USA?

    The best thing is to learn to ignore these idiots which is not easy actually.
  7. S2007S


    Subprime Debacle

    Analysts and investors say they are keen to hear what the firms say about their potential losses as defaults on subprime mortgages, home loans to borrowers with bad credit records, rose to seven-year highs.

    More than 20 subprime lenders have closed down or sought buyers since the start of 2006. So far this year, shares of New Century Financial Corp. and Fremont General Corp., two independent subprime lenders, dropped 90 percent and 50 percent respectively.

    The perceived risk of owning subprime mortgage bonds, backed by subprime mortgage loans, has risen about 30 percent since the start of February, according to the ABX-HE-BBB- 07-1 index of credit-default swaps on 20 securities rated BBB- and created in the second half of 2006.

    Together, Goldman, Morgan Stanley, Merrill, Lehman and Bear Stearns hold about $6.4 billion of the securities, according to estimates from Hintz at Sanford C. Bernstein.

    $1 Trillion

    ``They're all involved to a degree, whether it's trading or originating deals,'' said Benjamin Wallace, who helps manage $650 million at Grimes & Co. in Westborough, Massachusetts, and holds shares of Morgan Stanley. ``You just don't know who owns what. They may have securitized it or still hold stuff on their balance sheet.''

    Goldman and Lehman would be hardest hit if the slump in subprime mortgages turns into a credit crisis like the one that followed Russia's debt default in 1998, Hintz told clients in a March 6 report. If the losses are contained to the mortgage market, Lehman and Bear Stearns will sustain the biggest drop in earnings, he said.

    Investment banks repackage mortgage loans into securities that they sell to investors. Demand for higher yields led them to the subprime market, where interest rates are 2 or 3 percentage points higher than prime loans. As that business flourished, firms financed subprime lenders and some bought them outright.

    `Internal Risks'

    The subprime market ``was virtually non-existent 10 years ago,'' said Karl Case, an economics professor at Wellesley College in Wellesley, Massachusetts, and co-creator of the Case- Shiller Home Price Index, which tracks residential real estate values. ``It's well over $1 trillion now, it's big stuff.''

    Lehman, which last year securitized $146 billion of residential mortgages, held $2 billion of non-investment grade residual interests from residential mortgage securities as of Nov. 30, up from $500 million a year earlier.

    ``We're going to find out how good internal risk controls are today at these big shops versus five years ago,'' said Bruce Foerster, president of South Beach Capital Markets in Miami and a former capital markets executive at Lehman.

    If Lehman's holdings decline 20 percent in value, 2007 net income would be reduced by about $130 million, or 3.2 percent, Hintz estimates. That isn't likely, said David Trone, a New York- based analyst at Fox-Pitt, Kelton Inc.

    ``While Lehman has $2 billion in residual interest in subprime mortgages, we believe the company has hedged 100 percent of its credit risk,'' he wrote in a March 1 note to investors. ``This has created meaningful gains that should offset any future increased credit loss experience.''
  8. ElCubano


    many people cried wolf when P/E's where in the thousands and when stock prices soared even though many internet companies didn't even have a good model in place...what happened?? NOBODY listened and/or CARED..why?? cuz prices kept on climbing and thats all that matters til the shit hits the fan...then and only then DO PEOPLE start to listen....thats why they call it dumb money; smart money has long been out when the dumb money finds its way in....
    #10     Mar 12, 2007