The Contrarian: Housing values are not falling

This blog is an open forum, but it's dominated by a like-minded crowd: those of us who believe the housing and credit bubbles have popped, and housing prices are declining -- rapidly in some areas, gradually in others.

Today a contrarian view from a guy I respect, mortgage broker and Fed watcher Lou Barnes. He argues that we have our collective head on backwards, at least regarding trends in national housing prices:

"The financial press is having a wonderful time ginning-up a housing depression, this week shrieking about new home-price data: “Decline in Home Prices Accelerates” (WSJ), emphasizing the Case-Shiller index, down 8.9% in ’07.

More: " Case-Shiller is designed to magnify home-price declines. Mr. Shiller ... has spent the last several years misapplying financial-market principles to real estate, gleefully predicting a 30-40% national crash in home prices."

More:  "The design flaw: it captures only sales of homes, obviously heavy with distressed transactions. For the authentic story and great methodology, visit www.OFHEO.gov and its All-Transactions House Price Index, which includes repeat appraisals in refinances, by definition free of distress. By that measure, national home prices in the 4th quarter rose by .8%. Prices fell in only 11 states, and in only five of those were declines in excess of one percent. See page 21 of the report for its critique of Case-Shiller."

More: "At the micro level, some spots are in horrible trouble: of OFHEO’s 291 Metropolitan Statistical Areas, 15 had price declines last year in the 10%-19% range (all CA and FL). And the national market is decelerating: of 39 states with positive appreciation in the 4th quarter, 32 had gains of less than 1%."

Thanks, Lou.
There's a very big drawback to applying OFHEO data to Los Angeles: It is pretty much irrelevant to this market because it tracks only conforming loans, those under $417,000. Still, Lou is making an argument about national housing price trends, and for that purpose OFHEO is worth discussing. So discuss away. Send story tips to peter.viles@latimes.com.

Comments

[sunsetbeachguy]

Lou is an industry shill and is taking the LA LA LA LA I can't here you approach.

There is a reason he is a mortgage broker and not something respectable.

[Sam]

Lou, is that a bottom I hear you calling?

Check, Ill add him to the long list before him.

Incidently, Lou, you are right housing is falling because of a lack of credit. Consider, however, that inappropriate credit issuance caused housing to explode in value. Time for a rewind all the way back to 2000 values and probably even further. Remember, markets over correct in both directions.

[Digitalian]

Barnes is less than objective and for him to arrogantly claim to identify flaws in other valuation methods and then counter with a method riddled with flaws is laughable.

[arroyogrande]

Besides the "conforming loan only" problem stated by Peter, there is this:

"The Contrarian...Housing values are not falling...At the micro level, some spots are in horrible trouble: of OFHEO’s 291 Metropolitan Statistical Areas, 15 had price declines last year in the 10%-19% range (all CA and FL)."

Translation: Housing values are not falling (nation wide), but CA and FL are in 'horrible' trouble.

Not much of a contrarian in my view...more of a contrarian on the severity of the downturn.

"By that measure, national home prices in the 4th quarter rose by .8%. "

I wonder what his prediction is for Q1, 2008...

As for the true housing bulls, not to beat a dead horse too much, but remember the Option-ARM and Prime-ARM resets taking place starting mid-2009 going all the way to 2011, and the tightening up of down payment requirements, such as Wells Fargo's 25% down payment in "severely distressed" markets. Suddenly, median income level and ability to pay starts to mean something as far as house purchases are concerned...

- arroyogrande

[BottomFisher]

Denial phase is a long and tough period for the RE shills

[Paul Hiller]

I admit that the blogs like this one are a bit of an echo chamber. Still, it doesn't make us wrong.
On my own little patch [Coachella Valley] we have 9500+ active listings, and for the month of Feb. we averaged 12 sales a day. That does include a fair share of the new homes sold, as more of the new homes are going into the multiple. This is obviously a huge imbalance and as financing and down-payment requirements tighten, the situation regarding prices will deteriorate. The NAR loves the phrase “all real estate is local". Guess what? Financing isn't.

[LouDubb]

Hey Lou,

Why not buy more houses and apply for some loans if housing market is so great? I mean, you can probably still buy 10 houses with stated income and 0% down, right?

Yea, there's no housing crash and no credit cruch.

And I'm sleeping with Jenna Jameson

[allen gillespie]

Barnes' main claim is that statistics on sold homes overstate the decline. However, the OFHEO data itself show the difference between the sold house index and their broader index including appraisals over a year is 0.4%. Regardless of who is right, this is making a lot out of nothing. You've got to come up with better, Lou.

[150 multiple choice questions]

What kind of A-H$$$ is relying on appraisals? Why, it's Lou Barnes and the OFHEO... either complete idiots, complete liars, completely paid to make it look like housing is in great shape or all three...

[NationalBubble.com]

Maybe Lou should watch this video:

http://tinyurl.com/2ecana

[Joseph F]

Contrarian?

A contrarian is someone who bets against prevailing sentiment.

You quote a shill who misrepresents established fact.

That makes him wrong, not a contrarian.

[Dan]

Still, we are going through a process of price discovery for where the market would have been if the non conforming loan never existed. It has 2-3 years yet to run.

[tom]

why waste people's time wtih this nonsense? Look at
the headlines Lou. There's no more teaser rates.

[mbob]

Hey Arroyogrande, how about if we modify a figure of speech to "....not to beat a dead realtor..."

To misquote the great M. Ali, "....no horse ever sold me an overpriced dump."

Samuel Clemens once opined "...there are lies, dam*ed lies and statistics." He was right.

Vermont, South Dakota, North Dakota, West Virginia, Maine et al did not join in the bubblefest. So, these kinds of states are not suffering the hangover effect. Average them in and voila: no crisis. But remove them and things don' look so hot.

[anon1137]

Who cares if home prices aren't falling in South Dakota?

[Jimmyz]

Shiller is one of very few who have been honest, objective and correct on housing. If you watch his interviews, he is careful to tell only what the fundamentals indicate to him and not that he is predicting anything.

Lou says that Shiller's design flaw is that he captures transactions that are heavy in the distress area. In a normal market this would be a flaw. However, if the market is a market of distressed transactions then by definition that is the market.

[Hans]

To say that appraisals tell a completely different story than sale prices is to put some doubt on the value of the appraisals. To be sure, distressed sales usually happen at low prices, but other than distressed properties, the market clearing prices are what should be the basis of the appraisals. If there is an offset between these and the sale values, then the professionals doing the appraisals should really get better data for their comps.

[shockg]

As for the true housing bulls, not to beat a dead horse too much, but remember the Option-ARM and Prime-ARM resets taking place starting mid-2009 going all the way to 2011, and the tightening up of down payment requirements, such as Wells Fargo's 25% down payment in "severely distressed" markets. Suddenly, median income level and ability to pay starts to mean something as far as house purchases are concerned...

You mean the resets on the 5-10 year ARMS that will reset to a rate not much higher than the existing rate?? The horror of going to 5.5% to6%!!! Of course that is after 5+ years of raises to help offset this "alarming" reset. lol

[Stump Barnes]

Lou Barnes claim that the Case-Shiller Index is flawed because it includes "distressed properties" is akin to claiming that yesterday's decline in the S&P 500 was flawed because the decline included people selling their stocks at a loss. What nonsense. The selling of "distressed properties" is all about price discovery in a real market, not artificial appraisals riddled with conflicts of interest.

If people had spent more time thinking about the real estate market in the same terms as they think about other financial markets, perhaps they would have realized that asset prices can and do frequently decline, and that excess leverage cuts both ways.

There is a reason that Joe Six-Pack can only get 2 to 1 leverage on stocks. To think Joe Six-Pack could handle 100 to 1 leverage on real estate was insane. This was the 1920's all over again.

[Brian]

"You mean the resets on the 5-10 year ARMS that will reset to a rate not much higher than the existing rate?? The horror of going to 5.5% to6%!!! Of course that is after 5+ years of raises to help offset this "alarming" reset. lol"

The "reset" will be the jump in payment of the Option ARM when they reach the 110-115% trigger after years of making the less than interest owed negatively amortizing amount. Stats show fully 75% of Option ARM borrowers make the minimum payment. LOL,

[steve]

It seems like the issue of fraudulent appraisals is casually left out. In the current situation in LA requires 25% down on an average home price of $500-600k, are buyers going to look at appraisals or at recent closings before they plop down $125-200k cash? I say that if someone is smart enough to have saved $200k cash, they'll be smart enough to ignore the rampant fraudulent appraisals that are commonplace in LA.

[amir]

appraisals are junk. Always have been, always will be. The reason the banks are in such trouble is because they appraised real estate loans incorrectly.

Schiller's data is far more correct because it relies on actual sales. It's all bull until someone actually puts his hand in his pocket and pulls out some cash.

The only problem with Schiller is that it's behind the curve. Houses that are declining in value or haven't sold will not appear in his data until they sell. That's why I think the picture is actually worse than in Schiller's current numbers.

[Daniel]

What is new about this? If you are on the coasts, your price rockets up and then rockets down. Thats historical cycle, prices here are falling, just as they are in Boston and New York. If you are in Chicago or Nashville or Cleveland on the other hand, prices are flat or up a percent or two, because they don't get the 20% appreciation years that the coasts do.

If you like housing roller coasters, live on the coasts, if you like slow, steady but extremely low appreciation, likely as not barely keeping up with inflation, live in the middle somewhere. This is hardly new information.

D

[N Your Dreamz]

Seems like Lou is saying that there are two classes of home prices: those that sell and those that don't. And only the ones that are sold lose value, while homeowners who are smart enough to keep their properties off the market (and perhaps whistle in the dark the next ten years or so)won't suffer any loss in value. That's one hell of a stretch to make an argument (that he can't possibly win in the end).

[waitingforgodot]

I think you should carefully read Barnes's full commentary before dismissing him.

E.g., The key to this unpleasant situation: housing is sinking because of credit starvation, not the other way around, housing wrecking credit markets. No matter what it takes, the supply of credit must be restored to housing and the rest of the economy."

He is no pollyanna, and while perhaps overstating his case is trying to refocus attention on what he believes to be the underlying issue: the collapse of credit. If anything, his implied vision of the future is worse than a lot of the bloggers here, who are focused solely on housing prices. I could be wrong, and I could be a bad reader, but he's no RE permabull who is arguing that now is great time to buy.

[Kathy]

Barnes does not seem to comprehend Shiller's data model; it tracks prices of the same homes over time, which naturally would include distressed properties in a time of heavy foreclosures and a whacked out credit market.

[Hugh Jorgan]

The application of the macro housing market (read national) trend, to the micro housing market (SFV, Westside, South OC, pick one) trend, is no more valid than applying behavioral generalizations to the individual. Both are wrong, and dangerous predictors.

Applying the micro to the macro is equally wrong.

Peter, your respect of Lou Barnes is misplaced. I wouldn't respect his views on the direction of the LA housing market any more than I would respect a GM dealer's views on the 2009 models.

[MyLessThanPrimeBeef]

Lou may just be right.

Before you lynch me, hear me out.

I was thinking...say you are upside down here, why not put it in one of the many empty, humongous container-ships going west across the Pacific and move your house to Australia, then you will be right side up again.

I mean, what the bleep is it all about? We live a quantum world. Quantum is God and it's all about your perspective. If you think your house is not sinking, it's not sinking...right?

[AJ]

Bottom line: What is an affordable house to the average buyer in the LA market. 1300 square feet selling for a 1/2 million was never a reality. Flippers jumped in hoping to grab an opportunity that was never there.
However, needless to say, many opportunists jumped out of the pool before it drained. What happened to all of that money. I know this has been brought up before, but think about that before you blame the banks. Sellers at the height of the market walked away with alot of money. Where are they now?

[shockg]

The "reset" will be the jump in payment of the Option ARM when they reach the 110-115% trigger after years of making the less than interest owed negatively amortizing amount. Stats show fully 75% of Option ARM borrowers make the minimum payment. LOL"

Those people lost their home or sold long ago.

[LJR]

I think contrarian opinions are important because they offer a countervailing view. That said, this one seems to say that if we would only stop using the low sales prices and concentrate on what the appraisers have to say we'd understand that things aren't so bad.

Glad I wasn't drinking coffee when I read this because my keyboard is hell to clean.

So this contrarian POV ends on a note of acceptance that the primary markets are in deep trouble. Shucks son. Is that your best shot?

[Truth2Pwr]

Exactly how is one supposed to "appraise" a property value in CA these days? Are the banks issuing crystal balls to appraisers that tell them whether a home's value will bottom in 6 months, 2 years, 5 years? At -5%, -20%, -50%?

Well sheeeeet, padnuh! I gots to get me one ah dem thangs!!!

[Alan greenspan]

Credit crunch? I was able to qualify for a loan in no time. Needed 20% down though.
Prices dropping? What do you expect when they will no longer make no doc loans to people without social security numbers.
But lets not forget the con artists who got phony appraisals and sold homes back and forth until there was no more money to steal. That $695,000 home is now listed by the bank at $340,000, and they won't get that.

[Tom]

"Sellers at the height of the market walked away with alot of money. Where are they now?"

They're up here in Portland, paying top dollar for housing.

[NotBuyingIt]

Lou,

Nice try but you're addressing a somewhat more informed crowd.

Yeah, right. The market is fine and the foreclosures are a mirage, optical illusion, drug-induced delusion.

[Stump Barnes]

shockg wrote:

"The "reset" will be the jump in payment of the Option ARM when they reach the 110-115% trigger after years of making the less than interest owed negatively amortizing amount. Stats show fully 75% of Option ARM borrowers make the minimum payment. LOL"

Those people lost their home or sold long ago."

shockg,

Do you have anything to back-up that assertion beyond your own wishful thinking? Go read the 10-K for Wachovia, Washington Mutual, First Federal, or Downey Financial. For instances, Wachovia still has $120 billion in negative amortizing pay-option ARMS in its loan portfolio. That's approximately 15% of Wachovia's total assets.

Downey Financial, based in Newport Beach, is even worse. 56% of Downey's total assets are neg am pay option ARMS. As of February 15th, Downey had non performing assets of 9.14%. Over 70% of Downey's neg am pay option ARM borrowers just make the minimum, less that interest, payment. The figure for Wachovia is over 60% of borrowers just make the minimum payment.

The carnage from neg am pay option ARMS is just beginning. Most of the resets for these loans begin later in 2008 and run into 2010.

Go do some research before you make such unfounded claims. There is a reason the housing bears are so negative. They have actually been looking at the data and watching with their eyes wide open the unfolding train wreck. This crash will not be over until the last rail car is derailed.

[Thomas]

Value is just a figment of your imagination until it is converted to cash (why refinancing comes up with a higher value than actual sales is beyond me - the methodology should be the same - comparable sales).

If you are trying to sell and don't think your house has gone down in value, do a comp valuation and see who is wrong and who is a contrarian. The exact same house, in the exact same condition, within 3 houses (or 1 block, mile/neighborhood/city/whatever), with the same amenities (spa/flooring/landscape/kitchen/central air/etc), sold within 2 months (6 months/1 year/ whenever or looking prospectively with trending), with the same neighbors (dogs/garage rock bands/vehicles on the lawns/kids/ or whatever). And the value is supposed to be the average of the comps - not the highest which was sold to the charmed nor the lowest which was sold by the distressed, but the statistical average of the many comps. Add in subjectivity for adjustments and you can see that any valuation besides actual cash in hand has a lot of arbitariness, missing information, and subjectivity.

I guess it depends on what you are trying to accomplish. If you are trying to refinance, go with the refinance numbers which for some reason seem to be higher. If you are trying to sell (willing buyer and willing seller definition of value), go with actual sales. These actual sales should be a mix of distressed sellers, distressed buyers, and everyone in between. If the mix is different in the current market, hey . . . that's the market, not the creative imagination of appraisers working for banks who need to earn a paycheck.

[Michael Snyder]

waitingforgodot hit the nail square on the head. "E.g., The key to this unpleasant situation: housing is sinking because of credit starvation, not the other way around, housing wrecking credit markets. No matter what it takes, the supply of credit must be restored to housing and the rest of the economy."

We can argue statistics and where the bottom is until we're blue in the face, (and we do) but until this credit conundrum is cured the real estate market will be at standstill. To use a freezing person scenario, Wells Fargo just lost its' feet & fingers to frostbite and is retreating to its' core. The problem is now it can't move or actively assist in its' own rescue. It'll preserve it's core for a while longer, but without nutrition (income) or the ability to move (write new business) its' fate is already sealed by its' own survival response.

To the folks in here who still think "flippers" were the problem, try watching another TV program. Then do a little math during the commercials and you'll find between the fees, commissions & YSPs the lenders actually did as well or better than most of the" flippers". I'm talking about lenders as a whole who in essence got to originate two separate loans within a very short time span for any one property and they probably closed the second loan with, "Don't worry about the re-set. You can just re-finance in another year or so." Translation: "Thanks for the $15,000 in commission fees & costs you amortized into your loan, I'll see you in another year when your re-set causes you to panic for another cash infusion."

We are rapidly approaching a scenario where the availability of credit will have a greater effect on housing prices than median income or any other measure of "affordability". We spend our time here on real estate, but all markets are driven by credit/cash availability. Everything from credit cards to auto loans have been "packaged" and sold and re-sold in much the same manner as home loans & they are all subject to; and are likely destined for the same tribulations that plague the mortgage market.

There will be no long term relief from our economic dilemma until all of the junk paper in the bond market is accurately valued. As the foundation for available credit, artificially inflating the value of these instruments weakens the foundation of our entire economy. If they're not excised soon they will cause the collapse of the entire structure.

[vultur]

I think Barnes is trying to say that housing is not a mark-to-market business like stocks. However, just as a salesman is only as good as his last sale a house is only worth as much as it sells for. If the data shows big declines then that by definition is the market. The idea that rubberstamped appraisals set market price is just ridiculous- on the way up or on the way down.

I think a stronger argument can be made that the housing market is actually quite strong is the fact that the average home has gone up about 250% in the past 10 years. (http://www2.standardandpoors.com/portal/site/sp/
en/us/page.article/0,0,0,0,1145771405992.html)

Despite massive foreclosures and big declines in the past 18 months, the great majority of homeowners in America who haven't budged from their nest in 10 years have seen a dramatic rise in the value of their primary residence.

Of course that is little to no solace for the empty nesters looking to cash out today and buy a condo or laid out factory worker in Michigan who relied on the equity in his home as a pension, but overall the long term homeowners are still in good shape.

I think perspective is very important here. Speculators of all kinds have gotten slaughtered (as they rightfully should and as anyone could have predicted, exact timing aside) and prices are coming down to reflect that 3-4 years of excess. But once that dirt pile is cleared I think we will find a return to market stability and probably a look back yield of 5% annually on housing values over a 10 year period.

Those of you (us?) hoping for a crash to enter the market are no less speculating that the those of them (us?) who tried to ride the boom upwards.

Let us not forget that the housing boom began as a result of the injection of liquidity into the market following the worst act of terrorism of american soil ever in history. The market tends to overshoot (that's capitalism) and it did to the benefit of many and the detriment of some. Along the way new products were created, billions were made (and lost to be sure) and at the end of the day a house is shelter.

[arroyogrande]

"Those people lost their home or sold long ago."

Then you have nothing more to worry about.

Howerver, if other institutions go the way of Wells Fargo, and start requiring 25% down payment in "severely distressed" areas (Los Angeles County, Orange County, etc.), that might put a bit of a damper on home prices

I'm sure that it will all work out, and that foreclosures will start going down and house prices will level off sometime this year.

I'm pretty sure that all of the prime and alt-a ARM holders refinanced earlier this year, before the panic started and mortgage standards tightened. And most of them didn't fall for the teaser rates available to prime borrowers in the range of 1%-2%, and if they did, they didn't use those rates as their only means of "affording" expensive SoCal houses, hoping to "serial refinance" their way into the good life. And the remaining Option-ARM resets won't be too burdensome as people with Option-ARMs were much to sophisticate to only pay the minimum Negative-Am amount, and wont feel too much of a burden when their reset takes away their Neg-Am payment option. Anyways, even though only 27%-32% of purchase and refinances in LA and OC county in 2006 were payment option ARMs, it's not like option-ARMs made up *all* purchases and refinances in 2006, and I'm sure people made better mortgage choices in 2004, 2005, and 2007.

On second thought, after writing this, I'm now a little worried.

- arroyogrande

[Susan]

Just wait until the new conforming loan limits are published and those mortgage applications sitting on the desk at Wells Fargo can now go toward closing escrow on a number of homes. (I know somebody who works in mortgages there, and she says they've been "really busy" since January.)

Should that indeed occur, and lower end buyers come back into the market, I would expect to see median prices DROP in my area, because there will be more lower end sales relative to the higher end sales that have until now been keeping this market afloat.

Many sellers in the meantime have not just been sitting still, there has been a steady flow of price cuts in my area. We need higher volume to get those lower values fully realized and "marked to market", not just guessed at.

Once that happens, I would expect the flood of interest to die down (because homes are still for the most part unaffordable), for inventory to start accumulating again, for markdowns to occur again, and for the cycle to repeat ad nauseum until we find a bottom - years away.

[Cal]

Susan : "I know somebody who works in mortgages there, and she says they've been "really busy" since January"

Might want to ask her if those are purchases or refinance applications. Watching the Mortgage Application Index publised by the MBA , refis apps have been extremely high since late december and have just started dropping. Purchases not so much.

So I wouldn't expect too big affect on the median.

[NoWayinLA]

"E.g., The key to this unpleasant situation: housing is sinking because of credit starvation, not the other way around, housing wrecking credit markets. No matter what it takes, the supply of credit must be restored to housing and the rest of the economy."

That's like saying the cure for lung cancer is... more cigarettes.

The price run-up was caused by excessive supply of credit, and poor evaluation of who it was extended to. A tightening of credit standards to some degree is absolutely necessary. You've got to stop doing new damage before the healing can begin.

[Sean]

As a result of the hyper inflation we experienced due to sub prime loans taken out by irresponsbible people which pushed prices to rediculous highs, housing prices will naturally keep falling for a while.

The bottom is years away from now. We are only just beginning the price recovery.

Dont listen to the "rosy" talk that realtors give you. They are like any other sales person - what ever it takes to get you to buy.

Prices wont stabilize until regular people can afford to buy again.

Thanks Countrywide for the mess you created.

[Susan]

"Might want to ask her if those are purchases or refinance applications. "

They are getting plenty of both refis and new purchase applications. That was the first question I asked.

[Jim]

Peter,

Don't discount the OFHEO data for LA so quickly - loans above $417,000 are not included, but home prices well above that level make it into the sample. Consider a million dollar home purchased with 600,000 equity for instance.

[shockg]

Do you have anything to back-up that assertion beyond your own wishful thinking? Go read the 10-K for Wachovia, Washington Mutual, First Federal, or Downey Financial. For instances, Wachovia still has $120 billion in negative amortizing pay-option ARMS in its loan portfolio. That's approximately 15% of Wachovia's total assets.

Downey Financial, based in Newport Beach, is even worse. 56% of Downey's total assets are neg am pay option ARMS. As of February 15th, Downey had non performing assets of 9.14%. Over 70% of Downey's neg am pay option ARM borrowers just make the minimum, less that interest, payment. The figure for Wachovia is over 60% of borrowers just make the minimum payment.

The carnage from neg am pay option ARMS is just beginning. Most of the resets for these loans begin later in 2008 and run into 2010.

Go do some research before you make such unfounded claims. There is a reason the housing bears are so negative. They have actually been looking at the data and watching with their eyes wide open the unfolding train wreck. This crash will not be over until the last rail car is derailed.

Stump Barnes, Just out of curiosity, are those national or local stats? And what percentage of those shaky loans were used to purchase homes in desirable areas of Soca vs. the Inland Empire, Stockton,Palmdale etc. i'm sure you have all the answers since you are salivating at the thought of all these resets happening and lining your pockets.

[Laker]

shockg: "Those people lost their home or sold long ago."

Are you kidding me????
Most of these Option ARMS were underwritten in 2005, 6, 7. And if you make the minimum payment, it will usually reach the peak cap, 110-115% in about 2-3 years. So forget the reset of the rate, the big shock (not shockg) is the switch to true amortizing amount....This starts to kick in 2008 big time and will be steady until 2010 guaranteed.
Basically, it is much simpler than you think. All buyers (well maybe 95% of them) that bought in 2005-2007 will guaranteed to lose their homes. the problem is that those that bought at 2002, 2003, 2004 are soon to join them!
shockg, your name suggests you have seen the shock of the option Arm adjusting....I think YOU ARE going to be BITTER RENTER SOON.

[l.a.guy]

I like Lou too but I wonder if his argument is akin to the Captain of the Titanic telling everyone not to panic because only 10% of the bow is under water so 90% of the ship is still doing great.

[Rory @ parentalcation]

its All-Transactions House Price Index, which includes repeat appraisals in refinances, by definition free of distress

Except since people whoes houses have lost value are very unlikely to refinance, so all this does is add a skewed factor to the calculation.

[Ann]

I have 5 neg option ARMs and don't intend to default on any of them. Two were originated in 2005. I think that they are great products, when combined with a significant down payment. My loans are with WAMU and I put 20-30% down when I took out the loans.

I don't think that you all should assume that because a loan is negatively amortizing that it is in danger of default. With the Fed's recent rate reductions, my interest rates will be in the mid 4% to mid 5% range by the end of the year.

These products are not appropriate for someone making a small down payment. Other products need to be created to help folks with little down. With housing prices so high in California, 1st time home buyers will not be able to come up with 20% down. The housing market cannot stabilize without 1st time home buyers being able to get financing.

[shockg]

Laker, your talking about the Inland Empire and im not.

[William Jones]

The sky is NOT falling. The ground is rising!

[Michael Snyder]

NoWayinLA
I believe you're mistaking issuing credit to unqualified individuals with the issuance of credit at a corporate level. What I'm talking about here is a lack of funding caused by a lack of confidence at the highest levels of finance. John Q Homeowner is not the cause of this problem! The homogenization of packaged long term debit sold and resold in a short term market that's undermined the very foundation of our banking system as its' been leveraged to insane levels.

There's an article in the NY Times titled "States and Cities Start Rebelling on Bond Ratings"
http://www.nytimes.com/2008/03/03/business
that neatly defines the dilemma facing municipalities as they service their bond debt. Their tribulations are indicative of what you can expect to find across the bond/packaged debit market in the upcoming months.

This is where the lack of "trickle down" over the past few decades is coming home to roost. Some experts believe only about a quarter of the $600,000,000,000 in "subprime" losses have been accurately accounted for. I'd suggest even with the ridiculous underwriting standards of the past few years; this crisis would be contained and controlled without the homogenization of debt.

I've done my best to surrender my Viet Nam era conspiracy paranoia, but this boondoggle sure hits a nerve. The proof will be in who has the courage to allow these untenable positions to unwind. Meanwhile I'm sure Warren Buffet's new bond insurance company is doing a brisk business.

[JohnnyB]

Many good posts effectively concluding Lou Barnes is spewing nonsense in this regard...

I would just respond to these related statements;

"The financial press is having a wonderful time ginning-up a housing depression..."

and

"Mr. Shiller ... has spent the last several years... gleefully predicting a 30-40% national crash in home prices."

You know it wasn't too long ago that we were BOMBARDED at every turn, for at least 7 years straight, by every media mouth piece with a microphone and every wall street analysts with a calculator and EVERY SINGLE RE AGENT ON THE PLANET...

...ginning up the housing boom and gleefully predicting ENDLESS price increases... even after the 50%, 100%, 200% +++ increases that had just occurred... and most continued up until late 2006. Many of those self interested pundits still couldn't stop their own absurd inertia through 2007.

Here's Lou Barnes in 2008 trying to lift the Titanic with the ever hopeful "truism" that housing priced NEVER decline. Wasn't that so-called truism the foundation of wall street's derivative-based, securitized/collateralized mortgage product investment scheme?

That it didn't matter what the house actually cost as long as it was going up in value and as long as an affordable monthly payment could be structured in the mortgage and in the short term in order to close the "sale" at all cost. Why worry about long term viability and home affordability in general?

Now, to cherry pick the data and ignore the overwhelming evidence…

Oh contraire Lou…

[toby]

It's not a flock of birds flying in unison.

Each market will crash in it's own individual way. Just because they are all not doing the EXACT same thing doesn't mean they are doing something different.

[pathetic]

From shockg: "You mean the resets on the 5-10 year ARMS that will reset to a rate not much higher than the existing rate?? The horror of going to 5.5% to6%!!! Of course that is after 5+ years of raises to help offset this "alarming" reset. lol"

Wow, that's pretty sarcastic especially considering it's inaccurate. When these ARMS reset, they generally go to prime or LIBOR plus margin. Prime today is 6% so if plus 2 points then going from 5.5% to 8% is pretty substantial and potentially "alarming" to many I would think.

[Laker]

shockg,
I'm talking about SFV ,not inland empire. And good areas of it like Tarzana, Woodland Hills.
Since you mentioned inland empire, so you can use them to see how LA is going to look like in a year or so...we simply lag them, that's all. To understand that you need to study the food chain...then you will see how Beverly Hills is still connected to Paris, Riverside...

[pathetic]

Ann said: "I have 5 neg option ARMs and don't intend to default on any of them. Two were originated in 2005. I think that they are great products, when combined with a significant down payment. My loans are with WAMU and I put 20-30% down when I took out the loans.

I don't think that you all should assume that because a loan is negatively amortizing that it is in danger of default. With the Fed's recent rate reductions, my interest rates will be in the mid 4% to mid 5% range by the end of the year."

Ann, I hope you understand that Fed cuts on discount and overnight rates have no direct correlation with long term rates. In fact while short-term rates have gone down, long term rates on mortgages have gone up since the Fed began to cut. Much of this is the result of risk being terribly mis-priced in years past now coming to reality. So I wouldn't count on any 4-5% rates even with an ARM much less a fixed. Prime is now 6% add margin to that and you have significantly higher carrying costs than your 4-5% projections.

[NoWayinLA]

Michael Snyder:

"NoWayinLA
I believe you're mistaking issuing credit to unqualified individuals with the issuance of credit at a corporate level. What I'm talking about here is a lack of funding caused by a lack of confidence at the highest levels of finance. John Q Homeowner is not the cause of this problem! The homogenization of packaged long term debit sold and resold in a short term market that's undermined the very foundation of our banking system as its' been leveraged to insane levels."

I see no disagreement here. In fact, I'd say you're understating the case. It's more than the banking system. Stocks, mutual funds, and large pension funds are getting brutalized, too. And as interest rates are being lowered, the weakening dollar is eroding savings. This situation is radiating throughout the entire economy.

The fraud at every level that created this situation (realtor->appraiser->lender->servicer->Wall Street) was largely fueled by an excessive amount of investment capital being poured into real estate. The thieves were drawn to where the money was. Some reduction in the amount of credit made available is, as I said, a natural and healthy response.

Some of that money being poured into CDOs should have maybe gone to municipal bonds instead. The bond rating agencies fraudulently steered investors to CDOs instead by playing with the ratings, but that appears to be an issue on its way to correction.