The global housing bubble deflates

This just in: Everybody else was doing it! They were flipping houses in Barcelona and overpaying for condos in Ireland!

The New York Times reports of bursting real estate bubbles around the world: "Once-sizzling housing markets in Eastern Europe and the Baltic states are cooling rapidly, as nervous Western Europeans stop buying investment properties in Warsaw, Tallinn, Estonia and other real estate Klondikes. Further east, in India and southern China, prices are no longer surging. With stock markets down sharply after reaching heady levels, people do not have as much cash to buy property. Sales of apartments in Hong Kong, a normally hyperactive market, have slowed recently, with prices for mass-market flats starting to drop."

The Times floats the angle that the spreading global problem is a "result of American contagion." I'm not so sure. Overpriced assets and easy money are capable of finding trouble on their own. They don't need help.

And the global bubble has been bursting for quite a while now. Check out this YouTube video -- I first posted it on this blog almost a year ago, on April 17, 2007 -- about the French housing bubble. The "bulle immobiliere," if you please.

Your thoughts? Comments? E-mail story tips to peter.viles@.latimes.com.

Comments

[John]

For once it's good to be an American. We may be short-sighted and greedy, but we're usually pretty good about airing our problems once the denial is over.

We'll get some plans in place to move the housing market to the bottom pretty quickly, and get dumb homeowners back into apartments and smart renters into homes they can afford, and get things handled.

Europe on the other hand, will probably remain in denial and then expect their governments to come up with yet another social welfare program to bail them out, except this time it's not going to happen, as their welfare systems are already going to be stretched as the baby boomers start to retire.

I just hope they come up with a decent solution, as Europe doesn't exactly have a good history of handling downturns well, and sudden mass unemployment, loss of homes or home values, and a rise in Islamic fundamentalism in the immigrant workforce (and resentment thereto) could be a recipe for absolute disaster.

[Santa Barbara Real Estate Voice]

I just had a 1 hour discussion about this yesterday with some friends and a client of mine. Our consensus was that usually 6-9 months is the delay factor for what happens over in Europe once major bad news comes from the US. I am very connected with Europe, travelling there every year and being married to a wonderful Dutch woman. We will be there again in June 2008 and I am certain this will be a topic of conversation.

Blog: www.SantaBarbaraRealEstateVoice.com

[MyLessThanPrimeBeef]

Apparently it is especially bad in Spain for real estate accounts for something like 14 % of the the GDP there. So, Costa Del Sol might just give Metro LA a run for your money, Lefty. But a word of advice, be prepared to live with Germans, though it is not as bad as it sounds, for I read over the weekend about a German website there called ebum.de, kind of like ebay you might say, where women, fighting a disturbing global trend of inadequate wages, can offer to auction sex for things/services they need, for example, sex for tooth implant for one lucky dentist.

Speaking of more global real estate, I have heard nothing about these 'primitive people' there in Papua New Guinea worrying over their famous yam houses deflating. That is probably becuase people there don't borrow cowrie shells to pay for yam houses. It makes one wonder if they are not more civlized than we are. Perhaps, it's only because of our arrogance that we delude ourselves into thinking we are not less primitive than them.

[brettdl]

I was particularly annoyed this morning by the New York Times characterization of the U.S. housing woes spreading to Europe. Spreading my foot. Those bubbles are of Europe's own making and have been building for a long time.

[Michael Snyder]

Ground control to The New York Times: Did you catch that story about Northern Rock? How about that back blurb about UBS writing down something like $60 billion in subprime losses last year? Chinas' been outsourcing to Viet Nam for years and everybody's hiding their money in Dubai. You might want to read the news.

This morning on http://www.bloomberg.com Liz Capo McCormick reports on the inevitable results from Henry & Ben's "good idea" in"Nothing Special With Treasuries as Fed Has Mortgages (Update5)"
"April 14 (Bloomberg) -- The dollar isn't the only casualty of the Federal Reserve's rescue of seized-up credit markets. Bond traders are finding there is nothing special about Treasuries anymore, now that the Fed accepts substitutes for government securities as collateral -- having concluded it wasn't enough to reduce the benchmark interest rate for overnight bank loans six times since September.
As recently as March 21, Treasuries were in such demand that traders were willing to lend cash at rates 2 percentage points less than the Fed's target for overnight loans if they could obtain the securities as collateral. Now, the gap is back in line with the 0.06 percentage point average in the 10 years prior to August, when subprime mortgage losses spread.
The $6.3 trillion-a-day repurchase agreement, or repo, market is a barometer of sentiment because it's where firms finance trades. A narrowing of the spread between the so-called general-collateral and federal-funds rates may suggest declining demand for U.S. government debt. Treasuries have lost 0.8 percent on average since March 20, when the central bank expanded the type of debt it would take in return for the securities to include mortgage and commercial real estate bonds. "It is an indication that the markets continue to lurch uneasily back toward normalcy,'' said Ward McCarthy, a principal at Stone & McCarthy Research Associates in Skillman, New Jersey, and a former chief financial economist at Merrill Lynch & Co. and senior economist at the Fed. ``The pressure in repo trading has finally begun to ease.''
General Collateral
Securities that can be borrowed at interest rates close to the Fed's target rate are called general collateral. Notes and bonds that are in the highest demand are called ``special'' by traders because rates on loans secured by these securities are lower than the general collateral rate.
The Fed is making as much as $200 billion in Treasuries available for 28 days through its Term Securities Lending Facility, allowing dealers to pledge mortgage-backed securities as collateral for the first time. As a result, they will be able to rid themselves of the debt while gaining sought-after U.S. government bonds. It is one of three lending programs Fed Chairman Ben S. Bernanke created since mid-December."

So now that one of the few remaining "safe havens" within American financial markets has been infected with the sub prime virus in what amounts to the largest money laundering scheme in history; I'm wondering what size shoe will drop in the next 180 days as these notes come due. Ward McCarthy's just glad for the bail out but he is right about the market lurching. I don't care what color you paint it, the Fed's lending face value against collateral that's been leveraged over 30:1. So what do we have, a handshake?

Historically the world has lagged behind America through boom & bust. Since short sighted greed knows no bounds and you indeed can fool most all of the people some of the time it's not surprising to "discover" this is an international crisis.
The American consumer is the driving force behind much of the world's economy and we've been stretched to the breaking point. Or more accurately till we're broke. In another article Bloomberg cheerfully reported an increase in retail sales last month. This increase of 1.1% was driven by a 6.9% increase in the cost of gasoline which according to my infamous logic equates to a real time loss of 5.8%. With good news like that it's small wonder every speculative dollar on the planet is in oil right now. Well, not every dollar, but enough to inflate the price by a full 33% over what a market not fueled by leveraged buying would place the price.

The only way these financial whiz kids can keep their insanely leveraged positions afloat is to keep them moving. What vehicle they choose has no bearing on their choice so long as it can show enough short tern growth th keep Paul from ever catching up to Peter. The net results in the "real world" are artificially inflated prices for everything we purchase.

The real boondoggle that's gonna bite us in the butt was the "good idea" of converting food to fuel without processing it through a living being first. (methane burns real good) As a result of the Bio-fuels Industry's rush to market & government inflated profit they decided to process the food portion of the crop instead of the 90% or more of the plant that is wasted. Most folks don;t know that corn husks are routinely used in livestock feed & with a few more steps the husks & stalks will also yield ethanol. Or you can clean up behind the cow & make methane.

The squeeze is already being felt in portions of the world where food aid is a daily lifeline and is spreading upwards across the globe. When that bubble burst we won't be worried about the economy anymore.

[Liz Wetzel]

can anyone explains to me how FHA streamlining works, in detail please? Thanks.

[Nancy]

Maybe HGTV is popular there too? :-)

[MyLessThanPrimeBeef]

Michael Snyder, this is what British PM Brown had to say about those mortgage backed securities collateral you mentioned, straight from London Telegraph:

In an article for a Sunday newspaper, Mr Brown said: "To create the conditions where banks feed through their interest rate cuts to homeowners and new buyers, we must first rebuild confidence in the banking system and reduce the uncertainty that is holding the banks back from lending to each other. If the world's largest banks could come together quickly and agree as a group to come clean about the potential bad debts they face, we could reduce the uncertainty and risk they face and restore confidence back into the markets."

There you have - Honesty is the best policy, not just to some private fund-raising party goers, but the public. And it's something Bin Lackey might want to instill in our bankers. Remember, it was the covering up that got to Nixon finally. So, how much is it, the Level III/off-balance sheet stuff? $5 trillion of UFO's (Unassessable Financial Objects)? $10 trillion? $50 trillion?

[NoWayinLA]

While listening to that catchy French tune (accordion aside), did anyone notice the timeline in the animation? It suggested their bubble began inflating in 2000, which put it ahead of ours by two years. In 2000 we were just finding the bottom from our previous bubble.

It makes you wonder how much of this originated in America at all. Were SIVs and CDOs invented elsewhere? Or were they a Wall Street invention that found a market abroad first?

One thing is sure... greed and stupidity transcend national borders.

[Brad A. Greenberg]

Once sizzling housing markets where? Eastern Europe and the Baltic states? In other words, Europe's Inland Empire.

[Geek Seek]

This might be another clue (c/o wikipedia.org):

"In Europe exists a type of asset-backed bonds called "covered bonds" (commonly known by the German term Pfandbriefe). Pfandbriefe were first created in 19th century Germany when Frankfurter Hypo began issuing mortgage covered bonds. The market has been regulated since the creation of a law governing the securities in Germany in 1900. The key difference between Pfandbriefe and mortgage-backed or asset-backed securities is that banks that make loans and package them into Pfandbriefe keep those loans on their books. This means that when a company with mortgage assets on its books issue the covered bond its balance sheet grows, which it wouldn't do if it issued an MBS, although it may still guarantee the securities payments."

That's it, it's Frankfurter Hypo's fault.

[tew]

The Times is wrong. This is not contagion. The U.S. was the first high profile symptom, but wasn't even the first market to turn.

The Economist has done a decent job tracking the worldwide housing bubble for the past five years or so. They were early sounding the alarm, but show decent comparative statistics.

And then there's Grantham's "It's Everywhere in Everything" thesis about asset values globally overall.

No, the U.S. is not causing this anymore than the wave causes the tsunami flood. It is but a messenger of a deeper fault.

[Jet]

When you peel back layers - Pension Funds, IRA's, 401K's are the source of the funds which have driven the successive bubbles over past 25 years or so.

Look on page 11 and 13 for god indication I am correct about this........

http://www.nasra.org/resources/economic/CalPERS.pdf

Everyone on Wall Street had a hand in these bubble. Everyone on Main Street knew about it and went along. Everyone is involved - everyone. Looking for scape goats is a witch hunt of the first order - but that won't stop it. The FBI is already "looking into things".

How big is the problem - probably the size of all the retirement funds - in the range of $50 Trillion. It is world wide.

This is circular debt. We owe it to ourselves. The same people paying into pension funds take out mortgages. Banks Brokers and Hedge Funds are "in the middle" to put it politely.

There are fundamental flaws in the concept of Pensions. It is impossible to transfer that much wealth and power across that much time. How can paying 10% for 30 yrs = draw out 80% for 30 yrs?????

The way Retirement works is the working population is taking care of the older population no longer able to work. Money does not have the power to perform that function.

The Pension funds create pools of money which don't belong, have no useful purpose, distort politics and business, and are just plain dangerous.

The best outcome would be to have mortgages reduced by the amount of Pension Funds and make everyone including government workers be taken care of by Social Security which at least was set up with the correct theory behind it. The Baby Boomers will not get their dream retirements - I'm a boomer.

Odds are that sort of highly organized logical response will not happen.

The Banks are all bankrupt worldwide. The Pension Funds start paying lawyers "to get their money back" and Chaos is the result.

[JohnnyB]

Michael Snyder wrote; "The only way these financial whiz kids can keep their insanely leveraged positions afloat is to keep them moving."

The carni shell game continues...

tew wrote; "No, the U.S. is not causing this anymore than the wave causes the tsunami flood. It is but a messenger of a deeper fault."

Brilliant...

[Geek Seek]

Hmmm.. . Frankfurter Hypo (Frankfurter Hypothekenbank Centralboden) might have invented the mortgage backed security, but it looks like (at least back in 1997) they took a conservative approach to them.

From Euromoney.com, "The 1997 Guide to Germany: Pfandbriefe" --

"...a further in-built security mechanism which distinguishes Pfandbriefe from mortgage-backed bonds in other markets is that no mortgage eligible as collateral is allowed to exceed 60% of its prudently assessed lending value."