Thursday, February 02, 2006

Housing, Consumer Spending and Deep Crapola

This new Bankrate article states that mortgage rates are up sharply, and then points out that both demand and prices are down. Well, I certainly agree with their assessment so far, but my concurrence abruptly ends there... The article quickly moves towards weaving a positive spin on the situation and states: “We're going through a period of adjustment”, then later suggests: “the affordability crisis might be easing.”

It’s absolutely baffling to me… How can a positive spin be placed on this situation? Can’t people see what is happening? Don’t they understand that there are huge underlying economic issues causing the tide of events to turn, and that the fallout will be quite painful?

I personally see numerous reasons for the recent trend of housing price declines & increasing inventory, and these reasons are just beginning to have an impact on the market--the long term implications of a changed market are downright scary… Anyway, allow me to touch on a few of the reasons why we are begining to see a changing market: Increasing interest rates, rising inflation and high fuel costs are finally starting to impact the consumer, who is (like the Government) absolutely, positively, COMPLETELY BROKE!!! Not since the Great Depression has the American consumer had a negative personal savings rate… and it’s only going to get worse my friends.

As I have noted in the past, housing and consumer spending have been responsible for ~ 80% of our increase in GDP over the last 4 years. The housing boom provided a “wealth effect” in which consumers felt richer, and it allowed them to live beyond their means. Homes could and were being used as ATM machines, and the ever-increasing equity provided the monetary fuel for: taking vacations, getting a new car, buying that HDTV, new furniture, remodeling the kitchen, installing a pool, paying off the credit cards, etc… Life was great!

Now, with the housing market moving in the opposite direction, people will quickly find that they have no more equity to extract to pay for their lavish lifestyles, and they will finally have to pay the piper. Many folks (especially those who bought during the last 2 yrs) will end up upside down on their homes, and scores of them will chose to walk away from their homes & mortgages. The foreclosing banks will then take possession of these properties, but they too will be unable to unload the homes in a market already saturated with depreciating assets…. The banks eventually will have to accept huge losses and many will ultimately fail...

For homeowners that DO have large equity positions in their residences, they too will begin to find it too expensive to refinance, as their LTV ratios increase, interest rates increase and banks tighten their lending standards. Ultimately, millions of American consumers will have to reign in their spending, live within their means and increase savings.

So, what will that do to the U.S. Economy? Well, we’re already looking at higher fuel costs in the future, and depending on the fallout of IRAN and Nigeria, it could get much worse. When we combine the oil issues with much lower consumer spending and falling property values, I think we will see the economy contract hard, and the ramifications will be far reaching. Many employers will lay off employees as inventories increase; profit margins decrease, and stock values fall.

I personally believe we will enter a recession in late 2006 or early 2007, and depending on our Fed & Government decisions, I think we could be in very deep crapola by 2010.

If you want to read more about my feelings on these issues, see this link


MMAfia said...

Keep up the posts, more people should be made aware of what's about to happen... the confluence of all these situations will line up for the breakdown in 1-2 years.

We need the breakdown to happen, because unfortunately, that's the way of human nature.

In fact, people are crazy. With the negative savings rate, the latest consumer confidence report shows that consumers are the most optimistic they've been in years. They are living in a world of oblivion, and will continue to do so until they get hammered. and boy, will they get hammered hard.

David said...

I think the recession is looking at mid to late 2006. Although early 2007 is also realistic.

Bubble Meter Blog

41cadillac said...

The first call to the Real Estate Crash and Burn is Delinquencies. So here we are:

Mortgage Delinquencies Increasing
The number of default notices sent to the state's homeowners is up 15.6% in 2005's last quarter from a year earlier.

From Associated Press

The number of default notices sent to California homeowners rose in the last three months of 2005 as the rate of price increases slowed, a real estate research firm said Thursday.

The delinquency notices serve as an early indicator of possible foreclosures. Typically, about 5% of homeowners who receive such notices end up losing their homes.

Lenders sent 14,999 default notices to California homeowners from October through December, according to DataQuick Information Systems.


mmafia said...

On that note... how about the EAST???

Here's a snippet from (boston globe -

Massachusetts Defaults At 12 Year High

Kimberly Blanton at the Boston Globe has this update on the housing bubble. "The number of foreclosure notices filed against Massachusetts homeowners last year reached their highest level since the housing bust of the early 1990s, as homeowners fell behind on their mortgages and lenders began the process of taking back the properties."

"Paradoxically, the sudden halt to sharply rising home prices put a squeeze on many borrowers. Homeowners were less able to refinance their loans at more attractive rates, or sell and pay off their debts, because the value of their homes fell or remained flat."

"'There's an epidemic of foreclosures,' said Boston lawyer Gary Klein, who represents borrowers in lawsuits against lenders. 'We're getting a steady stream of referrals of people who are looking for any option to save their home.'"

"The biggest spikes last year occurred in Essex County, north of Boston (up 48 percent), Barnstable County on Cape Cod (47 percent), Suffolk County (45 percent), and Bristol County (44 percent). 'People can't pay their mortgage,' said Juan Ortega, a real estate agent in Lawrence in Essex County. 'They're up to the top. They bought very high, and now they can't make the mortgages.'"

"In the winter of 2004, Susan Chamberlain lost her part-time job as an IRS tax examiner. She recently was rehired, full time, but that earlier layoff precipitated a November foreclosure filing. She and her husband initially purchased their Lawrence home for $158,000 in the spring of 2001 with US Veterans Affairs financing. In December 2002, they refinanced and withdrew some money to pay off a car and some bills, bringing their mortgage debt to $206,000."

"The interest rate on the new mortgage was variable, initially averaging 9 percent but rising since then. With the Veterans Affairs loan, the Chamberlains paid $1,200 a month on their mortgage; their current monthly payment is $1,900."

"In the Boston area, house prices are so high, Klein said, that mortgages consume a growing share of monthly take-home pay. 'It used to be, if you lost a job you'd be at risk of losing the house,' he said. 'Now, if you lose overtime, many families are so close to the brink, and that can create problems.'"

Out at the peak said...

Before next Christmas, I want to have a meeting with my family and agree to have minimal presents. We always say we will do this, but there is usually $300 to $600 exchanged every which way each year. This permutates into $4000 of unnecessary expendature.

Even though we carry no debt and can afford to do so, it's unnecessary.

What I might do is just give them a whole bunch of silver and a little bit of gold. That would be worth while.

MMAfia said...

Very interesting- mainstream media article from USATODAY talking about USD perils... apparently, the chief honcho at MOODY'S puts it around 15% for the likelihood of a spike in interest rates due to a devaluation of the USD... that's pretty conservative IMHO...

here's the text:
Betting against U.S. dollar may be good buy
Thursday February 2, 9:48 pm ET

We all have things we worry about in the middle of the night. Taxes. Blood pressure. The creature in the basement.
One thing that's kept economists and strategists up for years is the U.S. dollar. Chronic budget and trade deficits someday may sharply weaken the dollar - which, in turn, could bring a slew of other problems. Is the dollar something you should worry about? Possibly. Fortunately, you have several ways to help shield your portfolio from a falling dollar, depending on your degree of fear.


Flowers Jewelry Lingerie
Electronics Chocolate Game Consoles

In a way, it seems odd to worry about the dollar, which reigns as the world's preferred currency. The oil market, for example, is run largely in dollars. And in countries such as Ecuador, the greenback has replaced the national currency.

But economists worry that there are too many dollars in foreign hands, thanks to our enormous budget deficit. The United States must borrow to finance its debt. To do so, it issues Treasury securities, which are interest-bearing IOUs backed by the government.

There's not enough demand for Treasuries in the USA. So we rely on foreign buyers to take up the slack - which they've been doing enthusiastically.

Japan owned $683 billion of Treasury securities as of November, according to the latest information from the U.S. Treasury. China is the second-largest foreign holder of Treasuries. It also holds a lot of other government-backed securities.

If foreigners became less inclined to buy our debt, the Treasury would have to raise interest rates to entice more buyers. Rates on commercial loans and mortgages would rise, too. Those higher rates, in turn, could slow the U.S. economy.

Powerful forces are at work to try to prevent a dollar meltdown. Foreigners know that if the U.S. economy were to grind to a halt, so would U.S. purchases of foreign goods.

Additionally, Treasury rates are already higher than most major world interest rates, which keeps buyers coming. The 10-year T-note, for example, yields 4.56%. That compares with 3.5% for Germany's 10-year government note and 1.6% for Japan's.

John Lonski, chief economist for Moody's Investors Service, puts the likelihood of a spike in U.S. interest rates driven by a dollar sell-off at about 15%. Those are long odds. But they're not negligible ones, either.

"There is a risk," Lonski says, "and it's perhaps foolish to be complacent about it."

David Wyss, economist at rival Standard & Poor's, agrees that the dollar is worth worrying about. The U.S. trade deficit - the gap between imports and exports - was about $817 billion last year, up from $668 in 2004.

"No country has ever been able to run a trade deficit which is that big a percentage of gross domestic product and not have a currency collapse," Wyss says.

And James Grant, editor of Grant's Interest Rate Observer, notes that currency problems don't have to end suddenly: The British pound, for example, swooned for decades after World War I.

What's an investor to do? Actually, you have many choices, depending on how worried you are. Grant recommends gold, which gains in value when paper currencies fall in value. An easy way to invest in gold is through the iShares Comex Gold Trust (ticker: IAU). It's an exchange-traded fund that invests in the yellow metal. You can buy or sell shares through your broker.

If you're really bearish on the buck, there's the Rydex Weakening Dollar fund (ticker: RYWBX). It uses futures and other investments in its effort to rise 2% for every 1% fall in a dollar index. If you're less bearish, the Falling Dollar ProFunds (FDPIX) is designed to rise 1% for every 1% fall in a dollar index.

If you're down on the dollar but eager for euros, you could invest in the Euro Currency Trust (FXE), an exchange-traded fund that invests in euros. It rises when the dollar falls against the euro, and vice versa.

Another avenue is bank CDs denominated in foreign currencies. EverBank, in Jacksonville, offers CDs and other accounts denominated in a variety of currencies, as well as some linked to currency indexes. You'll gain if the dollar falls.

It's no sure thing, though. Even though the CDs are insured by the federal government against the bank's collapse, you could still lose money if the dollar rises. EverBank's Internet address is

Probably the most sensible way to hedge against a dollar decline is an international stock or bond fund. Still, both would run into problems if worldwide interest rates rose. International bond funds are probably the better currency play. Some international stock funds use futures to hedge against currency risk.

The USA has run big deficits for a long time, and economists have been predicting a weakening dollar for a long time. They could be wrong much longer. But if a small position in foreign currencies helps you sleep, then it might be a good investment.

41cadillac said...

Gold is smoke and mirrors. Too much risk. Why not go for a sure commodity "OIL and GAS". This world runs on oil and gas. Always has always will.

Yes I know you can put up windmills.

Yes I know you can build nuke Generatores for electricity. Even the USA still cannot get the nuke waste sent to that mountain in Nevada.

Yes you can grow corn, and change it to run in a car. Good grief corn is to feed the world.

So oil and gas will be the major sourse of energy for generations to come.

contrarian2day said...

I agree the breakdown will ultimately help us be a better society... We're currently far too materialistic,self centered and ignorant to the world.

Good info on the Mortgage Delinquencies.. I didn't realize it was already starting to be a problem.

I'm personally betting against the dollar with the MERK Hard Currency Fund, an International Stock Index fund and several types of gold & silver tangibles.

I agree that Oil & Gas are worthy investments these days and will probably reward the investor very nicely. Personally though, I don't have any energy investment options through my employer, and am stuck with their limited group of investment plans.

Lets say, however that I had some discretionary cash. What Oil or Gas company (companies) would you suggest?

41cadillac said...


Invest in which oil and gas companies?

Long term: BP (BP), Exxon - Mobile (XOM), Chevron (CVX).

Also: Oil and gas companies which are drilling in the USA or Canada. Safe from Governments taking over their operations.

Oil and gas companies which have made profits for the last 3 years.

Dividens are also a plus.

How do you find them?

Go to Yahoo Finance and use their:

CALGARY (CP) - World oil prices will likely skyrocket and hit record $80-US levels by the end of the year amid continued unrest on the world stage, including the ongoing nuclear saga with Iran, say analysts.

"We think things are just going to continue to heat up and prices to consolidate during this quarter near the old high of $70 US," said Vince Lauerman, a global energy analyst with Calgary's Canadian Energy Research Institute (CERI).


Out at the peak said...

My energy plays are with CanRoys with attractive dividends.

FDG 13%
AAV 12%
HTE 12%
PVX 11%
PWI 11%
PTF 10%
PGH 10%

You are subject to Canadian withholdings, so think about that. But since it is Canada, you also diversify against the USD at the same time.