Heh yes, like Bush firing the Treasury secretary when he predicted the war in Iraq would cost $ 200 Billion lol. The latest estimates are in the region of $ 2.5 Trillion give or take a hundred billion or so. Insane spin is the name of the game with the Bush administration if anyone was still in doubt.
I think this is gonna go on for quite some time.
I have to keep an eye on the price of my townhome I guess.
fleshconsumed
Diamond Member
- Feb 21, 2002
- 6,486
- 2,363
- 136
http://money.cnn.com/2007/10/3...ure_activity/index.htm
It keeps going and going, and should continue in the 2008-2009. The article specifically targets Sun/Rust belts while leaving out the rest of the country. I would have liked more stats about IL, it prices here are coming down, but way too slow. Gotta be patient.
Same sentiments hereI live in a medium to small sized town in Southern IL, across the river from St Louis, MO. Typically I have seen the prices of existing houses in my neighborhood around $110,000. However, I have seen some new housing in my area for around $149.00 and higher. Prices can vary about $50,000. Just from one town to the next depending how old the town is. In some places there is not room to build new houses and the towns run into each other. Prices in my sub-division have probably gone up $40,000 in last 15 years. They cant go too high or no one from around here will be able to afford the houses.
I imagine that a house in the $200,000 range is common in some areas that are more affluent. Probably higher as you get closer to Chicago or Springfield.
I imagine that a house in the $200,000 range is common in some areas that are more affluent. Probably higher as you get closer to Chicago or Springfield.
fleshconsumed
Diamond Member
- Feb 21, 2002
- 6,486
- 2,363
- 136
I wonder what do you mean in the 200 range. I live in Chicago suburbs and basically anything under $250K is not worth looking at because it's either too old, requires major repairs, is in a run-down neighborhood, or miles and miles away from any civilization. To give you an idea how rampant prices are, look at my other post several posts above this one about an old lady wanting $250K for her one story house just behind oil change place. There are decent houses on the market in good neighborhoods, but they go for 450-700K last time I checked. I wonder who is buying them, because you need two high paying jobs to even afford one. Prices are coming down, but sadly very slowly. Prices have been going up for 7 years, so I suppose it might take 7 years to come down as well, unless feds will do something really stupid and continue lowering rates in which case they won't come down for a long time.
theeedude
Lifer
- Feb 5, 2006
- 35,787
- 6,197
- 126
It's not going to be contained to subprime, no way. If prime borrowers stretched to buy a house expecting appreciation, they may just walk away from it if the value drops far enough.
Sure, their credit rating is worth something to them, but there is a price on that too. If they have hundreds of thousands of dollars in negative equity between mortgage and CC debt, some may just cut their losses go into foreclosure and bankruptcy, and rent for a few years.
Especially if they miscalculated their ability to pay off increasing ARM payments, experience a negative event such as layoff or medical bills.
Sure, their credit rating is worth something to them, but there is a price on that too. If they have hundreds of thousands of dollars in negative equity between mortgage and CC debt, some may just cut their losses go into foreclosure and bankruptcy, and rent for a few years.
Especially if they miscalculated their ability to pay off increasing ARM payments, experience a negative event such as layoff or medical bills.
If you graph out the Shiller index you are seeing a parabola. Now there isn't on MSA area that hasn't experienced a loss from its high, something that just happened in the last month or so.
- May 21, 2001
- 25,913
- 4,498
- 126
What did this month bring? Lets see:
[*]New home prices fall most in 37 years. Not to mention that sales rates of the homes are at 11-year lows. Oh and, of course, unsold finished homes are at a record high.
[*]Foreclosures surge doubling the rate from this time last year. This is associated with the massive increase in mortgage resets for Oct mentioned earlier in this thread. If you go back, you'll see that foreclosures will likely not get any better any time soon.
[*]Exisiting home prices plummet at biggest rate in 21 years. Look at the graph on the thread's first post and you see sales are low here too. I had to change the graph scale just to fit this data.
[*]I could go on about how starts are near many-year lows, how the fed mentioned housing may very likely lead us into a recession, etc.
[*]New home prices fall most in 37 years. Not to mention that sales rates of the homes are at 11-year lows. Oh and, of course, unsold finished homes are at a record high.
[*]Foreclosures surge doubling the rate from this time last year. This is associated with the massive increase in mortgage resets for Oct mentioned earlier in this thread. If you go back, you'll see that foreclosures will likely not get any better any time soon.
[*]Exisiting home prices plummet at biggest rate in 21 years. Look at the graph on the thread's first post and you see sales are low here too. I had to change the graph scale just to fit this data.
[*]I could go on about how starts are near many-year lows, how the fed mentioned housing may very likely lead us into a recession, etc.
I think it is a mistake to bail out the people who are causing this foreclosure problem. I look at this as a correction. Institutions lent out too much money to too many people with little or no credit or collateral using ARM Loans that will all reset. So just let the system collapse for a while and make the prices on housing drop to realistic rates. We need to quit bailing out people and banks that make these bad loans. Let them all crash and burn. Only the strong will survive.
What will happen is those remaining institutions will tighten up the availability of loans making it harder to purchase a home and they will gobble up the institutions that made bad business decisions based on bad business principles. We have to let this happen or these problems and practices will not be corrected. The Feds have warned those in the industry that this was a problem. The industry chose to not listen, so this has to occur to force the changes that are needed.
What will happen is those remaining institutions will tighten up the availability of loans making it harder to purchase a home and they will gobble up the institutions that made bad business decisions based on bad business principles. We have to let this happen or these problems and practices will not be corrected. The Feds have warned those in the industry that this was a problem. The industry chose to not listen, so this has to occur to force the changes that are needed.
blackangst1
Lifer
- Feb 23, 2005
- 22,902
- 2,359
- 126
On top of this Beranke makes moves toward lowering interest rates for some temporary relief . However it is further increasing deficit - making the inevitable fall even harder .
TastesLikeChicken
Lifer
- Sep 12, 2004
- 16,852
- 59
- 86
How does the economic impact of the housing market decline compare to the impacts of the dot-com crash and 9/11?
I'm wondering because we took both of those in stride, one after the other, and recovered well. Is the third time the charm or is housing just another bump in the road?
I'm wondering because we took both of those in stride, one after the other, and recovered well. Is the third time the charm or is housing just another bump in the road?
Direct economic fallout of foreclosures is limited (talking heads on tv used to say subprime represented only 15% of GDP or something like that). But politicians can't appear to be standing idly by as people are losing their homes.
Real issue seems to be that massive losses that have to be absorbed by institutions will lead to tighter and less lending (corporate bond markets), which could stunt growth in the U. S. and elsewhere, leading to a profound economic downturn sometime down the road.
Major institutions around the world used cheap borrowed money to leverage up many many times and made lots of money on the very high yielding subprime slime when housing market was always going up, but now have potentially large losses because the collateral for these highly leveraged bets of borrowed money are not worth what their essentially no risk assumption models said they were:
http://www.usagold.com/derivativeschapman.html
Also, this worldwide liquidity bubble made money really cheap and low rates reflected an assumption of essentially no risk. Now that that assumption has been proven wrong and risk is being repriced into the markets, there are lots of private equity deals that institutions don't want to go through with because they are not profitable like they thought when they made the deals (very low borrowing costs based upon assumption of essentially no risk). Seller still wants deal to go through at agreed price, but buyers are balking because they will now lose lots of money on the deal:
(excerpt below from Oakmark Funds Mutual fund commentary)
THE OAKMARK AND OAKMARK SELECT FUNDS
William C. Nygren
"At Oakmark, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close.
Private equity. The term is everywhere. You can?t go to a financial website, read the business section of a newspaper, or watch stock market shows on TV without hearing about private equity. Some say it?s already overdone and will suffer the bad ending that all bubbles inevitably suffer. Some say it?s early, and they still want more of their capital invested in private equity. Some argue that private equity is stealing companies from an uninformed public, while others say that private equity has inflated the entire stock market. What is it? Why all the sudden interest? Most importantly, how does it affect our Funds?
In the most general sense, private equity is simply ownership interest in a company whose stock does not trade publicly. More specifically, the term ?private equity? today usually refers to the capital, which is normally highly leveraged, that is used to purchase a publicly held company. This type of transaction has roots back to the 1960s, but really began to blossom in the 1980s with the emergence of what was then called the ?junk bond? market. One of the most difficult hurdles to pass before paying a premium to take a company private was obtaining the financing that facilitated a highly leveraged acquisition. The creation of a public market for very high risk debt made getting past that hurdle much easier. The logic behind those transactions was typically that the entrepreneurial buyer had a plan to radically increase the value of the business, perhaps by making tough decisions that corporate managers lacking economic alignment with their shareholders were unwilling to make, such as selling divisions and downsizing. The debt for such a transaction was expensive, frequently six percentage points or more above Treasuries. But, with lots of low hanging fruit, it was worth the cost, and the returns on leveraged private equity were high.
As always happens, however, the markets adjusted. Competition among buyout firms grew, bond owners demanded higher returns, and most importantly, corporate managements reformed, adopting the ?maximize shareholder value? mantra, making high-return targets difficult to find. For the next twenty years or so, private equity faded to the background. Recently, however, the spread between Treasuries and what is now euphemistically called the ?high yield? bond market has hit record lows. Bond buyers, hungrier than ever for yield, now demand only a three percentage point premium to Treasuries, half the historical spread. With bond buyers taking so much of the risk for so little of the return, levering up has again become profitable. In fact the after-tax cost of capital is now lower for private equity firms than it is for many cash-rich companies. A private equity firm can offer a safe harbor with no Sarbanes-Oxley, no public disclosure of executive compensation, and no pressure from investors to meet quarterly earnings targets. Financially, a leveraged private company also enjoys a big reduction in income tax payments (which is because interest to debt holders is deductible, while payments to shareholders aren?t), and a leverage-enhanced equity return that is about twice the return of a typical stock.
Imagine a debt-free company that is growing earnings 10% per year and that sells in the stock market at sixteen times earnings. It accepts a 25% acquisition premium, getting purchased for twenty times earnings. The private buyer then increases the leverage to eight times cashflow, paying 8% in annual interest. After five years, the company re-enters the public marketplace, again at the same sixteen times earnings it sold for before it was acquired. Had the company remained public, the annual return to shareholders would have been only the 10% that earnings grew (since we assumed the P/E3 ratio didn?t change). But, the return to the private equity holder in the above example is not just 10%. In fact, it exceeds the 20% compound annual return target that most private equity firms set as their hurdle. The tax payments fall sharply, the debt buyer allows for a very low cost of capital, and with no change in the operations, the equity returns are doubled. Magic! That?s why we?re seeing record volumes of such transactions. Private equity firms no longer need to devise operational strategies that increase earnings and grow value, but rather, most of today?s transactions succeed purely on financial arbitrage.
Who?s funding all this? Back in the old days, investors paid up significantly to have a public market for a security. ?Marketable securities,? both debt and equity, were considered preferable to unmarketable securities. They were viewed, correctly in our opinion, as less risky than private securities because they were easier to sell. But today, the tables have oddly turned. In an article about a local company that was getting acquired, CDW Corporation, the Chicago Tribune quoted an analyst as saying that one of the reasons this well run company should go private was that it would ?allow CDW more access to capital.?4 After I stopped laughing at what I thought was a misprint, I realized that today, it might actually be true. There is such a strong desire, misguided in our opinion, by institutional investors (endowment funds, foundations, pension plans) to increase their exposure to ?alternative investments? (read: high fee private partnerships) that it might be generally true that illiquid private investments are in greater demand than are liquid public investments.
At Oakmark, we?re buying public equity interests in what we believe are some of the greatest businesses in the world, and we?re paying lower prices than private equity is paying for what we view as mediocre businesses. But investor demand is falling for traditional public equity investment, while it is rapidly growing for private equity. Hmmm. That strikes us as an anomaly that is likely to reverse. To the extent private equity has provided a tail wind for the whole market, it has provided a much more powerful assist to mid-cap companies than to large-cap. When private equity slows, which it inevitably will, the loss of that tailwind shouldn?t hurt large-cap stocks as much as it will hurt small- and mid-caps. By purchasing the businesses we believe are most attractively valued, independent of whether or not they are likely to get acquired, we believe we are well positioned no matter how long the private equity boom continues.
Some shareholders have asked if we aren?t concerned that private equity will buy out all of our companies. To me, that?s like asking: ?Are you worried that if you win the lottery you might not be able to do it again?? We welcome acquisition bids on any of our holdings. If a potential buyer believes a company is worth a lot more than its market price, and they want to submit a proposal to purchase it, we applaud. But what if they?re not offering full value? Once an acquisition proposal is made, our focus is as much on the process as it is on the price. We believe that today?s acquisition market is so competitive that, almost by definition, an open process will result in a fair price. Last year when Knight-Ridder was being sold, we were disappointed that the price we got for our shares wasn?t higher. We were, however, highly confident that the process had been fair and open, and therefore believed that the buyer was indeed the high bidder. With a year of hindsight and with lower valuations on newspapers today, both in the stock market and in transactions, the Knight-Ridder price appears to have been quite good. An open process with a level playing field is the best insurance we can get that we are obtaining the highest possible price. And if one of our holdings is considering a proposal to be acquired and you feel you?re getting shut out from making a higher bid, please let us know. We can make a lot of noise when we need to."
Real issue seems to be that massive losses that have to be absorbed by institutions will lead to tighter and less lending (corporate bond markets), which could stunt growth in the U. S. and elsewhere, leading to a profound economic downturn sometime down the road.
Major institutions around the world used cheap borrowed money to leverage up many many times and made lots of money on the very high yielding subprime slime when housing market was always going up, but now have potentially large losses because the collateral for these highly leveraged bets of borrowed money are not worth what their essentially no risk assumption models said they were:
http://www.usagold.com/derivativeschapman.html
Also, this worldwide liquidity bubble made money really cheap and low rates reflected an assumption of essentially no risk. Now that that assumption has been proven wrong and risk is being repriced into the markets, there are lots of private equity deals that institutions don't want to go through with because they are not profitable like they thought when they made the deals (very low borrowing costs based upon assumption of essentially no risk). Seller still wants deal to go through at agreed price, but buyers are balking because they will now lose lots of money on the deal:
(excerpt below from Oakmark Funds Mutual fund commentary)
THE OAKMARK AND OAKMARK SELECT FUNDS
William C. Nygren
"At Oakmark, we are long-term investors. We attempt to identify growing businesses that are managed to benefit their shareholders. We will purchase stock in those businesses only when priced substantially below our estimate of intrinsic value. After purchase, we patiently wait for the gap between stock price and intrinsic value to close.
Private equity. The term is everywhere. You can?t go to a financial website, read the business section of a newspaper, or watch stock market shows on TV without hearing about private equity. Some say it?s already overdone and will suffer the bad ending that all bubbles inevitably suffer. Some say it?s early, and they still want more of their capital invested in private equity. Some argue that private equity is stealing companies from an uninformed public, while others say that private equity has inflated the entire stock market. What is it? Why all the sudden interest? Most importantly, how does it affect our Funds?
In the most general sense, private equity is simply ownership interest in a company whose stock does not trade publicly. More specifically, the term ?private equity? today usually refers to the capital, which is normally highly leveraged, that is used to purchase a publicly held company. This type of transaction has roots back to the 1960s, but really began to blossom in the 1980s with the emergence of what was then called the ?junk bond? market. One of the most difficult hurdles to pass before paying a premium to take a company private was obtaining the financing that facilitated a highly leveraged acquisition. The creation of a public market for very high risk debt made getting past that hurdle much easier. The logic behind those transactions was typically that the entrepreneurial buyer had a plan to radically increase the value of the business, perhaps by making tough decisions that corporate managers lacking economic alignment with their shareholders were unwilling to make, such as selling divisions and downsizing. The debt for such a transaction was expensive, frequently six percentage points or more above Treasuries. But, with lots of low hanging fruit, it was worth the cost, and the returns on leveraged private equity were high.
As always happens, however, the markets adjusted. Competition among buyout firms grew, bond owners demanded higher returns, and most importantly, corporate managements reformed, adopting the ?maximize shareholder value? mantra, making high-return targets difficult to find. For the next twenty years or so, private equity faded to the background. Recently, however, the spread between Treasuries and what is now euphemistically called the ?high yield? bond market has hit record lows. Bond buyers, hungrier than ever for yield, now demand only a three percentage point premium to Treasuries, half the historical spread. With bond buyers taking so much of the risk for so little of the return, levering up has again become profitable. In fact the after-tax cost of capital is now lower for private equity firms than it is for many cash-rich companies. A private equity firm can offer a safe harbor with no Sarbanes-Oxley, no public disclosure of executive compensation, and no pressure from investors to meet quarterly earnings targets. Financially, a leveraged private company also enjoys a big reduction in income tax payments (which is because interest to debt holders is deductible, while payments to shareholders aren?t), and a leverage-enhanced equity return that is about twice the return of a typical stock.
Imagine a debt-free company that is growing earnings 10% per year and that sells in the stock market at sixteen times earnings. It accepts a 25% acquisition premium, getting purchased for twenty times earnings. The private buyer then increases the leverage to eight times cashflow, paying 8% in annual interest. After five years, the company re-enters the public marketplace, again at the same sixteen times earnings it sold for before it was acquired. Had the company remained public, the annual return to shareholders would have been only the 10% that earnings grew (since we assumed the P/E3 ratio didn?t change). But, the return to the private equity holder in the above example is not just 10%. In fact, it exceeds the 20% compound annual return target that most private equity firms set as their hurdle. The tax payments fall sharply, the debt buyer allows for a very low cost of capital, and with no change in the operations, the equity returns are doubled. Magic! That?s why we?re seeing record volumes of such transactions. Private equity firms no longer need to devise operational strategies that increase earnings and grow value, but rather, most of today?s transactions succeed purely on financial arbitrage.
Who?s funding all this? Back in the old days, investors paid up significantly to have a public market for a security. ?Marketable securities,? both debt and equity, were considered preferable to unmarketable securities. They were viewed, correctly in our opinion, as less risky than private securities because they were easier to sell. But today, the tables have oddly turned. In an article about a local company that was getting acquired, CDW Corporation, the Chicago Tribune quoted an analyst as saying that one of the reasons this well run company should go private was that it would ?allow CDW more access to capital.?4 After I stopped laughing at what I thought was a misprint, I realized that today, it might actually be true. There is such a strong desire, misguided in our opinion, by institutional investors (endowment funds, foundations, pension plans) to increase their exposure to ?alternative investments? (read: high fee private partnerships) that it might be generally true that illiquid private investments are in greater demand than are liquid public investments.
At Oakmark, we?re buying public equity interests in what we believe are some of the greatest businesses in the world, and we?re paying lower prices than private equity is paying for what we view as mediocre businesses. But investor demand is falling for traditional public equity investment, while it is rapidly growing for private equity. Hmmm. That strikes us as an anomaly that is likely to reverse. To the extent private equity has provided a tail wind for the whole market, it has provided a much more powerful assist to mid-cap companies than to large-cap. When private equity slows, which it inevitably will, the loss of that tailwind shouldn?t hurt large-cap stocks as much as it will hurt small- and mid-caps. By purchasing the businesses we believe are most attractively valued, independent of whether or not they are likely to get acquired, we believe we are well positioned no matter how long the private equity boom continues.
Some shareholders have asked if we aren?t concerned that private equity will buy out all of our companies. To me, that?s like asking: ?Are you worried that if you win the lottery you might not be able to do it again?? We welcome acquisition bids on any of our holdings. If a potential buyer believes a company is worth a lot more than its market price, and they want to submit a proposal to purchase it, we applaud. But what if they?re not offering full value? Once an acquisition proposal is made, our focus is as much on the process as it is on the price. We believe that today?s acquisition market is so competitive that, almost by definition, an open process will result in a fair price. Last year when Knight-Ridder was being sold, we were disappointed that the price we got for our shares wasn?t higher. We were, however, highly confident that the process had been fair and open, and therefore believed that the buyer was indeed the high bidder. With a year of hindsight and with lower valuations on newspapers today, both in the stock market and in transactions, the Knight-Ridder price appears to have been quite good. An open process with a level playing field is the best insurance we can get that we are obtaining the highest possible price. And if one of our holdings is considering a proposal to be acquired and you feel you?re getting shut out from making a higher bid, please let us know. We can make a lot of noise when we need to."
Slew Foot
Lifer
- Sep 22, 2005
- 12,379
- 96
- 86
Bernake is in a bad position. Everyone knows that inflation is jumping but he feels that he needs to bail out the economy(even though the primary job of the the Fed is to save the dollar/ward off inflation) so he's going to cut rates. It may provide some short term boost, like the last couple, but the underlying fundamentals still suck. And killing the dollar to the point of $100 barrels of oil doesnt help either.
Meh there was no recovery. The US simply bubbled and inflated itself onwards the result of which we are beginning to see now. The dollar has lost 70 % to the euro during this time and savings are now in minus territory (unheard of since the Great Depression). This time the US will have to pay the piper. If Bernanke lowers the interest rate to bubble onwards it will only make things even worse down the road.
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