House prices - Wave 2

Karl Denninger looks at recently-failed US banks and by comparing their asset valuations with losses charged to the Federal Deposit Insurance Corporation discovers that they overvalued their properties - at the time of failure.

If you add up the nominal assets of the three banks - $903 million - and downgrade them to their real value as implied by the losses borne by FDIC - $602.3 million - you will find the collective assets were overvalued by 49.9%. In other words, current estimated real estate values should be cut by 33.3%.

These were banks operating in (now) economically distressed states - Florida, Illinois (both with official unemployment rates at or exceeding 11%), Maryland (over 7 % unemployment), so you can't necessarily apply that regrading to the whole of the USA.

Nevertheless, those states are relatively heavily populated, and so are the others now showing high rates of unemployment - see this US population map. So it may well be that the US housing market in general may need to be reassessed. If, as Denninger says, he is "generous" in estimating houses to be overvalued by 25%, that means we need to cut nominal prices by 20%.

This is borne out to some extent by reported house sale prices - see this real estate website - though the Northwest has shown a rise (why?).

And then we have to consider properties repossessed by lenders but not sold, and owners who are sitting on their properties and refusing to sell.

The UK, with its much more densely-populated land, maybe somewhat different; but I think that when all the recent financial stimuli stop and we get past the next General Election, we may see clearer evidence of declining valuations here, too.

ADDENDUM (10 March):

A counter-argument would be that the FDIC has applied a "forced-sale" valuation, as with individual or company insolvency. On the other hand, the FDIC must be in no hurry to overstate its obligations/losses - its own finances are already very shaky - and there are already many forced residential property sales actually ongoing, so the regrading of assets may to some extent reflect actual market conditions.

Grit your teeth, Scrooge

Mark Zandi – chief economist for Moody’s – has calculated which stimulus programs give the most bang for the buck in terms of the economy:


From "Naked Capitalism"

Thought you'd like this

The Big Snit by Richard Condie, - NFB- Watch more Videos at Vodpod.

Hope

My brother sends me a link to a polemic by Joe Bageant. My reply:

A passionate polemic, seductive in its combination of apparent political and financial savviness, high-level generalization, defrocked moral preaching, enemy-finding, self-pitying despair, self-castigation. Clearly one who has adopted Marcuse's Marxian-Freudian notion of "introjection". And one who secretly welcomes gotterdammerung because (surely) it is the necessary precondition of rebirth and the Golden Society. Don't believe his reference to species extinction - if he believed that he wouldn't bother to praise the international South American bartering system.

Yes, the system is in crisis - but it's fixable. The US medical system is about 3 times more expensive per capita than in the UK, there's a lot of room to cut costs. When the dollar crashes and house prices hit the floor, people won't have to earn the same money as before to make a living, and they'll begin to compete in the global market. And we surely don't really need the level of material possessions we have now, nice though it can be.

Where I do agree with this Jeremiah, is that a load of fat b*st*rds will have to be trimmed.

Put me down as a hope fiend.

Democracy: why bother?

After all the fuss I make about the right to decide, I thought I'd look at General Election results in my own constituency. No wonder MPs used to think they could get away with pretty much anything they liked - and probably still can.

The winner is: None Of The Above; disqualified (because he doesn't appear on the ballot paper) in favour of the runner-up, Indifference.

Salami-slicing the franchise

One of David Cameron's ideas is to reduce the number of our representatives in Parliament. I don't want fewer MPs, just better - ones who understand their role. In 26 years of living at the same address, I've never been approached in person by my present MP or his constituency workers to ask for my vote, let alone my opinion on anything.

If anything, I'd like more MPs - look at the ratio of MPs to qualified electors in the nineteenth century. I'm not proposing to go back to the 1831 ratio, but we have drifted from having 1 vote in 858 to 1 in 74,000 - our voices are very small indeed, now.

A brief discussion from the blog of Chris Whiteside, Conservative Parliamentary candidate for Whiteside, Cumbria:

At today's Conservative conference David Cameron promised real action in six key areas to help get Britain back on its feet

[...]

6: Change politics
Reduce the number of MPs, cut Whitehall and quangos by a third, and let taxpayers see where their money is being spent.
_________________________________________________
Comments to the above:

At 8:32 AM, Sackerson said...
6. Isn't reducing the number of MPs another step in the de-democritization of the UK?

At 1:53 AM, Chris Whiteside said...
Sackerson: a 10% reduction in the number of MPs won't have that effect, no.

At 8:38 AM, Rolf said...
Chris: thanks for your courtesy in responding. I have to disagree: a 10% reduction in MPs is an 11% increase in constituency voter numbers and so a corresponding decrease in the value of my individual vote. And where will it end?

KING LEAR
Ourself, by monthly course,
With reservation of an hundred knights, by you to be sustain'd,
Shall our abode make with you by due turns.

GONERIL (Murmurs to Regan) He may enguard his dotage with their powers,
And hold our lives in mercy.
(To King Lear) It is not well! Dismissing half your train, come then to me.

KING LEAR (To Goneril) What, fifty of my followers at a clap!

REGAN I entreat you to bring but five and twenty:
To no more will I give place or notice.

KING LEAR What, must I come to you with five and twenty, Regan? Said you so?

REGAN Speak't again, my lord; no more with me.

KING LEAR (To Goneril) I'll go with thee:
Thy fifty yet doth double five and twenty, and thou art twice her love.

GONERIL What need you five and twenty

REGAN or ten!

GONERIL or five!

REGAN What need one?

(For those who attended school after the educational reforms of the 1980s, Shakespeare was an English writer and used to be regarded as an essential element of our cultural heritage. Yes, a bit like Carol Ann Duffy, as you say, Blenkinsop Minor; but only a bit.)

Daniel Hannan and the EU

Look at the clip below - and pause it at 9 seconds in. All you need to know about the EU?

Should we have paid-off everyone's mortgage?

A recent figure I've seen for total mortgage debt outstanding in the US is $14.4 trillion. According to this commentator, the true cost of all the financial crisis bailout measures is $14 trillion. Should we have simply cancelled all mortgages, massively deflating house values but liberating millions of Americans from the threat of repossession and freeing up large amounts of their take-home income?

Probably not. Sudden and simplistic measures can be horribly destructive. But can we permit a system to continue, that is built on inflating (or maintaining the absurdly high level of) the cost of our dwellings? In cartoon-mythical ancient times, all a tribe of cavemen had to do was get rid of the bear - all in a day's work - and now the right to live in your own space takes years and years of toil.

Back to Thoreau and Walden?

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Big market fall expected, over several years

It seems likely that there will be a new leg down in financial asset valuations, as reality overcomes often not-so-subtle propaganda and disinformation. It may start in March, or it may be a 'market break' that provides a subtle warning for a large decline that begins in September 2010, with multi year progression to lows that are, as of now, almost unimaginable, at least in real terms. I cannot stress this issue of nominal versus real enough. As inflation comes, it will initially be in a 'stealth' manner, with the backing of the currency eroding slowly but steadily, and largely unrecognized for some time.

This from "Jesse", a sober and savvy commentator who deplores the schadenfreude crowd. Do read the rest.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.

Matt Taibbi on the reinflated bubble

Rolling Stone journalist Matt Taibbi reexamines the world of Wall Street in his latest article of 3 days ago. He finds that the US government, aiming to rid the market of toxic mortgage-related investments, has provided cash for buyers and so inadvertently created a market for the rubbish it's trying to clear. In the third quarter of last year, reports Taibbi, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America bought $3.36 billion of such bad assets, presumably expecting to sell them on at a profit in a government-underwritten buying environment.

Slashing interest rates to get us through the emergency has made ordinary savings accounts unproductive and forced money into investments instead, even when analysis says stay out:

"One trader, who asked not to be identified, recounts a story of what happened with his hedge fund this past fall. His firm wanted to short — that is, bet against — all the cr*p toxic bonds that were suddenly in vogue again. The fund's analysts had examined the fundamentals of these instruments and concluded that they were absolutely not good investments.

"So they took a short position. One month passed, and they lost money. Another month passed — same thing. Finally, the trader just shrugged and decided to change course and buy.

""I said, '**** it, let's make some money,'" he recalls. "I absolutely did not believe in the fundamentals of any of this stuff. However, I can get on the bandwagon, just so long as I know when to jump out of the car before it goes off the damn cliff!"

"This is the very definition of bubble economics — betting on crowd behavior instead of on fundamentals. It's old investors betting on the arrival of new ones, with the value of the underlying thing itself being irrelevant. And this behavior is being driven, no surprise, by the biggest firms on Wall Street."

It takes nerve to stay out of the market when it's rising and when you think you may lose value on your cash held at bank. But unless you're confident that you'll be able to "jump out of the car before it goes off the cliff" (and remember, you don't have access to instant dealing like the City pros), maybe sitting on your hands is the thing to do.

And if price inflation worries you, don't forget, both the US and UK governments still sell guaranteed inflation-proofed investments of their own.

DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.