It’s been a few days since the KoolAidMan has posted a new article; he’s been awful busy catching up with all the current news after a few days being unplugged.

Bloomberg is reporting today that consumer confidence dropped more than expected and home prices dropped the most in at least six years, strengthening the case for the Fed to lower interest rates again.

The Conference Board’s gauge of confidence declined to 95.6, the lowest since October 2005, from 99.5 in September, the New York-based group said today. Home values in 20 U.S. metropolitan areas slid 4.4 percent in the 12 months that ended in August, according to the S&P/Case-Shiller home-price index.

The figures heighten concern that consumers will put a brake on spending, which accounts for more than two-thirds of the economy. Fed policy makers will need to cut the target rate for overnight loans between banks tomorrow by a quarter point to 4.5 percent to prevent the housing recession from triggering a broader economic decline, some analysts said.

“Housing is clearly the root of the problem,” said Carl Riccadonna, an economist in New York at Deutsche Bank Securities Inc. who predicted a drop in confidence. “If consumer spending falls apart, the Fed will have much bigger problems to contend with.”

This is a great difference in opinion from the economists and other experts who claimed that ‘problems in the housing market are contained.’ To be somewhat fair, Ben Bernanke claimed that “troubles in the subprime sector on the broader housing market will likely be limited.” Since that statement was made, we’ve seen that it’s not just subprime that’s the problem. There are problems with all types of mortgages and less of a demand for housing, which is driving prices downward. So it’s not just subprime, it’s the housing market in general that seems to be negatively impacting our economy and it doesn’t look like we’re anywhere close to the bottom.

“The outlook for sales heading into the holiday season looks gloomier than a year ago,” said David Resler, chief economist at Nomura Securities International Inc. in New York. “With the surge in oil prices likely to soon push up gasoline and home-heating oil prices, more consumers are likely to be forced to curb their holiday shopping.”

Record oil prices, lower consumer confidence, declining home values, and tighter lending standards seem like a recipe for trouble ahead.

Economy, Real Estate | 1 Comment »

We have been linking to CNN quite a bit lately, but they keep supplying good information! Today there’s a report that there are two million vacant homes for sale nationwide.

For purposes of comparison for the current situation, imagine the Detroit metropolitan area, which the Census Bureau estimated had 2.08 million households in its 2000 Census. Now picture virtually every house or condo empty, with a for sale sign in the front yard of every home, from inner-city Detroit to its suburbs, all the way to nearby cities such as Flint and Ann Arbor.

That puts things into perspective; 2 million homes is an awful lot!

Because the mortgage market meltdown has thinned the ranks of potential home buyers some home owners have been forced to move out of homes before they can find a buyer. And those who bought homes or condos as investments during the real estate and building booms of a couple of years ago have found an exceptionally weak market for their property. That in turn has lifted the number of vacant homes for sale by 57 percent in just the last three years. And some see the situation only getting worse.

This sounds just like a Ponzi scheme - the success of an individual is dependent on getting more people involved at the next level down. When the real estate party was going strong, it was difficult to find mainstream media reporting anything negative about what was going on with the real estate markets. This is what happens when everyone wants to (or in some cases has to) sell at the same time. The concept of supply and demand should straighten things out in no time.

“It’s very hard to see how this doesn’t get worse,” Baker said. “It’s certainly possible we could see 3 million, maybe 4 million (vacant homes on the market.)”

If you’re reading this post, chances are that you knew about this all along and wisely decided not to get involved (or if you did get involved, you knew when to cash out).

Kool-Aid, Real Estate | No Comments »

Earlier this morning, Forbes ran an article highlighting how the problems in the credit markets will continue, and they may have be underestimated.

Wall Street has been moving billions of assets into a relatively new accounting category called “level 3,” a designation that the fair value of those assets, including subprime mortgages and derivatives, couldn’t be determined because there was no observable market for them. Those assets can sit in level 3 until the market for them springs back.

This points to a fundamental in valuation of any asset: it’s only worth what someone else is willing to pay.

Assessing the fair value of derivatives and thinly (if at all) traded mortgage securities holdings is far more art than science, with wiggle-room galore. Merrill said it marked its CDO holdings to “observable” market values, where there were prices to be observed. Otherwise, it used “quantitative” calculations: In other words, Merrill priced its own holdings based on a model.

Problem is, if every bank is pricing its own holdings to a model, there is no way of knowing whether the marks are accurate until everyone lays all the cards on the table. Merrill stopped short of doing that Wednesday. And so did everyone else.

Negative news like this is no good - anyone want a glass of Kool-Aid?

Financial Market | No Comments »

Marketwatch is reporting that the credit problems in the financial markets are directly a result of the Federal Reserve’s regulatory minimalism during the past decade.

In the wake of the financial market turmoil that arose over the summer and even now threatens to push the U.S. into recession, there has been a remarkable lack of finger-pointing so far over the cause of the crisis.

But one observer, Tom Schlesinger, the founder and executive director of the Financial Markets Center, a think tank that has followed the Federal Reserve closely for the past decade, believes the blame for the crisis falls squarely on the Fed and accuses the central bank of “regulatory foot-dragging” that has harmed the public.

The Federal Reserve was pretty lax on regulation during the past decade which allowed financial institutions the flexibility to offer many ‘innovative’ services that haven’t been tried before.

In his recent autobiography, Greenspan said when he accepted the top Fed job, he worried that his Ayn Randian brand of libertarianism would make it difficult to be a bank regulator and said he planned to allow others at the Fed to take the lead.
Upon joining the Fed, Greenspan said he had a “pleasant surprise” when he found the Fed staff was not so keen on regulation either. Together, they interpreted congressional legislation with a view to “letting markets work,” he wrote.

Mr. Greenspan was correct, and the markets are working! Now that investors are realizing how these innovative products and services have performed, they’re approaching them with extreme caution (and in many cases deciding not to get involved at all).

Financial Market, Economy | No Comments »