The Slow Burn

Discussion in 'Financial Cents' started by melbo, May 13, 2007.

  1. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

    [​IMG] [FONT=Arial, Helvetica, sans-serif][/FONT]<script>HideAdFrame('StoryToolbarSponsorship');ChangeSponsorAdTitle();</script>[​IMG]<hr>The New Money Pit: Housing Bust Gets Worse
    It started with subprime mortgages. Now owners of McMansions are defaulting, and the effects of the housing bust are beginning to ripple through the economy.
    By Daniel Gross

    Sept. 10, 2007 issue - Walking through the gated community of Black Mountain Vista on a hill in Henderson, Nev., Thomas Blanchard offers a guided tour of real-estate woe. A row of stucco duplexes that recently sold for as much as $500,000 sit empty. "That's a repo," the real-estate agent says as he stands in front of 678 Solitude Point Avenue. Then he points to the adjacent houses, where yellow patches blot the spartan lawns and phone books lie on front porches, their covers bleached from weeks under the desert sun. "No. 680, repo; 684, repo. Those two at the end, repo."
    Three years ago, this Las Vegas suburb was teeming with modern-day prospectors armed with low-interest mortgages, all hoping to strike it rich in real estate. Now, what started with the subprime-mortgage mess and subsequent credit crunch are turning communities like Black Mountain Vista into luxury ghost towns. Buyers who got in over their heads are being forced to abandon their homes, leaving behind empty McMansions on the California coast and see-through condominium towers on Miami Beach. Real estate is turning into a money pit, sapping the fortunes of home buyers, hedge-fund managers and house painters alike. The really bad news? This is only the beginning.
    No sooner did the housing market peak last summer than pundits and home builders assured the public the bottom had been reached. But with each passing month, the shoes continue to drop. First, dozens of subprime lenders were forced to close their doors. Then in July the nation's largest mortgage lender, Countrywide Financial, reported that mortgages held by borrowers with better credit were starting to curdle. Nearly 180,000 homes fell into foreclosure in July, up 93 percent from a year ago. Last week President George W. Bush offered a series of proposals designed to ward off a flood of foreclosures. Sales of new single-family homes were off 22.3 percent in June from a year earlier, and sales of existing homes—a much bigger market—were off 9 percent in July. The National Association of Realtors reports there's enough housing inventory for sale to last 9.6 months, more than double the 2005 level. The Case-Shiller index, which tracks national housing prices, fell 3.2 percent between June 2006 and June 2007. While that's a relatively small drop, "this is the largest sustained decline in year-over-year prices since 1991," says Yale economist Robert Shiller.
    The decline in housing construction and sales has had an immediate economic impact. From the perspective of job creation, real estate was the best sector in which to have a boom, providing jobs at every rung of the ladder: real-estate agents and mortgage brokers, architects and lawyers, investment bankers and decorators, movers and painters, contractors and landscapers. Between November 2001 and April 2005, housing and housing-related industries created 788,300 jobs, or 40 percent of the total created in the United States, according to Asha Bangalore, an economist at Northern Trust in Chicago. The demand for mortgage brokers in Las Vegas was so strong that "every stripper, waiter and bartender on the Strip had a broker's license," says Boyd Nyborg, a former mortgage broker who now tends bar at the Tao Las Vegas.
    But since August 2006, employment in housing-related industries has declined 119,400, according to Bangalore. Last month brought a rash of job cuts: 1,600 at Accredited Home Lenders, a subprime-mortgage company based in San Diego; 1,900 at Capital One Financial's GreenPoint Mortgage unit; 6,000 at Tucson, Ariz.-based subprime lender First Magnus. Many real-estate professionals who work on commission have seen their pay plummet. Mike McNamara, a broker at Windermere Coeur d'Alene Realty in the Idaho resort town, says sales in the area have fallen by half since the summer of 2005. "My sales are down 30 percent from last year," he says. "There are about 1,500 agents in this market and approximately 300 are making a living." Harry Heyward, who has been appraising homes in Tampa, Fla., for almost 20 years, says he's doing about five appraisals per week—down from 10 to 15 at the height of the boom. "I keep thinking it's going to get better, and it never does."
    The collateral damage is spreading. Because home sales and moves stimulate purchases of appliances, electronics and furniture, the giant chains that catered to house flippers and renovators have reported recessionlike results. In the second quarter, same-store sales were down 5.2 percent at Home Depot and 4.3 percent at Sears.
    Americans who were living high by taking out home-equity loans during the boom have watched their equity drop, and are now faint of heart when it comes to big-ticket discretionary purchases. The National Marine Manufacturers Association said it expects pleasure-boat sales, down 6 percent in 2006, to fall 10 percent more in 2007, largely due to the housing woes. Boatarama in Ft. Lauderdale, Fla., had to consolidate from four locations to one, and it now sells only used boats. Brunswick Corp., which makes Sea Ray boats, said in July that it was slashing production due to the housing situation "in Florida and California, which are two of the nation's largest boating markets."
    The nation's biggest retailing sector—automobiles—is likewise feeling the effects. In July, auto sales were down 12 percent from the year before. When CNW Research asked consumers who were putting off plans to buy new cars why they were doing so, 17.6 percent cited housing issues like falling home equity or rising mortgage payments. That compares with just 2.3 percent in 2005. John Crane, general sales manager at Ron Smith Buick Pontiac GMC Jeep in Merced, Calif., a farming community of 80,000 that has experienced an influx of Bay Area refugees, has seen a tremendous slowdown in the past six to eight months. "People don't have the money to look at cars," he says. "They're having a hard time paying house payments. Now their second mortgages and 1 percent loans are coming up."
    Which brings up another problem. Roughly $370 billion in adjustable-rate mortgages will reset this year, according to First American CoreLogic, and millions of Americans will have to pay significantly more per month just to stay in the same home. Mark Zandi, chief economist for Moody's, says that in the peak month of October 2007, some $50 billion worth of mortgages will reset at higher rates. Meanwhile, new mortgages are getting harder to come by, and not just for borrowers with subprime credit. Freaked-out lenders are ratcheting up requirements for minimum-credit scores and down payments. Kim Dicce, a Realtor in Tampa, where housing inventory is piling up, notes that lenders now seem to be requiring buyers in her area to put 15 to 20 percent down and have a credit score above 700. "Now we only have one third of the eligible buyers that we had before, and five times as many houses." Higher-income earners with good credit haven't been spared, as chastened lenders focus on making loans that they can quickly sell to Fannie Mae and Freddie Mac, which buy mortgages only up to $417,000. Rates on 30-year fixed jumbo loans have risen in the past month from 6.625 percent to about 7.5 percent, says Michael Daversa, president of Atlantic National Mortgage, a mortgage broker in Westport, Conn. On a $500,000 mortgage, that's an extra $4,375 per year in interest—a 13 percent increase.
    It's difficult to project where all this will lead. As was the case in the tech boom, seers and prognosticators have been proved wrong time and again. Some markets are holding up just fine, especially in so-called superstar cities like New York and San Francisco. But unlike stocks, which can fall 20 percent in a day, housing markets take longer to correct. Shiller notes that after the 1980s housing boom, housing prices fell in real terms (i.e., adjusted for inflation) by 20 percent from 1989 to 1996. "This time I think it could be worse, because it was a bigger boom," he says. "And look at the apparent confidence problem that we're seeing right now."
    Confidence is indeed in short supply. Robert Toll, founder and CEO of Horsham, Pa.-based home builder Toll Brothers, was one of the avatars of the boom. In 2005, Toll, whose company specializes in building high-end homes in the suburbs, prophesied in a New York Times Magazine cover story of a day when middle managers might pay $4 million for a home in the distant New Jersey burbs of Philadelphia or New York. But on a conference call with investors last week, Toll glumly declined to call a bottom. "This past week was the worst week for traffic in our history," he said.
    All of which means those houses outside Las Vegas—and those auto showrooms in Merced—could stay empty for a while. That's probably not what the developers in Henderson had in mind when they named the street Solitude Point Avenue.
    With Eleazar David Melendez in Henderson, Alice Chen in Merced, Lynn Waddell in Tampa and Temma Ehrenfeld in New York
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  2. poacher

    poacher Monkey+++ Founding Member

    So if I understand you right Clyde you are buying the gold for when things come back, or, for if you decide to bail and go to another Country. The Silver is going to be used more for barter and everyday issues as things progress from no CC/debit cards to no checks and lastly no FRN's.
    So do you feel that laying in more gold is of the wiser choice or more silver? I realize that everyone has their own opinions here but I'm just trying to get a idea. If gold is to be your wealth portion and silver to be you currency then my thoughts would be more with gold than silver.
    Reason being that barter can be done with anything that two people consider to be of value. Whether it be silver, bullets, beans or a tire pump if you consider it to be of a certain value then it is. Silver just being the king of barter.
    Gold on the other hand is what will buy you your land and large purchases. But how or who is going to value gold? In the late 1800's/early 1900's we had the standardization of gold prices but there again that price did fluctuate between locations hence the gold and silver certs coming into play.
    Would the buying of Gold and Silver certs also be a wise investment? It gives a standard and since it would seem that we would be moving back to a Gold standard, those would work just as well as having the gold itself.
    I look forward to your and others opinions on this.
    Take care Be safe Poacher.
  3. Jonas Parker

    Jonas Parker Hooligan

    The advantage of PMs over FRNs is that the PM represents a standard. It's the FRN's value that is fluctuating, not the PM's. Another advantage of 90% (pre-1965) U.S. silver coins is that there is no requirement for an assayer or scale (at least until counterfeiting becomes profitable again) when a simple scale will allow you to sort the real coins from the fakes. The weight of silver in dimes, quarters, half-dollars, silver dollars, and silver eagles is known, and all of those coins are recognized as "money" by the U.S. population. Somewhat "iffy-er" for recognition are silver "war nickels" (minted in 1942 through 1945), but these are generally inexpensive to buy. As of this posting, a "war nickel" contains $.70 of silver, and a pre-1965 dime contains $.90 of silver.

    Even if silver prices increase 1,000%, you're still dealing with "war nickels" and dimes which are valued at under $10.00 each. This makes them a convenient bartering tool.
  4. ghrit

    ghrit Bad company Administrator Founding Member

    Ahhh--. The flak cometh, just as forecast.

    Let me take a trivial example, then. Gold or silver can represent a standard, sure. But of what? If I have beans, and am the only one with beans, and you have gold along with everyone else, I'm going to have a lot of gold to make plates to serve my beans on. Which, in a trivial way, illustrates that gold has no standard value. A trivial case, sure, but illustrative no less.

    Consider also that the airline may well be more interested in JP8 than gold when you go to barter for a ticket to the Azores. And, when you get to the Azores, I guarantee the local farmer will be more interested in food for his donkey than gold for his teeth.
  5. Clyde

    Clyde Jet Set Tourer Administrator Founding Member

    No flak, Ghrit as I agree with you gold/beans supposition. Beans will alway be more important.

    Suppose one made the decision to leave and due to draconian banking laws they would not move their so called money (this exists already), there is no easy way to move "wealth" other than gold/diamonds or some other commodity which someone would want. Thanks to the Patiot Act I & II, all transactions above certain amounts are tracked...according to my bank $3k gets them ruffled now. So, how would one move $2 Million in cash or equivalents other than hawala banking? The US goverment is getting ready to pass an "exit" tax on people who take their money out of the US system (Charlie Wrangle).

    Beans & Bullets, Land, batteries, etc, then Silver, Gold, etc. We all have access to different information so our level of concern is certainly different. What is true now? The Dollar and the US economy are both going to go down.
  6. ghrit

    ghrit Bad company Administrator Founding Member

    That could well enough be so. The point of this exercise is to see if there is either common ground, or another direction to look; another idea to explore. Now, says me and maybe me only, (but I read some agreement with that in the above) if all the other bases are covered, PMs make some sense to hedge against the recovery. Frankly, I see no use or need for it in the dark times.
  7. melbo

    melbo Hunter Gatherer Administrator Founding Member

    I'm holding mine as a store of wealth for when things come back. You have to have an awful lot of chickens before I want to part with an oz of silver. I know a lot of survivalists are thinking of barter... If they want to barter, I'll be accepting rather than handing out.

    In fact, that's my entire SHTF PM thoughts... If I have everything, and am a de facto General store, I don't want your old pair of jungle boots for some matches.... If I have everything, you better have some PMs to trade e cuz I'm looking at the upside of the times.
  8. monkeyman

    monkeyman Monkey+++ Moderator Emeritus Founding Member

    Just remember not to turn down that pair of jungle boots with a bunch of life left in them for the book of matches. The boots should bring you more PMs once someone comes along that has some and need to shop with you.
  9. Bear

    Bear Monkey+++ Founding Member Iron Monkey

    My general opinion and plan is that pms will be very useful on the way down, after paper becomes useless and before the bottom and on the way back up after the bottom and before paper returns... I'll use them on the slopes down and up.... the bottom is a whole different story IMHO... and yes beans, tp, boots etc... way more demand for those items during the bottom.... but better yet... try to have a bit of all the categories... A plan for all the "phases" of a dip, bottom and recovery..... I've been really thinking, planning and stocking for the last 17 years (Hurricane Iniki smacked the islands as a Category 5 back then and got me interested in preparedness) so I've had some time to spread out the purchases, planning and learning..... Surviving well is the goal and its the strategy that works for me.... JMHO.....[winkthumb]
  10. melbo

    melbo Hunter Gatherer Administrator Founding Member

    Despite a recent bout of relative strength for the dollar, the two-year Dollar Index chart continues to look like a slippery slope to us, and quite vulnerable to further declines. As we discuss in detail below, a liquidity crunch precipitated by the current subprime mess is forcing a general re-pricing of risk across many markets, and will have profound consequences for the fate of the buck. Gold, of course, will benefit immensely from any major dollar declines.
  11. ghrit

    ghrit Bad company Administrator Founding Member

    Despite a recent bout of relative strength for the dollar, the two-year Dollar Index chart continues to look like a slippery slope to us, and quite vulnerable to further declines. As we discuss in detail below, a liquidity crunch precipitated by the current subprime mess is forcing a general re-pricing of risk across many markets, and will have profound consequences for the fate of the buck. Gold, of course, will benefit immensely from any major dollar declines.

    That is clear enough. Observation from here is that whatever the value of gold (or any other PM) is relative to the FRN, it remains a commodity that will vary in price (of any medium of exchange) according to demand. For now, in a sinking dollar market, the FRN price to be paid for any particular commodity simply has to increase. (By the way, this does NOT mean that the intrinsic value of any metal is a constant.) The question in my mind is how well it will hold the price if/when the FRN recovers. And it occurs to me that at the bottom (if there ever is one) what the use the metal(s) might be is open to debate. Even in a recovery, the holders of metals will have to hold on to the bars and bullion until the demand price exceeds the price paid however many months or years earlier to recover the costs. The inventory costs need to be factored in at the same time, thus the security expenses of vaults, ammo, posting of guards and watches need to be considered. Once the holder starts to use it, the knowledge of possession becomes a liability.

    If any of us were sufficiently prescient and wealthy, we would have bought metals some years ago at $435 and timed the sale for just before the bottom drops out, and put it into land and horse drawn farm equipment. But I for one wasn't (still ain't) both prescient and wealthy. It will be a damn sight harder to get my ox in a pocket when the farm is raided than a sock full of bullion (overstated in my usual fashion.)
  12. Jonas Parker

    Jonas Parker Hooligan

    I probably should have made myself clearer. Gold and/or silver is the standard for currency (and is notably absent in coinage today). In a barter economy, currency isn't involved at all (ie: how many beans are worth one bullet?). However, in bartering, the buyer may have the need for the seller's product but not have what the seller wishes to barter for (the buyer has the wrong caliber bullet, the seller's beans won't be picked for another week). That's the purpose of coins and currency... to be used as a "standard" with an assigned value in trade. In your example, the airline flying to the Azores may be more interested in JP8 than gold, but few, if any tickets will be sold if the airline is waiting for passengers to pull up to the terminal lugging five-gallon cans of jet fuel. Since gold and silver have an inherent value, these metals have historically been used to transfer the value of goods (and/or services) without necessarily physically transferring those goods and/or services at the time of the transaction. Unfortunately the temptation of the "printing press" is too much for most governments (including that of the United States). As our government has needed more currency, it was printed. without worrying that the government didn't have the gold and/or silver to back up the paper.

    I was a history major, but my area of study was military history, not economic history. However, I did study the post-WWI era of the German Weimar Republic, where inflation became so great that it took baskets of banknotes to buy one loaf of bread (the temptation of the printing press again). There were other economic factors involved as well, so I'll risk oversimplification here for the sake of brevity. In Germany at that time, gold and silver coins held their purchasing value separately from the printed currency which effectively became worthless.

    As an example useful today, in 1929, a US $20.00 gold piece or a $20 bill would buy a good three-piece man's suit. Today, a $20 bill would maybe buy the buttons, but the value of the gold in a $20 gold piece (and I'm only talking about the melt value of the metal, not any numismatic value of the coin) will still buy a good three-piece man's suit. The value of the U.S currency has changed, the value of the gold has not.

    I'm sorry if you thought I was giving you flak, and I apologize again for my lack of clarity. JP
  13. ghrit

    ghrit Bad company Administrator Founding Member

    You kept the discussion on track. You are not guilty of throwing rocks without cause. We will, in spite of ourselves, learn something from every pebble thrown into this pond.

    It's worth the mention that metal sequestered out of circulation, say in plates and jewelry, will come back in as the price (in FRNs) rises. The original metal value was enhanced by labor. Throw that consideration into the mix, and all of a sudden metal has an even more variable value.
  14. Jonas Parker

    Jonas Parker Hooligan

    True, Grandma's silver will be headed for the smelter (as maybe will her wedding ring), but the weight and purity of Grandma's silver (or anything else not minted) is neither well known nor readily discernible. My points on pre-1965 U.S. coins were:
    1. these coins are generally recognized as "money" by the population, and
    2. the weights and silver content of these coins is well known.

    The value of the silver as a medium of exchange, is not affected in any way by the labor it took to convert it from ingots into Grandma's silverware, however. In fact, the cost to convert the silverware back to ingots, rounds, or bars will probably be deducted from the price of the weight of the silver by the metals dealer.

    As far as your question about the suit, if you were to go up to a "guy " on the street and offer him a suit for a gold coin, the "guy" (with any street smarts) wouldn't buy a suit from a street hustler, and probably wouldn't have a gold coin in his pocket to pay you anyway. I go to a reputable store for my suits, and the salesmen wouldn't know the value of or what to do with a gold coin if I tried to pay them with it. Look for increasing sophistication among the survivors as the economic meltdown of the currency in this country continues, however.
  15. Bear

    Bear Monkey+++ Founding Member Iron Monkey

    Spears on the Housing Bubble....

    Just for fun [beer]

    YouTube- Britney Spears explains the subprime Housing Bubble Crash

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  16. melbo

    melbo Hunter Gatherer Administrator Founding Member

    I fully realize that the 'price' jump or drop USD in the price of an oz of Gold has nothing to do with the intrinsic value of that oz. An oz is an oz. It's really the rising and more recently falling of the FRN/USD that gets all the goldbugs in a frenzy. Nothing changes except the amount of FRNs it takes to get that oz.... I think we are all on the same page on that point.

    I like Gold. I like 90% Silver even better and it's a heck of a buy right now at 56:1 ratio
  17. ghrit

    ghrit Bad company Administrator Founding Member

    I like land. And, it seems to me that going into a long duration economic low dictates that preparing with new appliances and other hardware and resources to ride it out solo if necessary (along with sufficient stores to make life less onerous) is a better use of my limited bank account. For my purposes, anyway. And that whole premise is why I'm here, to figure out and plan for the hard times that I think we all expect.

    Commodities are not for me, too risky. I envy those that have the resources to dabble in commodities, the rewards are commensurate with the risks, and to those that can play in that field, well worth the effort and cost of Tums. (I also like low Tums bills.) But to me, pork belly futures make better sense, at least I understand the risks, and the term of the risk is limited, not open ended like PMs. And I would take the time to caution those that are unaware (if there are any such Monkeys in our family) that PMs are exactly that, commodities.

    To further fuel the fire, re-standardizing on gold is fraught with hazard as well. There just ain't enough of the metal above ground to make a quick switch; the price will just become unattainable by the entire budget and full faith of the US Gov't (if there is any left) if the number of FRNs is prorated against all the gold held by all the nations and private citizens in the world. Thus, like it or not, the conversion will have to be carried out systematically and over time to avoid instantaneous crashing of all economies in the entire world. Yes, that would make holders instantly richer than Croseius. (Where the hell is spell check when you need it?) But TPTB are well aware of that, thus control of the conversion will be PC in that no one will be allowed to profit unduly. Count on it, the wisdom of acquiring will not be rewarded in any significant measure. And even if there is a revolution, the sense of fairness inherent in this country will limit profiteering as well. Those that have the guts to stand up and be counted in such an event will be the ones with that sense, or I'm on the wrong planet.

    But that is all me, and me only.
  18. Jonas Parker

    Jonas Parker Hooligan

    You bring out an interesting point about re-standardizing to the gold standard, but I was playing with an Excel spreadsheet this morning, plugging in last night's closing silver prices and noticed the following:
    1 90% silver dime is currently worth $.91 FRN, 1 90% silver quarter is worth $2.28 FRN, 1 90% silver half dollar is worth $4.56 FRN and 1 90% silver dollar is worth $9.75 FRNin silver content at the current price. If US coinage (which is not under the Federal Reserve System) were to go back to the 90% silver coinage of the past, then (doing a bit of judicious rounding off) we would end up with a $1 coin, a $2.50 coin, a $5.00 coin and a $10.00 coin, all of precious metal. Why not re-standardize to the silver standard?
  19. ghrit

    ghrit Bad company Administrator Founding Member

    You could indeed do exactly that, and as well to any PM, but the same basic idea that there is no absolute value to any commodity applies. Bear in mind that as soon as a "standard" is identified, the cost in FRNs will skyrocket. I have no idea if silver above ground is particularly more plentiful than gold, but it seems to me that the same principles would apply. Rather taken to extremes one (as yet unminted) coin, say a wooden nickle (with an RFID embedded to assure it's genuine) could stand for a bag of soy beans on deposit at your local elevator. (If that is not too extreme an example.) Then watch the farmer who is into soy get rather excited (if for no other reason than he can make more beans faster than gold can be mined.)

    Anyway, it is all rather academic at this point. I've laid out my own personal views in the hopes it would stimulate some discussion. It has, but leaves me with more unanswered questions than I started with. FWIW, I distrust those that publish "do this" and "do that" simply because I am a serious skeptic, wondering what is to be gained by following one of those ideas without seeing a downside in a well published point-counterpoint style. If it smells, even just a bit, like a skunk, I go the other way. This is not aimed at any particular tout; they may well be operating altruistically, but I'm not equipped to suss out the reality. Yet.
  20. Bear

    Bear Monkey+++ Founding Member Iron Monkey

    "Anyway, it is all rather academic at this point. I've laid out my own personal views in the hopes it would stimulate some discussion. It has, but leaves me with more unanswered questions than I started with. FWIW, I distrust those that publish "do this" and "do that" simply because I am a serious skeptic, wondering what is to be gained by following one of those ideas without seeing a downside in a well published point-counterpoint style. If it smells, even just a bit, like a skunk, I go the other way. This is not aimed at any particular tout; they may well be operating altruistically, but I'm not equipped to suss out the reality. Yet."

    Your posts are certainly well thought out and appreciated... I constantly question my own views and adjust and take the path that seems right at the time... I wish I had more time or that we could grab a drink and sit and talk... I think that would definitely be of benefit... and I'd enjoy that [beer]
    New views and questioning thoughts are good for honing for the mental process...[winkthumb]
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