Leverage is all about using something small to move something big. The small subprime market unto itself is as you indicate...however, as this markets debacle filters thru the worldwide system, measurable effects will be seen worldwide..these effects are commented on everywhere...’ripple effect’ is what will define the relative importance of the subprime meltdown. Ripple effect has not reached its peak yet.
Big French fund affected by US subprime meltdown..here is link..many foreign funds are doing the same thing..this is just one..http://www.bloomberg.com/apps/news?pid=20601087&sid=aNIJ.UO9Pzxw&refer=worldwide
Just like I said on the other thread, it doesn’t matter what the market share is, because this mess is having a real effect on the global markets.
Some attempts at propaganda are thin on their face. Little teeny banking interests like GS, MER, LEH, and BSC are taking all this in stride. Why, just today, the Fed threw $24 billion into the market and the ECB threw “unlimited” funds into their markets. So, there’s nothing to worry about. Especially when talking about the single topic of “sub-prime”. But the topic is a tad larger than “sub-prime”, it includes “alt-A” and it also isn’t strictly a matter of mort defaults: It is the systematic realization that virtually ALL credit has been based upon putting lipstick on a pig for a few years now. And, a very significant amount of the market’s recent advances have been based on these relentless corporate buyouts....buyouts for which the funding is likley to become quite a bit tighter.
And as I keep saying, the bulge in the curve as to mortgage resets will be occurring Sept-October this year. So, the S hasn’t completely hit the F yet.
http://www.irvinehousingblog.com/wp-content/uploads/2007/03/reset.PNG
Extremely vulnerable are high-yield money market accounts, which are likely invested in mortgage backed securities. You can argue with me about anything else, but these funds are nothing if not highly vulnerable.
The latest link from Bloomberg:
http://www.bloomberg.com/apps/news?pid=20601087&sid=ajeVDJ5jB97w&refer=worldwide
That works out to 80,000 mortgages that are late. Assuming a 200,000 mortgage, that works out to about $16 Billion that is late.
The question is ... can the economy handle a $16 Billion default?
In an enviroment of decreasing home prices, lenders are not going to accept the risk of foreclosures at loss. Since today, lump sums and high credit scores will be mandatory to buy an house.
Subrime loans represent 14% of the mortgage market, with 14% of buyers kicked out, real estate will spiral down,as well as new constructions, with the loss of millions of jobs in all the related sectors. Enough for a recession.
bttt
This is all rather irrelevant. The reaction has been real regardless of the veracity of the threat. Banks have locked accounts, inter-bank lending rates have gone up and markets have reacted. Good luck selling the guy that just lost money that it’s not a real problem.
The repricing of loans will most likely do the following. The homebuyer will decide if the house is worth the monthly payment. If he had a 3% loan that gets raised to 9% because he shouldn't have had the loan in the first place, he must decide if he can, or even wants to pay the extra money. If he lives in a house that is up in value, he might just pay the money.
Lets say his value has gone down or he just can't pay. The difference in this time and the Carter years is,......he has a job! He can throw the keys at the repo man, go across the street and get the same house, or more, for less money now. When Carter was president, we had DOUBLE DIGIT unemployment, and DOUBLE DIGIT inflation, and DOUBLE DIGIT( 13%-20%) housing interest rates. saying there is a problem at 4.6% unemployment, or a 5.25 interest rate with inflation at 2% is ludicrous. These people "loosing" their houses, most likely will have another in a flash. In Carters day, it took years( and Reagan) to work out the excess.
What we have now is a rise in home pricing that was built on easy money. To say a house is worth $150, $300, even $900 a square ft is built on what you can get rather than what it costs. There are houses in my city that go for less than $50 a square ft. I would gladly sell my home for $60 a sq ft right now! To build a home would cost $60-$80 a sq. ft. If you live in Miami or Las Vegas, you have a job, you have been paying your payments on time, they should allow you to reprice at 7% or so if you have good payment history. If they won't then you bail, give them the house, and move somewhere else, BECAUSE YOU HAVE A JOB. The loan people HAVE A HOUSE, even if it's 50 cents on the dollar, it's not ZERO, as the market is trying to suggest, so they aren't going to go under. The one left holding the bag is going to be the home builders, because we are going to have a house glut for awhile. They may not survive if we don't need them to build houses for a year or two. They make their money when the house is sold, so they get NO income for quite some time. If they decide to lower their price, it makes the housing "dump" worse when you can move down the street and get a bigger house for less money than you could a year ago. It doesn't cost $300 a ft to build a house, so there is plenty of room to go down. They will be hurting for awhile.
As I stated in my first paragraph, the saving grace here is 4% unemployment. Sure, there could be an uptick coming, but nothing like the 10% in the "old" days. Even if we went to 5% unemployment. that's more the rule than exception. People may only be willing to pay $50 for tennis shoes, instead of $200 and they may buy a Nokia phone instead of an iphone. Hardly the end of the world. I've seen the end of the world. It was when Carter was president.
Heck, the black population is about 13%... are they also a number too small to worry about?
Does this herald the return of the “everything’s fine!” crowd previously known as the “real estate is the best investment you can make” crowd?
