Thursday, March 22, 2007

What goes boom must go bust: U.S. housing collapse comes as liquidity dries up


Scott Reamer works at Vicis Capital, a multi-strategy hedge fund in NYC. He also writes for

NEW YORK (MarketWatch) -- Mortgage marketing campaigns have been changed from "Money? Free!" to "Last four years of W2's - notarized!", font sizes have been reduced in print ads, get-rich-on-real-estate infomercials have been moved from prime time to 2am, your brother in law has finally clammed up. Indications, all, that something has changed - really changed - in the housing market.
Official news over the last several weeks that lenders from Countrywide (CFC
Countrywide Financial Corp
Sponsored by:
to Freddie Mac (FRE
Freddie Mac
Sponsored by:
would be tightening their lending standards in the subprime sector of mortgage originations positively begs the question: what's changed?

But before we can attempt to limn even the faint outlines of the answer, we need to countenance the conclusion that such question asking as: "Do you have an income?" and "Can I see proof?" has one and only one effect on credit supply and demand: a decrease.

And that means liquidity is drying up in the mortgage market.

The particular exit strategy of someone-will-buy-it-from-me-at-a-higher-price rests squarely on the next Mensa reject wrestling the required funds from a banker before he can exercise his herding instinct, sate his brain stem, and flood his circulatory system with endorphins. And if those bankers are now equipped with stethoscopes as they claim, that next buyer won't ever get his golden ticket. Which means someone is stuck with $2,350 per month in maintenance, taxes, insurance, and mortgage costs on an 'investment property.' And $3,775 when the re-set comes in late 2007.

When home prices stopped going up 12-18 months ago, the frustration was palpable but hardly fear inducing. Timelines were stretched for ROI, 'we'll use it as a vacation home' rationales started flooding forth, and travertine backsplashes suddenly went wanting. But things are different now, measurably so. And that difference is not just that the demand for credit to speculate on housing has declined. It's that supply is now contracting. And when a credit cycle starts seeing supply contract (liquidity declining), all sorts of things start to happen: speculation gets robbed to pay a tax to prudence.

But, really, what has changed? What has really changed?

It's not as if bankers don't have money laying around to extend or sweeten the terms of the new loans these home speculators now need. Hell, the Fed and Treasury just need to print it into existence. And certainly Senator Dodd has played his cards: he thinks Congress should help 2.2 million home owners who are getting squeezed from buying a home they couldn't afford in the first place (and apparently who are not English speakers also because existing federal regulations demand that every possible term and contingency in lending be laid out for borrowers).

So you have the Federal government's legislative AND executive branches (if you know which branch the Federal Reserve comes under please email me) wanting to help these folks. But, still, liquidity wanes.

Why? Time preference. Specifically aggregate time preference.

The bankers who sign the checks, the appraisers who value the property, the retiree who speculates on the property, the investment bank that pools the mortgages and tranches them, the rating agency that rates those pools, the other investment bank that securitizes the tranches, the rating agency that rates those securitized pools, the other investment bank that sells insurance on the securitized tranches, the pension/hedge fund that buys the pools/tranches/securitizations. All have the means to keep the game going - to effectively go back in time to the halcyon days of 2004 or the even the salad days of 2005. But that's not what's happening.

And it's not going to happen either. Whomever it was that first came to his/her senses in this credit madness is moot; it's the fact that his/her action -- that mortgage banker, that CDO trader, whoever -- catalyzed the opposite trend toward probity. After an orgy of credit-based risk taking, incented in almost every conceivable fashion by monetary and social institutions, the negative feedback effects of reduced liquidity are almost certain now to run their course in the opposite direction with potentially equal (or greater) costs. Booms turn to busts not because something 'happened.' They turn to bust because there is simply no other path.
It is said that when men go mad they do so all at once. But they gain their sanity slowly and one by one.

That credit supply is being tightened means we've passed the 'one-by-one' stage and we're approaching 'all-at-once.'

1 comment:

Eric said...

By the way, this comment is in reference to the posted video. Since Marc thought he would be clever and disable comments to that video so that I could not post the TRUTH any longer. Well, if he wants to play hard ball I'll keep working around things. He has deleted my post 4 times now because it shows the truth of this video. So, here are my proofs that this video is of a firefight indeed. Marc this is really sad that you have to censor your material like this. I used to think you were against "Big Government", but you have proved your ways are just like "Big Government" or worse.

Why don't you make a comment Marc and tell viewers why you continually are deleting my posts?

Now for my original post:
Well, I guess this news source loves to censor information and delete posts that actually give the true facts. Well, I'll post again for the greater purpose of truth.

1. This video shows a normal firefight as they occur in urban areas. This is textbook combat. These soldiers do a marvelous job in their situation. I could seriously open a Marine training manual and you would see this exact firefight probably listed.
2. Notice the cars as they come in together. This is a normal insurgency tactic. They rush cars in, try to use them as cover so they can quickly enforce their brothers under attack. Only, when they do this they usually don't know how many US forces are present or firing. In falujah they used this tactic many many times. It may look like civilians, but it is not civilians in any way, shape, or form. Gun fire like this can be heard for miles. All civilians would be out of the area and people in cars who had the capacity to hear would not find themselves in that situation.
3. Listen to the background sounds. What's that I hear? It is AK-47 fire rattling it off. You can hear it under the M-16 rifles blasting. Google a video that has an AK-47 firing and you'll notice they sound the same.
4. Towards the end of the video you'll hear someone mention a sniper bullet that almost hit another marine. Snipers + AK-47 fire =, it's not civilians to anyone who knows anything about urban combat. Everything in this video is completely normal. I notice nothing odd. If I would have recorded my three firefights that I experienced in Falujah they would all be very very similar.
5. The way the US marines are acting is how I'd expect any marine to act in their situation. You don't think there was celebration of victory at D-day, Iwo Jima, or any of the other battles of WWII? I'm sorry but this is victory in the face of death. This is a victory like no other to these men. What about the man who is excited about pumping 30 bullets into one of the insurgents? This is what this man is trained to do. It is his job. It is his mission. It gives his life purpose. Why should he not be able to celebrate doing what he was trained to do? Why should he not be happy that he successfully completed his mission? War is ugly, but there is still victory. If you don't think men acted like this during WWII just look up some World War II celebration videos and you'll understand. These men are facing death and when they overcome someone who is threatening them with death they have all the right to be prowd.

Moral of the story is that we should not believe propoganda when we have not experienced what these men are experiencing themselves. This video is obviously a firefight with insurgents. Whoever posted this video as "American soldiers shooting civilians" is lying to you. You believe it because you do not see the truth (I can see why you would believe this propoganda if you had not been in this situation yourselves). It is the small details that WITHOUT A DOUBT show that this is a simple firefight where the insurgency is outplayed.