Fed endorses home mortgage plan

WASHINGTON - The Federal Reserve moved Tuesday to protect home buyers from dubious lending practices, its most sweeping response to a mortgage meltdown that has forced record numbers of people from their homes.

The Fed has been under attack for not doing more to stem the crisis as hundreds of thousands of people lost the roof over their head. The situation raised the odds the country will fall into recession, unhinged Wall Street, racked up multibillion losses for financial companies and resulted in political finger-pointing over who was to blame.

The proposed rules, endorsed by the Federal Reserve Board in a 5-0 vote, would crack down on a range of shady lending practices that has burned many of the nation's riskiest "subprime" borrowers — those with spotty credit or low incomes — who have been hardest hit by the housing and credit debacles. The rules also would curtail misleading ads for many types of mortgages and bolster financial disclosures to borrowers.

"Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and indeed, the economy as a whole. They have no place in our mortgage system," Fed Chairman Ben Bernanke said. "We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated," he said.

If ultimately adopted, the plan would apply to new loans made by thousands of lenders of all types, including banks and brokers. It would not cover loans already made.

The proposal would restrict lenders from penalizing risky borrowers who pay loans off early, require lenders to make sure these borrowers set aside money to pay for taxes and insurance and bar lenders from making loans without proof of a borrower's income. It also would prohibit lenders from engaging in a pattern or practice of lending without considering a borrower's ability to repay a home loan from sources other than the home's value.

The plan disappointed both supporters and opponents of tougher home-lending regulations.

Mortgage lenders worried that the Fed plan was too tough and could crimp customers' choices. "We worry that some of the product restrictions could make it harder for bankers to tailor products for their customers and communities and result in some creditworthy customers not being able to obtain a loan," said Edward Yingling, president of the American Bankers Association.

Consumer groups and Democrats in Congress complained that the proposal doesn't provide sufficiently strong safeguards for borrowers.

"The Fed has done too little, too late," said Kathleen Day, spokeswoman for the Center for Responsible Lending, a group that promotes homeownership and works to curb predatory lending. "We don't think it is strong enough to protect people in the future and does nothing to help people left holding the bag now," she said.

Consumer advocates wanted an outright ban on prepayment penalties. These penalties, they say, deter homeowners from refinancing on more favorable terms. The penalties can be hard on borrowers who want to get out of adjustable-rate mortgages that reset from a low introductory rate to a much higher one they have trouble paying off. However, mortgage industry representatives argued that prepayment penalties ensure that lenders receive a minimum return if loans are paid off early, and can provide borrowers with a benefit of lower upfront costs or lower interest rates.

Another disappointment to consumer groups: to make a case for a possible violation, the lender has to have engaged in a pattern of making loans without considering the borrowers' ability to repay. An individual incident would not be sufficient by itself.

"We are pleased the Fed recognized the critical issues that have caused the foreclosure crisis. Unfortunately, the proposal fell short of the mark," said Allen Fishbein, the Consumer Federation of America's point person on housing and credit policies.

Before taking effect, the public, industry and others can weigh in. The Fed will then vote again, and the rules could be revised.

The proposal offers Bernanke, who took over the helm in February 2006, an important opportunity to put his imprint on the Fed's regulatory powers. Some critics have complained that Bernanke's predecessor — Alan Greenspan, who ran the Fed for 18 1/2 years — failed to act as a forceful regulator especially during the 2001-2005 housing boom, when easy credit spurred lots of subprime home loans and many exotic types of mortgages.

When the housing market went bust, subprime loans were most heavily affected.

Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72 percent entered the foreclosure process during those months. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.

When home values weakened, borrowers were left with loan balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.

The House has passed legislation that would put into law some tougher provisions than contemplated by the Fed. A similar bill is pending in the Senate.

Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee and contender for his party's presidential nomination, called the Fed proposal a "significant step backwards." Rep. Barney Frank, D-Mass., said it shows that the Fed is "not a strong advocate for consumers, and two, there is no Santa Claus. People who are surprised by the one are presumably surprised by the other."

For both risky and not-so-risky borrowers, the Fed also proposed:

• Prohibiting certain types of misleading or deceptive advertising for home mortgages. For instance, it would bar using the term "fixed" to describe a rate that is not truly fixed over the life of the entire loan. It also would require that all applicable rates or payments be disclosed in ads with equal prominence as advertised introductory "teaser" rates.

• Require lenders to provide financial disclosures to borrowers early enough for them to use while shopping for a mortgage. Lenders could not charge fees — except for a fee to obtain a credit report — until after the consumer receives the disclosures.

In addition, the Fed proposed barring lenders from paying mortgage brokers a fee that exceeds the amount the would-be borrower had agreed to in advance that the broker would receive.

The Fed also proposed banning certain practices, such as failing to credit a mortgage payment to a borrower's account when the company servicing the mortgage receives it. And it would prohibit a broker or other company from coercing or encouraging an appraiser to misrepresent the value of a home.

___ By JEANNINE AVERSA, AP Economics Writer 1 hour, 16 minutes ago

On the Net:

Federal Reserve: http://www.federalreserve.gov/

Peter Schiff on 'Your World with Cavuto' on the The Housing Bubble

A Real Estate Investor and Peter Schiff Debate the Real Estate Downturn.

Mr. Schiff has a Catastrophist View that many leading economic figures are also now saying is a stonger possibility due to the real estate and subprime crisis.

Imagining Recession

The world’s housing, oil, and stock markets have been plunged into turmoil in recent months. Yet consumer confidence, capital expenditure, and hiring have yet to take a sharp hit. Why?

Ultimately, consumer and business confidence are mostly irrational. The psychology of the markets is dominated by the public images that we have in mind from day to day, and that form the basis of our imaginations and of the stories we tell each other.

Popular images of past disasters are part of our folklore, often buried in the dim reaches of our memory, but re-emerging to trouble us from time to time. Like traditional myths, such graphic, shared images embody fears that are deeply entrenched in our psyche. The images that have accompanied past episodes of market turmoil are largely absent today.

Consider the oil crisis that began in November 1973, resulting in a world stock market crash and a sharp world recession. Vivid images have stuck in people’s minds from that episode: long lines of cars at gas stations, people riding bicycles to work, gasless Sundays and other rationing schemes.

Today, the real price of oil is nearly twice as high as it was at the peak of that crisis, but we have seen nothing like the images from 1973-5. Mostly we are not even reminded of them. So our confidence is not shaken, yet.

Just before the October 19, 1987, stock market crash, the biggest one-day drop in history, the image on people’s minds was the crash of 1929. Indeed, the Wall Street Journal ran a story about it on the morning of the 1987 crash. I know that those images contributed to the severity of the 1987 crash by encouraging people to sell, because I ran a survey of individual and institutional investors the following week.

Images of 1929 – of financiers leaping from buildings, unemployed men sleeping on park benches, long lines at soup kitchens, and impoverished boys selling apples on the street – are not on our minds now. The 1929 crash just does not seem relevant to most people today, probably because we survived the 1987 and 2000 crashes with few ill effects, while 1929 seems not only the distant past, but another world.

But images of the 1987 crash, driven by computers in tall modern steel-and-glass office buildings, do seem to be on people’s minds today. The stock market suffered one of its biggest one-day drops this year on the 20th anniversary of the 1987 crash, with the S&P 500 falling 2.56%. No previous anniversary of the 1987 crash showed any such drop.

The image of a bank run, of long lines of angry people lining up outside a failed bank, was briefly on our minds after the Northern Rock failure in Britain. But the Bank of England’s direct intervention prevented these images from gaining a foothold on our collective psychology.

The images that are uppermost in our minds are of a housing crisis. We imagine residential streets with one “for sale” sign after another. Worse, there are images of foreclosures, of families being evicted from their homes, their furniture and belongings on the street.

If home prices continue to decline in the United States and possibly elsewhere, there could be many more vivid images. You may yet be presented with the image of your child’s playmate moving away because his parents were thrown out in a foreclosure. You may see a house down the street trashed by an angry owner who was foreclosed. Such images become part of your sense of reality, and could disturb your sense of confidence and reduce your willingness to spend and support the economy.

Could such changes in psychology be big enough to tip us into a world recession? While it is far from clear that they will, it is a possibility. Psychology need only change enough to bring about a drop in consumption or investment growth of a percentage point or so of world GDP, and market repercussions can do the rest.

Source HERE

Robert J. Shiller is Professor of Economics at Yale University, Chief Economist at MacroMarkets LLC, which he co-founded (see macromarkets.com), and author of Irrational Exuberance and The New Financial Order: Risk in the 21st Century.

Homebuilders' index scraping bottom

December reading of U.S. builders' sentiment comes in at record low for third straight month.

WASHINGTON (AP) -- A December reading of U.S. homebuilders' sentiment remained at a record low for the third straight month.

The National Association of Home Builders said Monday its housing market index, which gauges builders' perceptions of conditions and expectations for home sales over the next six months, came in at 19 in December. The number was at the lowest level since the index began in January 1985.

Index readings higher than 50 indicate positive sentiment. The seasonally adjusted index has been below 50 since May 2006, and declined for eight straight months this year, and has been unchanged since October.

Tighter lending standards, rising defaults among borrowers with weak credit and a sense of worry about the housing market's future have meant fewer buyers for hard-hit homebuilders such as D.R. Horton (DHI, Fortune 500), Pulte Homes (PHM, Fortune 500) and Centex (CTX, Fortune 500).

Many builders are "bracing themselves for the winter months when home buying traditionally slows, scaling down their inventories and repositioning themselves for the time when market conditions can support an upswing in building activity," David Seiders, the trade group's chief economist said in a statement.

That's likely to occur, he said, by the second half of next year.

Confidence dropped in the northeast, but inched up in the Midwest and South. It remained unchanged in western states.

Nationwide, new-home sales are projected to fall to 788,000 this year, down 25 percent from 1.05 million last year, the National Association of Realtors said last week. Sales are expected to drop further to 693,000 in 2008, according to the Realtors' group.

Source HERE

The Catastrophist View

What would it take to send the U.S. economy—and New York’s—into free fall? A doomsday primer.

By Duff McDonald

• Published Oct 28, 2007

Peter Schiff is laughing at me. I’ve just asked him to entertain the following notion: that we dodged a bullet during August’s financial-market turmoil and, with the stock market bouncing right back from every dip, things might be okay. So why worry?

He stops laughing. “Why worry?” he asks. “Because we dodged a bullet but are about to step on a hand grenade.”

Sitting in a corner office of a nondescript building just off I-95 in Darien, Connecticut, Schiff, the president of brokerage Euro Pacific Capital, and author of Crash Proof: How to Profit From the Coming Economic Collapse, will spend the next hour spelling out a singularly pessimistic view of the American economy. And he will do so while exhibiting a curious juxtaposition unique to the bearish prognosticator: He speaks of disaster with a smile on his face. No, he’s not happy about our impending doom. But he is happy that people are finally taking him seriously.

Some people, anyway. The recessionary fears that were sparked by the global liquidity crisis in August have eased, largely because of a resilient stock market and a belief that the Federal Reserve’s interest-rate cut in September curtailed deeper losses. When Goldman Sachs invested in its own imploding Global Equity Opportunities hedge fund in August, calling it an “opportunity” and not a “rescue,” people laughed. Guess who laughed last? Goldman, which had reportedly enjoyed a $370 million gain on its $2 billion rescue by October. The optimists stay focused on stories like Steve Jobs’s next stroke of genius.

But Schiff, whom CNBC calls “Dr. Doom,” has not, as bears do when winter approaches, gone off to hide in a cave. Why not? Because every single one of the underlying economic factors that he has identified as cause for concern has worsened. And his is no longer a lone voice in the woods. If you don’t care to listen to a man nicknamed Dr. Doom, you can listen to people like former Federal Reserve chairman Alan Greenspan, esteemed bond-fund manager Bill Gross, or famed money manager Jeremy Grantham. They’re part of a growing chorus of voices that are saying many of the same things as Schiff.

Their bearish arguments come in many shapes and sizes, but here’s the basic one: The past five or six years have been deceptively fortunate ones for the U.S. economy. That’s because any troublesome developments—the surge in oil prices from $28 per barrel in 2003 to about $87 today, for example—have been papered over by rising home prices. Home equity has been used to buy flat-screen TVs, SUVs, and more homes. Wall Street bought up all this debt from lenders, thereby allowing them to lend more.

The softening of real-estate prices in most parts of the United States put a crimp in this system, but it hasn’t stopped it. The question is, what, if anything, will? What will bring on the apocalypse that Schiff and others believe is inevitable? They see it like this:

THREAT NO. 1
The Bottom Continues to Fall Out of the Housing Market
Manhattan’s gravity-defying real estate aside, it’s quite clear the nation is experiencing a genuine housing crisis. In August, pending home sales dropped 6.5 percent, and they currently sit at their lowest level since 2001. The National Association of Realtors conducted a recent survey that showed more than 10 percent of sales contracts fell through at the last moment in August, primarily owing to disappearing loan commitments from banks. The crisis will only deepen, when more borrowers see their adjustable-rate mortgages adjusted upward. There was a foreclosure filing for one of every 510 households in the country in August, the highest figure ever issued, and by one estimate, more than 1.7 million foreclosures will occur in the country by the end of 2008. That’s not just subprime borrowers: According to the Federal Housing Finance Board, while nearly 35 percent of conventional mortgages in 2004 used ARMs, some 70.7 percent of jumbo loans—those above $333,700 (the jumbo threshold in 2004; it’s now higher)—did too.

Historically, bond-market investors have been the boring counterparts to their equity-market brethren. But in his October Investment Outlook, famed bond investor Bill Gross was anything but. The managing director of money management firm pimco pointed out that the Federal Reserve is caught in a bind: It must continue to lower interest rates to ameliorate this burgeoning housing crisis, but in doing so, it “risks reigniting speculative equity market behavior, and … a run on the dollar.” (More on the dollar later.) Gross doesn’t have the answers but observes that the Fed is “in a pickle, and a sour one at that.” Worse yet, concerns that a rate cut might be inflationary actually caused bond yields to rise in the wake of the rate cut, something that doesn’t normally happen. The Fed’s influence, always overstated, might turn out to be nonexistent in a credit market that remains on edge.

Hedge-fund veteran Rick Bookstaber, the author of A Demon of Our Own Design, spells out a potentially disastrous scenario that could unfold regardless of what the Fed does: Continued foreclosures result in a further drop in housing prices, which results in further foreclosures, which result in a further drop in housing prices. Even for those of us not selling, reduced home values result in a reduced sense of security, which results in reduced consumption, which results in a slowing economy, which … you get the point.

THREAT NO. 2
The Derivatives-Related Meltdown, Part II
Anybody who glances occasionally at the financial pages these days knows that mortgages issued to home buyers are packaged together (in a process called securitization) into a collateralized-debt obligation, or CDO. That’s what’s known as a derivative, a security whose value depends on the value of other securities. The price of the CDO, you see, is “derived” from the prices of the underlying mortgages. (It works with credit cards, too, or bank loans—any kind of debt will do.)

In principle, the idea of a CDO makes perfect sense. In buying $5 million worth of a CDO, an investor has essentially lent money to an entire portfolio of homeowners, instead of placing all his eggs in one basket, say, by funding a single $5 million mortgage. In the real-estate-crazy environment of the past decade, the CDO market took off like a rocket. But the buyers of these derivatives made a critical error—they confused the spreading of risk with the elimination of risk. A booming economy made this confusion not just possible but irresistible. With relatively few defaults in the first half of the decade, investment firms, including many hedge funds, came to see CDO returns as a sure thing and loaded up on them, often borrowing money to do so, taking on debt to buy debt and thereby setting up a potentially deadly chain reaction. The readiness of the secondary market to buy all these mortgages encouraged the lenders to run wild and lend to anyone who walked through the door, leading—inevitably, in retrospect—to a decline in loan quality. Analyst Christopher Wood of Asia-Pacific investment house CLSA succinctly defines the problem in his highly readable newsletter Greed & Fear: “[Securitization] has one fatal flaw, which will ultimately prove to be its undoing … it removes the incentive of those making the loan to worry about whether the loan is a good credit.”

Still, it all held together until mortgage defaults began to cut into the yields of these CDOs and holders looked to sell them, only to realize their value had slipped. Forced liquidations as a result of that “price discovery” were a primary factor in Bear Stearns’ hedge-fund calamity in August. And it’s not over yet: The aftershocks of the mortgage meltdown are still being felt, as banks such as Citigroup and Deutsche Bank announce multibillion-dollar write-downs.

Each time one of these write-downs has been announced, the market has had a curiously positive response, taking the news as a sign that the worst was over and the banks were cleaning up their books. But because these derivatives are linked to other debt, there’s no reason to be certain that trouble won’t bleed into other markets. Among other things, the liquidity crisis froze the market in structured investment vehicles (SIVs), a nifty bit of financial engineering that banks use to profit from the spread between short-term debt and long-term debt. No one yet knows how nasty these losses could turn out to be because SIVs are stashed, Enron style, off the books.

THREAT NO. 3
Consumers Run Out of Steam (and Take the Economy Down With Them)
The U.S. economy, for all its worldly sophistication, is driven by mall shoppers and late-night Amazon addicts—70 percent of the gross domestic product is accounted for by consumer spending, which is buttressed by debt. According to the Federal Reserve, total U.S. household debt was, as of August, $2.5 trillion—a 24 percent increase in the past five years. Total credit-card debt, including gas cards and the like, was $915 billion.

The willingness of consumers to keep spending and piling on debt in the midst of a slowing real-estate market is hailed on Wall Street as an act of patriotism, which Schiff considers perverse. Imagine, he suggests, that you ran into a good friend and asked him how he was doing. His reply: “I took out a third mortgage, maxed out my credit cards, and emptied out my kids’ college savings account so I could buy a bigger TV and a new car, and we’re going to Greece on vacation over the holidays. Things are great!” Schiff lets the idea sink in and then finishes the thought: “And we’re celebrating the fact that we’re doing this as a nation?”

The Catastrophist View

In a recent interview, John Santer, a district director of NeighborWorks America, a community-based nonprofit, pointed out that 43 percent of American households spend more than they earn each year, and fewer than six in ten have enough savings to last them three months if they were suddenly out of a job. So where’s the money coming from? From 1991 to 2005, Americans borrowed $530 billion against the value of their homes each year.

James Glassman, a senior economist at JPMorgan Chase, told a Tulsa, Oklahoma, luncheon crowd in early October that before 1985, consumer spending grew in line with income, but since that time, it’s grown half a percent faster on an annual basis. As a result, household savings, which once reached 10 percent of income, is now literally negative. “My guess is that in five years we’ll look back and realize … that the consumer we knew for twenty years is coming to an end,” he said.

Roger Ehrenberg, an ex–Wall Streeter and author of the financial blog Information Arbitrage, forecasts extreme financial pain. “You’ve got a weaker dollar, declining economic fundamentals, and a debt-strapped consumer—I’d call that a bad fact set,” he says. “Lay on top of that the mortgage problem and declining home values, and you can paint a pretty ugly picture.”

THREAT NO. 4
That the Rest of the World Decides They Don’t Need Us and the Dollar Tumbles Hard
The dollar is falling, possibly collapsing, depending on whom you talk to. The greenback has sunk close to its lowest point in the post-1973 floating-exchange-rate era, so low that it’s been overtaken by the Canadian dollar—affectionately known as the loonie—for the first time since 1976. How low will it go? When Alan Greenspan was asked by Lesley Stahl of 60 Minutes last month what currency he’d like to be paid in, his response was telling: “[The] key question … is, ‘In what currency do you wish to hold your assets?’ And what I’ve done is I diversify.” Translation: He isn’t betting on the dollar. And neither is the majority of Wall Street.

Here’s why catastrophists see that as a major problem: About 25 percent of our government debt is held by foreign governments, with the major holders being Japan ($610.9 billion), China ($407.8 billion), the U.K. ($210.1 billion), and our friends in the Middle East, the oil-exporting countries ($123.8 billion). When the current Fed chairman, Ben Bernanke, cuts rates to soften the housing blow for Americans, he also weakens the dollar by making dollar-based investments less attractive. And when the dollar weakens, so, too, does the value of these gigantic positions held by the foreign governments. At some point, they’re no longer going to tolerate the losses we inflict on them by lowering rates, and if that happens and they start dumping dollars, watch out for the peso.

The bulls will tell you that foreign governments understand the American economy is the key to global economic health, and that they’ll suck it up and take it when we devalue their debt. To which Schiff offers another analogy. Imagine if five people were washed up on a desert island: four Asians and an American. In splitting up their duties, one Asian says he’ll fish; another will hunt, another will look for firewood, and another will cook. The American assigns himself the job of eating.

“The modern economist looks at this situation and says the American is key to the whole thing,” says Schiff. “Because without him to eat, the four Asians would be unemployed.” The alternative: Without the American, the Asians might eat a little more themselves and even spend some time building a boat. This is happening as we speak: With the rise of the Chinese consumer class, the local citizenry is now spending, and the country is no longer totally dependent on exports. Which means they’re no longer totally dependent on us.

Readers of the financial press are surely familiar with the buzzword of the moment, decoupling. It’s used to describe how U.S.-Europe and U.S.-Asian trade relationships are becoming less dependent at the same time as European-Asian ties are growing. Most Asian nations, including China, are seeing more rapid growth in exports to Europe than to the U.S. And the U.S. now accounts for a declining share of European exports. The bearish interpretation: that the longtime global embrace of the dollar is loosening.

THREAT NO. 5
That We Don’t See It Happening Because It’s a Slow-Motion Train Wreck
Last but not least, we can circle back to the Dow Jones Industrial Average making new highs in October—14,087.55 on October 1—offering hope that our equity portfolios will carry us through to the other side of whatever it is we’re on the wrong side of. Before addressing the fact that the equity market might just be clueless, there’s one last dollar-related point to make. The true value of a stock portfolio isn’t really its quoted worth in dollars—it’s what you could buy with that portfolio if you were to sell it.

Given that we as Americans don’t manufacture that much anymore (we’re a service economy!), we are largely talking about foreign-made goods, such as flat-screens from Korea or cars from Germany. Over time, if the dollar continues to slump, foreign manufacturers will raise prices to compensate for what they’re losing in the exchange rate. In that light, a Dow at 14,000 with the euro at $1.42 is really no different from a Dow at 13,000 with the euro at $1.33. (One reason the price of oil has risen so high is that it is quoted in dollars, and the sellers thereof have had to continually jack up the per-barrel price to maintain their own purchasing power at home and elsewhere.)

Still, a rising Dow is better than a falling Dow, and the bulls are piling into every rally. Which still doesn’t impress Jeremy Grantham, chairman of Boston-based money manager GMO, in the least. “The equity market is always slow to pick up on someone else’s crisis,” he says, referring to the turmoil in both the housing and fixed-income markets. “And so you’ve got a slow-motion train wreck that has to work itself through the system.”

How will it work itself through? Grantham points to the recent strength in profit margins, fueled by—you guessed it!—our plummeting savings rate, and says there’s nowhere to go but down. “If you start with an overpriced market and bring profit margins down, that’s more than enough to bring stock prices down,” he says. “It is the most certain mean-reversion in all of finance.” Grantham calculates that the U.S. stock market will have to fall by a full third before it gets to its “fair value.” At which point we will likely be in full-blown recession. And when that happens, Schiff says, we will see a country in downsizing mode, “selling the consumer goods we’ve been buying back to the Chinese. It will be one big, giant repossession.”

So assuming all this is true, that Schiff and his fellow doomsayers are right about the rotten core of the U.S. economy, how will this affect New York City? We’ve grown accustomed to the idea of our local economy, particularly the real-estate market, being inherently stronger than the nation’s and possibly immune to whatever woes strike the rest of America. Wall Street, after all, makes money on downs as well as ups, and the stampede of foreigners and foreign cash could, if anything, be aided by the weak dollar.

Last week, though, the argument against New York invincibility was implicitly made when Merrill Lynch announced a larger-than-expected write-down of $7.9 billion dollars in its third quarter alone, primarily due to losses in the credit markets. Numbers as large as that can paradoxically seem trivial due to the abstract nature of accounting—a “write-down” involves no movement of real-life cash, just a readjustment of some theoretical values—but here’s something nontrivial to consider: Merrill Lynch is one of the largest employers in New York City. While so far only a few Merrill bigwigs have been shown the door, it’s almost certain that a chunk of the company’s rank and file will soon follow. All told, New York–based financial companies had already announced more than 42,000 layoffs as of October, according to one study, and the pace could pick up through the end of the year. That’s people who won’t be bidding up new apartments, who won’t be going out to dinner five times a week, who won’t be testing the outer limits of their credit cards at Barneys. The downstream effects of this could be even more severe, as every Wall Street job is estimated to account for another 1.3 to 2 jobs, meaning that additional job losses could push 100,000.

Meanwhile, the public sector is feeling it, too. A recent report by Nicole Gelinas, published by the Manhattan Institute, forecast a budget deficit for New York City next year and predicted that Mayor Bloomberg, who enjoyed a string of budget surpluses until this year, will likely be forced to leave his successor with a double whammy: a deficit and a projected 50 percent increase in outstanding debt. Of course, the catastrophists could be dead wrong, as they have been for going on a decade now—but to them, it sure smells like the seventies all over again.

Source HERE

Voodoo debt and the coming recession

This article by Bill Fleckenstein's touches on many of the concepts in Mr. Roubini interview (posted yesterday). This article helps to supports and explain some of the concepts and preditions that Mr. Roubini has been sharing with the financial world for almost two years.

Harry

With debt piled high in a variety of voodoo mortgages, the declining economy will soon turn into a bobsled ride to tears.

By Bill Fleckenstein

The eyes tend to glaze over at the mention of "collateralized debt obligations" (CDOs) and "credit default swaps" (CDSs).

It's understandable. These financial instruments -- the glue that has held together the speculation in housing finance and the housing ATM -- have proved somewhat incomprehensible, even to the professionals. That's why I referred to them as "financial dark matter" in my column two weeks ago. (Special thanks to my friend Jim Grant for having gotten me up to speed on this subject in his past two issues of Grant's Interest Rate Observer.)

Shedding light on dark matter

But while CDOs and CDSs are hard to fathom, a disruption in these risk-filled markets would become all too comprehensible to average folks -- as the aftermath would bring serious turmoil in real estate and the economy. In the spirit of "forewarned is forearmed," I will now attempt to explain a bit of this mortgage exotica, and then show what risky behavior it has financed in neighborhoods across America.

In the marketplace, there are indices known as ABX.HE. They are a synthetic version of assets backed by U.S. home loans. They are subdivided into "tranches," or sections, that are grouped by their relative risk. Two weeks ago, a friend alerted me to the rather large trade that went through in a particular tranche of one of these indices. (It happened to be the BBB- tranche, which is the riskiest.) When the trade took place, it knocked the bid price a bit lower. It has continued to drift and now is off about 1.5%.

One tranche now bears a stench

What makes that interesting? In the nine months since the ABX.HE began trading, every time one of these indices has sold off, some CDO manager (with a natural appetite for asset-backed home-equity-loan securities) has stepped into the market and driven these slightly fallen angels right back up. But now those buyers seem to have disappeared.

I believe that the CDO and CDS markets (the lower-grade tranches in particular) will be ground zero in any financial dislocation. As my friend says: "A slowdown in the housing market is a growth event. Something going wrong in subprime is a volatility event" (i.e., a market dislocation). Granted, it's too isolated thus far to draw any big conclusions from, but then again, all trends must begin somewhere.

Source HERE

The Subprime Bailout: Too little Too Late

The consensus is moving from the soft vs. hard landing debate towards how severe the hard landing will be

Nouriel Roubini Dec 11, 2007

While a few months ago analysts were still heatedly debating whether the US would experience a soft landing or a hard landing (a recession) the center of the macro debate has now clearly shifted away from soft landing versus hard landing discussion to a recognition that a hard landing is the most likely scenario; thus, increasingly now the debate is on how deep and severe the forthcoming hard landing will be.

David Rosenberg of Merrill Lynch is now clearly predicting a recession for the US economy in 2008; Jan Hatzius at Goldman Sachs is not formally speaking of a certain recession in 2008 but most of his analysis is consistent with a high likelihood of a recession in 2008; Mark Zandi of Moody’s Economy.com is also very close to a hard landing view.

More interesting now even the thoughtful Richard Berner – who used to be strongly in the soft landing camp while his counterpart Steve Roach was in the hard landing camp – is now predicting a recession in the US in 2008, even if he expects such a recession to be mild. And even the soft-landing optimists at JPMorgan are now recognizing that the likelihood of a US recession is now at its highest level in years. When mainstream analysts such as Berner start to talk about a recession beng likely you know that the debate has clearly shifted towards a discussion of not whether a recession but rather how deep of a recession.

And in the academic camp some of the most senior economists in the profession – Bob Shiller, Marty Feldstein, Larry Summers, Paul Krugman – are all in various degrees in the hard landing camp or very concerned about a hard landing.

So it is time to move away from the soft landing vs. hard landing discussion and start considering seriously how deep the coming recession will be; in the view of this authors the 2008 recession will be more deep, protracted and painful than the short recessions of 1990-1991 and 2001; this time around – unlike 2001 when only tech investment faltered - most components of aggregate demand are under threat: falling residential investment, falling capex spending by the corporate sector and now evidence of a sharp slowdown and near stall of private consumption that accounts for 70% of GDP. When the US saving-less and debt burdened US consumer is now under threat the risk of a more protracted and severe recession than the mild one of 2001 are significant.

And don’t be misled by better than expected reported same store chain store sales for November this week; those data – as known to all analysts – are distorted by the longer sales calendar in November compared to 2006; whatever gains will be obtained in November will be undone by a payback in December. As Goldman Sachs put it today in a note to clients:

Same-store sales data for major retailers improved substantially in November. Our Goldman Sachs Retail Index jumped to 4.5% on a year-over-year basis, from 1.2% in October. From this vantage point, it looks like the indefatigable American consumer is spending freely as the holiday season gets underway. However, the improvement in monthly data contrasts with relatively tepid weekly reports and declining consumer confidence, and is mostly explained by reporting differences. Some retailers compared a four-week November that ended with the Thanksgiving week in 2006, but included the week after in 2007. The extra holiday shopping days in 2007 boosted sales at these retailers, but will involve a payback in the next release, which will now have fewer holiday shopping days than last year. We estimate this distortion accounted for roughly 2½ percentage points of the improvement in the GSRI… The corollary of better November data is a headwind for December retail sales reports. If the effect of over two percentage points is symmetric, then December same-store sales stand a good chance of coming in at or below zero.

Indeed, according to the UBS/ICSC data that looks at a broader range of retailers than the major ones same store chain store sales fell in 3 out of the 4 weeks of November with the figure in the reporting week ending on December 1st being a negative 2%.

So the US consumer is indeed at a tipping point and the overall holiday sales will end up showing the weakness in the sector that represents over 70% of GDP. If the saving-less US consumer falters – as it soon will being hit by falling home prices, falling HEW, rising debt servicing ratios, high debt burdens, high oil prices, sharply falling confidence, a slackening labor market – a recession becomes inevitable.

Indeed, as reported by the WSJ, the consensus among professional economists is now shifting towards the hard landing scenario as they put the chances of a recession at 38%, the highest in more than three years:

Economists Say Recession Risk Is Climbing By PHIL IZZO December 11, 2007; Page A3 The risk of a U.S. recession is rising, and the Federal Reserve should do something about it, according to economists in the latest WSJ.com survey.Fed officials have "to move to show their willingness to both avert risk of recession and stabilize the financial crisis," said Diane Swonk of Mesirow Financial. She said Fed Chairman Ben Bernanke's emphasis on consensus has proved to be the central bank's "weak spot in crisis mode. Now they need to show conviction instead of consensus."

Fifty of the 52 economists surveyed expect the Federal Open Market Committee to trim its target today for the federal-funds rate, the rate charged on overnight loans between banks. Only two see the Fed holding the rate steady at 4.5%.Some 61% say a quarter-percentage-point cut would be right; 27% say the Fed should cut rates by a half-point. Only 12% say the Fed should stand pat.

The economists, on average, now put the chances of a recession at 38%, the highest in more than three years, and up from 33.5% in November. They also reduced forecasts for U.S. economic growth across the board. They expect the nation's gross domestic product to grow at an annualized rate of 0.9% this quarter, down from 1.6% in the previous survey, with six economists expecting either a negative or a flat reading. Three economists project an economic contraction in the first quarter, with the average growth forecast at 1.5%, down from 1.9% in November.

Source Here

Mr. Roubini predicts the housing crisis almost two years ago

Online video helps troubled borrowers spot fraud

By Patrick Rucker Wed Dec 12, 4:35 PM ET

WASHINGTON (Reuters) - Fraudsters are targeting troubled borrowers facing foreclosure in a scheme that could leave homeowners with even more debt than they otherwise would face, a new online video warns.

In the video that dramatizes a common case of fraud, a homeowner receives an unsolicited offer to help settle mortgage debt but ends up homeless and with battered credit.

Under a common scheme, a con artist will seek out a public notice of foreclosure and approaches the potential victim with documents and the promise of sorting out the debt.

"You sign, thinking you are saving your home but you are really giving the con artist the deed to your house," according to the video called Avoid Fraud, which can be found on the Internet site YouTube. (http://www.youtube.com/avoidfraud )

Once a con artist has the deed to a home, he can strip out any untapped value and also charge new expenses under the borrower's name, according to Freddie Mac, the mortgage finance company that produced the video.

Rather than accept unsolicited offers of help, troubled borrowers should contact their mortgage servicer or lender directly, Freddie Mac advises.

Borrowers can also get free credit counseling help from a government-chartered program called HOPE NOW by dialing 1-888-995-HOPE (4673).

Freddie Mac produced the film because one in four troubled borrowers turn to the Internet for advice first on how to get help saving their homes, said Ingrid Beckles, the company's vice president for asset management.

"With fraud reports on the rise, we are using every communication channel out there to warn borrowers about these fraudsters and urge borrowers to call their lenders when they fall behind on their mortgage," she said.

Source Here.

Why the Fed bailout might not work

There are so many reasons why the bailout won't work. Here are some specifics about the flaws in the current bailout plan.

Harry

Why the Fed bailout might not work

The announced plan to make credit markets more liquid could end up having the opposite effect.
By Peter Eavis, senior writer

NEW YORK (Fortune) -- The Federal Reserve's latest move to make credit markets more liquid could deepen problems in the banking system and actually cause the markets to be even more illiquid.

Wednesday, the Fed, along with other central banks, announced a plan that is designed to enable banks to borrow money directly from the Fed at below-market rates. This will allow a wider range of banks to access Fed credit, and simultaneously allow them to submit a broader range of collateral to the Fed when taking out those loans.

Why do this now? The Fed explained in a release Wednesday: "This facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress." In layman's terms this means that rates on loans between banks - measured by something called the London Interbank Offered Rate, or Libor - are too high for the Fed's tastes, so it is now prepared to itself lend to banks at much lower rates.

Before this move, banks could borrow directly from the Fed through the so-called discount window, at 4.75 percent. The key Federal funds rate is lower, at 4.25%, but that is open to a narrower range of financial institutions and accepts a narrower range of collateral than the discount window. The new program - called the Term Auction Facility (TAF) - will auction funds to banks at rates very close to the lower Fed funds rate. The first TAF auction, for $20 billion, is scheduled to begin on Dec. 17.

The potentially dangerous aspect of the TAF is that it will allow banks with problems to borrow their way out of trouble, rather than by taking measures like issuing large amounts of stock to bolster their balance sheets. Struggling banks are struggling chiefly because they were mismanaged and wrote too many risky loans when credit was cheap. The TAF potentially gives mismanaged banks even more cheap credit, which will delay a much-needed restructuring of the banking sector. Nervousness about banks could then deepen, leading to even fewer loans being made.

Source Here.

The Biggest Slump in US Housing in the Last 40 Years"…or 53 Years?

Mr. Roubini called it before most. His article, back in August '07, was still seen by the great majority of others to be just another worst case senerio, but as it turns out, Mr. Roubini forcasts are playing out almost exactly as he predicted.

Harry

Nouriel Roubini's Global EconoMonitor
"The Biggest Slump in US Housing in the Last 40 Years"…or 53 Years?
Nouriel Roubini Aug 23, 2006

The Biggest Slump in US Housing in the Last 40 Years: These are not my views but those of the Toll Brothers, the famous luxury McMansions homebuilders, as CNN reported last week. Also, as reported by the WSJ today: In his 40 years as a home builder, Mr. Toll says, he has never seen a slump unfold like the current one. "I've never seen a downturn in housing without a downturn in employment or... some macroeconomic nasty condition that took housing down along with other elements of the economy," he says. "This time, you've got low unemployment, you've got job creation, you've got a stable stock market and relatively low interest rates.". This followed last week’s CNN headline: “Builder: Oversupply slump worst in 40 years. Toll Brothers slashes outlook on new homes as orders plunge and revenue misses forecasts” Indeed, yesterday’s sharply falling profit results from the Toll Brothers confirmed their view that this is the worst housing slump in decades. Similarly, Angelo Mozilo, the CEO of Countrywide – the country’s largest independent home mortgage lender - recently stated: "I've never seen a soft-landing in 53 years, so we have a ways to go before this levels out. I have to prepare the company for the worst that can happen." So, effectively the only debate now is whether housing conditions are the worst in the last 40 years or in the last 53 years. So much for the bullish soft-landing wishful thinking coming out of Wall Street these days….

Of course, the message from the Toll Brothers and Countrywide is like the proverbial canary in the mine that is reflective of an ongoing rout – calling it slowdown or slump is a misnomer by now – in the US housing market. Every possible indicator of the housing sector that has been coming out in the last few weeks – and I will discuss their details below - suggests that the housing market is in free fall. And today’s figures on existing home sales and unsold homes say it all; as Bloomberg concisely headlined this morning: U.S. Existing-Home Sales Tumble; Unsold Inventory Is Highest in a Decade


At this point there no doubt on whether the housing sector is contracting – real residential investment fell at the annualized rate of 6.4% in Q2. The first derivative of the housing market is clear and negative today and looking ahead for the next few quarters. There is not even a debate about the second derivative of the housing market as any estimate out there suggests that the housing sector will contract at a faster rate in Q3 and Q4 than in Q2. Some official estimates that I have seen suggest that real residential housing will contract at 10% - rather than the Q2 6.4% in the next two quarters. My own estimate – based on a reading of the coming data – is that, actually, the contraction is more likely to be of the order of 12-15% annualized rate in the next several quarters. So, the only remaining scary question is about the third derivative of the housing sector and at which point – in terms of quantities and prices – the housing market will bottom out.


I have also argued before that the effects of housing on US economic growth and the role of housing in tipping the US economy into a recession in early 2007 are more significant than the role that the tech sector bust in 2000 played in tipping the economy into a recession in 2001. There are three reasons:

1. The direct effect of the fall in residential investment in aggregate demand will be as high as the effects of the fall in real investment in the 2000-2001episode. Then, real investment fell by about 2% of GDP. This time around the fall in residential investment alone – let alone the role other components of real investment, such as software and equipment, that are already falling in Q2 – will be as large as residential investment could fall from the peak of about 6.2% of GDP (the highest level since the 1950s) to as low as 4% of GDP at the bottom in 2007.
2. The wealth effect of the tech bust was limited to the elite of folks who had stocks in the NASDAQ. The wealth effect of now falling housing prices – yes median prices are starting to fall at the national level - affects every home-owning household: the value of residential real estate has also increased to 48.5% of household wealth in 2006 from from 38.7% in 1996. Also, the link between housing wealth rising, increased home equity withdrawal (HEW) and consumption of durable and non durables is very significant (see RGE’s Christian Menegatti brief on this), much more than the effect of the tech bubbles of the 1990s. Last year, out of the $800 billion of HEW at least $150 or possibly $200 billion was spent on consumption and another good $100 billion plus went into residential investment (i.e. house capital improvements/expansions). It is enough for house price to flatten – as they already did recently – let alone start falling - as they are doing now since they are beginning to fall in major markets – for the wealth effect to disappear, the HEW dribble to low levels and for consumption to sharply fall. Note that this year there will be large increases in the borrowing costs for $1 trillion of ARM’s while this figure for 2007 will be $1.8 trillion. Thus, debt servicing costs for millions of homeowners will sharply increase this year and next.
3. The employment effects of housing are serious; up to 30% of the employment growth in the last three years was due directly and indirectly to housing. The direct effects are job lost in construction, building materials, real estate brokers and sales agents, and employees of the mortgage finance industry. The indirect effects imply that the role of housing is even larger than 30%. The housing boom led to a boom in consumer durables spending on home appliances and furniture. Indeed, in Q2 real consumption of such goods was already negative: as you have less new home built and purchased and less old homes refurbished and expanded, you get less purchases of home appliances and furniture. There are also other indirect effects of the housing bust on employment, even on the purchases of motor vehicles. Indeed, the current auto sector slump is not unrelated to the housing slump. As the Financial Times put recently, the sharp fall in the sales of Ford's pick-up trucks is related to the housing slump as such truck are widely purchased by real estate contractors. And indeed in Q2 real consumer durables (that include both cars, home appliances and furniture all related to housing) already fell, consistent with the view that we have now have a glut in the stock of consumer durables (durables consumption has a investment-like nature to it as such goods last for a long time). Thus, as housing sector slumps, the job and income and wage losses in housing will percolate throughout the economy.

How bad are the signals coming from the housing sector? As a recent news headline clearly put it: it is simply UGLY. Indeed, all the indicators from the housing sectors - including the latest housing starts and the homebuilders (NAHB) forward looking business conditions - indicate a housing sector that is literally in free fall. New home sales started to fall since the beginning of 2006 and in some regions they are down over 30% relative to a year ago. As Bloomberg summarized today the new housing data: “Sales of previously owned homes in the U.S. fell more than expected in July, resulting in the biggest supply of unsold homes in more than a decade, as higher mortgage rates discouraged would-be home buyers.. Purchases declined 4.1 percent last month to an annual rate of 6.33 million, the lowest since January 2004, from 6.6 million in June, the National Association of Realtors said today in Washington. Sales fell 11.2 percent compared with a year earlier.” Indeed, the number of unsold homes and the ratio of unsold homes to new home sales has therefore risen sharply to over 5.5 months of supply. Similarly the ratio of unsold homes to existing home sales has also sharply increased. These are clear indicator of a glut of unsold homes in the market. Housing starts are also sharply down elative to a year ago and expected to fall further over the next few quarters. Note also that, while overall mortgage applications are still up in the latest figures published today, due to sustained refinancing applications, applications for purchase applications have fallen 1.0% during the last week, this being fifth fall in the last six weeks. Moreover, there is a large amount of evidence that suggests increasing cancellation of initial mortgage applications, as the slump in the housing market and in the economy is now scaring households considering buying a home. Thus, the official data on purchase mortgage applications are very likely to exceed actual home sales.

More generally, note that when demand for housing initially falls relative to a glut of supply, the initial market response is not on price, as it is the case of financial market where prices adjust rapidly, but rather on the quantity of unsold homes and on how long unsold homes stay on the market. Housing prices, unlike financial assets, are sluggish. This market inventory adjustment eventually leads to lower prices once sellers realize that demand is low and that waiting is not going to help.

The housing market has thus followed so far the predicted various stages of adjustment to cycle driven by the initial housing bubble: initially a glut of supply of new homes as high prices (driven in part by speculative demand) led to high and excessive production of new homes; then a fall in demand as speculative high prices and rising rates made the purchases of housing less affordable to many; then, the ensuing inventory adjustment – an increase in unsold homes. Then, the reduction in the production of new homes – lower housing starts – as homebuilders with falling revenues and profits and lower expected demand finally reacted to the growing glut of unsold inventories. Indeed, the value of home builders’ shares on the NYSE has fallen by almost 50% relative to a year ago. Finally, we have now a price adjustment in two directions: a) an increase in rents as housing affordability fell since more and more households could not afford to pay the speculative prices of existing and new homes; this increase in rents is now correctly jacking up owner equivalent rent and increasing headline CPI inflation; b) the beginning of a fall in actual housing prices as the glut of unsold homes is now putting downward pressure on actual prices. (for more on recent indicators of the housing bust see the RGE Monitor cluster of readings on housing indicators)

The evidence on falling home prices is now becoming clearer. Since the end of World War II, there has never been a year on year fall in housing prices. There have been instead several quarters in which housing prices declined. Of course in some regions where there were housing busts prices declined for a while: in Texas during the housing bust of the mid 1980s that led to the S&L crisis; in California in the early 1990s following the recession in that state; in Boston in 1990. Those episodes were all associated with the housing bust that was related to the 1990-1991 recession So, you do not need a persistent year-on-year fall in median housing prices to have a housing bust; such bust can occur even if prices are flattening or falling in some regions, but not nationally. Moreover, such regional bust can be associated with national recession, as in the 1990-91 episode. So, the fact that the latest housing bubble was concentrated on the two coasts (North East all the way to Florida; and West Coast, especially California) does not mean that the coming housing bust in these regions will not have national macro effects. For one thing, the value of the housing stock in those two regions is close to 50% of the total housing stock given the bubble of recent years. Thus, a housing bust in the two coasts can and will have macro effects.

Indeed, today the National Association of Realtors reported today that the median price of an existing home rose only 0.9 percent in July from a year ago. So, housing prices are practically flat at the national level. Worse, relative to a year ago housing prices have already fallen in the North East (-2.1%), Mid-West (-0.6%) and the West (-0.3%). So, not only housing prices are falling in the bubbly two coast; they are also starting to fall in the Mid-West, the region where the conventional wisdom was that there was no housing bubble. The fact that home prices are falling in the Mid-West where prices did not skyrocket in the bubble years is a scary signal of how much the housing bust and glut in supply will lead to a sharp fall in housing prices in the quarters ahead with painful effects on the wealth, and thus consumption, of households. You can expect falling median housing prices, on a year-on-year basis, at the national level starting this month of August: indeed, today's figures on the glut of unsold homes - much larger than in the housing bust of the early 1990s - are only consistent with a highly likely actual fall in home prices in the months ahead and throughout most of 2007. Note also that, on an inflation adjusted basis, real home prices (relative to the CPI index) are already falling at a 4% plus rate.

Also, as noted by Dean Baker: "current house price indices are failing to pick up the full decline in prices because they miss the various concessions (seller paid closing costs, buyer-side realtor bonuses, and seller subsidized mortgages) that sellers often use to move their houses."

Even more ominously, futures markets now expect that house prices will fall during 2007. Following the lead and prodding of Robert Shiller – the maverick Yale professor who predicted the 2000 stock bust and is now predicting a housing bust - the Chicago Mercantile Exchange opened this spring a new futures market for house prices in ten U.S. cities. While this market is very new and still relatively illiquid, it is now predicting that U.S. house prices will fall in 2007 at the national average level, for the first time in over fifty years. The index of this futures’ market for the entire US is projecting a 5% price fall in 2007. And the futures contracts for individual cities show expected declines in housing prices even larger than 5% for Miami, New York, Boston, San Francisco, Boston, San Diego and Las Vegas.

The likely fall in median home prices in 2007 may actually turn out to be larger than the 5% priced in the futures markets. In fact, one of the peculiar features of the latest housing cycle has been the presence of a large housing bubble: prices were going up well above economic fundamentals because of the speculative demand coming from expectations of increased housing prices that were feeding further speculative demand: "condo flipping" is the popular term for this speculative demand. Now that the bubble is bursting the fall in prices will be sharper than the one implied by medium term fundamantals as the initial price increase was due to a bubble that is bursting and leading to a fall in speculative demand: with prices now falling homeowners and speculators have no incentive to buy new homes as they expect prices to be lower in the future. So, an expected price fall leads to fall in speculative and fundamental demand and triggers actual larger than otherwise fall in actual prices. The speculative excess of a price bubble will now bring the bust of this price bubble. While the effect will be slower than in asset markets where prices adjust instantaneously (due to the sluggish nature of housing prices and their slow adjustment to increased inventories) eventually this price adjustment will occur - as it is now - and it will be very persistent over time. So, you can expect falling housing prices throughout most of 2007.

So, the simple conclusion from the analysis above is that this is indeed the biggest housing slump in the last four or five decades: every housing indictor is in free fall, including now housing prices. By itself this slump is enough to trigger a US recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession. And on top of the housing bust, US consumers are facing oil above $70, the delayed effects of rising Fed Fund and long term rates, falling real wages, negative savings, high debt ratios and higher and higher debt servicing ratios. This is the tipping point for the US consumer and the effects will be ugly. Expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession.

And the housing bust is not going to be only a US phenomenon. As I will discuss in another blog, housing bubbles festered in many other economies including many European ones. Thus, the combination of high oil prices, delayed effects of rising interest rates and slump of housing that is now leading to a US recession is a phenomenon that is common to many other economies, including several European ones. So, expect the same deadly combinations of three ugly bears (slumping housing, high oil prices and rising interest rates) to hammer Goldilocks and sharply hurt Europe and other economies in the world.

Housing: a crisis with staying power

There is so much instability in our current economy. The War in Iraq, Oil prices at record highs, the sub-prime lending crisis and of course the nose dive of the real estate market.

For those who currently own or looking to purchase a home, which is usually the largest investment made in one's life, your decision now could affect the rest of your life’s. Please proceed with caution. The are times to gamble, but your life is not a roulette wheel and with so much volatility and instability in the housing market, it's probably best to play is safe and sit on the sidelines (if you are looking). But for those in this jam, don't just cross your fingers and hope for a quick turn around. Although possible, the odds are small. If your budget does not allow for your current mortgage payment and your savings are running down. Protect yourselves from a possible disaster and sell your home. Forget the possible upside...you must protect you and your family from the potential nightmare of losing your home and ruining your credit.

I sold two homes, one in 2006 and one in 2005 and did not buy. People thought I was loony. There were realtors, friends and family who told me how this market will continue to rise and that I'll be throwing away money if I didn't buy another house. Others told me that our San Francisco Bay Area real estate market will NOT go down...can "never" go down?!?!? When I started seeing the unbridled frenzied in the market and hearing all this from just about everyone, I thought it safe to cash in my chips.

Now there is talk of a turn around. Do weight those who intest are not alighed with yours greater that your own self interest. You know your own financial situation. It should be basis on facts, not hopes. If you are stuggling...then I urge you to exit this market and save what you can...even if it's just your credit. Good luck!

Harry

By Mark Trumbull Staff writer of The Christian Science Monitor
from the December 10, 2007 edition

Housing: a crisis with staying power

Americans just witnessed the biggest housing boom in their history. The impact of the bust that has followed looks to be wide and long-lasting. First of a three-part series.

Cape Coral, Fla. - The current deflation of home prices is changing America.
It's a real estate storm that made landfall like a slow-moving Gulf Coast hurricane here in south Florida and in other once-booming housing markets last year. In recent months it has gathered momentum and spread, shaping up to become perhaps the worst home-price slump since the 1920s and '30s.

The bust promises to have lasting effects. Among them:
•It is defining the limits, for now, of what President Bush has called the "ownership society." A surging foreclosure rate means that the rate of homeownership, after a historic rise, is falling.
•It's forcing a rethink of economic policy. The Federal Reserve is expected to ease interest rates this Tuesday. Over the longer term, today's hard lessons might influence the way the Fed and the mortgage market operate.
•It affects the mood of America entering the year of an up-for-grabs presidential election.
•It marks a pocketbook shift for consumers – and perhaps even global investors – from an era of housing-fueled wealth to belt-tightening. Real estate can no longer be viewed as a surefire investment.

"We are in the aftermath of the biggest housing boom in history," says Robert Shiller, a Yale University economist. "We are in a period of exceptional uncertainty about the value of our homes."

It is that issue – how far home prices rose – that sets this bust apart from other US housing downturns in the past century. This is more than a typical cycle where the pace of home building plummets. And this goes well beyond a crisis of subprime borrowers.

That's because this housing cycle now puts the wider economy at risk through several channels. First, the dive in home sales and construction subtracts directly from economic growth. Second, the erosion of property values is beginning to affect consumer confidence and spending. Perhaps more serious, write-downs of bad loans are crimping the health of banks, raising concerns that the flow of credit could be choked off despite Federal Reserve efforts to keep interest rates low.

In the boom, prices up 90 percent

What caused US home prices, as tracked by the Standard & Poor's Case-Shiller index, to shoot up nearly 90 percent in the first six years of this decade?

Easy credit laid the foundation for the run-up. But it also gathered a momentum of its own. As people saw the annual gains in home values outstrip the interest on a loan, they piled into the market.

Some worried that if they didn't scramble to buy, they'd never get another chance. Others were investors eager to "flip" homes for quick profits. When home values finally maxed out in 2006 – not because of any general trouble in the economy but because asking prices outstripped the means of new buyers – the stage was set for a reversal. Speculators backed out of the market and defaults began to rise for subprime borrowers, who face higher interest rates because they present a higher risk to lenders. When adjusted for inflation, housing prices have fallen an average of 8.9 percent this year, according to Mr. Shiller

Most economists expect them to fall further. Economists differ on whether this housing slump is tipping the nation into its first recession since 2001. It is certainly a big drag on growth.
Recession or no, it appears clear that some of the repercussions will be long-lasting.
Start with a historic surge in foreclosures that has made some neighborhoods look like disaster zones. The problem may not crest for several years.

Full Stoy here.