Desire is not Demand

Desire — U2

The last line of defense for the housing bulls is the fallacy of pent-up demand. Belief in this fallacy relies on people’s inability to distinguish between desire and demand.

Most people want a house. About 65% of Orange County residents own their homes, but probably 95% of residents wish they did. The desire for housing always exceeds the supply because there is always some segment of the market who is unable to obtain home ownership due to the cost of housing and a lack of available credit. True demand is the amount of money those with the desire for housing can raise to put toward the purchase of real estate. If those with the desire for real estate do not have savings and if they cannot qualify for a loan, they create no measurable demand. When realtors make the assertion that there is pent up demand, they are correctly surmising that there is an increasing number of people who want real estate who cannot obtain it, they are totally incorrect in their idea that this demand is merely sitting on the fence waiting to enter the market at a time of their choosing.

California’s residential real estate market is completely controlled by loan terms and the availability of credit. I first discussed this phenomenon in the posts Your Buyer’s Loan Terms and The Anatomy of a Credit Bubble. When credit terms are restrictive, when 30-year fixed-rate conventionally-amortized mortgages are the only available financing product, prices reflect the amounts of money people’s incomes can finance under those terms (as they were before the bubble). When credit terms are loose, when stated-income, Option ARMs, low interest rates, high DTIs and other terms and conditions allow people the ability to borrow two or three times the amounts available under restrictive terms, prices in the residential real estate market will be reflective of those terms (as they were in the bubble). Local supply and demand issues may temporarily halt the rise and fall to a new equilibrium level, but supply analysis alone completely fails to predict this new equilibrium or explain how prices got there.

Analyzing supply and calculating the time on the market is one method of trying to predict future price movements. The theory is that when inventory is low and sales volumes are high that prices must rise, and visa versa. This market snapshot of the balance between supply and demand can be useful, but it is notoriously unreliable because it does not examine the cause of the demand and it falsely assumes that demand is ever increasing. When you look at the chart below showing months of inventory from 2002-2007, you see a false spike in 2004. This signal would ordinarily foretell the collapse of market pricing, but since demand was stimulated in 2004 through the widespread sales of Option ARMs and the near elimination of lending standards, the inventory was quickly absorbed and prices continued higher. Similarly, right now in our market, inventory is down from the peak, and months on the market has fallen below 6 months. This would ordinarily be a signal of a price stabilization or future price increases. However, since credit is continuing to tighten and loan terms are becoming more restrictive, demand, as properly measured by dollars, will continue to weaken, and prices will continue to fall.

California has had a chronic housing shortage for many years. The
mechanisms for bringing supply to the market are slow and cumbersome,
and many local municipalities restrict the ability of developers to
bring new supply to the market or outright forbid it. It is not
uncommon in California for price points to favor the construction of
new dwelling units and for municipalities to forbid its construction.
In these circumstances, the normal mechanism for rebalancing supply and
demand do not function. In most states, when there is a demand for
housing, homebuilders will go to work and provide dwelling units to
meet this demand. The increase in supply blunts the price impact
greater demand has on market prices. This is why many states where
there are fewer land-use controls, they experience much less volatility in
their housing markets.

Of course, this is one other factor that contributes to the wild
volatility in California’s residential real estate market: irrational
exuberance (kool aid intoxication). In California’s markets, when
prices start to rise, fear and greed creates a positive feedback loop
that compels people to buy more (if credit is available) and drive
prices even higher. In other markets rising prices creates a negative
feedback loop that causes people to shun higher prices and not buy real
estate. This psychological reaction to market price fluctuations is
different for each market. Because supply delivery mechanisms are
dysfunctional in California, it is easier for Californian’s to drive
prices higher quicker than it is in other markets. This feeds the local
psychology and creates even more volatility.

Prices have already dropped 20%-25% in Irvine from their peak in
2006. This initial price drop did not occur because of foreclosures or
supply issues. It occurred because tightening credit has stopped market
participants, those desirous of real estate, from bidding prices as
high as they could in the past. The rate of decline is certainly
impacted by foreclosures and inventory problems, but the overall price
levels are determined by incomes and the amount of money people can
borrow based upon it. Credit will continue to tighten, and the amounts
people will be able to borrow will continue to decline. We have already
witnessed a spike in jumbo interest rates as risk premiums are being
priced in to the loans that are not backed by the GSEs. As the
repricing of risk continues, interest rates will continue to rise. This phenomenon will be most noticeable for jumbo loans (the high end is doomed). Also, as the
recession begins to impact incomes, the borrowing power of potential
buyers will be reduced even further. Currently, there are still many
5-year and 10-year ARMs being used to purchase real estate with very
high DTIs. As these products become less common (they are just dragging
out the foreclosure problem,) and as DTIs continue to decrease, bids
will decline, and prices will decline with them.

Some of the people I know that purchased in this market did so
because they saw the tightening credit as something that was going to
take away their ability to finance the sums large enough to buy real
estate. In short, they thought they would be priced out forever. This
reasoning puts the cart before the horse. The tightening of credit
terms is going to cause prices to fall because it directly determines
the market bids. Right now, the high end market is characterized by
very large bid/ask spreads. Sellers are holding out for wishing prices
while buyers are seeing their bids get smaller and smaller due to
tightening credit. Transaction volumes are very low, and while sellers
hold to their fantasies, there will be very few transactions. This will
not change until the Alt-A and Prime ARM resets force asking prices
lower. We have seen this phenomenon before. The low end of the market
in the areas most decimated by subprime ARMs is already at rental
parity, and there may be overshoot in these areas. The bid/ask spreads
in these submarkets are tight because there are few sellers bothering
with wishing prices, and sales are dominated by REOs.

In the post Houses Should Not Be a Commodity, I went into some detail on the stages of market psychology and buyer behavior. In this first stage of the decline, there are still people who are willing to extend themselves to the maximum to obtain real estate because they believe they must. The bubble psychology has not really changed, but the technical factors of credit availability and terms have begun to limit bids. This is why prices have only corrected about half way to date. In the next stage, people will start voluntarily reducing their debt-to-income ratios because they don’t want to stretch themselves to buy what is obviously a depreciating asset. I discussed that phenomenon in more detail in Our Changing Relationship to Debt. The next phase in the drop is going to be characterized by a reluctance to purchase exacerbated by even more stringent financing terms.

If you really want to understand the real estate cycle in California, you need to understand the credit cycle. The changing availability of credit and the fluctuations in the amounts of money financed with people’s incomes are the key determinants to price levels in our residential real estate markets. Right now, we are in a tightening cycle, and this will cause prices to continue to drop. Someday, long after our current credit crisis has passed and the credit markets recover, we will see a loosening of credit, and we may build another residential real estate bubble. Perhaps lenders and borrowers alike have learned the painful lessons of the Great Housing Bubble, or perhaps not. Greed springs eternal.


Lover, I’m on the street
Gonna go where the bright lights
And the big city meet
With a red guitar…on fire

She’s a candle burning in my room
Yeah I’m like the needle, needle and spoon
Over the counter with a shotgun
Pretty soon everybody got one
And the fever when I’m beside her

And the fever, getting higher

She’s the dollars
She’s my protection
Yeah she’s a promise
In the year of election
Oh sister, I can’t let you go
Like a preacher stealing hearts
At a traveling show
For love or money money money
money money money money money
money money money
And the fever, getting higher
Desire, desire, desire, desire


Desire — U2

75 thoughts on “Desire is not Demand

  1. AZDavidPhx

    The government’s new mantra is all about “availing us the credit that we need”.

    This is how to government looks at us; like we are junkies who will go into convulsions if we cannot pay for things on credit.

    The question that I keep asking is “Why do I need all of this credit? I have owed money to anybody in a long time and I seem to be getting by OK by saving money and budgeting and living below my means. If credit goes away – it does not affect me personally at all.”

    Could you imagine the horror that would fall upon the country if all of a sudden we asked people to save up 60,000 for their Cadillac Escalades? Such a horrific scenario could lead to people thinking a lot harder about what they spend their money on and possibly manipulate them into purchasing cheaper and more practical vehicles of transportation. It would doom the well-to-do-poser-car market.

    We cannot let this perverted way of thinking infect us. Our bankers are dependent on our need to finance everything from a stick of gum at the Quicky Mart to our educations, to our cars, to our houses.

    Save the bankers to save our wealth (also called debt/salavery).

    1. AZDavidPhx

      Correction “I have not owed money”.

      Please bring back the edit feature so we can fix mistakes in our posts. It was available when you first switched over the software and then it disappeared a day or two later.

        1. lam3

          Amazing. You actually responded to your own post twice. Get the feeling nobody but you cares about what you write…I do.

    2. smarterthanyou

      You and the authors of this blog are idiots. You fail to realize that everyone with retirement etc loses. By not giving 700B today we have lost 1.2 Trillion in value across the board. Moron.

        1. no_vaseline

          I made the same observation with similar reaction over on the forum.

          It doesn’t matter now. I hope the ‘Pubs enjoy the shit sandwich they fixed for the rest of us, because IMO we’re getting ready to see what unleverageing really looks like.

      1. muzie

        Oh, look, geez, about 600B$ of that “loss” came back today. And, wouldn’t you know, the market is right back at the point it was BEFORE the bailout vote. Guess that kills your panicky theory.

        Maybe a trillion will disappear again tomorrow? Who will you blame then?

  2. Shadax

    Thanks IR for telling it like it is. I am so sick of shills like Steve Thomas from REMAX talking about “demand levels” when he is CLEARLY using the terms incorrectly. Well, you certainly don’t need a degree in economics to be a RE agent. I think he might just afraid that if his office(s) go under he’ll have to go back to being a used car salesman.

  3. alan

    In the last downturn in the early 90’s, as I recall it was the high end that declined first because job losses took out potential buyers then as the high end came down, the low end, especially condo’s got hammered. In this downturn it seems to be the other way around, the low end is leading.


    is CA that much worse than other states? I don’t have that much experience getting projects through municipalities but my builder friends do complain a lot. (I thought complaining was their natural state) “many local municipalities restrict the ability of developers to bring new supply to the market or outright forbid it. It is not uncommon in California for price points to favor the construction of new dwelling units and for municipalities to forbid its construction.”

    1. IrvineRenter

      Yes, California is more difficult than most other states to obtain entitlements, although it is difficult in the Northeast as well. The CEQA process is costly, cumbersome and takes much time, and at the end of the day, the governing council may still not approve the development. Californians greatly limit the supply of new dwelling units by just saying no.

    2. Some Guy

      There are dozens of steps in the process to getting permitted for building housing in CA. At all those steps, there is an opportunity for influence by “community activists” and local politicians with their hands out. Generally, the process is operated in the suburbs with the goal of keeping lot size up, and minorities out.

      Little known fact, environmental/community activism in CA is basically a tool for keeping higher density housing out of your neighborhood…and the accompanying blacks and Mexicans.

      Yes, I speak from experience.

      In the old days, “community activists” wore white hoods and rode only at night. Now, with CEQA and planning boards, they do it in broad daylight, and feel smugly superior about doing it.

  4. Blueberry Pie

    IR, a year ago you were posting some predictions on your blog about what you expected from the housing market. I think much of it has been coming true.

    One thing you did not predict was massive financial institution distress like we are now seeing. Do you think this is just a part of the bubble popping, or is this an additional factor that you didn’t previously factor in, and will it cause a greater decline in the housing market than you originally estimated?

    1. IrvineRenter

      For a long time, I did not realize just how much of this garbage lenders kept on their books. I assumed that most of this toxic waste was purchased by hedge funds and other institutional investors. I knew there was going to be a lot of pain, but I really thought our lenders were more insulated than they were. I do see this as leading to the last nail in the coffin of real estate: higher interest rates. We now have a much less competitive lending environment, and those that remain face higher short-term borrowing costs. I don’t see how this cannot lead to higher interest rates.

      1. Matt

        The counter-pressure I see, though, is that the remaining lenders will still need to drum up business. Yes, competitive pressures reduce prices, but reduced demand for a product forces even a monopolist to recognize that supply and demand are stronger forces than competition. Monopolists squeeze what ‘rents’ they can out of their supply advantage, but with low demand, there really aren’t any rents.

        But, this counter-pressure can’t push back against both less competition AND the changes in the SUPPLY function (such as the phenomenal pressure real inflation puts on rates). Rates will rise. The fact that people won’t buy a house if the price is too high OR the rates are too high will push for lower rates, but inflation, bad loans on the books, and monopoly conditions all push those rates higher.

  5. Anonymous

    Love the blog IR, helps me keep track of the panic in California from NYC. Most of what I see, and prices still have not corrected to levels consistent with affordability, much less what cash flow investors would buy.

    The credit side of the housing mess is much neglected yet just as integral to affordability as prices. People fixate on prices, but where will the marginal buyer for the surfeit of home inventory if one cannot obtain a mortgage? Affordability is a function of many things, but primarily prices and the interest rate used to get the loan. If the latter is prohibitively expensive, then prices have to fall further to reach an equilibrium for new homebuyers like young couples or cash flow investors in REIT’s or private equity funds.

    Extending your point further, the people who can obtain a mortgage and afford the 20% down now required are likely to be financially prudent/savvy people who will haggle aggressively for a deal. Just as the blowoff top was driven by creative/aggressive/fradulent lending, a capitulation bottom could be driven by the dearth of marginal buyers (patsies as Buffett would say) because of prudent/standard/intelligent lending.

    Moreover tightening credit is nowhere near the worst it will get for mortgages. I work on a trading desk for a large bank here in NY and can tell you that credit and money markets are a mess. European banks are paying 5% for 3m USD funds, so you will need a steeper curve/higher long rate to justify the higher short-end funding costs. Everything I’ve seen in the financial markets over the last year hits the economy with a 3-6m lag. This Winter will not be pretty for housing. I just hope it doesn’t pull us into the abyss because we are very close right now.

  6. Orcian

    Thanks, IrvineRenter. I got sick of my realtor friend telling during the boom that homes were selling because there was a “demand” for them, though I didn’t realize at the time that much of it was false demand. I couldn’t put it into words. There is always a desire to buy a home, and if we give every moron out there access to toxic loans, they will certainly take it, and by golly that’s demand — not.

    1. Texas Triffid Ranch

      Orcian, I like the concept of “false demand”, because that’s actually a concept that applies in this case as well. In my situation, false demand applies to the “I think you should aughta…” whines coming from people who give the suggestion that they’d buy if the seller included particular features/perks/benefits, but who’ll never bother to buy once it’s offered to their specifications. Everyone who’s ever worked in retail knows these dolts: they’ll whine and whine about how they’d buy from you in a heartbeat if you just included one dealbreaker to the mix, but the moment you ask them to pay for it, they suddenly run like hell and leave you with the item.

      I think that false desire helped with a lot of the real estate bubble, especially with convincing buyers to get as much house as they could possibly afford. Does everyone need or even want zero-lotline McMansions that cost the rough equivalent of the gross national product of Singapore to heat and cool every year? No, but somebody got it into his/her microscopic head that this sort of house would be cool, especially if fitted with a giftwrapping room and a shoebox-sized swimming pool in what tiny strip is left of the back yard. Same deal with pergraniteel and big staircases visible from the front yard and kitchen islands: they thought these things were in demand, and subsequently built or influenced the market so these things became standard. After a while, it became nearly impossible to put a house on the market without stainless steel appliances, even though nobody could explain, with a straight face, why stainless steel was an improvement.

      The clincher, of course, comes when the houses stop being bought as investments and commodities. Many of the buyers in the boom, and I say this from firsthand knowledge, were the sort that caused the implosion of the toy market in the late Nineties thanks to an obsession with collecting action figures and playsets as an investment. When they were in their twenties, they filled their rooms with mint-on-card Star Wars action figures, certain that they’d only go up in value as they got older. Now that it’s impossible to give away Jar-Jar Binks figures with free beer, they can’t find buyers because enough of their contemporaries woke up, asked “And what did I just blow two paychecks on?”, and got out of the market. We’re watching right now as those twentysomethings turned thirtysomething and fortysomething try to get out of the housing market, trying to turn their cool investments into much-needed cash at a time when nobody even comes close to wanting what they’re trying to sell. False desire all over again: I keep looking at horribly designed houses with no storage space, bad placement of walls and windows, and no thought toward longterm occupation, and wonder who in their right mind would be crazy enough to buy them in another ten years.

  7. alan

    Bailout fails in HOUSE! Dow down 500!

    Roubini now calling total systemic meltdown predicting that if Merrill and GS don’t find a larger bank to merge with now they will be BK in a few weeks and “the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions”

    Blood in the streets. The end of days is here.

    Forget housing, there are bigger things to worry about now.

    1. Blueberry Pie

      If a $700B bailout would be able to prevent a massive meltdown, wouldn’t that same bailout be able to solve the problem a month from now if the meltdown actually begins to happen?

      1. AZDavidPhx

        It was crap from the beginning. Trying to rush it all through and give the voters a chance to forget before November.

        This will be painful, but it’s not the end of the world.

        1. Major Schadenfreude

          I’m digging this rejection of the bill.

          Anybody know how to see how people voted on it this afternoon?

          1. AZDavidPhx

            Someone posted the list on the HousingPanic comments:


            Here’s the Hall of Shame for Today:

            Vote accordingly…

            (Democrats in roman; Republicans in italic; Independents underlined)

            H R 3997 RECORDED VOTE 29-Sep-2008 2:07 PM
            QUESTION: On Concurring in Senate Amendment With An Amendment
            BILL TITLE: To amend the Internal Revenue Code of 1986 to provide earnings assistance and tax relief to members of the uniformed services, volunteer firefighters, and Peace Corps volunteers, and for other purposes

            Ayes Noes PRES NV
            Democratic 140 95
            Republican 65 133 1
            TOTALS 205 228 1

            —- AYES 205 —

            Bishop (GA)
            Bishop (NY)
            Bono Mack
            Boyd (FL)
            Brady (PA)
            Brady (TX)
            Brown (SC)
            Brown, Corrine
            Camp (MI)
            Campbell (CA)
            Cole (OK)
            Davis (AL)
            Davis (CA)
            Davis (IL)
            Davis, Tom
            Edwards (TX)
            Frank (MA)
            Hall (NY)
            Hastings (FL)
            Inglis (SC)
            Johnson, E. B.
            King (NY)
            Klein (FL)
            Kline (MN)
            Larsen (WA)
            Larson (CT)
            Lewis (CA)
            Lewis (KY)
            Lofgren, Zoe
            Lungren, Daniel E.
            Mahoney (FL)
            Maloney (NY)
            McCarthy (NY)
            McCollum (MN)
            Meek (FL)
            Meeks (NY)
            Miller (NC)
            Miller, Gary
            Miller, George
            Moore (KS)
            Moore (WI)
            Moran (VA)
            Murphy (CT)
            Murphy, Patrick
            Neal (MA)
            Peterson (PA)
            Price (NC)
            Pryce (OH)
            Rogers (AL)
            Rogers (KY)
            Ryan (OH)
            Ryan (WI)
            Smith (TX)
            Smith (WA)
            Van Hollen
            Walden (OR)
            Walsh (NY)
            Wasserman Schultz
            Weldon (FL)
            Wilson (NM)
            Wilson (OH)
            Wilson (SC)

            —- NOES 228 —

            Barrett (SC)
            Bartlett (MD)
            Barton (TX)
            Bishop (UT)
            Boyda (KS)
            Braley (IA)
            Broun (GA)
            Brown-Waite, Ginny
            Burton (IN)
            Davis (KY)
            Davis, David
            Davis, Lincoln
            Deal (GA)
            Diaz-Balart, L.
            Diaz-Balart, M.
            Edwards (MD)
            English (PA)
            Franks (AZ)
            Garrett (NJ)
            Green, Al
            Green, Gene
            Hall (TX)
            Hastings (WA)
            Herseth Sandlin
            Jackson (IL)
            Jackson-Lee (TX)
            Johnson (GA)
            Johnson (IL)
            Johnson, Sam
            Jones (NC)
            King (IA)
            Kuhl (NY)
            Lewis (GA)
            McCarthy (CA)
            McCaul (TX)
            McMorris Rodgers
            Miller (FL)
            Miller (MI)
            Moran (KS)
            Murphy, Tim
            Peterson (MN)
            Price (GA)
            Rogers (MI)
            Sánchez, Linda T.
            Sanchez, Loretta
            Scott (GA)
            Scott (VA)
            Smith (NE)
            Smith (NJ)
            Thompson (CA)
            Thompson (MS)
            Udall (CO)
            Udall (NM)
            Walz (MN)
            Welch (VT)
            Whitfield (KY)
            Wittman (VA)
            Young (AK)
            Young (FL)

            —- NOT VOTING 1 —


    2. MalibuRenter

      In case you haven’t noticed, Merrill already found a partner, BofA.

      Perhaps you mean Morgan Stanley?

  8. NanoWest

    What is sort of sad about all this is that nobody want to come out and say what the real numbers are…… is very simple to calculate what the underlying values of the mortgage assets are….(what would be retrieved if all the homes with bad mortgages went to auction)

    Take all home loans sold in 2004- 2007, they are worth 40 % of their value.

    home loans from 2001 – 2004 are worth 50 % of the value

    home loans from 1998 – 2001 are worth 60% of their value.

    So thats it,,,,,,,,,,,,,,,,,,we now know what the damage is. Problem is, nobody want to tell the general public because they will be very, very upset.

    1. alan

      That would work if all homes were located in CA or Fl. In TX, housing prices are actually increasing.

      There are estimates of the total losses. CR posted a number of $1.5 trillion of which only $430 billion has been written down to date.

      If Roubini is right in calling the “mother of all bank runs” then it is Armegedon for the dollar.

      1. nanowest

        Well if you like go state by state……….but it is possible to figure out what the value of the assets is in relationship to the value of the mortgages….and that is the maximum damage. No politician, banker or citizen wants to tell the American homeowner that their homes are worth far less than they thought.

  9. phil

    Barney Frank gets on after the bailout vote failed and says “the problem with the housing market is foreclosures…”

    This guy bugs me. The problem isn’t foreclosures; that’s the symptom of the problem! The root problem is housing valuations are out of whack and need to return to affordable values. Why don’t reporters and economists lambast this guy and others like him?

    1. alan

      Barney Frank was chair of the committee that blocked increased supervision of Fanny/Freddie requested by Bush back in 2004 and look what happened.

      I still haven’t seen him or his party admit their role in this mess.

      1. IrvineRenter

        Barney Frank was not the chairman of anything in 2004. The Republicans controlled the House and the Senate. Barney Frank would have been the senior member of the minority party on any committees, but he would not have been a chairman.

  10. camsavem

    Im glad it failed and here is why.

    We are supposed to believe that they know what they are talking about now, and risking 700B on their opinion yet…..

    None of them saw this comming?

    I knew it was comming since 2005.

    Either they are morons (not likely) or liars (likely) and think we are morons.

    Let them eat cake.

    1. Chris

      Sure, unless you’re unemployed/retired with mega million stashed such that you can live off dividend and interest even with premium healthcare paid for by the div/interest, you’ll be affected one way or another buddy.

      Can you say jobless?

      Yeah, burn baby burn. Jobs will be burned too even without this bailout.

      IR, hope you’ll command 6 figures or more with that book. You might need it if layoff occurs.

      1. tonyE

        There’s no hope with some people. Jefferson was right, Jackson was wrong. You can not have a republic when the voters are dumber than a rutagaba a foot in the ground.

        Poor IR may also come out a loser. No one will want to buy ( or be able to afford ) his book when we’re all unemployed and trying to get a job tending dishes in Mexico.

        At least I speak spanish so I can get the maitre’d job while you anglo-onlys will be forced to wash dishes…

        “Andale Camsavem, you buey, get those damn dishes washed pronto or we’ll call la Immigracion Mexicana on you and back to LA you go….”

    1. IrvineRenter

      The libruls that caused this housing mess through their communist agenda and affordable housing initiatives have derailed our great President’s noble attempt to save the economy and the common man. Let us pray that the conservative voices of the righteous can save us once again…

      Er, something like that.

      1. tonyE

        Be serious for a sec… It was the Democrats in Congress that got us into this mess.

        Check this from 2005.

        Todd, Kerry, Obama….

        If you goggle you will find lots of info in 2003 and 2005 about how Bush and McCain tried to control the lending on Fannie Mae and Freddie Mac but it was the democrats who blocked them.

        So, please, don’t make politics out of this because the Dems really are to blame too. In some ways much more than Bush.

        Normally I don’t get too wound up with the political crap out of DC, but today’s complete bullshit speech by Pelosi meant to cover her us in her reelection in SF screwed the whole country.

        It may get her reelected but she should lose her post of Majority Leader.

          1. tonyE

            Let’s see… Eliot Spitzer.. A Democrat right? The guy with the prostitute habit who at the same time took the holier than thou attitude.

            Sorry Kirk… hope the bell in your computer don’t wake you up… but you got to choose your sources better.

            In 2003 and 2005 Bush and McCain tried to control Congress and Fannie Mae and Freddie Mac.

            Spitzer’s friends in Congress stopped them.

          2. Kirk

            What can I say? If nailing some hooker to clear the mind is what is needed to do the job then I’m all for it. I really could care less what politicians do with their genitals. They can nail some guy in an airport bathroom for all I care. Spitzer, and several other state attorneys, tried to act and Bush blocked them. End of story.

          3. Mikee

            So, the Dems didn’t control the House or Senate until 2006 right? So, a Repub controlled Congress (with help from some Dems) defeated any try to rein in the lending/credit card/bankruptcy business.
            As well, federal courts stopped certain states (i.e. GA, NY) from implementing their own safeguards. And this was done while the President, House and Senate were all Repub-controlled right?
            I’m just trying to get the story right.


    Based on your observation that the price is strongly connected to credit availability (I agree with that) what would be your prediction regarding house prices if credit availability is severely restricted (e.g., close to non existent)? Would this in turn result is severe price drops that we are yet to see (let’s say 70% off the peak)?

    1. IrvineRenter

      Well, if we go back to a cash basis, anything is possible. Realistically, prices will drop to financing levels where people’s real salaries with a 28% DTI supports payments.

      1. tonyE

        The problem is that 28% of nothing is nothing.

        If the economy tanks amd layoffs come around your boss don’t care if you are a renter, homeowner with a good mortgage or a would be flipper living in a TRidge mansion.

        Then, of course, your 401K will go to pot.

        And eventually we may run into inflation too, so good luck with your cash.

        Those 700B were peanuts, and in any event they were supposed to be used to buy stuff at deeply discounted values.

        Instead, we got all of these knuckleheads that don’t realize that no matter how well off and insulated you may be today, tomorrow we’ll be be shooting at each other to stake out the best underpass.

        And then you got Pelosi… what a frickin’ idiot.

        1. mmg

          TonyE–>Those 700B were peanuts, and in any event they were supposed to be used to buy stuff at deeply discounted values.

          That is part of the bubble mentality, peanuts, you know how many peanuts 700 B will buy you 😆

          we need to deal with reality not fantasy land, these people in charge got us into this mess and thus I personally dont give a $hit what they think will get us out, enough with the madness.

          Maybe they should have a panel of IR, CR, Mish, N Roubini and Schiff to take a look at this mess, not these retards in Congress.

          1. tonyE

            Look, the issue here is that we’re all in the same boat now.

            If we have a credit crisis and we ALL tank, then you better have a bunker somewhere full of gold, propane, dried food stuffs, a water well, a generator, plenty of ammo, guns and liquor and be ready to shoot any trespassers.

            It won’t make diddly squat of a difference whether you rented, bought or stole your home if you ain’t got a job, dig?

            This is why what Pelosi did today was so particularly odious. She put her own political interests ahead of the entire country.

            And yes, compared to the economy, and your job (assuming you are not a trust fund baby and your trust fund is in gold right now) those 700B are just peanuts.

            Time to realize that the time for political posturing and bullshit is over. Pelosi better shut her mouth and remember that is was her and the Democrats in Congress that really got us in this mess.

            We’ll have time to clean things up later, but right now those 700B are the peanuts that are needed to keep the beer flowing. Otherwise we’ll all be caught with peanut butter in our mouths and no milk in sight. 😛

          2. tonyE

            Pelosi got her buddies to vote no on what she knew was a very unpopular dose of medicine… and then she could blame the GOP for passing it.

            Now, who’s being partisan here?

            Pelosi is the Majority Leader and both Obama and McCain pushed for a show of bipartisanship. Pelosi wwould have none of that and hence torpedoed the bill.

            If I were being partisan, I’d say that this was planned by Obama and Pelosi.

          3. Food


            I don’t think we are on the same boat. I save my pennies. Some would call me cheap, and yet some would even suggest by looking up on the word “cheap” in the dictionary, it will show a picture of my face as an example, but in reality I am frugal by today’s standard but nowhere near the 30’s. The society ought to reward the frugal just like the field I am in.

            If this organized/legalized bank/treasury robbery engineered by Paulson and Bernanke is passed, my hard-earned savings would be worth less. If there is a depression with surely long-term higher interest, I will benefit even if I lose my job. Hey, being an electronics engineer, the days are numbered for me anyway, but with a depression, at least some industrial jobs would come back to the United States.

            Thank God that any coup is not necessary at this moment. This is the first time that the people united does make a difference in politics. Fuck Paulson and his Jewish sidekicks Greenspan and Bernanke. All of them should go to hell. Among them, I hate Greenspan the most. He was the clueless asshole who raised the interest rate just to kill the high-tech expansion that was when I lost my job in the high-tech industry. Moving to a new location, he priced me out of the real estate market by artificially lowering the interest. He was so clueless that he could not even make up his fucking mind. God, I hate Greenspan. I hate them all. The exact opposite of what they want must be the best for the country given the dire circumstances we are in right now.

  12. granite

    From MarketWatch article on bailout failure.

    “…Or perhaps the plan’s many critics were right in saying that credit markets and home prices can adjust on their own, once the promise of free money is withdrawn.”

    Burn baby burn.

    1. Matt

      My concern is that home prices can adjust on their own (people can’t trade up as much, and many people have lost their retirements, but that just puts more of a drain on governmental balance sheets), but I’m not sure the credit markets CAN bounce back without help.

      Yes, stupid, greedy people did this. But, I’ve been wondering if the analogy of a fire is correct here: sure, some punk kid started a brush fire while burning ants, but do you not put out the fire just to teach the kid a lesson?

      I can’t claim to know the answer, but I have to admit to being concerned that not passing a bailout is simply paving that road to hell.

  13. Capocorso

    Anyone have a guess as to what this bailout failing is going to do to interest rates?
    I heard one of the many “experts” say he thought interest rates would spike to over 10% if no help is given by the fed gov.

    1. Schadendude

      Hard to call a number, but double digits is all but assured once the spread between the three-month LIBOR and the Fed funds rate reaches 3%. Not to mention our national credit rating will be adversely affected by any bailout and the market for Tbills will disappear once faith in the dollar reaches capitulation.

      “Right now people, don’t think return ON capital, but return OF capital.”

      -Peter Schiff

    2. MalibuRenter

      Interest rates will spread. Shorter term interest rates will go lower. Longer term interest rates will go higher.

      Interest rates for people and institutions with very good credit will drop. Interest rates for people with OK credit will rise. People with crap credit won’t be able to get any new loans.

  14. Chris

    For all you permabears on housing, I like to see your bear side when unemployment hits 50% nationally (and you’re being hit with a pink slip as well).

    Let’s see…hmm…I rent, good, I don’t play the stock market, good, I just lost my job, SUPER!

    1. Dave

      I’m going surfing.


      I have been breaking my balls last 5 years saving on what was left of the divorce settlement taking my small dot com savings because I knew in my bones this shit storm was brewing. I now have a tidy little pile. Not much, but more than enough.

      Being out of work a year will be like a vacation. It *will* be a vacation.

      Then I’ll get back to work like my father did during the Great Depression. He was never out of work. He was willing to work.

      Everything is paid for. No debt. Savings for car repairs, food, rent, everything. Bring it on.

      Why people cannot understand that economic calamities are normal is beyond me. Supply/demand, predator/prey, a billion year old cycle that we can only remediate, but never completely mitigate.

      So, yeah, I’ll be partying like it’s 1999. And after I get tired of surfing, I’ll expand my current company or start a new one. There will be lots of talent available ready to work, and the price will be competitive with all our current outsourced venues.

      BTW, one my contractors in Eastern Europe is now par with San Francisco pricing on entry level web development. We’re keeping him because he knows the current system. We’ll be replacing him as we grow. Replacing him with North American talent.

      1. Dave

        As a followup, the subcontinent is doomed. Bangalore is going to have to find a domestic market for their talents. Good luck given the massive social inequity embedded in the Indian system.

        1. Kirk

          That’s what I’ve been trying to tell people for years. Indians are elitist bigots. That’s why we took their land. To bring social justice to these lands.

          1. Schadendude

            Ummm Indians from India and Indians from the Americas do not share the same culture.

            thanks for the laugh though…

  15. MalibuRenter

    As I have said previously, the banks with MBS portfolios are very much like homeowners under water. They remember 2006 pricing and just can’t believe they can’t get anywhere near it. They think/hope that it is all temporary, if they hold on long enough, they will make money.

    The same kinds of thing bring banks to reality as homeowners. 1. No one will refi them. 2. Any borrowing cost not already fixed either gets more costly or dries up on them. 3. Bankruptcy happens slowly at first, then all at once.

    1. LooksSimilar

      thumb up…… spoke out what I wanted to say but didn’t know how

      If I want to sell something that is worthwell and can make money by holding, I don’t want to give it away to you, the taxpayer, it makes no sense why Bus told us we can make money on those assets the private companies planned to dump…..Do you think gov is smarter than wall street MBA-s, I doubt it.

  16. ochomehunter

    $630 Billion pumped despite $700 bailout refusal – FED Hypocrisy

    What is the fuss all about? Fed Pumped $630 Billion Into Financial System today and at the time when Congress rejected $700 billion
    bailout. If FED has the money and they can pump our USD (currency) as much as they want without approval , then where does the liquidity
    crisis question come from? Can someone explain this??? My understanding of Federal Reserve is that its a private bank cartel that is holding USA hostage in debt big time, and now that their
    trillions of $$ are being lost in bad mortgages, they want to pass the buck over to USA Govt. and bury us deeper in debt and keep collecting
    taxes and interset until we all disappear from the face of the earth.
    What a freaking FED Hypocrisy here folks. I lost money today in the market and as much as I hate losing money and as much as everyone hates bailouts, think about the core monopoly game being played by the FED here and lets discuss what you folks think about this whole fiasco! Its just a bunch of BS on FED’s part and they got the Govt. by the balls!
    If you think about this, USD has been recently gaining strength with falling other currencies, at the same time FED is pumping billions and
    billions of newly printed funny money into the markets, thereby diluting USD as it accumulates somewhere. When markets return to sanity, USD will flood the markets causing massive dilution. But, by then FED would have gotten its pray via asset or gold accumulation from those who needed to be rescued.
    Economists call the market cycles as “Business Cycles” while most economists represent these big banks. If you think about it, FED is the one that causes easy money policy = creates bubbles = squeezes every penny out of citizens into real estate or stock markets = money transfers, changes hands from people to banks = credit is squeezed by FED again = massive loses for citizens, life savings wiped out, put deeper into debt = keep working your butt and keep paying interest.
    The only way out of this FED’s stangle hold is I think that people spend money they own and not they borrow. Once that happens, lending will be less lucrative and economies will prosper without these big blood suckers!

    1. muzie

      The money was not printed, it is from expanded currency swaps from with central banks.

      What does this mean? Well, I don’t know, but it woudl be premature to assume it is “printed” without knowing the details.

Comments are closed.