Discovery channel predicts housing crash

The price-rent ratios suggest that housing is overvalued in the other three cities as well, but to differing degrees. Although the price-rent ratio in New York is elevated, housing does not look much more overvalued there than it did in the late 1980s. House prices appear elevated relative to rents in Chicago as well, but it is Miami that stands out as the most overheated of the four markets shown here.

http://www.federalreserve.gov/monetarypolicy/files/FOMC20050630meeting.pdf

One lender told me that they are using the secondary market first of all for their conforming products; second, for their nonconforming products; third, for their HELOCs; and fourth, for loans on first delinquency. And for the latter, this lender is selling them at only a 2 or 3 percent reduction to book. So that loan is going off the books, and in some instances, they are even selling the residual in the secondary market. So there are five different channels through which this lender is able to use the secondary market. It sounded to me very similar to what the 1960s New York Yankees were doing with the old Kansas City A’s under Charlie O. Finley—using them to improve asset quality. [Laughter] They were unloading high-risk properties, and doing so without any expectation of compensation from the counterparty. And they were doing it annually. So it’s much the same thing that is happening now.

As for the secondary market, why is that market so avaricious? I’d cite a number of reasons. There are many new investors, including the hedge funds, with minimal experience in dealing with market uncertainties. There are many new products; 50 percent of the mortgage-backed products are either alt-A or nonprime. That’s the flow, as we discussed yesterday. There is evidence of a lack of secondary market discretion, including the ability to price for risk; the risk premium simply does not reflect the risk embedded in that product. There have been some indications that the secondary market is starting to tighten its standards, one of which Susan mentioned, which is the new guidelines from Standard and Poor’s. The other is the beginning of some change, particularly in the AAA tranche, where a slight price increase recently was passed on. In summary, the activity in the mortgage market shows no signs of abating. The risk exposures remain, and the risk exposures seem most likely to be in the MBS market. The place to look for the first evidence of weakness would be in the first-loss position, wherever that first-loss position happens to be. It’s not clear at this point if the MBS market will be an efficient distributor
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and disseminator of risk or if those in that market will be the last to recognize the risk that’s embedded in what they’re doing and know how to price it.

http://www.federalreserve.gov/monetarypolicy/files/FOMC20050630meeting.pdf

MS. YELLEN
Finally, with those two comments, a question. It concerns the presentation by Andreas and the numbers cited on loan-to-value ratios at origination. One of the things we’re seeing in California and elsewhere in our District—and maybe this is true nationwide—is a growing use of piggyback loans. Loan-to-value ratios of 90 to 95 percent are common in California, and we’ve even seen combination loan-to-value ratios and piggyback loans going up to 125 percent. I guess that means two things, one of which is that the traditional first mortgage looks utterly conventional. Those mortgages have an 80 percent loan-to-value ratio and I suppose they are being sold off to Fannie and Freddie. The other thing is that with such conventional mortgages being sold to Fannie June 29-30, 2005 36 of 234
and Freddie, there’s no need for private mortgage insurance. So Fannie’s and Freddie’s books may look better in some sense—less risky—than they really are because of all of the second mortgages going up to possibly 125 percent. CHAIRMAN GREENSPAN. It sounds like a CDO [collateralized debt obligation]. That’s what it is, isn’t it?

http://www.federalreserve.gov/monetarypolicy/files/FOMC20050630meeting.pdf

Four strokes. R u getting hard yet?

So does that mean that that new show on National Geographic about gold means that golid is soon going to crash? I remmeber seeing a relaity show called "Black Gold" about oil back when oil was $145 a barrel. SHortly after that show aired, oil crashed to $50 a barrel.

"Gold is a bubble - resist its charms"

http://money.cnn.com/2011/01/10/pf/investing/investing_in_gold.moneymag/index.htm

"Can you tell when a boom has turned into a bubble? One clue: When pop culture starts paying attention. The housing bubble, for example, brought both the TV show Flip This House and a rival on another network, Flip That House.

So if you own a lot of gold, you might regard a recent episode of Saturday Night Live as your first warning. In the opening skit, Bill Hader as China's President Hu Jintao declares that Glenn Beck was right and that "my government should have bought gold. Unfortunately, all our assets were tied up in U.S. Treasury bills."

very, very interesting discussion...

So Riversider, Socialist, Sunday and anyone else reading this thread, if you had money...where would you invest and most important of all...why?

CD's with ridiculously low interest vs
real estate with ever increasing property taxes vs
bonds with increasing concerns about defaults vs
stocks (foreign vs domestic) vs
gold, silver, commodities? vs
something entirely different????

Tax free bonds laddered 1-7 years in term+cash.

Fed data for the bubble-heads.

http://www.federalreserve.gov/monetarypolicy/files/FOMC20050630material.pdf

Swim - my question exactly - if someone inherited $1,000,000 in cash today (after yaxes), where would you "park it"?
For argument sake, the lucky individual was 50 years old and preservation of capital was a high priority.

I guess if you bought tax free bonds and income taxes went up over the coming 5-10 years it would drive up the bond prices. I don't think that would ever be a high yield investment strategy though.

I've thought to myself that if I were to win the lottery today that I'd buy a condo in Manhattan but be very conservative about what I spent. Let's say if won $50M after taxes, I might spend $2M-$3M at the most. I'm not optimistic about the performance of real estate in the coming decade eve if it is Manhattan.

I think we are headed into a challenging period of stagflation. I like short term bonds for approximately 40% in investment grade bonds that mature within five years (proceeds to be invested towards equities over time). These bonds will not provide much return but they promise investable funds over a period when I think the stock market forms a major bottom. I recommend 20% in stocks or stock funds today, with at least one-third foreign, and a bias towards dividend payers and good balance sheets. The remaining 40% of investment capital would be available towards your home, but I would recommend a share of that commitment be towards modestly levered diversified REITs to the extent you can afford to limit your home equity investment.

PMG - how do you define stagflation? What do short term bonds offer you in absolute yield terms? After tax, and after inflation, what is going to happen to the 40% that you are investing in these bonds? thanks

Short term tax frees are better. Yield the same as gov't bonds plus the tax advantage. If you stick with quality G.O. or dependable revenues the risks are minimal.

The stock guys who argue for controlled inflation because commodity costs can't be passed on to consumers in my view ought to be stock bears. Not being able to pass on costs in the form of higher prices is a definite negative for stocks which based on this argument are more leveraged to inflation than bonds. And if you do think that inflation expectations are going up, the stocks get discounted again.

I can see that people on this thread are quite knowledgable about finances....so..can people share their thoughts with me on:

A friend of mine due to "fear of a double dip in stocks" moved his money in his retirement account from mutual fund the first week Oct 2010 and into an annuity. The money still remains in his tax deferred annuity account so there is no tax liablities. This retirement annuity pays only 3.5 percent...however....this money gets a guarantee of NO LOSS of principle. Also, money placed into this annuity can be moved out "back to" mutual funds with no surrender fees or cost at any time with only a phone call.

As you all know, he missed that huge stock market upswing in the last quarter of 2010...so he unfortunately did not make that huge ten or fifteen percent upswing.

Should he keep the money in the "safe" guaranteed "no loss" of principle annuity or should he move the money "back" into mutual funds?

His friends think he should move money back into mutual funds because he is young and they say/quote "he has 20 years before retiring"...and yeah, yeah, yeah...stocks tend to over time do better than bonds, interest rates and other safer alternatives. His friends also say that leaving the money in this guaranteed no loss of principle gives such a low yield of 3.5% that inflation will make the money worthless in the future.

Riversider: I can see that you think stocks will drop...when do you think this will happen?

Some people say that stocks tend to go up or be more stable during an election year. Then of course some people say stocks tend to go up after election year since there is no more uncertainty. I am sure that there is no sure answer but I would be interested in seeing what people think.

Also, what do laddered tax free bonds pay? and Riversider...are these tax free bonds state or city bonds? and if so which ones would you buy.....and how risky or safe are these bonds....

Hopefully these bonds are safer than stocks/mutual funds....or are certain bonds more risky?? like maybe the ones from states such as California, Nevada, Florida and some other states that seem to have lots of problem with pensions and "balancing their budgets"

Riversider: I can see that you think stocks will drop...when do you think this will happen?

No real idea.
I suggest you read John Hussman's latest weekly column. He does a pretty good job describing the risk/reward in the stock market.

"A friend of mine due to "fear of a double dip in stocks" moved his money in his retirement account from mutual fund the first week Oct 2010 and into an annuity."

Ouch.