As I was researching on Monday night the day's collapse on Wall Street and how it might affect housing, I got a
better sense of how absolutely broad the news was. Consider:
- the world's largest insurer, AIG, must sell off $20 billion in assets and come up with another $20 billion in capital
- Lehman Brothers filed for bankruptcy, setting the dubious distinction of being the largest bankruptcy in history (more than 6x larger than 2002's WorldCom fiasco)
- Merrill-Lynch, in business since 1914, was forced to sell to Bank of America to avoid going into bankruptcy
- More than 24 stocks fell for each that rose on Monday
You probably have many questions regarding to bankruptcy, you can find FAQ here http://www.brightbk.com/faq/. As I write this, headlines scrolling across all the news stations are screaming at me – "Financial meltdown grows – AIG failing", "Fed fails to reduce interest rates", "Crisis on Wall Street". Insurance giant AIG is in talks right now with the Federal Reserve, on how best to stabilize that company with an infusion of capital somewhere on the order of $100 billion plus. Morgan Stanley has been dealt a severe blow, Several phone calls from friends and clients called or emailed throughout the day, and everyone wants to know what it's doing to the housing market.
Truth be told, I don't think that much happens. Here me out on this, there's a point.
When the stock market drops, you typically see people moving money from stocks and into what are considered "safer" investments, like bonds, and specifically mortgage bonds. A drop in the stock market is only a good thing for mortgage rates, as evidenced by the movement of rates over the last several days. In some cases, I've seen drops among 30 year fixed rates by as much as 5/8 of a point, and today they were lower than yesterday. I'm of the opinion that in the short-term, we'll continue to see mortgage rates low and no response from the Fed to move the interest rates. Rates won't continue to stay low – and truth be told they've been low for much longer than we realize – and will eventually trend upwards again. If you're a buyer right now and haven't yet found a place, I think you're likely okay for the time being. If you're under contract and haven't locked in your rate, you might want to do it as the volatility of rates this week is really creating a crap shoot.
The best analysis I've seen of this whole thing comes from Jeff Corbett, written on Agent Genius:
Lehman Brothers
The Government can’t bail everyone out and it looks like Lehman Bros
got to be the first major brokerage to receive the pink slip. Why?
They had the baddest of the bad assets, especially from a mortgage
perspective, Lehman owned Aurora Loan Services and BNC Mortgage. These
two sub-divisions lent sub-prime mortgage money on some of the most
ridiculous terms I’ve ever seen. 100% LTV on investment properties with
a 640 score, no need to prove income or assets… A+ paper, for the
bathroom.In the end it was cheaper and easier to let Lehman Bros get gobbled
up in Bankruptcy by Goldman Sachs and other private equity players than
have the Treasury shore them up. Someone had to be the first to get the shiv.Merrill Lynch and BoFA
As it became evident Lehman Bros was going down, Merrill Lynch
scrambled to make a deal with what ended up being cash deposit rich
Bank of America (rumors had them courting Wachovia too). Good for
Merrill, bad for BoFA, who apparently didn’t learn their lesson when
they acquired Countrywide (IMO). Merrill started going sideways when
they aggressively entered and became one of the top issuers of *drum
roll please* the sub-prime mortgage market. The way it’s being spun is
BoFA is strong in banking and lending and wanted Merrill’s wealth
management pundits…spin-spin…AIG
The world’s largest insurer (for now) appears to be in a bit of
trouble as well, although the trouble should be confined to their
holding company and not affect their individual insurance company
subsidiary’s ability to conduct business and pay claims. AIG (as most
insurance companies do) invest a portion of their premiums into other
assets, and guess where AIG invested heavily? *Drum roll please* the
sub-prime mortgage market…AIG is significant in all of this for a few reasons, they’re part of
the DJIA and a staple of many mutual funds. So as AIG goes, it drags
the Dow and many others (down) with it.The Common Denominators
So, crap runs down hill. The common denominators here are how
vested these companies were/are in the sub-prime mortgage market, how
bad those poor performing assets really are and what other upside is
there to mitigate the crap…Lehman Bros appears to have been the worst of the bad and was subsequently voted off the island.
More analyses here:
Not to sugarcoat any of this, because it sucks for a LOT of people. I wonder how Bank of America will do, taking on this many bad mortgages from Countrywide and now Merrill-Lynch?
Sammy76, thanks for the comment. The housing sector has certainly contributed to what could be coined “cheap credit”, but it certainly doesn’t bear the brunt of responsibility, in my opinion. Nevertheless, you’re right that credit has been the lifeblood of the consumer in recent years. I think I read somewhere – and this has certainly not been researched so don’t quote me – that we had built up a $7 trillion reliance on credit. $7 trillion is a big number to try and wrap my head around, but I’d guess the housing sector is not to blame for all of that.
Be that as it may, you are dead on that we’ve created a reliance on credit that needs to end. It may affect housing, certainly, but I don’t think it’s going to create a depression, particularly in the housing arena, which is why I said I don’t think it’ll affect housing much. I think solid credit scores and money down WILL be key, however; that alone will most certainly take some buyers out of the market, but already we’re seeing buyers jumping INTO the market because the opportunity to buy is too good to pass up.
Here locally, I don’t think it affects the number of people moving into and out of the market. It’s going to be interesting to see in 12 months how it all shakes out.
Sammy76, thanks for the comment. The housing sector has certainly contributed to what could be coined “cheap credit”, but it certainly doesn’t bear the brunt of responsibility, in my opinion. Nevertheless, you’re right that credit has been the lifeblood of the consumer in recent years. I think I read somewhere – and this has certainly not been researched so don’t quote me – that we had built up a $7 trillion reliance on credit. $7 trillion is a big number to try and wrap my head around, but I’d guess the housing sector is not to blame for all of that.
Be that as it may, you are dead on that we’ve created a reliance on credit that needs to end. It may affect housing, certainly, but I don’t think it’s going to create a depression, particularly in the housing arena, which is why I said I don’t think it’ll affect housing much. I think solid credit scores and money down WILL be key, however; that alone will most certainly take some buyers out of the market, but already we’re seeing buyers jumping INTO the market because the opportunity to buy is too good to pass up.
Here locally, I don’t think it affects the number of people moving into and out of the market. It’s going to be interesting to see in 12 months how it all shakes out.
I disagree. This crisis originated in the real estate sector, and it is going to and it is going to come back to roost in the real estate sector. Cheap credit is coming to an end, and incomes simply have not been rising, meaning people have depended on credit to expand their lifestyles. Without cheap credit, a lot of stuff will slow down, and the real estate industry will too. Furthermore, more regulation is coming and even if mortgage rates are low, 20% down is hard for people to come up with. This is not a psychological problem: there are severe strutural weaknesses that have to be fixed before we’re out of this.
I disagree. This crisis originated in the real estate sector, and it is going to and it is going to come back to roost in the real estate sector. Cheap credit is coming to an end, and incomes simply have not been rising, meaning people have depended on credit to expand their lifestyles. Without cheap credit, a lot of stuff will slow down, and the real estate industry will too. Furthermore, more regulation is coming and even if mortgage rates are low, 20% down is hard for people to come up with. This is not a psychological problem: there are severe strutural weaknesses that have to be fixed before we’re out of this.
Exactly my thoughts – I believe this crisis is pretty fuelled by media, which are causing panic and this panic continues to rise pressure on financial institutions. As realtor I feel pretty endangered, especially now, when Canadian market is on the razor’s edge. But I keep positive thinking – bread is still being baked, factories are working, both unemployment and inflation are mild – why to start panicking? We have survived worse events…
Elli
Exactly my thoughts – I believe this crisis is pretty fuelled by media, which are causing panic and this panic continues to rise pressure on financial institutions. As realtor I feel pretty endangered, especially now, when Canadian market is on the razor’s edge. But I keep positive thinking – bread is still being baked, factories are working, both unemployment and inflation are mild – why to start panicking? We have survived worse events…
Elli
Tom – someone contacted me offline this morning and said the same thing. You – and they – are right. Consumer confidence will be a key to how we move forward from here.
RU Alumni – I just don’t see it. I think in the short-term we’ll see continued drops, but in the long-term the credit tightening and reduction in size of these major brokerages houses will create an upswing. It will be slow, as consumers battered by financial losses and housing woes will be unable to get credit, but with money down and good credit scores there will still be loans available. I’ll be the first to admit that I know it sounds like I’m a cheerleader here, but that’s my $.02. And there are plenty of others far smarter than me who can tell us more!
Tom – someone contacted me offline this morning and said the same thing. You – and they – are right. Consumer confidence will be a key to how we move forward from here.
RU Alumni – I just don’t see it. I think in the short-term we’ll see continued drops, but in the long-term the credit tightening and reduction in size of these major brokerages houses will create an upswing. It will be slow, as consumers battered by financial losses and housing woes will be unable to get credit, but with money down and good credit scores there will still be loans available. I’ll be the first to admit that I know it sounds like I’m a cheerleader here, but that’s my $.02. And there are plenty of others far smarter than me who can tell us more!
Other than printing more monopoly money, where is the Fed (a separate, private organization) going to get the BILLions needed for these new bailouts? Given many years of multiple wars, the US Government certainly doesn’t have it in its piggy banks. Need a precendent? Will we call this the GREATer Depression? The safeguards that helped us out of the 2000-01 crash were eviserated by lobbyists promoting efforts that weakened financial and consumer protections. This is the tip of the proverbial iceberg.
Other than printing more monopoly money, where is the Fed (a separate, private organization) going to get the BILLions needed for these new bailouts? Given many years of multiple wars, the US Government certainly doesn’t have it in its piggy banks. Need a precendent? Will we call this the GREATer Depression? The safeguards that helped us out of the 2000-01 crash were eviserated by lobbyists promoting efforts that weakened financial and consumer protections. This is the tip of the proverbial iceberg.
Jeremy,
Very well said. Thanks for linking to what I wrote. I think that the biggest impact this might have on the real estate market is if it pushes consumer confidence through the floor and causes people to hold back that way….
Tom
Jeremy,
Very well said. Thanks for linking to what I wrote. I think that the biggest impact this might have on the real estate market is if it pushes consumer confidence through the floor and causes people to hold back that way….
Tom