Will Subprime Foreclosures Spread?

[wabmester]

Barnum was right, a sucker IS born every minute.

I hope you're right. That's the only thing that keeps me in the markets -- the hope that there's always another sucker willing to pay a little more for houses and stocks. Heaven help us all if we run out of suckers.

I've been thinking about this recently. The 80's and 90's both had high speculative returns (i.e., P/E expansion). What drove that P/E expansion, and do we still have the ingredients to do the same for the next decade, say?

My guess is that the 80's speculative return was driven by new-fangled IRAs and optimism that personal computers would transform the world.

The 90's were obviously driven by internet euphoria.

Do we still have a magic cookie to bring new money into the market again?

 

[mb]

I'm totally surprised by this list. I was expecting to see, Cali, Mass, NJ, Florida to be at the top of the list. What gives?

An article in the San Jose Mercury News last week showed that Silicon Valley has a relatively low rate of sub-prime mortgages.

MB

 

[Alex]

I hope you're right. That's the only thing that keeps me in the markets -- the hope that there's always another sucker willing to pay a little more for houses and stocks. Heaven help us all if we run out of suckers.

I've been thinking about this recently. The 80's and 90's both had high speculative returns (i.e., P/E expansion). What drove that P/E expansion, and do we still have the ingredients to do the same for the next decade, say?

My guess is that the 80's speculative return was driven by new-fangled IRAs and optimism that personal computers would transform the world.

The 90's were obviously driven by internet euphoria.

Do we still have a magic cookie to bring new money into the market again?

hmm..... I am in the market because I'm NOT a sucker. Suckers put their money into lottery tickets and bet the house at horse tracks.....So it comes down to perspective. I have faith in the US economy and the ingenuity of our people. I am an optimist.

You, by contrast are as cynical a pessimist as I've ever encountered. You should be buying bags of junk silver, you'll need 'em, for the coming 'hard' times......

 

[wabmester]

I am an optimist.

You, by contrast are as cynical a pessimist as I've ever encountered. You should be buying bags of junk silver, you'll need 'em, for the coming 'hard' times......

Are you telling me that all I have to do is think happy thoughts, wish upon a star, and the economy and my investments will go gangbusters? What a cool idea!

Let me ask you something. Do you look both ways when you cross the street, or do you run across with your eyes closed? The historical data says that you'll probably get across the street fine either way, but that doesn't mean that you should walk in front of an oncoming bus.

 

[haha]

You, by contrast are as cynical a pessimist as I've ever encountered.

Another guy who has led a very sheltered life.

Ha

 

[Alex]

Are you telling me that all I have to do is think happy thoughts, wish upon a star, and the economy and my investments will go gangbusters? What a cool idea!

Let me ask you something. Do you look both ways when you cross the street, or do you run across with your eyes closed? The historical data says that you'll probably get across the street fine either way, but that doesn't mean that you should walk in front of an oncoming bus.

well, I didn't say that. Maybe you read that by looking at tea leaves, or chicken entrails? That is how you make your investment decisions, right? Or maybe you just consult Greenspan, MONEY magazine, or another 'guru'? Short term timing schems don't interest me WAB, I invest for the long term. YOu should try it, it's very relaxing.

 

[wabmester]

Short term timing schems don't interest me WAB, I invest for the long term. YOu should try it, it's very relaxing.

"Long" is relative. I've done the math. Stock returns for the next 10 years or so look about as attractive as T-bills *unless* we have euphoric P/E expansion again. So, I'm looking both ways before I cross the street. I see the oncoming bus, and I'm still looking for the rollercoaster ride that just keeps going up no matter what gravity says.

We don't even need a recession to make stocks unattractive. Just a slower rate of GDP (or earnings) growth would be pretty miserable for stocks. Unless we get another burst of euphoria from left field. I'm willing to make a small bet on euphoria, and that's why I'm looking for clues to where it might come from.

What do the optimists think is going to make everything warm and fuzzy again?

 

[perinova]

Foreclosures do not hit states at the same rate of speed. I recollect that in Texas a home can be foreclosed after only one month, while in NewYork (the other extreme) it will take more than a year of non-payment before foreclosure.

 

[Alex]

"Long" is relative. I've done the math. Stock returns for the next 10 years or so look about as attractive as T-bills *unless* we have euphoric P/E expansion again. So, I'm looking both ways before I cross the street. I see the oncoming bus, and I'm still looking for the rollercoaster ride that just keeps going up no matter what gravity says.

We don't even need a recession to make stocks unattractive. Just a slower rate of GDP (or earnings) growth would be pretty miserable for stocks. Unless we get another burst of euphoria from left field. I'm willing to make a small bet on euphoria, and that's why I'm looking for clues to where it might come from.

What do the optimists think is going to make everything warm and fuzzy again?

So I guess it is chicken entrails then? Sorry wab, I can't take people like you seriously. You actually think you can determine what future stock market returns will be? My attitude is that nobody (that means you too wab) can predict what the future will bring, NOBODY. So, why worry about it? Life is for living and enjoying. I really could give two sh!ts about what Greenspan says, or if we are in a housing bubble or a subprime foreclosure nightmare. I am too busy living and enjoying my life. When I need my money, hopefully it will be there and I'll have enough to do what I want to do. Otherwise I'll adjust my plans. I don't worry about events out of my control.

Now about those junk silver coins, how many bags do you have hoarded in your fallout shelter

 

[wabmester]

You actually think you can determine what future stock market returns will be?

You're a smart guy, Alex. I'm sure you've seen this, but let's do a little Stocks 101 together.

stock return = dividend yield + earnings growth + P/E growth.

That's it. No gurus up my sleeve. Tell me if there is a hidden factor I'm missing.

We know dividend yield -- about 1.5%. The oncoming bus suggests that earnings might not be growing very fast. So, our only hope is P/E expansion. You are betting on P/E expansion even if you didn't realize it.

 

[Alex]

You're a smart guy, Alex. I'm sure you've seen this, but let's do a little Stocks 101 together.

stock return = dividend yield + earnings growth + P/E growth.

That's it. No gurus up my sleeve. Tell me if there is a hidden factor I'm missing.

We know dividend yield -- about 1.5%. The oncoming bus suggests that earnings might not be growing very fast. So, our only hope is P/E expansion. You are betting on P/E expansion even if you didn't realize it.

You must have missed the Asset Allocation part of that school. I have a good portion of my assets in Bonds, cash and reits. I also own my own business and a rental property with positive cash flow. So really, I don't care what stocks do, I don't want to beat the stock market, I am content to simply match the market returns. If P/E's expand, great. If not, thats ok too. No matter what happens I will be very content, relaxed, and comfortable.

 

[cute fuzzy bunny]

or do you run across with your eyes closed?

Bag over his head. Done it 1000 times. Nothing bad ever happened.

 

[wstu32]

1. subprime is 10% (give or take) of all mortgage paper.
2. while i dont think the blow up is good, i do honestly believe it is overblown
3. there is a concern not to let all subprime lenders go "under" by the fed and large institutional holders of subprime debt
4. their is actually a need for subprime
5. better regulation and change coming ~good

so, in my opinion, i think we have seen the worst.... but what do i know

 

[crazy connie]

I'm totally surprised by this list. I was expecting to see, Cali, Mass, NJ, Florida to be at the top of the list. What gives?

1st 3 are hit by auto industry downturn, Des Moines is home to Wells Fargo Home Mtg division & Maytag which outsourced as I recall and they have both been whacking, Mississipi well you must remember a lot of the sub-primes and liar loans came before Katrina which wiped out jobs.

Overall the Subprime is a shame on the lender and borrower. The ones we have yet to hear a lot about are the liar loans. I saw a lot of fools buying 7 figure properties (some with 5% down) because they could afford a negative amortization with buydown payment... That is going to bite a lot of fools hard with the leveling off of housing prices and slowing of raises and income.

 

[wstu32]

i agree..

but liar loans is not all subprime!

neg-amortized loans are absolutely immoral!! but lets not let all borrowers off the hook too! some borrowers were looking to make a quick buck in an insanely hot R.E. market and some seemed to get caught at the wrong time.

also, some subprime comanies that 'specialized" in that 1.4% teaser mortgage rate are better off dead, but didnt i see reputable companies offiering this?

countrywide
quicken loans
etc?

 

[riskadverse]

... You, by contrast are as cynical a pessimist as I've ever encountered.

Only because you haven't encountered me . . . Wab is an optimist on my scale.

 

[wabmester]

Wab is an optimist on my scale.

Hey, I'm always looking for the optimistic picture. I'm just finding a lot more bear food.

Here's the best I can do for the optimistic viewpoint. If you like pattern matching, 2007 looks a bit like 1996, which we all know was the start of a major bull run. Personally, I don't think so, but it's fun to imagine.

NY Time article

It is five years into an economic expansion and most Americans are still waiting for their share. Inflation is swallowing pay raises. Businesses are hiring, but forecasters worry that the economy may be about to stall.

“If this is a recovery,” the leader of the political opposition complains, “I can hardly wait for the recession.”

This may sound like the stuff of today’s headlines. But it comes from 1996...

 

[Alex]

Only because you haven't encountered me . . . Wab is an optimist on my scale.

OK. well, good luck with that...

 

[CompoundInterestFan]

Will Subprime Foreclosures Spread?

Magic 8-ball says: "Answer unclear. Ask again later."

 

[Texas Proud]

Answer is yes...

Was kinda watching Nightline and they were showing a location that had 'thousands' of forclosures... they were auctioning (I believe 12 or 20, can't remember) homes, but only ONE sold at auction... so, the houses were not even good enough to buy at auction...

 

[Telly]

If you want the bearish view, let me introduce you to an economist:

Nouriel Roubini

it will be the worst housing recession in the last five decades

The economy will experience a hard landing, at best in the form of a growth recession (growth in the 0%-1%) for most of 2007 or, more likely, an actual recession starting in Q2. Greenspan thinks a recession by Q4 has a 30% probability; the Fed’s yield curve model prices a 54% probability of a recession in 2007.

the Fed will try but will not be able to rescue the economy.

Ah, Nouriel. He is the resident Permabear guest on Kudlow & Co.

 

[Running_Man]

Now about those junk silver coins, how many bags do you have hoarded in your fallout shelter

I purchased many ounces of silver between 2000 and 2001 at prices ranging from 4.65 to 5.25. Sold in 2006 between 12.50 and 13.75 per ounce. I was pretty happy with that outcome although right now I own no silver or gold, which is in violation of my creed to always keep at least a few percentage points of my investments in precious metals.

I find whether it is stocks or a business when you can buy for less than the cost to produce the underlying assets profits can be made. To make oneself intentionally ignorant may be blissful but is not necessarily correct.

 

[lets-retire]

Answer is yes...

Was kinda watching Nightline and they were showing a location that had 'thousands' of forclosures... they were auctioning (I believe 12 or 20, can't remember) homes, but only ONE sold at auction... so, the houses were not even good enough to buy at auction...

I think as this happens more and more the banks will be more willing to work out an alternate solution and less likely to foreclose. Most likely I think the banks would extend the lower interest rate for a longer period. Either way the banks are not going to be in a good position.

 

[brewer12345]

I think as this happens more and more the banks will be more willing to work out an alternate solution and less likely to foreclose. Most likely I think the banks would extend the lower interest rate for a longer period. Either way the banks are not going to be in a good position.

A lot of them are doing "short sales." That means they agree to allow t he dirtbag borrower to sell the house for less than the loan payoff amount and eat the difference. That way they avoid having too much REO on the books.

 

[FinanceDude]

What is the percentage of OVERALL loans each year that are SUBPRIME? I think everyone's being a little alarmist is saying it will put the whole economy in a tailspin...................

A MUCH BIGGER worry is if GM, Ford or Daimler Chrysler go out of business to the Asian Invasion...........the shock waves of ANY of those would be a lot bigger, since roughly 30% of the overall economy of the US is tieed to the car industry.............