Posted by: Timothy Ellis (The Tim)

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

82 responses to ““We’re going to be at the bottom for a long time.””

  1. Scotsman

    WASHINGTON (AP) — Sales of existing homes fell for a third straight month in February, pushing sales down to the lowest level since last July. There is concern the fragile housing rebound is faltering, making it harder for the overall economy to recover.

    The National Association of Realtors said Tuesday that sales of previously occupied homes dropped 0.6 percent in February to a seasonally adjusted annual rate of 5.02 million.

    http://finance.yahoo.com/news/January-existing-home-sales-apf-78982446.html?x=0&.v=5

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  2. softwarengineer

    I Agree Tim

    But where do we go from here? It’s like the downfall of the Roman Empire; once there’s no more invasions and cities to build, what do we do?

    No one seems to have a replacement plan to an uncontrolled growth economy. IMO, until we get a plan implemented, the bottom will not only last forever, add in chronic price/wage decreasing too.

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  3. Sniglet

    Thanks so much for highlighting my podcast Tim. It was a lot of fun. Just to clarify the links, here are the feeds to use.

    For subscribing to my entire blog (podcasts and all about philosophy, entrepreneurship, careers, etc):
    http://feeds.feedburner.com/surkanstance

    For subscribing to my OptimisticBear podcasts and posts:
    http://feeds.feedburner.com/OptimisticBear

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  4. Sniglet

    I tried to be careful not to let my bearish side come through too much in this podcast, since Jillayne was the guest and I wanted to be nice. :)

    For the record, however, I still believe we will see at LEAST an 80% decline in average Seattle area real-estate prices by the time we hit bottom. We are barely through the first inning of a great deflationary depression which will take a decade or more to play itself out.

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  5. Ross

    By Sniglet @ 5:

    I tried to be careful not to let my bearish side come through too much in this podcast, since Jillayne was the guest and I wanted to be nice. :)

    For the record, however, I still believe we will see at LEAST an 80% decline in average Seattle area real-estate prices by the time we hit bottom. We are barely through the first inning of a great deflationary depression which will take a decade or more to play itself out.

    So housing prices will be cheaper, in many cases, than current yearly rent? I’d say that outcome has little to no probability of happening.

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  6. Jo

    How can Seattle be so special when San Diego is the special city. ;)

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  7. anonimaniac

    Ross, that scenario of cheaper than rent is the historical norm.

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  8. Sniglet

    Keep in mind that rents are falling… I suspects rents will be MUCH cheaper than they are now when we hit bottom as well as property prices themselves.

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  9. Sniglet

    Speaking of my podcasts, here’s a reminder that the Optimistic Bear internet radio show will be airing live tonight (Tuesday the 23rd) at 9:00pm Pacific Time. We will be discussing the past week in economics and finance. Feel free to call in and share your thoughts.

    http://surkanstance.blogspot.com/2009/11/introducing-optimistic-bear-weekly.html

    I would love to have someone call in and set me straight about why my predications for massive deflation in asset prices is bonkers.

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  10. ray pepper

    “I tried to be careful not to let my bearish side come through too much in this podcast, since Jillayne was the guest and I wanted to be nice. :)”

    Jillayne is the guest and she gets all this attention???…Your kidding me!

    When I was the guest….It was far more entertaining!

    “Is this the bottom? I think we’re going to be asking that question of each other for a long, long time. …I believe that the bottom is going to be not hard at all to find, because we’re going to be there for a long time.”

    This is the MOST common opinion of Wall Street Analysts across the board for the last 11 months. Flatline with a trendline down + to – 1 to 2% for many years.

    Surely not earth shattering news to people here…I hope.

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  11. Trigger

    RE: Sniglet @ 5 – Sniglet? What 80%?

    So a nice home which sells now for 800K will sell for 160K and you will be able to save up for it in 3-4 years? Are we getting richer or what?

    And you will be able to rent the 800K home which will sell for 160K – for 5K per month. Wow. So the returns will be amazing! Is this magic or what?

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  12. Sniglet

    When I was the guest….It was far more entertaining!

    There is one big difference, Ray. You called into my live weekly economics talk show, and my regular panelists could have at you. With Jillayne, I was just recording a 1 on 1 interview for publication.

    Different animals. :)

    Not that I would have been mean to Jillayne if she had called into my Optimistic Bear show. It’s just that when I profile guests for an interview, I try to focus on their ideas rather than pontificate on my own theories.

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  13. Ross

    By Sniglet @ 9:

    Keep in mind that rents are falling… I suspects rents will be MUCH cheaper than they are now when we hit bottom as well as property prices themselves.

    Well, I agree that rents and housing prices are correlated, though I’d generally suggest that its rental income that should be driving housing pricing, and not the other way around (recent bubble time excluded). But the point is, if, today, people can today afford to give 1st + last month rent, as well as a security deposit and rental application fee (which is about 1/4 of a year’s rent) — then it would not be a huge stretch to be able to afford a years worth of today’s rent (worst case, they’d just need to live with parents or sleep on a friend’s couch for 9 months). And this would be an investment providing huge return. So the only situation where I could see median housing prices fall by 80%+ would be a deflation of 80%+ (and we should already know Bernanke’s policy of defeating deflation: “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.” (He referred to a statement made by Milton Friedman about using a “helicopter drop” of money into the economy to fight deflation.) http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm“)

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  14. Sniglet

    I find it interesting that policy makers have been throwing around stimulus like mad for the last year (including lots of liquidity from central banks), yet it hasn’t brought prices back to the peak, and we still see deflation hitting a great many assets.

    Look at how Japan’s government has been shovelling out stimulus, and easy money, for almost 20 years yet they can’t seem to stoke inflation, and many Japanese asset prices are 60% or more off of where they were in 1989.

    In short, I believe that the ability of policy makers to “print” money is limited, and their hands are tied. The vast majority of the stiumuls is borrowed (i.e. not actually new minted cash), which merely steals money from elsewhere in the economy. The minute the government starts actually printing money to stoke inflation, the bond market will collapse and there will be no way to refinance the national debt. This is what prevents the government from going “nuclear” and actually running the printing presses (as much as Bernanke may threaten to do so).

    Instead, I predict we will see a massive deflation rip through the global economy, cutting commodity, stock, and real-estate prices by WAY over 50% of current levels in dollar terms.

    Interesting, I made a podcast on this very subject, outlining the case for deflation.

    http://surkanstance.blogspot.com/2009/01/deflation-101-podcast.html

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  15. anonimaniac

    1997 prices here we come!

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  16. ray pepper

    RE: Sniglet @ 13

    I’m still sad and would like a 1-1 for publication on any topic you like. If I don’t know what I’m talking about I will just make predictions for you that will be entertaining for the listener.

    http://www.youtube.com/watch?v=QVkjCQCTOEI&feature=channel

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  17. Jillayne

    Did anyone see the Janet Yellen interview excerpt today on CR:

    http://www.calculatedriskblog.com/2010/03/feds-yellen-outlook-for-economy-and.html

    Take a look at what she’s seeing regarding defaults.

    We can’t have stable housing prices when defaults are still rising.

    Underwriting guidelines will tighten again once we see what the secondary market will look like after the government stops buying MBS’

    We’re still doing FHA loans with a back end debt-to-income ratio of 55 percent with 3.5 percent down and FHA loans are being used for more than just first time homebuyer-type homes when we leave the loan limits high. Which means policymakers are using FHA to shore up the market. This will not end well for FHA.

    We are nowhere near a healthy, functioning housing market.

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  18. Ross

    By Sniglet @ 15:

    I find it interesting that policy makers have been throwing around stimulus like mad for the last year (including lots of liquidity from central banks), yet it hasn’t brought prices back to the peak, and we still see deflation hitting a great many assets.

    Look at how Japan’s government has been shovelling out stimulus, and easy money, for almost 20 years yet they can’t seem to stoke inflation, and many Japanese asset prices are 60% or more off of where they were in 1989.

    In short, I believe that the ability of policy makers to “print” money is limited, and their hands are tied. The vast majority of the stiumuls is borrowed (i.e. not actually new minted cash), which merely steals money from elsewhere in the economy. The minute the government starts actually printing money to stoke inflation, the bond market will collapse and there will be no way to refinance the national debt. This is what prevents the government from going “nuclear” and actually running the printing presses (as much as Bernanke may threaten to do so).

    Instead, I predict we will see a massive deflation rip through the global economy, cutting commodity, stock, and real-estate prices by WAY over 50% of current levels in dollar terms.

    Interesting, I made a podcast on this very subject, outlining the case for deflation.

    http://surkanstance.blogspot.com/2009/01/deflation-101-podcast.html

    Both inflation and deflation are hidden taxes, the former on lenders, the latter on borrowers — and to the extent that inflation is not priced into the original debt agreement, a change in the rate of inflation or deflation is a redistribution of wealth from one party to another. So I think we can both agree that a zero inflation (deflation) rate is the most fair policy, and barring that at least most people will settle for a stable inflation rate. The federal reserve can control inflation by controlling the supply of money in the economy (directly by printing, or indirectly by policy, such as reserve requirements at banks). If, as you suggest, we’re going to see massive deflation in the neighborhood of 50%, that implies a huge redistribution of wealth from borrowers to lenders. But realistically, most borrowers would be underwater and would default on pretty well all forms of debt, and would lead to bankruptcy for the lenders in turn on a widescale basis. Essentially, it would be financial armageddon and probably lead to a collapse in the US economy (if not worldwide). And deflation would also completely freeze the bond market, since borrowers don’t want to borrow a declining asset and lenders don’t want to lend to a population that is defaulting (in fact, printing money in this situation would thaw the bond market). So the federal reserve would have a very good reason to prevent the complete collapse of the US economy.

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  19. Sniglet

    If, as you suggest, we’re going to see massive deflation in the neighborhood of 50%, that implies a huge redistribution of wealth from borrowers to lenders.

    Just ask the Japanese banks how well they’ve been doing over the last 20 years. Deflation doesn’t seem to have done them any favours, and most of the Japanese financial insitutions are still walking zombies. The Japanese banks haven’t all gone summarily bust because the Japanese regulators have agreed to turn a blind eye to book-keeping slight of hand, and tolerate banks keeping assets on their books at ridiculous valuations.

    Deflation hasn’t stopped the Japanese bond market either. Investors are eager to buy Japanese sovereign debt despite the fact that the government keeps issuing ever larger amounts of it, and the yields are absurdly low.

    There clearly is no directly correlation between either banks getting rich or bond markets tanking and deflation.

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  20. Sniglet

    Interestingly, the Japanese national debt makes the US government look like a miser. Japanese national debt exceeds 190% of GDP (the US debt is less than 80%)! Despite all this stimulus spending (which has been building bridges to no where for over 20 years) they still haven’t been able to stop deflation.

    http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

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  21. Ira Sacharoff

    RE: Jillayne @ 18

    How in the name of financial sanity can the FHA be doing 55% debt to income loans?

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  22. Ross

    By Sniglet @ 21:

    Interestingly, the Japanese national debt makes the US government look like a miser. Japanese national debt exceeds 190% of GDP (the US debt is less than 80%)! Despite all this stimulus spending (which has been building bridges to no where for over 20 years) they still haven’t been able to stop deflation.

    http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

    You’re conflating situations which have some similarities, but many important differences: The economies, financial systems, social customs and lending is different in the US and Japan.

    Public debt in Japan is high partially because Japanese households save a tremendous amount of their income. Moreover, most of Japan’s debt is domestically funded (and Japanese savers are conservative investors, putting most of their money in bonds, savings accounts etc). Granted, the Japanese government has been on a decade long effort to stimulate its economy: and by the measure you’re suggesting for the US economy (-50% deflation), they are succeeding (they have been mostly positive over the last 2 decades) http://static.seekingalpha.com/wp-content/seekingalpha/images/20060829japan1.jpg (Pointing to japan’s case argues my point: The fed can push inflation positive if it wants).

    Social customs in Japan making default/bankruptcy/foreclosure politically and socially difficult. This goes for individuals as well as institutions. That’s why some banks have been allowed to carry underwater assets for decades without fail. Meanwhile, in the US, most of the big banks asset sheets are beginning to look healthy, and the small banks are getting closed left and right by the FDIC. With the exception of GM, most of the government’s TARP investments have generated a profit (even AIG is now expected to be breakeven)

    There clearly is no directly correlation between either banks getting rich or bond markets tanking and deflation.

    Japan barely saw deflation: It got as low as -2% for a brief period in 1989, but most of the time has been close to 0. There’s a big, big difference between 0-2% deflation and 50% deflation, just as 2% inflation wouldn’t freeze the bond markets, but 50% inflation probably would.

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  23. Jillayne

    Okay, how about this for some demand destruction. Guy knocks on my door just now:
    “Hi Mrs. Schlicke, remember me? I gave you a bid on repaving your driveway a few years ago? We’re going to be down the street at your neighbor’s house tomorrow. I can do your driveway tomorrow for $2,200.”

    I decline. He says, “Are you sure? We can do the whole thing for $1500.”

    Two years ago his company quoted $8,000.

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  24. Jillayne

    Ira, FHA will take the loans so the banks are making them with the full backing of the FHA Home Mortgage Insurance Program. I’ve heard back end debt-to-income ratios as high as 65% in January. FHA is always very, very slow to react when it comes to changing guidelines.

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  25. Jillayne

    Here’s another one for you. Window replacement company quoted me $22,000 to put double pane windows in my 1959 tri-level in 2007, but it would only be $18K if I signed “today only.”

    Two weeks ago, the bid came in at $8,000.

    …for triple pane.

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  26. Ira Sacharoff

    By Jillayne @ 25:

    Ira, FHA will take the loans so the banks are making them with the full backing of the FHA Home Mortgage Insurance Program. I’ve heard back end debt-to-income ratios as high as 65% in January. FHA is always very, very slow to react when it comes to changing guidelines.

    My God!
    What’s the limit on conventional back end debt to income rations, 28%?
    I’m just flabbergasted. 3.5% down, 55% debt to income ratio. I’m no economist, but one could venture a pretty good guess that we’re going to see a fair number of these become foreclosures. And who’ll be one the hook for these?

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  27. Jillayne

    Well FHA has always been a self-supporting program. If the FHA mortgage insurance fund runs out of money then FHA will need to raise premiums and/or ask for a taxpayer funded bailout.

    I would personally like to see FHA lower loan limits back to what they were before the financial sector meltdown.

    FHA was never meant to help people buy half-million dollar homes. It’s purpose was to help first time homebuyers buy a home with limited downpayment, not to help shore up the housing industry.

    Conventional back end ratios are lower than FHA but I’d have to check with Rhonda to see what the guidelines are today.

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  28. patient

    RE: Ira Sacharoff @ 28 – FHA, Fannie & Freddie are in deep dodo. The gov. is scrambling to come up with some sort of “restructure” to hide what is really going on ( continued bank bailouts through gov. “subprime”, risky, unprofitable lending ) and to not look like they lied when promising that FHA will not need a bailout. This will not be pretty to watch unfold.

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  29. Sniglet

    I can’t remember where I read it, but I recall seeing an article talking about how the 2009 FHA backed loans are performing worse than any other year on record for the same time period after issuance. In fact, 0 day defaults (i.e. cases where borrowers never make a single payment) are at all time highs with newly minted FHA loans.

    I am sure glad that our policy makers have learned from the lending practices of the sub-prime era to ensure that loans are only given to people who can actually afford them.

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  30. Hope & Change comes to America. . .

    “Jillayne » Mar 23, 2010 at 3:48 pm
    Here’s another one for you. Window replacement company quoted me $22,000 to put double pane windows in my 1959 tri-level in 2007, but it would only be $18K if I signed “today only.”

    Two weeks ago, the bid came in at $8,000.”

    You think THAT’S SOMETHING? Today the NAR reports home sales down in Feb and the Dow GOES UP 100+ points. . . No, Really the market IS honest. It’s NOT manipulated. There’s NO Plunge Protection Team. . . You CAN trust Wash DC and Wall Street. I’ll STOP when it hurts. . .

    Hope & Change.

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  31. Jillayne

    The dead downpayment assistance programs have much to do with the rising default rates of FHA loans. Here’s more:

    http://www.calculatedriskblog.com/2010/01/hud-probes-fha-lenders.html

    We also had many NEW firms that received FHA approval in 08 and 09. It’s only now that FHA is starting to really crack down on poorly performing companies.

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  32. patient

    Imo there is currently no driver for home price appreciation. There can’t be many buyers out there who are willing to pay above current market price and without that sentiment prices can’t really rise. My guess is that the overwhelming majority of buyers today are only willing to buy at or below current market price which logically will continue to drive prices lower. I think it will take a long time before buyers again are both willing and able to pay above current market price so when the bottom arrives whenever that is it will likely be long just as this post predicts.

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  33. Brian

    NOW is a GREAT TIME to buy!

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  34. Sniglet

    The Nehemiah Program, which allowed FHA insured mortgage borrowers to receive “donations” for down-payments ended in July 2008.

    http://www.fha.com/program_nehemiah.cfm

    However, that clearly didn’t mark the end of shoddy FHA lending guidelines.

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  35. Markor

    RE: Sniglet @ 9

    Agreed, rents much cheaper. I was paying $575 for a 2-bedroom on Queen Anne when the economy was better than now, and not a lot less population either.

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  36. The_Dude_Abides

    Many people, all across the media spectrum, have been throwing around the term ‘housing recovery’.
    I think we all have a different view of it’s meaning. To me, it doesn’t mean a return to the 2006-2007 bubblicious high, but back to 2000-2002 values, with no further declines. It reminds me of the NASDAQ…I think most people would agree that it has recovered, though it is still half it’s 2000 value. It was a flippin’ bubble, folks…the same as housing.

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  37. wreckingbull

    I have to admit I started kicking tires, but within one week I realized I would be a fool to do anything until this thing plays out. No way in hell I am taking the plunge while the government continues to do its damage via the FHA, MBS purchases, and GSAs. When the Gub gets out of the bubble business, (if they ever do) then maybe, after the echoes from the massive ‘poof’ subside.

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  38. Scotsman

    It’s hard to get excited about rising home prices when 79% of the population thinks the economy could collapse:

    http://www.foxnews.com/politics/2010/03/23/fox-news-poll-say-economy-collapse/

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  39. Daniel

    By Ross @ 23:

    Meanwhile, in the US, most of the big banks asset sheets are beginning to look healthy

    Do you believe in the Easter bunny? No offense… but I find it more likely that they would still _all_ be under water if they had to price their assets at a fair market value. They are just allowed to make profits that will allow them to dig themselves out of the hole if all goes well. In fact they gain an unfair advantage over some of the smaller banks that used to be healthy before the mess started. Instead of creating less banks “to large to fail”, both this administration and the previous one opted to make the existing problem worse.

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  40. Ira Sacharoff

    By Jillayne @ 33:

    The dead downpayment assistance programs have much to do with the rising default rates of FHA loans. Here’s more:

    http://www.calculatedriskblog.com/2010/01/hud-probes-fha-lenders.html

    We also had many NEW firms that received FHA approval in 08 and 09. It’s only now that FHA is starting to really crack down on poorly performing companies.

    I realize that it’s very easy to think we’d do differently if we were in someone else’s shoes, but if I were a loan originator, and someone came up to me to borrow money and had 3.5% down and wanted a 55% debt to income loan, I’d be really tempted to shake them and yell ” Are you nuts?”

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  41. Scott is Rad

    By Ira Sacharoff @ 42:

    I realize that it’s very easy to think we’d do differently if we were in someone else’s shoes, but if I were a loan originator, and someone came up to me to borrow money and had 3.5% down and wanted a 55% debt to income loan, I’d be really tempted to shake them and yell ” Are you nuts?”

    It doesn’t do any good. By a rough count I’d say I’ve lost at least six repeat clients to other loan originators because I advised against refinancing.

    These people wanted to go from stable, affordable loans to short term (3-5yr) ARMs, interest only, anything to get a lower payment and more cash-out when appreciation started to wane.

    One stands out as particularly bothersome. They dumped me for another originator who promptly refinanced them into an Option ARM, something they didn’t understand, until one day they saw that they owed 20k more than when they refinanced. They couldn’t afford the full payment and are in the process of losing the house.

    I don’t know the answer to dealing with clients who have not only drunk deep from the punchbowl of pumper flavored Kool Aid, but who also refuse to hear a word of sanity. They have their dream and they don’t want anyone pinching them awake.

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  42. ray pepper

    RE: Scotsman @ 40

    Scotsman do you truly trust a Fox News Poll?

    I mean come on………….Its pure titillation..and thats my conclusion being a left winger.

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  43. Jonness

    By Sniglet @ 5:

    I tried to be careful not to let my bearish side come through too much in this podcast, since Jillayne was the guest and I wanted to be nice. :)

    For the record, however, I still believe we will see at LEAST an 80% decline in average Seattle area real-estate prices by the time we hit bottom. We are barely through the first inning of a great deflationary depression which will take a decade or more to play itself out.

    And that right there Mr. Sniglet is why you are my favorite commenter on this site. I got a kick out of the stimulus kicking in and providing a temporary lull in the storm. A while back, some rather clueless individuals came out and called you names in the belief it was over and we would V-straight back up to bubbleland in a few weeks. Yet, some months later, I have friends who are just now losing $50/hr jobs, and they’re scared to death they’ll lose everything they’ve spent their lives working to achieve. The extreme optimists have been exposed as loons as have these idiots who continually call a new bottom each passing month. Like it or not, we are in it for the long run.

    IMO, it’s about this MV=PQ thing where M=MB/R. There are two entities that can create money from thin air in our system–banks and government. When the banks stop creating money from nothing (i.e. lending), the government attempts to pick up the slack. But, as you explained to me a long time ago, the government can’t keep up with the pace of credit contraction. Thus, the increase in MB is offset by the banks hoarding R. Without a legitimate increase in M, and V in the sewer, PQ growth is a difficult thing to sustain. Then along comes a larger debt burden as the stimulus expires and we need to pay back what we borrowed. So along comes another round of stimulus, and the misery cycle continues.

    I’ve been thinking the best way to monitor the above is by looking at core inflation. It is currently contracting and probably heading to 1% by year end. Some people argue that the decrease is due primarily to housing, and everything else is relatively OK. But I don’t buy that. I see my friends who took out equity in their homes and lived large during the bubble years. Now they are scraping by living in stress and fear. We live in a 180% opposite psychological world than during the bubble years. Everything other than housing is not OK. Until we see jobs rebound, it is premature to pretend we are out of the woods. And as far as housing is concerned, it will be subject to at least 2 more years of miserably high unemployment amidst ever tightening lending standards.

    Best case scenario: sideways misery
    Worst case scenario: miserable deflationary depression
    Most likely outcome: misery

    I am a lot less bearish than you are. However, currently I cannot see how we are going to grow out of this mess. I think it’s way worse than what you see on TV, and we could be going the way of Japan for some time. I would say in today’s market, generally speaking, if you buy a house for more than it was worth in 2004, you will for sure get stung. Maybe we end up with inflation that will bail you out, but I expect the opposite problem to persist for at least the next couple of years. The entire world is deleveraging, and that has consequences.

    In short, our economic model has been proven to be a failure. China is eating us for breakfast, has been for years, and the big turn-around is nowhere in sight.

    As usual, now is an excellent time to be saving a down payment for a house. Typically appreciation eats up your savings. But these days, not only can you save 100% of your money for the down, the house price decreases as well. As a bonus, saving money is good insurance in case you lose your job. In short, it is a terrible time to buy and a great time to be saving. Cross your fingers that most people don’t figure this out, because if they do, it will result in a vicious downward cycle as people hoard money waiting for prices to stop falling–deflation.

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  44. Jonness

    By Sniglet @ 21:

    Interestingly, the Japanese national debt makes the US government look like a miser. Japanese national debt exceeds 190% of GDP (the US debt is less than 80%)! Despite all this stimulus spending (which has been building bridges to no where for over 20 years) they still haven’t been able to stop deflation.

    http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

    But wait. Didn’t the Japanese start this process in much better shape than we did?

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  45. Jonness

    By Ross @ 23:

    Japan barely saw deflation: It got as low as -2% for a brief period in 1989, but most of the time has been close to 0. There’s a big, big difference between 0-2% deflation and 50% deflation

    House prices can fall 50% amidst 0-2% inflation. A troubled asset class doesn’t necessarily track the overall inflation rate.

    http://www.chpc.biz/images/JapanCompare-9-27-06.jpg

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  46. Scotsman

    RE: ray pepper @ 44

    “poll was conducted for Fox News by Opinion Dynamics Corp. among 900 registered voters from March 16 to March 17. For the total sample, the poll has a margin of sampling error of plus or minus 3 percentage points.”

    Sounds legit to me- Fox just paid the bill for a large-sample poll with a decent margin of error. Hey, even CNN has the blessed one down to a 46% approval rating- now that’s unbelievable. ;-)

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  47. ray pepper

    Scotsman hate to say I told you so…But I did…This will be HUGE when implemented across the board by WFC and Chase. There will be many variations of this but in the end they finally figured it out!

    http://www.cnbc.com/id/36012522

    The arrival of MTG Cramdown!

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  48. Scotsman

    RE: ray pepper @ 49

    Very interesting, and clever. But it’s not really a “cram-down” in the sense that some outside entity is forcing it upon the banks, and especially forcing the banks to modify existing contracts.

    From the details in your link it looks like the banks are volunteering reductions to current “customers” in an effort to prevent additional defaults or walk-aways. The catch is the borrowers only get the reduction if they stay current for five years. It may work, it may not, but if I was a bank I’d give it a try since the lost principle and interest will still be less than the loss from foreclosure or a forced sale through REO after the borrower walks.

    I do think that more and more will walk as this continues to develop, so we do agree on some things!

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  49. ray pepper

    RE: Scotsman @ 50

    Call it what YOU like. This is the DEFINITION of Mtg Cramdown and this implemented on a wide scale will GREATLY reduce foreclosures across the board.

    “I do think that more and more will walk as this continues to develop”

    As what continues to develop?

    People DO NOT walk when they have equity. Watch and learn. The caveat: widespread discontent from those who do not get their Mtg Crammed Down due to NOT being upside down greater then 120% and those who do NOT have Neg Am loans.

    But, watch and learn how effective this will be. When the other MAJOR lenders follow suit on a wide scale you will see your housing bottom.

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  50. Scott Weitz

    RE: Ross @ 23

    The banks are healthy because the government has bailed them out…and we have NOT fully been repaid. The govt is still handing out cash in the form of 0% rates at the discount window and 3-4% treasury yields. Banks borrow from the fed levered up 30-40x, then go get 4 risk free….we should all be lucky!!

    Don’t kid yourself: the repeal of mark to market (making it legal for banks to do what ENRON did); the buying of mortgage backed securities by Treasury, Fannie, and Freddie @ unimaginable levels; and the ability borrow at 0% have saved the banks, but we have not been compensated in whole as taxpayers. The TARP was one of many tools used to save the banks.

    That said, the consumer is still on life support, and this mess is far from over. We just spent trillions as a country to simply keep the biggest banks alive and kick the can for awhile. At some point, the consumer needs to deleverage.

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  51. ray pepper

    RE: Scotsman @ 50

    In all due respect you were also wrong on the Bush Mobile. It was by far the single most effective endeavor 500 Realty ever implemented to get its name out to the masses.

    Our web hits went from a mere 10-20 per day to a whopping 560 the day of the telecast and has averaged nearly 3.5 x the hits since all the controversy. You stated we would lose business and it was a poor decision on advertising. We have NEVER been so busy at 500 Realty!

    Any more predictions?

    People love to cheer the biggest bears here on Bubble. I’m bearish on many things going forward but when I see programs that will work …I’m all over it!

    Too late to go long now Scotsman…The real money has been made. Now you watch from the sidelines.

    I reiterate…Fox News is pure titillation and as hard as they try you will be seeing Obama 7 more years! Not to mention the Obama mobile that we will be rolling out.

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  52. Ross

    By Scott Weitz @ 52:

    RE: Ross @ 23

    The banks are healthy because the government has bailed them out…and we have NOT fully been repaid

    All TARP money given to the banks has been repaid (with gains). GM and AIG still have unpaid TARP.

    The govt is still handing out cash in the form of 0% rates at the discount window and 3-4% treasury yields. Banks borrow from the fed levered up 30-40x, then go get 4 risk free….we should all be lucky!!

    Agree, there’s plenty of giveaways happening (but that’s no different from the usual, just a different industry right now).

    Don’t kid yourself: the repeal of mark to market (making it legal for banks to do what ENRON did); the buying of mortgage backed securities by Treasury, Fannie, and Freddie @ unimaginable levels; and the ability borrow at 0% have saved the banks, but we have not been compensated in whole as taxpayers. The TARP was one of many tools used to save the banks.

    That said, the consumer is still on life support, and this mess is far from over. We just spent trillions as a country to simply keep the biggest banks alive and kick the can for awhile. At some point, the consumer needs to deleverage.

    I’m not saying we’re out of this financial mess. I was just arguing that 80% housing price depreciation and 50% deflation are extremely unlikely and unrealistic predictions. However, if you claimed we’ll have a decade + of flat growth (0 +/-2%), I won’t argue.

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  53. Ross

    By Jonness @ 47:

    By Ross @ 23:
    Japan barely saw deflation: It got as low as -2% for a brief period in 1989, but most of the time has been close to 0. There’s a big, big difference between 0-2% deflation and 50% deflation

    House prices can fall 50% amidst 0-2% inflation. A troubled asset class doesn’t necessarily track the overall inflation rate.

    http://www.chpc.biz/images/JapanCompare-9-27-06.jpg

    Except that the argument was for 80% decline in housing and a 50% across the board deflation. We’ve already seen a 50% decrease in housing prices in some parts of the country, but an 80% decline on top of what we’ve seen seems very improbable to me.

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  54. patient

    RE: ray pepper @ 53 – Ray, imo foreclosures do not change the outcome, they just help speedup the road to the bottom. Without them it will take many more years to return to a sound market but it will happen and the level it bottoms out at will be pretty much the same with our without foreclosures imo.

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  55. Scotsman

    RE: ray pepper @ 53

    So, you’re saying this is the bottom? Dow 20,000 baby, ride it all the way. Real estate always goes up- starting now!.

    As for the banks, in 4 years their customers will be 20% upside down. . . again. Do the banks reduce the balance owed again, or do the borrowers walk?

    If I buy the 20+ acres in Fall City and put 40 used trailers on it, each with a garden space, and rent them to broke realtors for $400/month will I make any money over the next 10 years?

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  56. Scotsman

    RE: ray pepper @ 53

    ” Not to mention the Obama mobile that we will be rolling out.”

    Awesome! You can have a pic of Obama with Greasy Joe whispering in his ear- “This 500 Realty is a big f’n deal!” Classy!

    http://hotair.com/archives/2010/03/23/video-the-obligatory-this-is-a-big-fing-deal-clip/

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  57. RE Guide

    Didn’t read all the comments but I find it interesting the general lack of knowledge about who runs the economy, what tools they use, and what their political goals are. The general ignorance is caused by watching too much mainstream media and entrusting that perpetual liars are now for some reason providing paradigms of truth.

    The US govt does not control it’s own currency, it just has the right to mint coins. The privately-run corporate “Federal” Reserve (name intentionally chosen to confuse) lends all debt to the US govt, at interest. This is what 100% of your “Federal” income tax goes toward paying — interest owed to private central bankers. It does not go toward street repairs, or schools, etc.

    The central bankers are instrumental in guiding US govt policy in such a way as to ensure the debt interest is as large as possible (anyone up for some illegal wars?). Such large amounts of interest owed by a govt puts a govt into the controlling hands of the lender, ultimately. We are not ruled by the govt of the USA. We are ruled by the private interests who own the World Bank and all central (“federal”) banks in every country around the world, including the USA.

    And you trust the mainstream media that is essentially owned or controlled (through share stakes) by these same bankers. This is why you know nothing of what I just wrote.

    Now that you are educated, imagine what the political goals of the World Bankers are and how it relates to the US housing market. Well, imagine that these plans are already made very, very public. Imagine Agenda 21, the UN’s Agenda for the 21st Century, backed by 192 countries. This is a plan in which private property is made illegal, worldwide. What do you think the plan is for RE in the US, then?

    Nothing I have mentioned above is secret or theory, unless you only follow the mainstream news for your own self-education.

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  58. Kary L. Krismer

    By ray pepper @ 51:

    RE: Scotsman @ 50

    Call it what YOU like. This is the DEFINITION of Mtg Cramdown and this implemented on a wide scale will GREATLY reduce foreclosures across the board. .

    Scottsman is right. This is not a mortgage cramdown. It’s a loan modification program, and there have been some modification programs that reduce principle from the beginning. They just have not been very common or very easy to qualify for.

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  59. Sniglet

    Except that the argument was for 80% decline in housing and a 50% across the board deflation. We’ve already seen a 50% decrease in housing prices in some parts of the country, but an 80% decline on top of what we’ve seen seems very improbable to me.

    .

    To be clear, I am predicting an 80% drop in real-estate price prices from the PEAK, which means that the price decline would be something like an additional 70% in the Seattle area.

    Also, I don’t expect everything to drop 80%. Commodities and equities will be hit in a similar fashion, but many goods (like food in the supermarket) may only fall 30% or 40%. Wages, for example, likely won’t fall close to 80% (althought they will fall).

    When you look at other deflationary depressions you will see this phenomena of varying degrees of price declines play out. The Great Depression of the 1930s didn’t see salaries drop as much as many other assets. Japan’s recent experience similarly shows that stocks and real-estate get creamed much more than wages and other things. Deflation always hits investment vehicles the hardest. Regular consumables are less impacted.

    Of course, a deflationary depression generally results in an economic contraction which reduces employment, so those larger numbers of people without jobs will experience 100% income declines.

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  60. Ira Sacharoff

    Scotsman said:
    “If I buy the 20+ acres in Fall City and put 40 used trailers on it, each with a garden space, and rent them to broke realtors for $400/month will I make any money over the next 10 years?”

    No. How are you going to get any money out of broke realtors? At least a broke handyman could barter his skills and fix up your trailers. What can a broke realtor barter with? WIll BS for rent?

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  61. ray pepper

    RE: Kary L. Krismer @ 59 – Home > Library > Business & Finance > Business DictionaryIn Bankruptcy, the reduction of various classes of Debt to a lower amount, with acceptance by the bankruptcy court. **For real estate assets, the loan may be reduced (crammed down) to the property value.**

    The definition has widely been used by homeowners and politicians across the nation in order to preserve appreciation of neighborhoods and to stop people from walking away. Anyway you like to call it, the Mtg is reduced to the current value “crammed down” in an effort to stop people from walking.

    Scotsman, I’m just here to point out that your “raw raw” and cheering of doom and gloom on the horizon with Snigilistic has been absolutely pounded by Wall Street with a Dow at 11,000 and stocks hitting all time highs multiple offer after multiple offer on short sales and foreclosures in the Puget Sound, retail soaring from its lows, …I can go on and on.

    You guys remind me of this: http://www.youtube.com/watch?v=EmfE4KAZicY&feature=related : Yet you keep getting your heads handed to you however. Where is Eleua? Amazing how he disappeared.

    I remain very bearish going forward on so many things but I cannot ignore what I see everyday. As we have discussed so many times. There is no bottom. Its the longest flat line in history with a trend line down bias. Consumers must always look at the cost to rent compared to buy and when they do they will realize prices are still to high. However, there are GEMS that are being bought/sold everyday by very astute Buyers.

    Principle reduction (mtg cramdown) whatever you desire to call it, will greatly curb the short sale and foreclosure numbers when its performed on a wide scale by all the major Banks.

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  62. bob

    By wreckingbull @ 39:

    I have to admit I started kicking tires, but within one week I realized I would be a fool to do anything until this thing plays out. No way in hell I am taking the plunge while the government continues to do its damage via the FHA, MBS purchases, and GSAs. When the Gub gets out of the bubble business, (if they ever do) then maybe, after the echoes from the massive ‘poof’ subside.

    I was out kicking the tires as well – the Real Estate agents organized a sort of area open house for about 25 condos in Belltown on Sun (all listed on 1 handy-dandy sheet). I was amazed at the unprofessional manner of about 1/2 the agents we saw – the other 1/2 were actually good (truly feast or famine). One agent was selling her own condo in the Parc, and did not tidy up or even print out flyers – wow.

    The pricing was mixed – some of the asking$ was truly wishing, but about 25% seemed to be priced to start a negiotation. If i wasnt so pessimistic on the downtown economy, i woudl be tempted to really get going.

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  63. Jillayne

    Ira, “if I were a loan originator, and someone came up to me to borrow money and had 3.5% down and wanted a 55% debt to income loan, I’d be really tempted to shake them and yell ” Are you nuts?”

    What loan originators say is, “if I don’t do the loan, someone else will so I might as well do it.”
    Or, “Well it’s the banks and FHA that will take the loan. They’re the underwriter, not me.”
    And, “Who am I to question what an individual wants to do. It’s a free country.”
    As well as, “I might be putting this person into an even better situation by doing this loan.”

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  64. Jillayne

    Hi Ray,

    Thanks for your email this morning regarding BOA cramdowns. I shall write a blog post about this for us. But not today; I have a class to teach at KW Bothell. Later on tonight.

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  65. mukoh

    RE: ray pepper @ 62 – Snig and etc. staff of SB have been bringing Japan up for over a year. Its funny how prices in Tokyo are after an 80% drop: http://www.tokyoapartments.jp/a_details.php?type=3&no=31640201903 thats $1400 a month for an 240 or so Square feet. ??? Thats after 80% off?

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  66. Kary L. Krismer

    RE: ray pepper @ 62 – Exactly. Cramdown is a bankruptcy term, and the link you had was a loan modification outside of bankruptcy program.

    Actually as sort of noted in your definition, the word is commonly used in the wrong sense. It doesn’t necessarily have anything to do with principle reduction, so the term when used is most commonly used incorrectly. But in your case you were using it incorrectly in two senses.

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  67. Kary L. Krismer

    RE: Jillayne @ 64 – People make a lot of decisions that I wouldn’t make. I’m not sure it’s a loan originator’s or real estate agent’s role to tell someone they can’t do something that they want to do. Even with the higher loan standards I will still tell clients they are better off not borrowing all they qualify for, but if they want to do that, I don’t view it as my role to stop them. My role is more of an adviser role, not a guardian.

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  68. ray pepper

    Best friend just called me from Cabo. Hes staying in an upscale resort that is absolutely packed. I thought it would have been somewhat empty but again here we go….Money is flowing!

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  69. The_Dude_Abides

    This blog is a hoot.
    It’s amusing to read the ‘extreme’ bears hammer on the ‘moderate’ bears.
    As I’ve posted before, only 1 large bank(C) of the 9 original TARP recipients needed it. 2 more banks eventually needed it to merge with failed institutions…BAC/ML & WFC/WB. Did you know BAC ceased making sub-prime loans in ~ 2001? JPM didn’t need TARP even after their BSC & WM mergers. You should also realize that the acquiring banks heavily wrote down the toxic portfolios of CFC, WM, WB, ML, et al. These cramdowns will be good for many banks…get them puppies off the NPAs.
    And, in every deep recession, the banking industry has a negative net worth, alas, is broke. ZZZZZzzzzz
    I would suggest everyone read the 13Fs of John Paulson, the guy who made the most from the housing bubble implosion, is now making a killing on the long side.

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  70. anonymous

    RE: Ross @ 54RE: The_Dude_Abides @ 71 – How much of the AIG bailout went to banks? I think a lot more banks would have been shut down if the US government hadn’t stepped up to pay off all those billions in AIG CDS to the banks.
    Don’t claim all the bank aid is paid off unless all that AIG money comes back to the government.

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  71. Tim McB

    RE: anonimaniac @ 16

    1997 Interest rates here we come! (7.5-8.0%)

    http://mortgage-x.com/general/national_monthly_average.asp?y=1997

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  72. Kary L. Krismer

    By ray pepper @ 70:

    Best friend just called me from Cabo. Hes staying in an upscale resort that is absolutely packed. I thought it would have been somewhat empty but again here we go….Money is flowing!

    golly. Cabo has been too crowded for about the past 5 years, and that caused prices for things like dining to skyrocket.

    Ask your friend if they have the new airport yet. That was another problem. They outgrew the addition to the old one very quickly.

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  73. patient

    By ray pepper @ 70:

    Best friend just called me from Cabo. Hes staying in an upscale resort that is absolutely packed. I thought it would have been somewhat empty but again here we go….Money is flowing!

    Was anyone man enough to wear a T-shirt saying something like:

    “This vacation was paid for by the american taxpayer, with gratitude from your friendly banker”

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  74. Kary L. Krismer

    RE: anonymous @ 72 – Arguably over half of them would have been shut down, if you believe the stories of what would have happened if AIG had been allowed to fail. Some of those probably didn’t even any any direct investments/protection in AIG.

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  75. anonimaniac

    By Tim McB @ 73:

    RE: anonimaniac @ 16

    1997 Interest rates here we come! (7.5-8.0%)

    http://mortgage-x.com/general/national_monthly_average.asp?y=1997

    How did our economy ever survive with such massive interest rates? Shocking. And the economy was bad in the 90s (sarcasm off).

    Bring it on. Higher interest rates >>> lower/realistic prices.

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  76. sallybuttons

    RE: Jillayne @ 27 – In the midst of two remodels and I am not having your experience. Unless buying previously misordered windows, discounts from solid suppliers and manufacturers are not fantastic…But an experience that I do understand is the “stupid/inept lady bid”. Please know, this does not suggest that you are stupid(!), and is only a suggestion that your contractor (or supplier) is crap. Never work with low bid and reduce time spent with flakes who underestimate yer mind. Numbers you provide suggest both, + such dramatic decreases further imply someone is awful at math or bombing big. I prefer not to enter contract with a desperate guy who considered me dumb last year.

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  77. The_Dude_Abides

    RE: anonymous @ 72
    It was once published who received the US monies for AIG CDS claims but can’t remember them. I think GS was the largest recipient, along w/ Societe Generale of France and a few German banks, which, rumor has it, the latter two would have been in real trouble without it.
    Did you know GS had cash equivalent collateral from AIG long before the crisis struck and would have merely cashed in the collateral if Uncle Sam had not paid the claims on AIG? Please note I am no fan of GS…selling RMBSs to state retirement systems at the same time they were, in essence, shorting them. They’ll get their’s some day.

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  78. Jonness

    By Ross @ 55:

    Except that the argument was for 80% decline in housing and a 50% across the board deflation. We’ve already seen a 50% decrease in housing prices in some parts of the country, but an 80% decline on top of what we’ve seen seems very improbable to me.

    Hmmm, I was thinking the claim was 80% from peak. Is that not the case?

    Maybe in Vegas.

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  79. Jonness

    By RE Guide @ 59:

    Nothing I have mentioned above is secret or theory, unless you only follow the mainstream news for your own self-education.

    I’m pretty sure 90% of the posters here understand that only Banks and the Fed can create money from nothing. Do you actually have anything new to tell us?

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  80. rational

    RE: Sniglet @ 20

    If home prices fall as drastically as you suggest (80%), why do you think they will be affordable? Wages will fall right along with asset prices and only those lucky few who have hoarded cash can take advantage of that massive deflation. Assuming, of course, they don’t pull the trigger too soon by buying too soon when the prices are down only 60%. Because, if they do that, they will be miserable bastards as prices continue to go down and all the waiting and wisdom of buying at 60% off peak prices won’t help them when they are facing a 50% haircut (they bought at 40 cents on the dollar and after a 80% depreciation, they are looking at a 20 cent market price).

    Everything is interconnected. If asset prices drop dramatically, it will impact everything. There will be a few lucky winners, but for the most part, as usual, the bankers, crooks, and politicians will figure out a way to get rich at the expense of the common man.

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