2 replies to this topic

[greenie]

1. Homebuilders have huge inventories. 2. Last year they were selling the inventories by providing large incentives. 3. Most likely targets for selling those homes were first-time buyers. 4. First time-buyers, who did not buy home yet after so many years of housing speculation, were probably the ones who could not afford the houses - low income or low credit quality. 5. One of the incentives provided to them was easy credit and low and affordable payments (at least for the initial period). That was done by creative financing. 6. If access to easy credit for people with low credit quality or low income is closed, homebuilders will not be able to sell anything. House prices will drop big, and it will affect the general economy negatively. I do not know, whether the stock indices will rise or fall tomorrow, but over a larger period, the second leg of housing bubble, and housing-related stocks , and as a side effect the entire market is coming down. I can see $HGX coming down from the bear flag to get into another vicious decline. Is it leading the rest of the market?

Edited by greenie, 11 March 2007 - 10:32 AM.

[pdx5]

But I thought there is too much liquidity out there for the market to decline in any meaningful way? Why can't the Fed and central banks everywhere print oodles of money to stave off a recession?

[greenie]

Good question. Fed can print money, but the banks would not lend it. Even if Fed pushes the interest rate to zero percent, effective interest rate for the actual borrowers are going up. This endgame is well anticipated, and is not happening the first time. Still people remain puzzled about how deflations happen, when Fed can lower interest rates to anything. As always, I remain heavily bullish on treasury bonds.



This is what I discussed in my blog:

Interest rate that a borrower perceives has two components - treasury rate and risk premium.

Although Fed has been raising rates for last two years, borrowers' interest rates were falling. Why? Because lending standards were getting more lax.

The cycle started turning now. although Fed is not increasing rates, lending standard is getting more and more tight. So, as a model, you can imagine that the people are now facing rapidly rising interest rate. Its impact will be very severe.

Even if Fed lowers rates to 0%, the effective rates will be much higher. Also, keep in mind that ARMs are fixed to LIBOR. So, we have to invade UK and take over their central bank to get lower rates for homeowners.


Fundamentally, I can see another leg down because of sharply rising interest rates last week. Recession is unavoidable.