Flashback: A trillion dollar game of JENGA!! (Dec 9th, 2005)
I am working on some new material, but I have been out of town for the past week for work. That said, I found this post that I wrote on December 9th, 2005. I think it is ’somewhat’ related to what is going on now…but I will let YOU be the judge of that. Here is the link to the ‘original’ time I posted this article. There are some good comments to read through as well. ORIGINAL ‘Jenga’ POST
Enjoy!
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Friday, December 09, 2005
Trillion Dollar game of JENGA!!
This housing bubble is like a game of Jenga. You can see the blocks going higher and higher, you know it is going to fall down soon, but it hasn’t yet…and you just hope it isn’t on your turn when it does! The housing market is the same way right now.
Some people pulled out of the tower, and are content. Some wanted to “win”, so they kept taking turns and piling blocks on the top. Some just wanted to stay where they were, but all the people piling on the top forced things like property taxes so high, they were forced to move.
BUT, as of right now, the tower is still standing. The “players” are taking more time moving their pieces. Occasionally the ceiling fan rocks the tower and some people yell “it’s crashing!” while others look at it and say the fundamentals are fine…it is a strong table, nothing to worry about, keep piling on.
So the question is, WHAT IS going to push this thing over the edge? and WHEN is that going to happen.
In an earlier post I went over how the ARMs were set to adjust and how I think that will be one catalyst that could finally send the jenga tower falling.
Another thing that could shake the markets is if there is a liquidity crisis in the Mortgage Backed Securities (MBS) markets. These are the people the buy the loans which allow the lenders to keep making loans. They are already starting to demand more premium (interest rate) for the risk they are assuming.
I think this story from Bloomberg says it all. The title is: Housing Bubble Bursts in the Market for U.S. Mortgage Bonds . I’m not going to paste the article here, and I’m sure some of you read it already over on Ben’s blog a few days ago.
This thing is really VERY simple. You have 50-80% of borrowers taking ARM mortgages the past few years. These people got loans when rates were crazy low, and lending standards lacked “old school” criteria like verifying income, reserves, penalizing people for BK’s, etc. When these people run out of “fixed” time on their ARM and they look to refi again, they are going to find higher rates (yes, still historically low, but not super low like they had been), and much tighter lending standards because of the article above.
This combination of higher rates and tightening lending standards (they ARE happening now) is going to leave people with very few feasible options. If they can barely afford their I/O ARM at 50 and 55% DTI’s (debt to income ratios), what are they going to do?!?!?
I predict that things will be slower and prices will start a slow decline through 2006. Hot properties will still move as will properties that are priced right. I look to 2007 and 2008 for things to start looking like this: JENGA!!!
Between now and then (through 2007), there are about 1.5 trillion dollars of mortgages that will be going adjustible. I’m already seeing the tightening in the MBS markets. I was talking to my manager this week about a loan, and they told me that our investors were demanding a lot, so we could not be lenient with rate and loan exceptions. Very few times the past few years have I ever been told that. The old mantra was “we’ll find a way, we’ll make the exception”, now the mantra is “we’re not going to lose money on that loan”.
Only time will tell…but that is where I have my sites set. What do YOU think?!?!??!?
SoCalMtgGuy
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It looks like the liquidity crisis with the mortgage backed securities IS having some problems here in 2008. I know my time frame wasn’t super specific, but I think I was pretty close, especially since it was the end of 2005 and things were still ‘booming’. I don’t recall any of the Wall Street firms or financial press warning people in 2005 of a liquidity crisis that might come in 2-3 years in the 2007-2008 time frame. You did hear it from a blogger that only has an Economics Major from the Naval Academy. Oh wait, maybe it isn’t just ‘economics’ that is important, but integrity as well. More on that later…
I don’t know about you, but I can just picture Cramer doing one of his ‘Mad Money’ rants, and at the end he yells ‘JENGA’!!! Pretty much sums up Wall Street and the world markets at this time.
What do you think? I look forward to the comments.
Stay Tuned…
SoCalMtgGuy
October 7th, 2008 16:42
Man shit is hitting the fan.Now the crooks on wall street are causing panic so they can make money on their short positions.the govt might as well buy all the foreclosed homes and give them to welfare families who need a roof over their heads.All i can say is do not panic.i know I have persobnally been shitting bricks as my retirement account tanks.I will not sell into the suckers on wall street.The best time to buy is when there is blood on the streets.Buy fear and sell greed.
October 7th, 2008 20:34
SoCalMtgGuy,
I commend you for the posts that you have made over the last few years on your excellent, long-running blog. I discovered your blog in late 2005 and it was definitely a source of inspiration to me at that time, when I felt as if the world had gone mad with greed and it seemed that no one could see how unsustainable the housing situation had become.
My wife and I are both young salaried professionals living in San Diego and at the time (2005) there was much pressure from family, friends, and co-workers to buy. When I outlined my plan to continue renting until the market corrected and tried to explain my reasoning as to why the housing market was in trouble, people would just kind of roll their eyes and act like I was just some sort of pessimistic sucker.
The thing that amazed me the most was how some very intelligent people I know seemed unable to grasp the fact that this market was TOTALLY different from any in the last 50 years. The financial instruments created to allow unqualified buyers get into a “home” were pure financial suicide, not to mention the fact that there was little to no integrity on the part of both buyers and lenders.
I used to be close friends with a financial analyst from Countrywide, and the stuff he used to tell me would just blow me away. As far back as 2003 I was telling him to get out, because I felt that a company with so little integrity could not possibly last. Of course at the time I was dismissed as someone who just didn’t “get it”.
SoCalMtgGuy, I truly wish you the best in all your future professional endeavors. I can’t tell you how many times I would cite facts and logical arguments derived from your posts while having housing market debates with people during the last few years. Many people who were so vocal about my decision to remain a renter are now dead quiet. There is no need whatsoever for me to say “I told you so”; the media is screaming it for me every day now.
Although I don’t think I would have bought a home had I not discovered you blog, it certainly helped me feel a lot better about my decision to continue renting once I came across “AnotherF@ckedBorrower”. That you were spot-on is all I can say. Now that the house of cards is tumbling down, I can say that I feel very little sympathy for those who lied about their incomes in order to purchase a home, as well as those who facilitated the transaction. It is not the duty of the American taxpayer to enable senseless greed. In order to truly restore integrity to our financial markets, it seems that we are going to have to learn the hard way after all. I just hope that the FDIC really works when put to the test.
October 8th, 2008 19:25
Very insightful post and I LOVE the comparison to JENGA. It’s so right on the money, no pun intended. I guess we finally just got to a point where the tower wasn’t stable enough and it came crashing down. Or at least it’s started to.
And I love the Cramer referrence to. I could totally see screaming JENGA at the end of a long rant about this mess!
October 9th, 2008 16:42
I agree. October is definitely the time for a major *JENGA* event!
October 10th, 2008 11:39
I knew we were in a housing bubble in the early 2000s, but until reading this blog and others I didn’t understand how prices could get further and further out of whack relative to income.
I remember this very post. I was shocked at what was going on.
October 21st, 2008 00:07
SoCal,
back in 2005 when I got married, a friend of mine in the mortgage business offered me 100% home loan @ 4.5 rate. I knew the peak was about to come. 3 years now, the rest is history. he lost his business and now, I am renting while my wife giving me all the credits for NOT BUYING a home back in 2005.
So… keep up the good work. looks like we are either heading toward a 1970s like recession or Depression II in 2010 to 2012… if we look at the macro level, the 80 year cycle is in the final stage and the economy needs a depression to clear up the current system. Unfortunately, the administration around the world would rather keep printing money to solve the problem. the root of the problem is still remain.
I wrote an essay title “black hole 2009″ on my blog for your reference. the worst is yet to come.
October 24th, 2008 12:17
Great post and how relevant. Luckily I am a renter and will probably be one for a while. While it kills me to flush money down the toilet by writing that rent check, I would much rather do that than lost equity in a house. Scary to think what could be coming.
Sean Murphy, Rofo - San Francisco Office Space
November 7th, 2008 21:57
Hold on tight people. We are going back to the times where incomes need to exceed expenses (what a novel idea, eh). Incomes and home values are nowhere near in line with each other even after the turmoil of the last couple of years. The banks are taking the bailout money and sitting on it, saying we aren’t going to loan our money to all these bad risk pukes who can’t handle the responsiblilty. As long as Barney Frank is in charge of the House Banking Committee, we have no hope of coming out of this mess.
November 29th, 2008 03:08
Well, I must say you were dead on. I also have to say, looking back, I really didn’t see this coming. I knew something had to happen because it was too good to be true, but I wasn’t sure how bad it would get. I wrote a blog on the falling housing prices and it contains a Jim Cramer reference also How to solve the drop in housing prices
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