Subprime Worries | Page 2 | Forex Factory

Options

Go to
Permalinks
Print Thread

Similar Threads

The Subprime to the ridiculous. 10 replies

The truth about the markets & subprime... 2 replies

What is subprime? 12 replies

Is there anybody who can describe this crisis of subprime mortagage 2 replies

US has subprime problem, but why USD strengthen? 4 replies

Subprime Worries

  • #21
  • Mar 17, 2007 11:43am Mar 17, 2007 11:43am
Quoting NewstraderFX
So it isn't really a question of whether sub primes will eventually affect other classes of loans-it's a question of whether home prices will continue to fall, which will have the effect of raising monthly payments on any loans set to adjust up to a higher interest rate since those loans also will not be able to re-financed at better rates.
great post man. i have to disagree with this part though. i DO agree that subprime woes will not have a direct effect on the other loan classes, but there is a domino effect that will start ripping through the entire lending industry. sure, the defaults on subprime loans are not of great worth, but what happens is that it will reduce demand for homes, which will bring home price down slightly, which will then create panic among all home owners, who then start to sell and create even more supply of homes. Also at work is the psychological effect that the subprime defaults will have on ALL lenders...real or not, this panic will make all loan classes harder to obtain, which reduces demand for homes because no one can get money. Diate talked about this very issue in an earlier post. Decreasing demand, increasing supply....thats the recipe for sliding prices everywhere in the home sector.

i liken this situation to a market reversal. if everyone is long the market, and we have hard spike down, all the longs get panicked and start to exit, making the selloff much more dramatic than it would have been. we saw this type of scenario with oil earlier this year.
Relax and be happy.
  • #22
  • Edited 6:57am Mar 18, 2007 6:43am | Edited 6:57am
Thanks for the props-it's a topic that's worth exploring because of it's importance to the economy and in true capitilistic style, it could point us into some very good trades. I want to bring up a question for you though:

..."which will then create panic among all home owners, who then start to sell and create even more supply of homes".

I'm not exactly certain this is neccessarily true because as home prices fall it will become more and more difficult to sell, putting a limit on the amount of supply that will become available from this segment of the market. If you have a good job and a mortgage who's payment is not set to rise, it's more likely that you will just decide not to sell and your house will never become part of the supply.

...real or not, this panic will make all loan classes harder to obtain, which reduces demand for homes because no one can get money.

And as the demand is reduced it becomes more in balance with the supply-the market will then bottom and start to turn the other way. No timetable on when this will occur, but it's inevitable.

We saw this type of scenario with oil earlier this year.

Yes we did and what happened? The market bottomed as the demand reduced and became more in line with the available supply. The supply and demand of all markets is limited, which causes them to tend towards a balance and eventual reversal. We wouldn't have an economy is this wasn't true.
  • #23
  • Mar 18, 2007 12:43pm Mar 18, 2007 12:43pm
damn, you pretty much nailed me, but i have some rejoinders for you LOL.

Quoting NewstraderFX
..."which will then create panic among all home owners, who then start to sell and create even more supply of homes".

I'm not exactly certain this is neccessarily true because as home prices fall it will become more and more difficult to sell, putting a limit on the amount of supply that will become available from this segment of the market. If you have a good job and a mortgage who's payment is not set to rise, it's more likely that you will just decide not to sell and your house will never become part of the supply.
ok, great point here.... and i agree people will sit on a house with a declining value, not rush out to sell. i see anecdotal evidence of this all around me. BUT, lets remove the individual home owner and talk about home builders. they are smart business people who know that sitting on a house with declining value is not very smart. so my point may not be true of individuals, but i think it is still true of the home builders, who at this time probably have more homes to sell than all the individuals put together (although i dont have stats on that, just judging from the 8 highrise condos going up on my block).
Quoting NewstraderFX
...real or not, this panic will make all loan classes harder to obtain, which reduces demand for homes because no one can get money.

And as the demand is reduced it becomes more in balance with the supply-the market will then bottom and start to turn the other way. No timetable on when this will occur, but it's inevitable.
yes agreed we will reach this balancing point, but my thoughts are that we are not even near it. i think we are getting into a panic mode right now, and in about 6 months, after a 30% home price decline, then we might be at this balancing point. i guess the only point of debate here is the timeframe for reaching the balacing point.

Quoting NewstraderFX
We saw this type of scenario with oil earlier this year.

Yes we did and what happened? The market bottomed as the demand reduced and became more in line with the available supply. The supply and demand of all markets is limited, which causes them to tend towards a balance and eventual reversal. We wouldn't have an economy is this wasn't true.
another good point. however, i dont think oil has seen its bottom. the current price is just a relief rally imho. which is about the same place i think the housing market was about 2 months ago. now we continue down, on both fronts...thats my bet anyway
Relax and be happy.
  • #24
  • Mar 18, 2007 12:50pm Mar 18, 2007 12:50pm
btw, what the hell is the currency play here? obviously if you believe this panic will spread, you'll want to be short dollars, because the panic could cause the fed to cut rates.

but what is the other side? should we play dollar short against all currencies? or is there one in particular that would be best? i am thinking short USDJPY is a good move, but i am too scared of the BOJ to put all of my eggs in that basket, plus the carry interest will kill ya on that play. im also considering the CHF and NZD because they are in rate hike mode. but still carry interest will hurt. i have been playing this idea in the US stock market and US treasury futures (and making a killing doing so) but i havent figured out what the sure winner is with the currencies yet...
Relax and be happy.
  • #25
  • Mar 18, 2007 3:47pm Mar 18, 2007 3:47pm
Quoting merlin
btw, what the hell is the currency play here? obviously if you believe this panic will spread, you'll want to be short dollars, because the panic could cause the fed to cut rates.
I'm thinking good old eurusd will be the best play (maybe gbpusd). A fed cut would be postitve for equity markets and right now the inverse relationship between equities and the yen is really strong. That negates the usdjpy short. The eurozone economy is in a good position and we may see a move towards capital appreciation and a stronger euro.

Just a thought.
  • #26
  • Mar 18, 2007 4:07pm Mar 18, 2007 4:07pm
why the inverse relationship with yen and US equity markets? because the japanese will sell their yens to invest in US markets? not sure if thats what you mean, but if so, its a valid point. although, i think the BOJ and carry trade will both have overpowering effects.
Relax and be happy.
  • #27
  • Mar 18, 2007 4:57pm Mar 18, 2007 4:57pm
It's just that the correlation bewteen yen and equities has been really high. Like newstrader said, compare the SnP and gbpjpy charts. People are borrowing yen to leverage into equities.
  • #28
  • Mar 19, 2007 12:56pm Mar 19, 2007 12:56pm
Here's a way to estimate the amount of potential foreclosures relative to price-according to a study by research firm First American CoreLogic, a 1 percent rise in national prices will cause 70,000 fewer loans to be lost from reset-driven foreclosures, while a 1 percent price decline will force an additional 70,000 into foreclosure.

The report went on to say that, "many lenders already are working with clients to modify terms or refinance existing loans to avoid default.
Lenders do not want an empty house on their hands or an empty condo, which will take them a year to sell and they have to pay maintenance, taxes and insurance..."
  • #29
  • Mar 19, 2007 1:06pm Mar 19, 2007 1:06pm
Quoting merlin
btw, what the hell is the currency play here? obviously if you believe this panic will spread, you'll want to be short dollars, because the panic could cause the fed to cut rates.

but what is the other side? should we play dollar short against all currencies? or is there one in particular that would be best? i am thinking short USDJPY is a good move, but i am too scared of the BOJ to put all of my eggs in that basket, plus the carry interest will kill ya on that play. im also considering the CHF and NZD because they are in rate hike mode. but still carry interest will hurt. i have been playing this idea in the US stock market and US treasury futures (and making a killing doing so) but i havent figured out what the sure winner is with the currencies yet...
See my thread this week and it'll tell u the currency trade for this. When u look at the charts-u won't believe it!

I believe the correlation can be partially explained by not only carry trades, but that the Yen is a funding currency for all kinds of trades. And once borrowed, that Yen has so be sold (converted) into the currency where the investment is to be made. The selling creates a supply increase for the Yen (and increased demand for the "investing" currency), driving up the Yen crosses and making those investments look even better as the Yen depreciates against the currency it was converted into.
  • #30
  • Edited 2:17pm Mar 19, 2007 2:02pm | Edited 2:17pm
It is not true, that a supply increase is created. If you look at the money supply figuers ( for example monetary basis OR M3 as usual ) u will find a decrease. YES there is a lot of Japes Yen in the market, or rather with the BANKS, BUT it is not flowing freely so there is no circulation.

Carry trades just mean that you go to your Japanese Bank and BORROW let's say 1.000.000 USD in YEN - this means you get 120.000.000 JPY and invest it in let's say the S&P 500.

The reason you do it, is of course, to lever (?) ( sorry for my English ) your trades. We all know this from 4x Trading, we do it all the time if we use leverage.

The reason you do it in Japan is, of course, that interest rates there are low. You get security backed credits for roughly 1.4% p.a. If you gain lets say 5% on the S&P 500, that's 3.6% for you profit = 36000 USD. Pretty nice money if you consider, that you did not use a single Penny from your own money.
Not the year is over and you have to repay your credit. If the exchange rates stays at 120:1 you repay 1.000.000 BUT if the rates changes only 1% to 118.8 you repaying roughly 12000 Dollar more, than you have actually borrowed and we all know that 1% is not exactly what you call a lot. So as soon as rates move more than your typical volatility people will get out of the market QUICKLY.

If you want to judge how and when carry trades will come to an end ( please don't forget that they have been in place for over 5 years now ) look at the yen futures.

Carry trades will be intact well after July when election time in Japan is over.

It will go hand in hand with a downward movement for US interest rates.

THEN and ONLY then we will see carry trades END.

At the moment, it is extremely hard to judge the market because we see the most important week since last Semptember. Be careful when trading. Look at the housing numbers this week NAHB was a bit disappointing although it came off it's 32 lows. BUT it is not over until it's over.

Please be careful, USD could see some upwards movement IF housing numbers come in as, or a little bit better than, expected. IF the market feels that at least in the housing bubble, we see a rather smooth landing, it could help the USD to appreciate. Inflation is still too high. The only reason that Fed would signal a rate CUT, meaning it changes it's BIAS ( see the other thread ) is that the economy is NOT going into RECESSION. Then we will see the FED on hold for at least another Quarter.

( I was asked why we would be heading into a RECESSION before, and I want to briefly explain )

We see some outlining details like:

LOW GDP Growth
Huge current account deficit
Overstretched housing market
Overstretched Sub Prime mortgages

Some more inherent details:

Options on interest rate futures indicating a 27% chance of a cut of 0,75%!

The inverted yield curve theory ( this means that short term US SECURITIES yield higher rates than longer term rates ) predicts a 50% chance of a RECESSION.

Mr. Greenspan predicted a 1 out of 3 chance of a RECESSION.

Last but not least we see liquidity being squeezed out of the market ( p.e. in mutual and hedge funds ).

The numbers that we saw in the past especially NFP and durable goods orders where bad.

( ------- Have Questions please ask ----------- )

So please be very careful there is potential to the up and to the downside

/Juao
  • #31
  • Mar 19, 2007 4:23pm Mar 19, 2007 4:23pm
I gotta disagree with a few of your points Juao-

If all of a sudden a few hedge funds borrow a few billion Yen and convert them to another currency-we are gonna see some movement on our charts-the Yen will have decreased. And there's plenty of Yen to be borrowed-Japan is the world's second largest economy.

More Yen will be borrowed if rates are lowered in the US-The equity markets would love a rate cut and there would be an excellent chance to make money there. That would mean the Yen would depreciate more as more gets exchanged into investing currencies. I realize that falling rates mean a currency goes down-but that would change quickly in this case because there would be plenty of demand to buy $'s to make US investments ( except for bonds, which usually decrease as equities increase).

I've also given a lot of thought to how the market might react to some weaker housing numbers tomorrow. Yes there likely would be an immediate decrease in the equity markets, but the end result could be that the Fed may be even more inclined to say something about the pace of growth that would signal a rate cut, which would then likely result in a strong boost as buyers swooped in for bargains.

Lowered rates, or even rates that look pretty certain to be lowered would be very beneficial for housing. Lenders might be more inclined to stretch terms for troubled botrrowers, rates wouldn't be adjusted up as much, credit would be eased and the inventory could start to work it's way down.

My own opinion is that a recession more likely then not will be averted, because I happen to have a lot of faith in this Fed; if it's in their power to prevent one-I think that they will.
  • #32
  • Mar 19, 2007 11:10pm Mar 19, 2007 11:10pm
I used to own REIT stock, the last of which I sold in January 2006. That was Novastar, one of the lenders that is not doing too well right now. At the time, I was trying to understand how they actually made their money. One thing that always came up in discussions was that it relies on the difference in short term and long term interest rates. If the short term rates rise faster than the long term rates, there is trouble. Of course, if people can't pay their mortgage that's not good either. Anyway, the future didn't look too bright, so I decided to sell.

Now the housing market. That's more complicated and the effects are more regional. There's two components to the price of a house, the structure and the land it stands on. I live in Arlington, VA, close to Washington, DC, in a house that's about 70 years old. The increase in my real estate assessment has come solely from the value increase of the land, which currently stands at $540,000 for 1/6 of an acre. This part has not gone down for this year's assessment, only the value of the structure itself, which is now about the same as in 2001 after a sudden $20,000 bump up last year.

Land is scarce in Arlington; there are not many unused lots available. So builders have been tearing existing homes down. Just behind me is a double lot and a builder has put two fairly large homes on it with not much room to spare. He paid $900,000 for the double lot and asks about $1,4 million for each of the houses. One home has been completed, but the other one is still in the process of being finished. According to the realtor, this is due to the market being "slow". So it will be interesting to see how this plays out. We live in area where people have more money than sense, but still.

Apart from this and similar follies, the local real estate market is still pretty strong. You know: "Location, location, location..."
  • #33
  • Mar 20, 2007 5:05am Mar 20, 2007 5:05am
The ultra bear, economist Nouriel Roubini, has just published a massive note on this topic, on his blog. He really does think the world is going to end. If you haven't read this guy before, he does provide some good analysis but I think he also knows that extreme views get headlines.

http://www.rgemonitor.com/blog/roubini/184125

It starts: "The sub-prime and overall mortgage carnage is now likely to lead to a financial crisis whose cleanup and bailout costs will make the S&L bailout bill look like spare change."

It concludes: " And may the unfolding mortgage disaster bury once and for all the neo-con supply side voodoo economics religion of unregulated free markets fundamentalism."

ps - the guy is so pessimistic I'm surprised he hasn't topped himself...ah, yes, of course, he must be short housing!
"Always bet on black"
  • #34
  • Mar 20, 2007 5:49am Mar 20, 2007 5:49am
Quoting abobtrader
The ultra bear, economist Nouriel Roubini, has just published a massive note on this topic, on his blog. He really does think the world is going to end. If you haven't read this guy before, he does provide some good analysis but I think he also knows that extreme views get headlines.

http://www.rgemonitor.com/blog/roubini/184125

It starts: "The sub-prime and overall mortgage carnage is now likely to lead to a financial crisis whose cleanup and bailout costs will make the S&L bailout bill look like spare change."

It concludes: " And may the unfolding mortgage disaster bury once and for all the neo-con supply side voodoo economics religion of unregulated free markets fundamentalism."

ps - the guy is so pessimistic I'm surprised he hasn't topped himself...ah, yes, of course, he must be short housing!
Interesting article.. I secretly hope he is right.. there would be some great bargins if he is.. I love rental property..
  • #35
  • Mar 20, 2007 7:23am Mar 20, 2007 7:23am
just saw president of quicken loans on CNBC, he confirmed that subprime is spilling into prime. he said around 15% of borrowers that would have been approved pre-subprime-fiasco are now being denied. ouch!
Relax and be happy.
  • #36
  • Mar 20, 2007 8:25am Mar 20, 2007 8:25am
Quoting merlin
btw, what the hell is the currency play here? obviously if you believe this panic will spread, you'll want to be short dollars, because the panic could cause the fed to cut rates.

but what is the other side? should we play dollar short against all currencies? or is there one in particular that would be best? i am thinking short USDJPY is a good move, but i am too scared of the BOJ to put all of my eggs in that basket, plus the carry interest will kill ya on that play. im also considering the CHF and NZD because they are in rate hike mode. but still carry interest will hurt. i have been playing this idea in the US stock market and US treasury futures (and making a killing doing so) but i havent figured out what the sure winner is with the currencies yet...

also maybe CHF and AUD, chf seems stable maybe?

AUD is kinda like GOLD right?
  • #37
  • Mar 20, 2007 9:22am Mar 20, 2007 9:22am
X I gotta disagree with a few of your points Juao-

If all of a sudden a few hedge funds borrow a few billion Yen and convert them to another currency-we are gonna see some movement on our charts-the Yen will have decreased. And there's plenty of Yen to be borrowed-Japan is the world's second largest economy.

More Yen will be borrowed if rates are lowered in the US-The equity markets would love a rate cut and there would be an excellent chance to make money there. That would mean the Yen would depreciate more as more gets exchanged into investing currencies. I realize that falling rates mean a currency goes down-but that would change quickly in this case because there would be plenty of demand to buy $'s to make US investments ( except for bonds, which usually decrease as equities increase).

----------------------------------------------------------------------------------------------

Well I was referring to an increased supply. If people borrow and then exchange it right after there is no more supply. This is only a minor difference. It is not the point that people need YEN but that they sell Yen. Otherwise it would be even if not benefiting for the YEN don't you think ?

/Juao
  • #38
  • Mar 20, 2007 9:27am Mar 20, 2007 9:27am
im still seeing conflicting reports/opinions on this subject... they all are agreed on the existence of a problem, some people want to minimize its importance, and others dont. some will say that even 20% default of subprime is less than 2% of the entire market, others will say that noone can finance new loans as a result, etc. i was half joking about pesos before, but mexico is still set to raise rates while the us will supposedly be lowering them. i think the mexican economy is decoupled from the us enough to make it a decent play in the next 12 months, course i could be wrong but ill be watching it for now.

as for the 'stable' housing starts number, is this just going to just make inventories worse? like i and zuijlen pointed out its going to be regional in nature, what the fate of the nation will be remains in question ?
  • #39
  • Mar 20, 2007 10:27am Mar 20, 2007 10:27am
Quoting november15th
im still seeing conflicting reports/opinions on this subject... they all are agreed on the existence of a problem, some people want to minimize its importance, and others dont. some will say that even 20% default of subprime is less than 2% of the entire market, others will say that noone can finance new loans as a result, etc. i was half joking about pesos before, but mexico is still set to raise rates while the us will supposedly be lowering them. i think the mexican economy is decoupled from the us enough to make it a decent play in the next 12 months, course i could be wrong but ill be watching it for now.

as for the 'stable' housing starts number, is this just going to just make inventories worse? like i and zuijlen pointed out its going to be regional in nature, what the fate of the nation will be remains in question ?
This is just a sign that the market has not yet bottomed out in terms of prices of existing houses since it still appears cheaper to build than to buy.

It is not just the number of sold houses that we should look at, it is much more important to see the prices of these houses.

/Juao
  • #40
  • Mar 20, 2007 11:40am Mar 20, 2007 11:40am
Well I was referring to an increased supply. If people borrow and then exchange it right after there is no more supply.

The supply never diminishes because once that Yen is exchanged-some other bank has it. Then, a bank in Japan decides it needs more so it goes to that bank and buys some. Now that Japanese bank has more to lend to the next person that wants to borrow some....and round and round it goes, with only the balances in our forex accounts showing it's woes...lol
0 traders viewing now