Writing in The Atlantic Christopher Leinberger argues the move to McMansions has peaked and affluent Americans want to move back into urban zones.
Arthur C. Nelson, director of the Metropolitan Institute at Virginia Tech, has looked carefully at trends in American demographics, construction, house prices, and consumer preferences. In 2006, using recent consumer research, housing supply data, and population growth rates, he modeled future demand for various types of housing. The results were bracing: Nelson forecasts a likely surplus of 22 million large-lot homes (houses built on a sixth of an acre or more) by 2025—that’s roughly 40 percent of the large-lot homes in existence today.
The retirement of the Baby Boomers will reduce the number of people in their households. On the other hand, immigration is pushing up the general demand for housing. However, poor and low skilled Mexican immigrants can't afford big suburban houses.
Leinberger points to relative prices to show the greater desirability of more densely populated and walkable neighborhoods.
Pent-up demand for urban living is evident in housing prices. Twenty years ago, urban housing was a bargain in most central cities. Today, it carries an enormous price premium. Per square foot, urban residential neighborhood space goes for 40 percent to 200 percent more than traditional suburban space in areas as diverse as New York City; Portland, Oregon; Seattle; and Washington, D.C.
It’s crucial to note that these premiums have arisen not only in central cities, but also in suburban towns that have walkable urban centers offering a mix of residential and commercial development. For instance, luxury single-family homes in suburban Westchester County, just north of New York City, sell for $375 a square foot. A luxury condo in downtown White Plains, the county’s biggest suburban city, can cost you $750 a square foot. This same pattern can be seen in the suburbs of Detroit, or outside Seattle. People are being drawn to the convenience and culture of walkable urban neighborhoods across the country—even when those neighborhoods are small.
Leinberger mentions energy efficiency as one of the advantages of urban living. People can walk rather than drive or drive shorter distances. Also, multi-unit dwellings share walls which reduce heat loss. If, as I expect, Peak Oil is upon us the energy efficiency advantage is about to become far more compelling. The need to reduce energy usage might become the biggest reason people shift back to high density living. Walkable neighborhoods could become all the rage.
Leinberger also fails to mention racial differences in crime rates. This topic is one of liberal America's many taboos and so his omission is not surprising. But to understand future American demographic changes one must pay attention to race and crime. White fear of black criminals, while only spoken about honestly by few writers, is the elephant in the room. Black-on-white crime causes whites (including liberal whites who deny this) to segregate themselves into white suburbs far from black urban areas. The white flight from crime was one of the reasons the suburbs grew after World War II in the first place. In areas with fewer blacks the whites can more easily urbanize without fear they'll become frequent targets of criminals.
White America has spent decades trying to make urban areas safe again by setting a world record for the rate of incarceration of criminals.
Washington, DC - 02/28/2008 - For the first time in history more than one in every 100 adults in America are in jail or prison—a fact that significantly impacts state budgets without delivering a clear return on public safety. According to a new report released today by the Pew Center on the States’ Public Safety Performance Project, at the start of 2008, 2,319,258 adults were held in American prisons or jails, or one in every 99.1 men and women, according to the study. During 2007, the prison population rose by more than 25,000 inmates. In addition to detailing state and regional prison growth rates, Pew’s report, One in 100: Behind Bars in America 2008, identifies how corrections spending compares to other state investments, why it has increased, and what some states are doing to limit growth in both prison populations and costs while maintaining public safety.
One in nine black males between the ages of 20 and 34 is behind bars.
A close examination of the most recent U.S. Department of Justice data (2006) found that while one in 30 men between the ages of 20 and 34 is behind bars, the figure is one in nine for black males in that age group. Men are still roughly 13 times more likely to be incarcerated, but the female population is expanding at a far brisker pace. For black women in their mid- to late-30s, the incarceration rate also has hit the one-in-100 mark. In addition, one in every 53 adults in their 20s is behind bars; the rate for those over 55 is one in 837.
From 1987 to 2007 America's prison population tripled and the US imprisons about 8 times as many people per 100,000 as Germany does. Curiously, prison spending by states in inflation adjusted terms grew by less than a tripling in this 20 year period from $19.38 billion to $44.06 billion.
Among men 18 and older the breakdown is 1 in 106 whites, 1 in 36 Hispanics, and 1 in 15 blacks. The middle figure poses the biggest problem for the promoters of reurbanization. Hispanics are a growing portion of the US population and their higher level of criminality will raise the cost of the imprisonment. Even adjusted for age Hispanic imprisonment rates are much higher than white rates (see table A-6, page 34 at the next link). For ages 18-19 1 per 107 whites are imprisoned. But for blacks it is 1 in 19 and for Hispanics 1 in 47. So the Hispanic incarceration rate is over double the white rate.
Will the ability to finance all these prisons put a limit on crime control measures and thereby limit the move back into cities? California so far has not backed off on imprisonment even during a severe budget crisis.
The economic picture is so dire in California, where a budget deficit of $14.5 billion is predicted for the coming fiscal year, that the Republican governor has proposed releasing more than 22,100 inmates before their terms are up. Eligibility would be limited to nonviolent, nonserious offenders, and the plan excludes sex offenders and those convicted of 25 other specific crimes. Governor Schwarzenegger says the state would save $1.1 billion through his proposal, but so far it has received a cool reception from both parties in the legislature.
Perhaps the biggest question about the future of crime control by imprisonment comes from the changing demographics of American voters. Will Hispanic voters show themselves as willing as white voters to lock up large numbers of criminals? Prisons are cheaper than paying for increasingly expensive gasoline to commute to distant safer suburbs. That $44 billion spent on incarceration saves far larger sums in transportation costs and in costs for guards on gated communities.
Urban spaces can also be made safer using other measures such as smarter methods of choosing who to parole, whose parole to revoke on violations, how to monitor and track parolees (e.g. drug testing and electronic tracking), and lots of cameras and other electronic sensors in public places. I am expecting the coming decline in oil production to increase the pressures on governments to make more densely populated areas safer as more demanding and influential higher class people move back toward higher density neighborhoods.
Update: 1 in 4 prisoners in the world are in US jails.
Susan Urahn, a senior Pew researcher, said the US now held one in four of the world’s prisoners. China was second, with 1.5m people behind bars. There are 82,000 people in jail in England and Wales, or roughly one in 500 adults. The proportion is similar in Scotland and Northern Ireland.
Why is this? I can see a few reasons. Some poor countries have ineffective police systems and can not afford to imprison a large number of people. Also, affluence tempts people to steal more since there's more to steal. Also, countries with only low crime ethnic groups (e.g. Japan and Finland) have populations disinclined to commit crimes.
Warren Buffett, once more richest man in the world, refers to America as Squanderville because we are going deeper and deeper in debt to other parts of the world (Thriftville). In another sign of our road to Squanderville Americans now own less than half the market value of their houses.
Homeowners' percentage of equity slipped to a revised lower 49.6 percent in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter – the third straight quarter it was under 50 percent. That marks the first time homeowners' debt on their houses exceeds their equity since the Fed started tracking the data in 1945.
Total equity in American houses equals less than 1 year of GDP. I'm surprised by this. I would have expected a much larger figure for housing worth as compared to GDP.
The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.
Blogger Calculated Risk points out that since almost a third of all homes have no mortgage the remaining homes probably have about 29.7% equity on average.
According to the Census Bureau, 31.8% of all U.S. owner occupied homes had no mortgage in 2006 (most recent data).
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Assuming 74.2% of total assets is for households with mortgages ($14,954.8 billion), and since all of the mortgage debt ($10,508.8 billion) is from the households with mortgages, these homes have an average of 29.7% equity.
Why does this matter? It tells us how far housing prices would have to fall before most mortgaged houses become worth less than the money owed on them.
Providence Equity Partners chief executive Jonathan Nelson says another 5% decline in housing prices will put 30% of homeowners owing more on their houses than their houses are worth.
"In real estate, house prices fell 7pc in 2007 so 13pc of mortgage holders were underwater. 2008 has already seen those falls rise to 10pc and if it falls a further 5pc, which is not impossible, 30pc of homeowners in the US are under water and have negative equity. So it's hard to see how the third pillar - confidence - can hold up."
Even if you are not a home owner or a holder of a mortgage security you could end up paying for some of these losses via taxes used to bail out failed banks.
Personal worths are declining as housing prices and stock prices fall.
Based on the current pattern of stock market losses and falling home values, household net worth is estimated to have declined by about $1 trillion in the fourth quarter and about $1.5 trillion to $2 trillion this quarter, depending on where stock prices settle. That would be the largest drop since the tech bubble burst in 2000.
How long will the recession last and how deep will it get?
Home prices are falling steeply. Adjusted for inflation the declines would be even larger.
U.S. home values in 2007 posted the first yearly decline in 16 years, according to two home-price indexes released Tuesday, and analysts said more price drops are still in the offing.
Home prices fell 8.9% in 2007, the largest decline in the Case-Shiller home price index in at least 20 years, Standard & Poor's reported Tuesday.
"The current housing difficulties differ from those in the past, largely because of the pervasiveness of negative equity positions," Mr. Bernanke told the Independent Community Bankers of America in Orlando yesterday. With negative equity, which means a home is worth less than its mortgage, "a stressed borrower has less ability…and less financial incentive to try to remain in the home. In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure than reducing the interest rate."
But for wannabe house buyers a big collapse in housing prices would provide great buying opportunities - at least for those who manage to avoid unemployment.
People are losing their houses even before their mortgages reset.
About 40 percent of all foreclosures are homeowners with prime or subprime loans who couldn't make their payments before the reset, Brinkmann estimated in an interview. Another 23 percent are borrowers who received some form of loan modification, typically a freezing or a reduction of their rate, and then default, he said
The foreclosure rate has hit a 36+ year record.
Over 900,000 households are in the foreclosure process, up 71% from a year ago, according to a survey by the Mortgage Bankers Association. That figure represents 2.04% of all mortgages, the highest rate in the report's quarterly, 36-year history.
America needs to stop running a huge trade deficit and Americans need to produce goods rather than try to get rich using debt to purchase unproductive assets. The bursting of this housing bubble ought to serve as a wake-up that pyramid schemes are not the road to greater wealth for entire societies.
Look for more housing price drops according to some analysts.
While a 25% decline is unprecedented in modern times, some economists are beginning to talk about it. "We now see potential for another 25% to 30% downside over the next two years," says David A. Rosenberg, North American economist for Merrill Lynch (MER), who until recently had expected a much smaller slide.
Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There's a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.
Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy.
Bargains! Housing bargains await us.
One problem: Will a rise in housing material costs driven by rising oil prices and rising commodities prices keep the price of new housing construction high enough that the long term cost of housing will rise above the old trend line? If the marginal cost of building a new house gets high enough I expect the marginal price to eventually equal that cost.
Similar events are playing out across the Canadian hinterlands, where at least 139 sawmills -- many of which depend on the U.S. market for most of their sales -- have been forced to close indefinitely or reduce shifts over the past 18 months, according to Canadian government statistics.
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In this era of interconnected economies, when globalization can take away as fast as it can give, the bite of the U.S. subprime-mortgage crisis is perhaps as visible in this Canadian town as in any U.S. community. With wood demand and prices plummeting along with U.S. housing starts, three of Mackenzie's five sawmills have shut down indefinitely, while the others have cut shifts -- propelling the town's unemployment rate from single digits to more than 70 percent since August.
That includes the loss of Mackenzie's largest employer, the two AbitibiBowater mills, which closed so abruptly Jan. 11 that thousands of felled tree logs remain piled up on its icing lot, awaiting processing by new multimillion-dollar saws that now sit dormant. Six of Mackenzie's eight logging camps, where tree cutters and haulers dined on early morning breakfasts of flapjacks before gathering wood in the sub-zero mountain air, have closed. Five of the seven town councilors or their spouses have lost their jobs. Laid-off locals cluster in Mackenzie's recreational center to tap the newly created job assistance center and debate over coffee whether to follow those who are abandoning town in search of work.
The housing boom illustrates the costs of artificial money supply inflation. As the price of oil went up the amount of money that flowed abroad and then back into the US as bond purchases skyrocketed. At the same time the Chinese took their trade surplus money and used it to buy US bonds. This lowered US interest rates unnaturally and caused an asset price inflation in the United States. That asset price inflation caused a huge misallocation of capital toward the housing industry and its supplier industries such as lumber. Much of that investment was excessive and ultimately a waste.
The costs to the lumber companies or construction companies tell only part of the story. The people who incurred expenses to move to get jobs and built housing in boom towns lost money too.
The appreciation of the Canadian dollar against the US dollar due to the Alberta oil sands boom has made the downturn in the Canadian housing industry even more severe. Canadian non-oil goods are getting priced out of the US market due to Alberta oil exports.
Bad news for people who bought at the peak of the real estate bubble:
La Jolla, CA.--The number of mortgage default notices filed against California homeowners jumped last quarter to its highest level in more than fifteen years, a real estate information service reported.
Lending institutions sent homeowners 81,550 default notices during the October-to-December period. That was up by 12.4 percent from 72,571 the previous quarter, and up 114.6 percent from 37,994 for fourth-quarter 2006, according to DataQuick Information Systems.
Last quarter's number of defaults was the highest in DataQuick's statistics, which go back to 1992.
But the decline in home prices is good news for renters who want to buy.
"Foreclosure activity is closely tied to a decline in home values. With today's depreciation, an increasing number of homeowners find themselves owing more on a property than it's market value, setting the stage for default if there is mortgage payment shock, a job loss or the owner needs to move," said Marshall Prentice, DataQuick's president.
The median price paid for a California home peaked at $484,000 last March and declined to $402,000 by the end of 2007, although much of that decline was caused by significant shifts in the types of homes that were sold.
Of course, this downturn in real estate will put some prospective home buyers out of a job. But if you can manage to stay employed and even increase your income home owning is becoming more affordable.
The Bay Area has the lowest rate of mortgage defaults. My guess is that Silicon Valley is doing well.
On a loan-by-loan basis, mortgages were least likely to go into default in San Francisco, Marin, and San Mateo counties. The likelihood was highest in Merced, San Joaquin and Stanislaus counties.
The percentage of defaults which end up as foreclosures has risen.
Fewer homeowners in default are able to hold on to their property. An estimated 41% of those in default are now able to avoid foreclosure by bringing their payments current, refinancing or selling their home to pay off their loan, DataQuick reported. A year ago, 71% of homeowners in default were able to recover.
Actual foreclosures statewide rose fivefold in the quarter, to 31,676, DataQuick said.
That's only about an eighth of a million households per year evicted from their mortgaged homes in a state with 12 million households total. So that works out to about 1% of the population. Then there's a separate group who are evicted for inability to pay rent. But they attract far less attention and sympathy.
The Wall Street Journal fingers fraud as a core cause of the mortgage meltdown.
Fraud goes a long way toward explaining why mortgage defaults and foreclosures are rocking financial institutions, Wall Street and the economy. The Federal Bureau of Investigation says the share of its white-collar agents and analysts devoted to prosecuting mortgage fraud has risen to 28%, up from 7% in 2003. Suspicious Activity Reports, which many lenders are required to file with the Treasury Department's Financial Crimes Enforcement Network when they suspect fraud, shot up nearly 700% between 2000 and 2006.
In 2006, losses from fraud could total a record $4.5 billion, a 100% increase from the previous year, says Arthur Prieston, chairman of the Prieston Group, which provides lenders with mortgage-fraud insurance and training. The surge ranges from one-off cases of fudging and fibbing to organized criminal rings. The FBI says its active mortgage-fraud cases have increased to 1,210 this year from 436 in 2003. In some regions, fraud may account for half of all foreclosures. "We've created a culture where a great many people know how to take advantage of the system," says Mr. Prieston.
Organized criminal rings used fake documents to make homes sell for very high prices and people involved in the transactions pocketed large sums. Buyers pretended to have very high incomes. Payouts when mortgages closed that were supposedly to construction companies instead went to shell companies.
Lax standards by banks helped fuel the growth of mortgage fraud.
Embroiled in an all-out war for market share, issuers reduced barriers to credit, for example, by offering so-called "stated-income" loans, which require no proof of income. "The stated-income loan deserves the nickname used by many in the industry, the 'liar's loan,' " says the Mortgage Asset Research Institute, which works with lenders to prevent fraud. A recent review of a sampling of about 100 stated-income loans revealed that almost 60% of the stated amounts were exaggerated by more than 50%, MARI says.
So if you get laid off due to the huge credit crisis remember that the sins of men made the massive market failure possible.
Fraud by Hispanics in Illinois.
A Rockford Realtor was sentenced to 20 months in prison this afternoon for his role in falsifying documents to help Hispanic families qualify for loans backed by the Federal Housing Authority.
Cesar Arenas was the fourth person sentenced in the five-person mortgage-fraud ring that operated from 2001 through 2003 and the second to receive prison time. Rhonda Torossian, the loan officer in the scheme, was sentenced Monday to 20 months in federal prison.
Arenas helped Latin Americans (blood runs thicker than water) get mortgages under fraudulent pretenses.
Federal officials in Miami announced charges Monday against 31 people accused of participating in a scheme to illegally obtain mortgage loans worth roughly $14 million.
Prosecutors said the group's leaders secured inflated loans for the purchase of at least 28 properties and then pocketed the difference between the loan and the actual purchase price.
Several of the properties involved in the charges are in Broward County, according to the 20-page indictment.
An unlicensed Branchville appraiser pleaded guilty Tuesday in U.S. District Court in Newark to one count of conspiracy to commit wire fraud for his part in an elaborate real estate scheme in Paterson.
William Ottaviano, 41, who went by the name "Billy the Kid," was one of more than 10 co-conspirators in a wide-ranging housing scam overseen by Mahwah real estate agent Michael Eliasof. The team Eliasof assembled falsified mortgage applications for unqualified buyers, who were sold dozens of overpriced houses between 2002 and 2005.
Anthony Accetta, a former federal prosecutor, says the biggest fraud in the mortgage business was committed by the big investment banks.
There has been criminal conduct at every stage of the mortgage business, and there is ample proof that virtually every major investment bank in the mortgage securitization business initiated fraud, or through conscious avoidance or reckless disregard of facts known to them, enabled, aided and abetted fraud.
The so-called sub-prime mortgage crisis was predictable and predicted, preventable, but not prevented. Greed, arrogance, criminal conduct, negligence, and fraud threaten to go unpunished.
Before the Enron era, there was serious mortgage fraud. From 1971-1974, I was lead federal prosecutor in what was then the nation's biggest mortgage fraud scandal, the New York FHA cases. Prosecutions were conducted in Los Angeles, Chicago, Detroit, Philadelphia, and other cities
Recently, while the Justice Department was busy with the Skillings, et al, and Congress was patting itself on its back for Sarbanes Oxley, Wall Street was doing deals that would leave financial and housing markets in turmoil. They were committing, aiding, and abetting mortgage fraud on a massive scale.
Without sufficient virtue in its people America can quickly become a Third World nation.
Yale economist Robert Shiller, who along with Wellesley College economist Karl Case created a widely respected housing price index, thinks the housing price decline could go on for years.
"Guess what?" said Robert Shiller in an exclusive Reuters interview. "For those of you who thought house prices would find their bottom in 2008 - think again."
According to the Yale economist and co-developer of the S&P/Case-Shiller Home Price Indices, "The bottom is hard to predict. I do not see it imminent and it could be five or 10 years too."
"The housing situation that we got in is unique in history because there was an investor psychology that developed that was stronger than we have ever seen before," Shiller said. "We have seen housing bubbles many times in history, but they have been much more local than this one."
In the United States retiring baby boomers might sell their bigger houses and help depress prices.
Shiller sees this housing bubble as the largest in terms of number of markets involved.
"The housing situation that we got in is unique in history because there was an investor psychology that developed that was stronger than we have ever seen before," Shiller said. "We have seen housing bubbles many times in history, but they have been much more local than this one."
"Perhaps we have gotten a little too confident in the global economic growth"
Robert Shiller, professor of Economics, Yale University, in his speech warned that possible speculative bubbles in stock, real estate and oil markets could cause instability in the global economy.
"Perhaps we have gotten a little too confident in the global economic growth. The problem is high oil, stock and real estate prices. There is a question about whether all this can be explained by low interest rates. This is a question that I can't authoritatively answer. But I believe that a substantial part is speculative bubble thinking. We have gotten too confident of the prices in these markets. The unwinding of these markets is the most serious risk facing these markets today," he said.
I worry that China will get hit by a depression due to inefficient capital markets misallocating capital on an enormous scale. Such a depression could pull the United States down with it.
Shiller thinks the various market bubbles could drive the world into a recession.
UAE. The world economy could be heading for a hard landing. This was the warming of Robert Shiller, the Stanley B Resor Professor of Economics at Yale University, in his keynote address during the opening session of the DIFC Economic Forum on Saturday 17 November 2007.
Shiller based his warning based on recent trends in oil prices and the US and international stock and real estate markets. Each of these areas, according to him, reveals speculative pressures indicating financial bubbles. If the pressures and instability continue to build, the global economy could enter another major recession.
But I think he's wrong to paint the price of oil as the result of an economic bubble. Unfortunately, the current price of oil is driven by fundamentals. Rising demand is not getting met by rising supply. Likely future oil production (PDF format) looks like another reason to be bearish on housing prices.
But if you are a renter who can manage to stay employed then bargains might be coming your way.
Really smart money guy Bill Gross sees a really big problem with the real estate debt crisis.
"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times — but, as an expert on the global credit crisis, he speaks with authority.
"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."
This article by AP writer Joe Bel Bruno has a lot of excellent data on the state of the US real estate market and of consumer indebtedness. Look for 3 million jobs to go bye bye, more than in the last recession.
Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute.
By comparison, in the last big downturn between 2001-03 some 2 million jobs were lost, according to the Labor Department.
The huge flood of adjustable rate mortgage rate resets coming up in 2008 and 2009 will push up lots of interest rates from teaser rates to 11% and 12%. Lots of people will be faced with near doublings of monthly mortgage payments and they won't be able to make them. The Collaterized Debt Obligations (CDOs) which mortgages have been bundled into create situations where there's no single creditor with a consolidated interest in rate negotiation. The mortgages have had their interest payments separated off and sold separately from their principle repayments. The securities have been sliced up in other ways with different tiers of creditors with highly conflicting interests that make many mortgages hard to impossible to renegotiate. The rocket scientists on Wall Street have created a lot of rockets that are going to explode.
Though some do not think the ARM resets make the problem much bigger.
Still, Christopher Cagan, the author of the First American study, isn't so alarmed.
The ARM resets will cost an extra $42 billion a year, roughly 0.4% of the nation's gross domestic product he estimates. (Adding some context, he notes that Americans spend much more than $100 billion a year on booze.)
I think 3 big macroeconomic developments are about to collide: 1) The housing market debt and price meltdown; 2) The retirement of the baby boomers; and 3) Peak Oil. Whoever wins the 2008 US Presidential election is going to find it a very hollow victory. Many of the rest of us won't find it much fun either.
Update: Robert Shiller argues in a New York Times piece that housing prices might decline as much as 30%.
WE have to consider the possibility that the housing price downturn will eventually be as big as that of the last truly big decline, from 1925 to 1933, when prices fell by a total of 30 percent.
He argues for a number of regulatory and legal changes to reduce the risks and costs of big housing market failures.
Congress is already on track to eliminate the provision — Section 1322 of Chapter 13 of the bankruptcy law — that prohibits courts from adjusting terms of first mortgages. But there could be more fundamental changes to bankruptcy law than that.
Bankruptcy law is a risk management institution, and such an institution should adopt more modern practices. For example, Andrew Caplin, professor of economics at New York University, has proposed that in personal bankruptcy proceedings, the courts should be allowed the latitude to substitute real estate equity — a share in the ownership of the property, to be realized when it is eventually sold — for first mortgage debt. This could let troubled borrowers stay in their homes, and might be better in terms of efficient risk sharing: it would provide incentives for the mortgage industry and would be friendlier to prospective home buyers who would otherwise face higher mortgage rates to pay for others’ bankruptcies.
I don't see how this measure would reduce the interest rates for prospective buyers. The modified mortgages would still end up being a loss to the creditors. Also, giving real estate equity to creditors would be extremely problematic. Someone might not sell for decades. When they do sell they will be less incentivized to maximize sales price since less of the proceeds would go to the seller. Creditors would face legal liabilities as part owners that they would not otherwise face.
Shiller also argues for home equity insurance. Well, he ought to take a hard look at the bond insurance companies that are currently on the verge of bankruptcy because they never expected so many collateralized debt obligation (CDO) bonds to greatly decline in value. Risk can't be reduced unless incentives for risky behavior are reduced. That's where we need changes.
A lot of people accumulated debt on their houses so they could buy lots of other stuff.
From 2004 through 2006, Americans pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refinanced mortgages, according to data presented in an updated working paper by James Kennedy, an economist, and Alan Greenspan, the former Federal Reserve chairman. These so-called home equity withdrawals financed as much as $310 billion a year in personal consumption from 2004 to 2006, according to the data.
But in the first half of this year, equity withdrawals were down 15 percent nationally compared with the average for the last three years, and consumption supported by such funds plunged nearly one-fourth, according to the Kennedy and Greenspan data.
This summer, the size of withdrawals fell even more sharply to about one-third below the level of late last year, according to Mark Zandi, chief economist at Moody’s Economy.com.
Housing prices are still falling. Also, credit conditions are tightening. So the amount of money people will have to spend from home equity loans and home sales will drop even further.
US Federal Reserve Chairman Ben Bernanke says the credit crunch and housing price downturn are going to slow the economy.
On a day when stock prices swung wildly, the dollar hit another new low against the euro and further signs emerged that consumers are growing more cautious about spending, Mr. Bernanke warned that the economy is about to “slow noticeably” as the housing market continues to spiral downward and financial institutions tighten up on lending.
The party's over.
America is coming off a real estate bender, a cheap oil bender, and a cheap imported goods bender. We are experiencing withdrawal symptoms from three different forms of substance abuse. How you feeling?
A large number of houses are sitting on the market unsold.
At the current existing-home sales rate of 5.04 million units a year, it would take a full 10.5 months to sell the 4.4 million existing homes now on the market, according to data released by the National Association of Realtors (NAR) on Oct. 24. The supply of existing single-family homes was at 10.2 months in September—the highest since February, 1988. Compare that with the height of the housing boom in January, 2005, when it reached a record low 3.6 months.
This supply of houses is going to continue to put downward pressure on prices. How long will it take for sellers to reduce their prices low enough to clear the existing stock of unsold houses? Some sellers will decide to wait out the downturn and just hold on. Others will be forced by circumstances to sell. Adjustable rate mortgage interest increases will push more homes into default next year. So in some markets waiting to sell might turn into a bad idea.
The continued rise in oil prices is also reducing the money available for housing. Most obviously, additional money spent on gasoline is money not available to spend on housing. But also the rise in gasoline prices reduces optimism and makes people more reluctant to make major purchases.
Lending practices were trhe leading cause of the real estate bubble.
Many analysts have pointed to easy lending as a contributor to the housing boom, but the Atlanta Fed paper may be the first to quantify its effect in a rigorous way. Using math-heavy macroeconomic analysis, the authors conclude that the availability of new mortgage options accounted for 56% to 70% of the decade-long increase in the U.S. homeownership rate, while demographic changes accounted for only 16% to 31%. Although the paper cites lowered downpayment requirements as the biggest factor in raising ownership, co-author Carlos Garriga of the St. Louis Fed says a forthcoming paper will attribute more of the effect to "teaser" loans with low introductory payments that appeal to young and lower-income buyers.
I'm more worried about the rising price of oil than by the housing glut. The housing market will eventually correct. But oil's high cost could be a lasting change in the energy market.
The two big problems weighing on the US economy at this point are the housing downturn and rising oil prices. The housing downturn is causing credit problems which has effects beyond the housing market. High oil prices cut into disposable income and create costs for businesses. But on the up side the declining dollar is boosting foreign demand for US goods. Hard to say whether the problems are big enough to push the US into a recession. But the housing market problem is getting even worse.
WASHINGTON, October 24, 2007 - Temporary problems in the mortgage market are easing and are expected to free some pent-up demand, but disrupted existing-home sales and distorted prices on sales closed in September, according to the National Association of Realtors®. Even so, prices rose in the Northeast and Midwest.
Total existing-home sales – including single-family, townhomes, condominiums and co-ops – fell 8.0 percent to a seasonally adjusted annual rate1 of 5.04 million units in September from a downwardly revised pace of 5.48 million in August, and are 19.1 percent below the 6.23 million-unit level in September 2006.
Home construction is declining along with home sales.
October 17, 2007 - Nationwide housing starts declined 10.2 percent in September as builders focused on reducing their inventories in the midst of continuing mortgage market travails, according to data released by the U.S. Commerce Department today. The majority of the downward movement was centered in the multifamily sector, where a significant uptick in starts had been registered in the previous month.
Overall housing starts fell to a seasonally adjusted annual rate of 1.19 million units, the slowest since March 1993’s pace of 1.08 million units. Single-family production registered a 1.7 percent decline to a 963,000-unit rate, while multifamily production posted a 34.3 percent decline to a 228,000-unit rate.
The worse the news gets the more reluctant buyers become and the worse the news gets. Are we headed for a recession?
I'm most worried about signs of a credit crunch.
The US market for asset-backed commercial paper (ABCP) contracted a further $11bn last week as lenders refused to roll over short-term debt. This form of paper has shrunk by 25pc since August, cutting off almost $300bn of funding.
Dr Suki Man, an analyst at Société Générale, said "shutters" had gone up across the debt markets. "Has it just got ugly again? The jury's out, but it's enough to make one feel the chill. All this is offset by a US economy still expected to grow by more than 2pc, and China and India still growing at breakneck speed," he said.
If you are thinking of switching jobs choose a company that has growing exports.
Good news for the renters. The housing market in the United States keeps going down.
Purchases of new homes fell to an annual rate of 795,000, an 8.3 percent decline from July, as inventory levels rose to their highest level since March, the Commerce Department said this morning. The median price for a new home was down 7.5 percent from a year ago, to $225,700, marking the steepest monthly price drop since December 1970.
Will the housing bust cause a recession? It is not working along in that direction. The rising price of oil is also a weight on the economy.
Another index measured a smaller but still substantial housing price drop.
The S&P/Case-Shiller home-price index, also out Tuesday, is deemed a more accurate gauge. It showed that prices in 20 U.S. metro areas fell 3.9% in July vs. a year earlier, worse than June's 3.4%. A 10-city index showed prices down 4.5%, the worst in 16 years.
One way to look at housing is housing construction as a measure of total GDP.
The United States reached its peak of residential construction-to-GDP at 6.3% in the fourth quarter of 2005, the highest level since the baby boom in the early 1950s. Prices increased a total of 2.6% since then, but have been declining since the first quarter of 2006.
Some countries have been in even bigger housing construction booms.
Nevertheless, Goldman points out the rise in residential construction has been very pronounced throughout the OECD. In the U.K. Canada and Australia, construction spending over 2003-2006 was more than one percentage point above the 1990-2002 average. In Canada, it's currently higher than the United States at around 7%. In Spain, its averaged 8.7% since 2003 and in Ireland it was astonishing 14.2% between 2005-06, though prices have now begun to cool.
The credit fears among the banks seem the scariest aspect of this situation.
"We're still a long way from resolving this whole crisis," said Robert McAdie, head of credit at Barclays Capital. "Banks are not willing to lend to each other beyond a week. The current situation is more systemic than the crisis in 1998. It effects far more institutions and will have a much greater impact on the global economy."
He said the relief rally in stock markets since the Fed slashed rates would come face to face with reality soon enough. "The equity markets are pricing in a 'Bernanke Put'. They are betting that the Fed will cut again and again, but they not factoring in the effect that this credit squeeze is having on the financial system," he said. "Cheap money is now history. There are not going to be any more of the big leveraged buy-out deals for a long time because the CLO [collateralised loan obligations] market that financed them is effectively closed," he said.
So there isn't just a credit crunch for housing. Much less capital is available for leveraged buy-outs as well. Will we see a downturn in capital investment?
The head of Fannie Mae does not see a bottom on home prices until the end of 2008.
Fannie Mae Chief Executive Officer Daniel Mudd said the housing slump will last beyond next year, dragging down home prices and increasing credit losses.
``We don't think we hit a bottom until the end of '08 and then we have some period of time to work our way back up again,'' Mudd said today in an interview in Washington.
At least the decline in the dollar is boosting exports.
The Commerce Department said the downward revision to growth reflected an increase in imports of both goods and services, which subtract from GDP growth. Imports fell a revised 2.7 percent in the quarter, not as steep a decline as the 3.2 percent decline estimated earlier. Exports rose 7.5 percent in the second quarter.
Housing was the main drag on growth. Spending on residential investment declined 11.8 percent in the second quarter, after plunging 16.3 percent in the first quarter.
Prices for high-end homes in China's capital have been bouncing to record new levels all year, even with dramatically fewer transactions, rental prices flat and many new units empty.
Some showrooms have fallen dead quiet. But popular addresses that hit the market a few years ago at $1,200 a square meter, or $112 a square foot, are now commanding prices of $2,500 to $4,000 a square meter as their final stages are completed. Developers and owners, as the local media put it, are "going with the wind."
Will China's economy pop? Or can the Chinese central government insulate it from a global recession?
In the second quarter of 2007, home prices were 0.1 percent higher than in the first quarter, according to the house price index of the Office of Federal Housing Enterprise Oversight.
But this index doesn't include high-priced homes. And it includes price data from home refinancings based on appraisals rather than just new purchases. Gault says that Global Insight expects this index to fall more than 4 percent by 2009.
An alternative index, seen as more accurate by many economists, has been more volatile.
The Case-Shiller index released Tuesday by Standard & Poor's showed home prices down 3.2 percent in the second quarter from a year earlier. The National Association of Realtors said Monday that the median sale price in July was $228,900, down 0.6 percent from a year earlier.
Since none of these indexes adjusts for inflation they all understate the extent of the decline.
The Case-Shiller index is probably most accurate.
There's still a fundamental reason to expect housing cost inflation to resume in the long run: population growth. This is especially true on the coasts where a barrier (the ocean) prevents expansion in one direction.
It would take stagnation of the economy to cause housing prices to stop rising. The biggest factor I can see that would cause that is a deteriorating demographic situation where smarter people become a dwindling portion of the total population. Combine that with the continued decline in the ratio of workers to retirees and economic stagnation becomes a real possibility.
Another possible cause of economic stagnation: a plateau in world oil production followed by a decline as we pass the oil production peak. The extent of the disruption caused by peak oil will depend on when the peak comes. The later it comes the more technology we'll have available to ease the shift to substitutes.
Across the United States housing prices are falling.
By one index released this week, home prices are down 3.2 percent from a year ago. Clear-cut gauges of US home prices only go back through the 1970s, but that decline probably exceeds any price drop since the Depression, except for one year during World War II. Economists say the trend could continue well into next year.
Net worth is falling for millions of families as a result. If consumers, feeling less wealthy, cut back on spending, the risk of a national recession would rise.
Why are home prices declining, when by many measures today's economy is much healthier than that of the 1930s? Basically, the good times for housing ran for so long, and prices rose so fast at the boom's peak, that it was unsustainable.
"This time, the problem with housing is not so much that interest rates became especially high.... It was that house prices became especially high," says Nigel Gault, an economist at Global Insight, a forecasting firm in Lexington, Mass. "What was unusual this time is that we had such a long period without any downturn."
Curiously, it looks like the fall in housing prices is now causing higher interest rates rather than the other way around. The drop in prices makes lenders more reluctant to lend which cuts into demand which causes further drops in prices.
Getting approved for a mortgage has gotten much harder.
As mortgage lenders tighten underwriting standards and home prices fall, Bank of America analysts estimated that 40% of home buyers who got a mortgage in 2006 probably wouldn't qualify for a home loan now.
That's a huge cut in mortgage availability.
While mortgage interest rates for lower cost houses (which can be insured by Freddie Mac or Fannie Mae) have stayed near last year's rates the interest rates for larger mortgages have soared.
The average interest rate for 30-year fixed jumbo loans failed to budge this week from a relatively lofty 7.4%. By contrast, the average for smaller "conforming" 30-year fixed mortgages fell 15 basis points to 6.43%, Bankrate.com says, citing housing market weakness.
Jumbo rates have climbed roughly 40 basis points since the end of July. Homeowners refinancing a $600,000 jumbo mortgage now vs. then face paying $162 more a month.
Meanwhile, rates for superjumbo mortgages (typically more than $1 million) have shot up about 200 basis points over the last several weeks to 8%, says Michael Covino, president of Luxmac Covino & Co. in Tarrytown, N.Y., which provides loans for $750,000 to $40 million.
The credit crunch isn't just hitting the mortgage market. Corporations are finding it tougher to get short term credit.
Outstanding commercial paper fell by $62.8 billion, or 3.1%, in the week ended Wednesday to $1.98 trillion, bringing the total decline in the past three weeks to $244 billion, or 11%, the Federal Reserve reported Thursday.
Such a hit has taken place despite commercial paper's seemingly safe-haven status in lending. "It's kind of like a margin account that businesses use for short-term financing," Arnold said.
While it has been a primary source of funding for corporate mergers and acquisitions, it "can be used for almost anything," said Raymond Benton, a Denver-based adviser who purchases individual bond issues for high net-worth clients. Commercial paper is a generic term for most any short-term corporate borrowing, he added. "It's nothing more than a short-term note that can come due in as little as 30 days or less," Benton said.
Reading this kind of news I'm having a hard time believing we can avoid a recession.
Yet the US economy grew speedily in the 2nd quarter.
The U.S. economy bounced back in the second quarter, growing at a 4% annual real growth rate, the Commerce Department reported Thursday.
The credit crunch really took hold in July and August. So analysts are expecting worse news on the economy as the effects of tight credit begin to be felt.
Does anyone believe the US Federal Reserve lacks the tools needed to raise mortgage interest rates in the United States? To put it another way: Has globalization neutered central banks?
Mr. Greenspan explains: “We decided that in 2003 that though we judged the probability of severe deflation as small, were it to happen, its consequences were seen as devastating. So we chose to take out insurance against them, fully recognizing at the time that we were taking risks in the process. But central banks cannot avoid taking risks. Such tradeoffs are an integral part of policy. We were always confronted with choices.”
Some at the Fed argue its policy can’t explain the greater part of the housing and borrowing boom, which took place in 2005 and 2006 — after the Fed had moved short-term rates up considerably.
Mr. Greenspan agrees: “We tried in 2004 to move long term rates higher in order to get mortgage interest rates up and take some of the fizz out of the housing market. But we failed. We were overwhelmed by excess global savings that continued to press real long term rates lower.”
The Fed has a few tools for regulating money supply growth: Interest rates it charges to loan money to banks, Buying and selling securities, and setting of reserve requirements for some types of bank requirements (see here for a more detailed run-down of Fed money supply management tools). Greenspan is arguing either that those tools are not powerful enough (really?) or that a Fed policy designed to cut housing demand would have had side effects on the rest of the economy that would have been too costly. If he's arguing the second point then does he really mean it and is he right? If he's arguing the first point then he really could have taken the fizz out of the market but didn't think the benefit was worth the price.
My guess is that he's not being totally honest and his response is defensive. Yes, the Fed could have stopped the housing boom. Might have cost the economy a recession though. So he opted to hope the excesses would correct without too much cost a few years later. Well, we are waiting to find out if he was right.
Read this article by Gretchen Morgenson in the New York Times before you enter into another loan. Renegotiation of mortgage loan terms has gotten harder because loans are sold through and serviced through so many layers that terms can't get modified.
And the very innovation that made mortgages so easily available — an assembly line process known on Wall Street as securitization — is creating an obstacle for troubled borrowers. As they try to restructure their loans, they are often thwarted, lawyers say, by strict protections put in place for investors who bought the mortgage pools.
This impasse could exacerbate the housing slump, pushing more homeowners into foreclosure. That would lead to a bigger glut of properties for sale, depressing home prices further.
“Securitization led to this explosion of bad loans, and now it is harder to unwind and modify them even where it is in the best interests of both the borrower and the investors,” Kurt Eggert, an associate professor at the Chapman University School of Law in Orange, Calif., said in an interview. “The thing that caused the problem is making it harder to solve the problem.”
Creating difficulties is the complex design of mortgage securities.
Some homeowners have problems simply identifying who holds their mortgages. Others find the companies that handle their loan payments, known as servicers, are unresponsive, partly because modifying loans cuts into profits.
Even if circumstances suggest fraud when a loan was made, lawyers say, the various parties protect each other by refusing to produce documents.
Beware financial institutions. They aren't fair. Though I'd make an exception if you can borrow hundreds of millions of dollars. That would change their incentives in dealing with you such that they'll take the time to think rationally about your relationship to them. Otherwise you'll just get processed according arcane rules designed simply to give them a lot more cards to play with you.
Now that the boom has fizzled and foreclosure rates are rising, the important role of large homebuilders as lenders is also coming into sharper focus.
In addition to spitting out subdivisions, many of which now stand half-empty, builders jumped into the mortgage business to a degree they never had. Wall Street provided the same encouragement it offered other lenders. Even as the housing supply began to exceed demand last year, builders kept sales brisk by pushing adjustable-rate, interest-only, and other risky loans. In some cases they attracted clientele who couldn't afford conventional mortgages. In others, builders allegedly violated federal lending standards to get customers to sign on the dotted line. KB Home (KBH) paid a record $3.2 million settlement in July, 2005, to resolve allegations by the Housing & Urban Development Dept. that the builder's mortgage unit overstated borrowers' income, among other practices, to obtain loan approvals. KB, which denied wrongdoing, sold its loan business before settling.
"Homebuilders really started to push these more aggressive mortgages down the throats of potential buyers to boost sales," says G. Hunter Haas IV, who as head of mortgage research and trading for Opteum Financial Services (OPX) had an insider's perspective on the proceedings. Opteum has served as a middleman between Wall Street and builders. The Paramus (N.J.) firm provided developers with financing for their mortgage operations, then resold the loans to investment banks, which packaged them as securities and hawked them to hedge funds and insurance companies. The whole process added liquidity to the market and made it easier for developers to build and sell expansively.
I checked Opteum's ticker page and it was trading at its 52 week high of $8.94 a year ago and just closed yesterday at its 52 week low of $1.13. Yet another lender reeling from the big burst of the housing bubble. Opteum decided to get out of home loan brokering. Wall Street has seen such high default rates from builder-originated loans that Wall Street has decided builders who originate loans can't be trusted.
The article says the growth of big publically traded builders made the builder-originated loan craze possible. Wall Street sees publically traded hefty companies as big enough to do business with them.
Some home buyers are suing at least one large builder for falsifying so much loan data that the resulting foreclosures drove down the values on the homes of the people who were not foreclosed on. By this logic the whole country should sue the builders and the Wall Street financiers who provided the financing that created the loan bubble. As this bubble bursting plays out lots of people will lose jobs and the economy might go into recession. Surely that damages the interests of a substantial portion of the populace.
You think you've got it bad? Rich people are stuck paying very high prices for housing with no relief in sight.
Sales of U.S. homes costing more than $10 million increased in the past year, said Kay Coughlin, president and chief executive officer of Christie's Great Estates in Santa Fe, New Mexico.
In San Francisco, 14 houses were sold for more than $5 million in the year ending in June, just one fewer than a year earlier. That suggests luxury homes there ``haven't taken any kind of hit'' amid the U.S. housing slowdown, said Andrew LePage of DataQuick Information Systems in La Jolla, California.
A newly constructed home near the Broadway property sold this year for $15.8 million. Another sold for $14 million, which was $1.5 million more than the asking price, said Moore of Alain Pinel.
A growing legion of rich people are bidding up the prices for prime real estate. It just is not fair. Poor people and the middle class are witnessing declining housing prices. But rich buyers get no break.
The Saudis are suffering just like American rich people. All that money flooding into Saudi Arabia due to rising oil prices is pushing up prices of housing and food.
RIYADH: Inflation in Saudi Arabia rose to a five-month high of 3.1 per cent in June as food and housing costs climbed, official data showed yesterday.
The cost of living index rose to 104.4 points in June, up 0.2pc compared with May, the Central Department of Statistics said, without giving a comparative figure for June last year.
Those Saudi princes and the Saudi masses sure have it tough. They didn't ask the East Asians and Western countries to bid up the price of oil. Now they have lots of money they didn't expect to have and not enough stuff to buy with it.
The rich folks face another problem: declining prices of homes owned by the middle class and poor could cut consumer spending on products and services made by companies owned by rich people.
On Tuesday, the Case-Shiller Home Price Indices revealed a 3.4 percent fall in its market basket of 10 U.S. cities in the past 12 months; San Diego prices plunged 7 percent. Those declines will have an effect on consumer spending, which accounts for 70 percent of the gross domestic product.
Will consumer spending slow as people feel less wealthy and feel the drain of higher energy prices? The American people have already have stepped back from profligacy in the last couple of years. Where'd this small dose of sobriety come from? Baby boomers saving for retirement?
America still has debt problems, but as of this week the phrase "negative savings rate" no longer applies to the nation's household habits.
Through June of this year, US citizens have socked away $164 billion. Moreover, in releasing its annual revision of prior-year data, the Commerce Department now says that Americans earned more income than they spent in 2005 and 2006 – a reversal of prior tallies showing a negative savings rate for those years.
Why has the savings rate improved? The same reason housing prices are up for rich folks: Personal income increased so much for rich folks that they saved more than the poor folks spent.
Also troubling, McMillion says, is that much of the upward revision in personal income stemmed from greater interest and dividend income, not wages. That suggests that the savings picture has improved mainly for the best-off Americans, those with substantial financial assets.
Markets are driven by greed or fear. The greed phase has run so many years that people have begun looking for signs of the fear phase. The housing market and the oil market are both signalling reasons to focus more on fear. The oil market looks set to keep signalling louder and louder "fear, fear, fear".
Months ago the spin on the housing market was that only subprime mortgages were in trouble and a turn-around was just around the corner. Yet another mortgage lender goes insolvent.
In a move that sent shockwaves through the financial markets and left investors millions of dollars poorer, Melville-based American Home Mortgage Investment Corp. announced yesterday that it lacked the money to pay its lenders or the credit lines to pay its borrowers.
It was the largest mortgage bank to face bankruptcy in a year of bad news for the mortgage industry, and the news that problems were not confined to high-risk lenders helped turn an early stock rally into a 147-point drop for the Dow Jones industrial average.
American Home lost a whole order of magnitude in value.
In corporate news, American Home fell $9.42, or 90 percent, to $1.05 following disclosure of its difficulties.
Moody's Investors Service tightened its standards Tuesday for so-called Alt-A loans, which are above supbrime but below prime loans in terms of credit quality. The move could stir concerns that credit problems are spreading beyond subprime loans to a higher quality of borrower.
Mortgage hedge funds have been collapsing.
After the market closed, the investment bank Bear Stearns, which this summer had to shut down two hedge funds that had made bad bets in the subprime mortgage market, said that a third fund had suffered losses in July and that redemption requests had been suspended.
Unlike the other two hedge funds, the Bear Stearns Asset-Backed Securities Fund, with $850 million in assets, had only a small fraction of its investments — less than 1 percent — in subprime mortgages, and the fund had not borrowed money to try to juice up returns, according to a person briefed on the fund but not authorized to speak for attribution.
Mortgage holders with higher credit ratings are also getting into financial trouble.
Countrywide Financial, which originates 17 percent of U.S. mortgages, reported a sharp drop in second-quarter profit, slashed its earnings forecast and signaled that its woes reflect that credit problems are spreading to a wider population of borrowers than once believed.
Countrywide Financial Chief Executive Angelo Mozilo is reported to have uttered this shocker in a conference call:
"Company is seeing home price depreciation at levels not seen since the Great Depression."
I hope the bursting housing bubble combined with Peak Oil don't throw the world economy into a depression.
Countrywide's growth in delinquent loans suggests a deepening housing financial problem.
Wall Street was shocked to hear that the percentage of Countrywide customers with good credit who were delinquent on their loans rose to 4.6 percent for the quarter, up from less than 2 percent a year ago.
We are reaching the end of "Flip This House"/"Flip That House" mania.
If you are a renter now's the time to start saving for a down payment. Get ready for the bargains.
The rise in housing sales has reversed.
Growing problems in the mortgage industry combined with bad weather in some parts of the country to fuel the steepest one-month decline in sales of existing homes in nearly two decades, the National Association of Realtors reported yesterday. Sales of previously owned homes in March fell 8.4 percent from February, the group reported. It was the largest one-month drop since sales plummeted 12.6 percent in January 1989, when the country was in a housing recession. It was also 11.3 percent below the number of units sold in March 2006.
Will the retirement of the baby boomers cause a glut of housing as retiring people sell their bigger houses to downsize into retirement homes? If so, has this housing market bubble burst catalyzed an early arrival of a housing bear market? I'm skeptical about this because population growth seems like it works against a long decline in housing prices.
The supply of unsold homes is high compared to the rate at which homes are getting sold.
Also, many buyers might be waiting to see if prices will soften as foreclosure activity jumps and the inventory of unsold homes rise. Under current sales rates and inventory levels, it would take 8.7 months to deplete the supply of homes for sale. A year ago, it would have only taken 4.7 months, according to the association
The US Federal Reserve's position is that inflation is a greater threat. So the Fed isn't inclined to lower interest rates to compensate for the housing downturn.
The number of US home sales has increased.
Sales of existing homes rose in February by the largest amount in nearly three years, but worsening troubles in subprime mortgages were viewed as a roadblock to a full-fledged rebound. The National Association of Realtors reported Friday that existing home sales climbed 3.9 percent last month, pushed up by a milder-than-normal winter that boosted sales in areas of the country such as the Northeast.
But prices are still dropping.
Even with the improvement in sales, the median price of a home kept falling, dropping to $212,800 in February, down 1.3 percent from a year earlier. It marked a record seventh straight decline in prices compared with the same month a year earlier.
The housing market is hard to measure by median sold home price. The houses getting sold might be shifting toward bigger or smaller size or more upscale or downscale neighborhoods. Foreclosures probably happen more now at lower income levels for cheaper houses. The sub-prime mortgage market until recently was pumping up the number of low income mortgage holders. Some of their foreclosed homes are coming on the market.
The effect of price drops might get cancelled out by more foreclosures and also by a reduction in credit available for borrowing. If so, prices have further to fall to complete this correction.
What I want to know: Will the retirement of the baby boomers create a glut of housing as they try to downsize into smaller housing? Or will population growth swamp that effect? Or will higher taxes to pay for retiree health benefits decrease the money available to buy housing?
A deep enough demand drop to bring on a recesssion?
Most economic forecasters in a new WSJ.com survey believe recent turmoil in the subprime mortgage market is likely to spread to the broader mortgage market and they expect a widely followed index of home prices to fall this year. But they still think the U.S. will avoid a recession and even a significant rise in unemployment.
Serious question: which sectors of the US economy can grow? Can any export industries grow enough to exert a substantial positive influence? At some point the US economy's growth is going to become export led. The US dollar can't stay strong against Asian currencies forever.
I think the majority are right that the subprime mortgage problem will influence the regular mortgage market. Some of those subprime buyers are buying from financially stronger sellers who are selling to buy another house but with a higher quality mortgage.
Of the 60 economists surveyed, 32 said it is either "very" or "somewhat" likely that the intense and speedy unraveling of the market for subprime mortgages -- home loans made to people with poor credit histories – will spill over to the rest of the mortgage market.
But 26 said that's not likely. Two didn't respond.
These economists put the odds of a recession in the next 12 months at only 25%.
They put the odds of recession in the next 12 months at about 25%, slightly less than former Federal Reserve Chairman Alan Greenspan's odds of about 33%.
But interest rates on shorter and longer term bonds suggest at least a 50:50 chance of a recession this year.
The bankruptcies of many sub-prime lenders and the general tightening of lending requirements by the remaining lenders means fewer people getting the money to buy and less demand for new and existing housing. Plus, less money will flow into "flip this house" remodelling. So the total demand for housing construction workers and materials will drop.
Rising mortgage default rates, especially on so-called sub-prime loans to financially weaker borrowers, are driving some subprime lenders into bankruptcy and causing others to tighten up standards for loans. As a result the housing downturn in the US now looks like it has not yet bottomed out and recession is not out of the question.
With mortgage rates rising and house prices falling, experts say as many as one and one-half million Americans could lose their homes. Rick Sharga, with RealtyTrac, a company that provides information on real estate trends, says foreclosures are at an all-time high – up 42 percent since 2005.
"It's almost a perfect storm if you are a homeowner who is in distress right now,” Sharga says. “Because you are seeing housing values go down in parts of the country, so the house might not be worth what you paid for it."
With the continued shift of manufacturing to China we can't very well expect manufacturing to counter-balance the worsening US housing sector. The housing bubble basically replace the internet bubble. What next can replace housing as the growth industry?
More than a dozen mortgage lender firms have gone bankrupt.
Susan Bies, a governor of the Federal Reserve, said in a speech Friday in Charlotte, N.C., that the troubles of sub-prime borrowers represented the "front end" of a wave the central bank was monitoring.
"This is not the end; this is the beginning," she said.
A surge in the number of homeowners defaulting on sub-prime mortgages has triggered the collapse of more than a dozen lenders in recent months.
Parallels are being drawn with the 1991 recession.
If this slump follows the same pattern as the last one, in 1991, it will persist for at least another year and may fuel a recession. New-home sales declined 45 percent from July 1989 to January 1991 and about 1 percent of all U.S. jobs, or 1.1 million, were lost in that recession, said Robert Kleinhenz, deputy chief economist of the California Association of Realtors.
This time around, new-home sales have declined 28 percent since September 2005, hitting a low in January, the last month for which data is available
The probability the U.S. economy will shrink for two quarters has risen to 50 percent, according to a model created when Greenspan ran the Board of Governors of the Federal Reserve System. The formula is based on differences in yields on Treasuries.
The economy has gone into recession six of the seven times since 1960 that short-term interest rates topped longer-term bond yields, as they do now.
Alan Greenspan puts the risk of recession down around 30%. But I figure the bond market knows better than Greenspan and the bond market disagrees.
The recovery from the last recession does not feel like it has been underway for all that long a time. Yet we might already be headed into another recession.
David Leonhardt of the New York Times reports that official figures on housing prices understate the extent of the recent housing price drops. An auction of houses in Naples Florida showed a 25% decline in housing prices in the last year.
The highest bid on one three-bedroom ranch house with a pool was $671,000. In 2005, the same house sold for $809,000. Another house, just steps from Naples Bay, received a high bid of $880,000, compared with $1.35 million a year earlier. On average, the bids suggested that the houses at the auction had lost about 25 percent of their value since 2005, according to Thomas Lawler, a real estate consultant who analyzed the results.
After tripling since 2000 the 25% decline still leaves Naples with very expensive housing.
Many sellers hold off from selling when prices decline. Auctions show what prices are at when sellers are committed to selling. Though perhaps auctions draw lower prices because they only bring in buyers who are on the market looking on the day of the sale.
The US government thinks Boston area prices rose by 1% in the last year. But industry sources put the price drop at anywhere from 10% to 20%.
In reality, homes across much of Florida, California and the Northeast are worth a lot less than they were a year ago. The auction in Naples may have exaggerated the downturn in the market there, but not by much. Tom Doyle, a Naples real estate agent, estimated that a typical house there, sold in the normal way, would go for about 20 percent less than it did the previous fall.
In the Boston area, prices have fallen about 10 to 15 percent since the middle of 2005, estimated Chobee Hoy, who owns a real estate brokerage firm in Brookline. Jerome J. Manning, who runs the Massachusetts-based auction company that conducted the Naples sale, told me he thought that values had dropped about 20 percent around Boston. (The government, meanwhile, says the average price rose 1 percent from last summer to this summer. But here’s all you need to know about how well the government tracks the Boston market: the index excludes any mortgage larger than $417,000.)
People pulled so much money out of their homes with mortgage refinancings that the average home owner in the Boston area has no more paid equity in their home than they did in 2000. What else has changed since 2000? The nation as a whole has sold huge amounts of government debt to foreigners as we've run increasingly larger trade deficits.
Are we looking at a asset bubble burst recession in 2007? I can think of one way for the US government to economize as tax revenues decline: Pull out of Iraq.
But it has three big weaknesses that end up making it much less useful than it could be. First, it excludes any mortgage over $417,000, because Fannie Mae and Freddie Mac — the two big mortgage buyers — don't own loans so large. Obviously, many mortgages on the coasts are bigger than that.
Second, the data for individual metropolitan areas includes not just house sales but also appraisals done for a mortgage refinancing. Appraisal values, as many people know, tend to be inflated.
Finally — and by necessity — the index includes only houses that have actually sold lately. In a falling market, with an enormous number of properties for sale, the houses that are selling tend to be more appealing than the average house.
What I wonder: When the baby boomers start retiring will there be a big bust in housing prices?
Paul L. Kasriel, Senior VP and Director of Economic Research at the Northern Trust Company, has written a great article arguing that the real estate bust has quite a ways to go to hit bottom: The "Carry" Trade in U.S. Housing Looks to be Over.
Former Fed Chairman Greenspan has recently commented to the effect that the worst of the housing recession is behind us. History is not on the side of this view. Chart 3 shows the peak-to-trough percentage declines in the GDP line item, real residential investment. In the prior nine housing cycles, the average peak-to-trough decline is 24.6%; the median is 22.6%. The peak-to-trough decline to date in the current housing recession is 7.9%. Unless this turns out to be a more moderate than usual housing recession, unlikely given the amount of speculation and leverage involved in the boom, then we have "miles to go" before we can put this housing recession "to sleep." Thus, don't look for the carry trade in housing to turn profitable any time soon.
Prices are down. Prices will probably fall further. But will the affordability of housing return to what it was, say, 10 years ago?
The National Association of Realtors reports a big drop in home sales for Sept