Mr. Market has decided to make housing much more affordable. Great news for prospective buyers who have good jobs.
Writes Capital Economics’ senior economist Paul Dales, “On the Case-Shiller measure, prices are now 33% below the 2006 peak and are back at a level last seen in the third quarter of 2002. This means that prices have now fallen by more than the 31% decline endured during the Great Depression.”
This is great news. Lower prices are better. Granted, these lower prices come with a multi-trillion dollar cost due to a corrupt ruling class. The scale of the intellectual and financial corruption that brought us to this point makes me worry about the future of the commonwealth. I see little sign our populace is going to make the corrupt ruling class act less corruptly. But at least there's an upside of surplus housing for those who can afford to make enough to buy one.
Time to buy yet? Depends on the market. Looking at home prices over the last couple of decades it seems like prices still have room to go down. The cities with the sharpest declines might be nearer their bottoms.
Coming soon to a town near you: cheaper housing!
Sales of previously owned homes fell sharply in February, setting the stage for steep discounting in the spring market.
The National Association of Realtors reported Monday that existing home sales dropped 9.6%, and the median price, $156,100, was the lowest since February 2002.
Why no parades and celebrations about more affordable housing? The goal of many Congresses, to make housing more affordable, is clearly happening. Politicians aren't taking credit for this happy turn of events. Why no calls to shut down no-longer-needed government-funded afforable housing programs? The market is making housing cheaper than it has been in 9 years. If we adjust for inflation the cost of housing is probably cheaper than it has been in 10 to 15 years. Great news for those who do not already own. Though with the trend in male incomes housing will have to drop much more to be affordable to the median.
But wait, don't rush out and buy too soon. More price drops are on the way. If Yale housing economist Robert Shiller is correct then stay strong and resist the temptation to buy.
Then Robert Shiller, the Yale economist and co-founder of the S&P/Case-Shiller home price indexes, dropped this bomb: "There's a substantial risk of home prices falling another 15%, 20% or 25%," he said.
Of course, in some parts of the country housing prices have already crashed. The buy-rent ratio in Las Vegas is ridiculously low. Though Las Vegas still has a high vacancy rate. Still more downward pressure on prices. The vacancy rates in Florida are highest. So prices still have a way to go down in Florida.
The luckiest person buys at the very bottom of the market right before hyperinflation takes off. Then your mortgage gets inflated away. If your salary can keep up to even part of the inflation rate you'll be able to pay down the mortgage with inflated dollars. Better make sure you can afford food though.
What about hyperinflaton? Well Dallas Fed president Richard Fisher says on our current course insolvency looms.
"If we continue down on the path on which the fiscal authorities put us, we will become insolvent, the question is when," Dallas Federal Reserve Bank President Richard Fisher said in a question and answer session after delivering a speech at the University of Frankfurt.
"The short-term negotiations are very important, I look at this as a tipping point."
Of course we know both political parties and the majority of the voters are so irresponsible that we aren't going to veer from our course. Fisher says our leaders will come to their senses and do the right things. But who is he kidding?
"In essence what we have done as a central bank is to monetize the entire US debt through the end of June," he lamented. "Had I been a voter last year, which I am this year, I would have joined [Kansas City Fed President Thomas] Hoenig and would have voted against what is known as QE2." It is "indisputable" that "there is plenty of fuel" for American businesses to invest and get people back to work, he said.
QE1 and QE2 will be followed by QE3 when the oil price spikes high enough to cause another recession. Going into the next recession the US government will not be able to afford to do counter-cyclical spending. Instead, as the already $1.6 trillion deficit soars to levels that thoroughly spook the bond market the US government will be forced to either print money (hence the prospect of hyperinflation to pay down mortgages) and/or to cut spending as tax revenues plunge. The next recession is going to be very ugly and the recession after that will be brutal.
Hyperinflation is the big puzzle for me. Will we have a deflationary or inflationary depression as Peak Oil strangles economic growth and forces a long term contraction?
A graph at this link shows housing prices bottomed sometime in early 2009 and recovered some since that time. Now housing prices have turned down again but they are still above the early 2009 low.
TRUCKEE, Calif. – Oct. 22, 2010 – Clear Capital (www.clearcapital.com), is issuing this special alert on a dramatic change observed in U.S. home prices.
“Clear Capital’s latest data shows even more pronounced price declines than our most recent HDI market report released two weeks ago,” said Dr. Alex Villacorta, senior statistician, Clear Capital. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”
A 5.9% drop in 2 months is a very sharp decline.
This special Clear Capital Home Data Index (HDI) alert shows that national home prices have declined 5.9% in just two months and are now at the same level as in mid April 2010, two weeks prior to the expiration of the recent federal homebuyer tax credit. This significant drop in prices, in advance of the typical winter housing market slowdowns, paints an ominous picture that will likely show up in other home data indices in the coming months.
Calculated Risk expects the CoreLogic and Case-Shiller housing price indexes to also show declines. This makes sense. Housing prices are still too high. Plenty more mortgages are going to default any potential buyers are afraid to buy and then see prices drop. The expectation of always rising housing prices is dead.
The economic conditions are ugly. A recent Gallup poll found the unemployment rate back above 10% for September and industrial production unexpectedly fell in September.
Historically, recoveries from recessions have been very strong with GDP growth running well above the historical average. This makes sense intuitively. The economy has to grow at an above-average rate some of the time to make up for periods of declining and stagnant economic activity. But the National Association of Business Economists projects only an average economic growth rate in 2011 with unemployment at 9.2% at the end of 2011.
The NABE Outlook panel cut its growth predictions for 2010 and 2011. Real gross domestic product (GDP) is now expected to advance 2.6 percent in 2010, down from the panel’s May prediction of 3.2 percent. While some of this reduction relates to historical data revisions, most of the markdown reflects worse-than-expected summer results and a dimmed outlook. Next year’s 2.6 percent gain shows the lack of a typical cyclical rebound and only matches the long-term growth trend previously expected by the NABE panel.
What I'd like to see: a measure of recessions by percentage unemployed per month above a baseline over some months. Translate the recession's total labor lost into cumulative percent of a year's total labor. So, for example, an extra 5% unemployed over 2 years is 10% of a year's labor. By that measure this recession would likely stand far beyond any other recession since WWII in terms of labor lost.
Even this projection might turn out to be excessively optimistic. We might be in the early stage of an extended period of low economic growth. Worse yet, oil price surges will at various points in the next 10 years choke off all economic growth. Once world oil production comes off its production plateau and enters permanent decline I expect a long period of economic contraction year after year.
I see lingering effects of the real estate bubble, the financial crisis, the coming oil production decline, globalization, and worsening demographic conditions in America (and other Western nations as well) all combining to make the next 10-20 years economically worse than the 1990s. The last 10 years will come to be seen as the transition period from the previous era of long term economic growth to a new era of austerity and declining living standards.
An article in Forbes about the real estate price double dip illustrates a recurring problem with housing market press coverage: Forbes covers housing prices from the vantage point of sellers, not from the vantage point of buyers.
U.S. housing values will fall 3% in the coming year, with the heaviest blows dealt to Las Vegas, Portland, Ore. and Seattle, Goldman predicts. With an eye toward high home-vacancy rates or rising mortgage delinquencies in these cities, the bankers projected values there would drop 4% to 12% in the coming 12 months.
Even if the darkest forecasts don't come true, the slippage so far this year is discouraging. Many homeowners had been hoping that home values would rise again this spring like they did in the spring of 2009 (they rose 8% between March 30 and mid-August, by Radar Logic's measure). That clearly hasn't happened during the most recent house-hunting season.
Why is a decline in prices a dark forecast? In most markets if prices fall this is seen as a boon for buyers. But in housing higher prices for sellers are treated as unalloyed good news and the flip side of higher prices for buyers is ignored.
If buyers pay more that does not mean they are getting more. Higher prices do not offer buyers any benefit. Higher prices mean that buyers have lower buying power. Higher prices mean lower living standards.
The obvious needs to be stated: the second round in housing price decreases now underway will make housing affordable to millions of people for whom home buying was previously not possible.
With so much effort put into attacking Goldman Sachs over profiting from the housing bubble you might think that Goldman Sachs actually caused the bubble. Goldman is being held responsible for AIG's foolish bet that bubble era mortgage securities were sound.
WASHINGTON — A congressional commission pressed Goldman Sachs executives Wednesday to spell out how much their company has earned from its exotic bets against the housing market, including $20 billion in wagers that helped force a $162 billion taxpayer bailout of the American International Group.
It takes two to tango. Goldman couldn't have bet on a collapse of the housing bubble without AIG there to bet that This Time Is Different. Of course, AIG was betting the same way that the US government was betting at the time. Goldman is being blamed for betting against the conventional wisdom of the day.
Many of Goldman's trades with AIG offset protection it wrote for clients on mortgage securities, but McClatchy reported Tuesday that Goldman wagered its own money on some swaps purchased from AIG.
But I have a question: Who decided to have a big housing bubble that would inevitably collapse whether or not Goldman bet against mortgage securities? Who created the conditions that made Goldman's bet possible? Was it Goldman? Nope, not really. So who did the dirty deed? Top inflators Fannie Mae and Freddie Mac led the charge. Fannie and Freddie are creations of Congress. Congress is part of the government.
Countrywide Finance, Washington Mutual, and a whole host of other retail banks (and Goldman is not a retail bank to any appreciable extent) did the field work of generating the mortgages to sell to Freddie and Fannie.
The US government promoted the housing bubble. George W. Bush and Congressional Democrats were united in their desires to see more poor NAMs take on more mortgages regardless of their credit worthiness. The Federal Reserve supplied the liquidity to make it happen.
So what is going on here? The guilty are trying to use Goldman Sachs as a fall guy. They are trying to shift attention away from their own culpability.
ING Direct, Australia's fifth largest lender, is preparing to sell loans that have no fixed term and no requirement to repay any capital along the way.
At current rates, the interest-only loans would cut repayments on a $300,000 mortgage by $5000 a year.
Repayments would be kept to a minimum, allowing borrowers to benefit from capital growth in their property.
This insanity is needed because prices are too high. Of course this will keep prices going up by making it easier for more to buy. That'll make housing too expensive even with no principal paid on the mortgages. So then it'll be time for another innovation.
"People are needlessly being denied the chance to buy a property while prices spiral rapidly out of their reach" ING Direct CEO Don Koch said.
Have they tried teaser rates yet? Are they going to this no principal payment idea because they've already copied all the innovations that helped make the US housing bubble such a smashing success?
ING Direct is bringing out this type of mortgage at a time when Australia is still in a housing price bubble.
THE average Sydney house is more expensive than its equivalents in London and New York, a comparison of real estate in the world's biggest cities has found.
Residex figures show the median cost of a Sydney house is $651,500 - almost $190,000 ahead of London, where the median price for a two- to three-bedroom house is $462,000.
A two-bedroom, free-standing house in the New York City metropolitan area (not including Manhattan) is about $180,000 less.
But isn't Sydney a nicer place to live than London or NYC? I've always wanted to visit Australia or even live there for a while.
I think that the moral thing for most borrowers to do, under present circumstances, is to default on loans when it is in their financial interest to do so.
Much of my thinking on economic and social issues comes back to T.S. Elliot’s proposition, “It is impossible to design a system so perfect that no one needs to be good.” Once upon a time, I chose to disagree. I thought it was the challenge of our day, and the grand project of modern economics, to build a system in which people pursuing their own self-interest would provide all social goods, in which the benevolent invisible hand would rule all and we’d have no need to rely upon ideas as shifty and manipulable as “virtue”. I have done a full 180 on this question. Economic self-interest and formal legal frameworks are simply insufficient to regulate a decent society. Elliot was right.
But it’s crucial to remember that “what is moral” is something we collectively decide, and not without constraints. A social order that routinely demands heroic sacrifice of people in the name of virtue will fail. Clever hypocrites will be rewarded while naive saints pay, and the overall tenor of society will not be virtuous. The most we can demand of fuzzy constructs like morality and social norms is what Arnold Kling calls “soft rule utilitarianism”, under which people accept modest personal costs on the theory that if everybody does so, we’ll all better off. But emphasis on the word “modest”, and expectations of reciprocity. Economic and legal scaffolding has to sit beneath informal social constraints so that in general it makes sense to be good. It is like the relationship between flesh and bone: You could not build anything as beautiful as a smile out of bone, but the smile will not survive if the jaw beneath is fractured and misshapen. We regulate the “bone structure” of our society explicitly via legal arrangements, and more subtly, via social and reputational incentives. There’s a kind of hygiene we have to attend to, in order to ensure that doing well and being good are not terribly inconsistent. Over the past few decades we’ve failed to attend to that hygiene, in large part I think because we let simplistic economic ideas persuade us that we didn’t have to, and that the pursuit of wealth yields virtue automatically and dirty is the new clean.
Whatever the reason, we find ourselves disillusioned. People in the financial industry earned huge sums making loans that shouldn’t have been made, offering “affordability products”, Orwellian slang for means of selling homes at unreasonable prices that buyers could not afford. They failed to perform the core social duty of creditors, which is to make prudent judgments about whether loans are likely to be in the mutual interest of borrower and lender over the full term of the debt. Once originators could resell loans, once the financial industry adopted practices of paying cash commissions and bonuses at the time of origination, once we had severed the nexus between the self-interest of the people making lending decisions and the long-term interest of borrowers, it was inevitable that bad loans would be made. So they were. Now that those bad loans are doing what bad loans do, lenders have suddenly found religion, and argue that the moral fabric of our society would be riven if homeowners behaved like, um, bankers. I think that under the circumstances, quite the opposite is true.
Read the whole thing.
I can see another and quite compelling reason for people underwater to walk away from their mortgages: The losses will teach banks not to lend with low down payments and under conditions where housing affordability is low. The US government is determined to shield banks from the full costs of their mistakes. This just creates the conditions for yet another round of folly. Bigger losses by the banks will teach them lessons that they otherwise won't learn.
One can see from this housing price index and another housing price index along with a graph of price-to-rent ratios when a housing bubble is happening. Banks which take taxpayer-guaranteed deposits and gamble with them in housing bubbles need punishment. Strategic default is punishment that'll teach them not to do the same next time - at least for several years anyway.
BTW, big commercial real estate investment corps use strategic default as a business strategy.
Mark David White, a mortgage broker in the Chicago area, has used a number of housing price histories to look at how far from trend the recent real estate bubble ran up housing prices. He estimates that depending on the source of pricing data and the length of historical time used that US national housing prices still have between 18% and 44% to fall from today's prices.
The total projected fall from Federal Housing Finance Agency (FHFA) data shows a peak-to-trend fall of 27%. Values on this index have fallen 11% from the high. The index predicts prices will fall an additional 18% from their current levels (please see chart above “Figure 2: Monthly House Price Index for USA”).
The FHFA prediction of a total fall of 27% is far less than the total fall of between 49% and 60% predicted by Case-Shiller. Click here and here to see recent posts with Case-Shiller data on either 22 years or 118 years of prices.
Based upon the three data sets reviewed, we can estimate a total fall of between 27% to 60% from the bubble top to the long-term trend. After averaging the three indexes, we may estimate a total fall of 45% from the bubble high.
Looking ahead from today, property values will fall a total of between 18% to 44%. The average of the three data sets says we still have 27% to fall from current levels.
Why does this matter? I can see a few reasons:
We will pay more in taxes. We will spend a longer time unemployed or working for reduced wages. Welcome to what some analysts call the New Normal.
Update: Charles Gasparino, author of a new book The Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System, says the political attempt to treat all people as worthy of owning a home caused this disaster.
RCM: Who's at the top of your list of people who should be held accountable for the unraveling of the global financial system?
Gasparino: The politically correct answer would list a long line of risk-taking CEOs starting with Stan O'Neal at Merrill, Sandy Weill and Chuck Prince at Citi, Jimmy Cayne at Bear, and of course former Lehman CEO Dick Fuld, as well as various senior traders at these firms. They're all in my book with their contributions to the demise of the financial system.
But what you will also find in my book, which I guarantee is absent from most of the others, is the root cause of the risk taking, which I believe begins and ends with the policy makers. The various heads of HUD, like Henry Cisneros, Andrew Cuomo and those in the Bush Administration who believed owning a home was a right, rather than something that should be earned, led to the disaster at Fannie Mae and Freddie Mac, which spread its guarantees to subprime loans, a place it traditionally stayed away from.
You also can't excuse Alan Greenspan for handing out free money to Wall Street every time the big firms screwed up over the past thirty years. It gave them incentive to double down on their risky bets until of course they double-downed so much the system blew up.
Gasparino thinks the government's policy has caused the crisis to abate only temporarily. I agree. The Peak Oil probably contributed even more. We are going to have a second round financial panic, more financial institution failures, and a second recession.
Edward Pinto, chief credit officer at Fannie Mae in the 1980s, says the Community Reinvestment Act's requirements for home lending to the poor and lower performing ethnic groups made a big contribution to our on-going financial disaster.
Though the feds, again, haven’t collected figures for CRA loans’ performance as a whole, we do have statistics from a few lenders that are troubling indeed. In Cleveland, Third Federal Savings and Loan has a 35 percent delinquency rate on its CRA-mandated “Home Today” loans, versus a 2 percent delinquency rate on its non–Home Today portfolio. Chicago’s Shorebank—the nation’s first community development bank, with largely CRA-related loans on its books—has a 19 percent delinquency and nonaccrual rate for its portfolio of first-mortgage loans for single-family residences. And Bank of America said in 2008 that while its CRA loans constituted 7 percent of its owned residential-mortgage portfolio, they represented 29 percent of that portfolio’s net losses.
Whatever the precise magnitude of the CRA’s role, there is no question that as the government pursued affordable-housing goals—with the CRA providing approximately half of Fannie’s and Freddie’s affordable-housing purchases—trillions of dollars in high-risk lending flooded the real-estate market, with disastrous consequences. Over the last 20 years, the percentage of conventional home-purchase mortgages made with the borrower putting 5 percent or less down more than tripled, from 8 percent in 1990 to 29 percent in 2007. Adding to the default risk: of these loans with 5 percent or less down, the average down payment declined from 5 percent to 3 percent of the loan’s value.
The US government is keeping itself intentionally ignorant about the extent to which CRA and related policies contributed to the massive mortgage losses and home foreclosures.
Taxpayers deserve to know why not one regulator had the common sense to track the performance of CRA loans. They also deserve to know why the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and other regulators appear to have no idea how trillions of dollars in CRA loans are performing now. But above all, they deserve to know that the damage done by the CRA won’t happen again. Incredibly, the House Financial Services Committee is considering legislation that would broaden the scope of the CRA.
Never mind the disaster. The US government is trying to reflate housing market with reckless issuance of loan guarantees by the Federal Housing Administration for buyers with little money to put down.
The government is giving as many people as it possibly can the chance to buy a house or, if they are in financial difficulty, refinance it. The F.H.A. is insuring about 6,000 loans a day, four times the amount in 2006. Its portfolio is growing so fast that even F.H.A. backers express amazement.
Having learned nothing from the disaster Barney Frank is keen on wasting taxpayer money to slow the decline in housing prices. So he wants more suckers to sacrifice themselves in order to bail out banks and other imprudent people.
Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.
“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”
We can go into decline. The nation does not have to keep growing. If the government tries hard enough it can make sure that the decline of the United States becomes a great tragedy told for generations to come in the history books.
Hopes of a recovery in consumer spending seem unrealistic to me. People who owe more than their houses are worth aren't going to be eager to do big spending.
More than 15.2 million U.S. mortgages, or 32.2 percent of all mortgaged properties, were in negative equity position as of June 30, 2009 according to newly released data from First American CoreLogic. As of June 2009, there were an additional 2.5 million mortgaged properties that were approaching negative equity. Negative equity and near negative equity mortgages combined account for nearly 38 percent of all residential properties with a mortgage nationwide.
What I want to know: How many banks will fail because of these numbers?
The Mortgage Bankers Association says 9.24% of all loans are delinquent. Since the MBA expects foreclosures to peak at the end of 2010 (yes, we are over a year from the peak) and since it takes more months for those houses to go on the market we are looking at a big supply of housing on the market in 2011. Keep that in mind before buying.
The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from the first quarter of 2009, and up 283 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.
These numbers will grow worse as more people with negative equity decide to walk away from their mortgages.
In Florida 12% of mortgages are in the foreclosure process and over 10% more are delinquent. You can buy a house cheap in Florida. But just wait and you can get one even cheaper.
The bright side is home prices are likely to keep falling for a couple more years at least, then do nothing much of anything for another 5-10 years. That means if you walk away and suffer the credit rating penalty now, it may not matter by the time you are ready to buy another house 3-5 years from now. Moreover, you would then have a clean slate on credit, and hopefully a saved up down payment as well.
However, if you try and wait this out, yet fail by going bankrupt in say two years, you will have made matters that much worse in terms of opportunity cost in improving your credit, and in saving up money for a down payment, while worrying every step of the way about the axe that will fall.
In a nutshell: a bad credit rating due to a foreclosure now won't matter for 5 years since you shouldn't buy a house for 5 years anyway.
Prices have now declined back within the range seen during the period from the 1970s through the 1990s. This is why the eternal optimists are proclaiming a housing bottom. These people don’t seem to understand the concept of averages. An average is created by prices being above average for a period of time and then below average for a period of time. The current downturn will over correct to the downside. The most respected housing expert on the planet, Robert Shiller, recently gave his opinion on the future of our housing market:
“Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline. After the bursting of the Japanese housing bubble in 1991, land prices in Japan’s major cities fell every single year for 15 consecutive years. Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.”
Americans have built up a lot more debt than they had in 1991. So recovery looks like it should be slow when it comes.
Quinn says Americans are far too indebted and blames the banks and the Federal Reserve.
When this debt binge began in 1982, the profits of financial companies accounted for 7% of all U.S. company profits. At the peak in 2006, they accounted for more than 30% of all U.S. company profits. This is why the money managers own the yachts, not the customers. The banking industry, backed by its sugar daddy the Federal Reserve, has enslaved the most of America in their web of debt.
I see the lesson here that easy credit is a bad idea. A substantial fraction of the population can no more handle easy credit than they can handle heroin or cocaine. We were better off when consumer debt was a lot harder to get because people are vulnerable to vices including vice of spend now to pay later.
Robert L. Rodriguez, Chief Executive Officer of money managers First Pacific Advisors, says the federal government's subsidization of consumer lending amounts to giving heroin to a heroin addict but people are going to increase their savings rates in spite of government intervention in credit markets. Could he be right on the consumer response?
Misguided measures to re-stimulate consumer borrowing, beyond just getting the system functioning, are highly questionable. The combined collapses of stocks and housing prices have pummeled the U.S. household’s net worth by an estimated $12.7 trillion, according to the Federal Reserve, while ISI International estimates it to be in the area of $14 trillion. This net worth destruction is the most severe since the Great Depression. We have a news flash for the government, creating new credit programs for a consumer who was spending almost $1.1 trillion more than they were earning in spendable income, according to MacroMaven’s estimate, will be a non-starter. More leverage is not what they need. Encouraging the consumer to take on more debt is like trying to help a recovering heroin addict lessen his pain by providing him with more heroin.
A dramatic rise in the U.S. personal savings rate will be required to begin the mending process of the consumer’s balance sheet. I expect the U.S. personal savings rate will rise from 2% to 8% this year and remain at an elevated level for the foreseeable future. This process should increase savings by approximately $650 billion annually. An increase of this magnitude, in such a brief period, is unprecedented, other than during WW2, when it rose from 12% to 24% between 1941 and 1942. Assuming some earnings on this incremental savings and a partial recovery in the stock and real-estate markets, it will likely take ten years for the consumer’s net worth to return to its pre-crisis level.
I would like to know why this guy thinks our savings rate will go that high. If it does go that high how will people invest their savings?
Anyone anticipating a consumer-led recovery is counting on consumers who have been whacked in the head with a 2 by 4 to stagger to their feet and say, thank you sir may I have another? Even with interest rates at extremely low levels, household debt service is 14% of disposable income, versus the 30 year average of 12.1%. As interest rates rise, this burden will break the consumer’s back. The only way to avoid this fate is a substantial pay down of debt.
I would also add that they are vulnerable to Peak Oil. Plus, America's demographics are deteriorating with an aging population and a large and growing non-Asian minority (or NAM) population that performs poorly in schools and in the work place. The American labor force's earnings power is weakening.
Reuters is running a funny headline: U.S. mortgage rate rise threatens housing recovery. What housing recovery? Blogger Calculated Risk points to the ratio of existing home sales to new home sales as a measure of the distress in the housing market. The ratio is still more than double its historical trend. Also, David Sokol, an executive at Berkshire Hathaway, sees no sign of "green shoots" in the housing market. He sees the same phenomenon as I've recently posted: the supply of unsold housing being held by banks is much larger than it looks.
However, there's a real important story behind this mortgage rate rise headline. 30 year mortgage rates in the US went from 4.875% last week to as high as 5.5% this week. That's certainly going to cut demand for housing. Plus, still rising unemployment is causing rising defaults on even higher rated mortgages.
The Federal Reserve might increase buying of US Treasury bonds in order to lower interest rates on longer term securities. But obviously the market thinks long term interest rates should be higher due to the threat of future inflation. Treasury interest rates have gone up substantially this year.
The 10-year Treasury note started this year yielding 2.2 percent, a rate that reflected an economy flat on its back. Today, investors who buy 10-year Treasuries can get 3.6 percent. In just the last two weeks, rates on those notes climbed by one-half of a percentage point.
Now look at the Treasury's 30-year bond, which offered 2.7 percent to investors at the beginning of the year. Interest rates on those bonds have climbed to nearly 4.5 percent, a very big move.
How many hundreds of billions of dollars will the Fed be willing to spend buying Treasuries in order to knock long term rates back down again? Will the spike in mortgage rates last long enough to speed the decline in housing prices? There's a big war going on out there in the debt markets. How's it going to turn out?
The difference in yields between 10 and 2 year Treasuries is the biggest on record. The Fed can hold down short term rates. But the market is putting up a big fight at longer maturity dates. I think the size of long term bond market is far too large for the Fed to lower rates in it. Longer term rates will only come down if the economy worsens.
Only 30 percent of foreclosed homes are currently on the market, meaning that some 500,000 sit vacant across the country, part of a vast “phantom inventory” that the market has yet to grapple with.
“There’s a frenzy for bank properties right now, and as a consumer, I’m likely to say, ‘Wow, that’s got to be an indicator of the bottom,’ ” says Brett Barry, a real estate agent at HomeSmart in Phoenix. “But a lot of us expect a tsunami of foreclosures to come on top in June, July, or August, because at some point the banks are going to release this stuff.”
They are holding back partly because they are too busy to process the paperwork. But the Obama Administration has also encouraged banks to hold back in order to help housing prices stabilize. I think they are just delaying the decline.
Whether the housing market recovers depends in large part on when the unemployment numbers turn around. Martin Feldstein, formerly Ronald Reagan's chief economist, argues that Obama's fiscal stimulus will only temporarily lift the economy. Rising unemployment will likely drive many more mortgages into default.
But the key thing to bear in mind is that the stimulus effect is a one-time rise in the level of activity, not an ongoing change in the rate of growth. While the one-time increase will appear in official statistics as a temporary rise in the growth rate, there is nothing to make that higher growth rate continue in the following quarters. So, by the end of the year, we will see a slightly improved level of GDP, but the rate of GDP growth is likely to return to negative territory.
The positive effect of the stimulus package is simply not large enough to offset the negative impact of dramatically lower household wealth, declines in residential construction, a dysfunctional banking system that does not increase credit creation, and the downward spiral of house prices. The Obama administration has developed policies to counter these negative effects, but, in my judgment, they are not adequate to turn the economy around and produce a sustained recovery.
Major lenders temporarily halted foreclosures late last year and early this year in anticipation of President Obama's housing rescue plan. In addition, California enacted a new law this fall that slowed down foreclosures. That means the foreclosure rate was artificially depressed over the past several months. The moratoriums have now expired.
The first group is made up of people who cannot afford their mortgages and have fallen behind on their monthly payments. Many took out loans they were never going to be able to afford, while others have since lost their jobs. About three million households — and rising — fall into this category. Without help, they will lose their homes.
The second group is far larger. It is made up of the more than 10 million households that can afford their monthly payments but whose houses are worth less than what is owed on their mortgages. In real estate parlance, they are underwater. If they want to stay in their homes, they will have no trouble doing so. But some may choose to walk away voluntarily, rather than continue to make payments on an investment that may never pay off.
Scratch beneath the details of any housing bailout proposal, and the fundamental issue is whether it tries to help the second group or just the first.
My initial reaction to reading the above is that of course the first group need to give up their homes and move down into smaller cheaper accommodations. Whereas we should want the second group who can afford to pay their mortgages to stay put and keep paying. But I do not think like a liberal Democrat. Obama wants people to stay in houses that they should never have bought in the first place.
Mr. Obama has evidently decided to focus on the first group, based on the previews of his speech that aides have offered. In coming weeks, his administration will begin spending $50 billion to entice banks to reduce the monthly payments of people who otherwise couldn’t afford to stay in their houses.
So basically this amounts to subsidized housing in the suburbs. Cheat on your mortgage appication, get way in over your head, and his sainthood will bail you out at the expense of net taxpayers.
Notice all the news stories that report lower housing prices as a bad development? Here's some sort of financial industry figure complaining that the prices of housing keeps dropping. Aren't lower prices supposed to be good? Bright spots are low prices, not high ones.
Month-over-month home prices fell in all 20 markets during January and are now at late 2003 levels.
"There are very few bright spots that one can see in the data," said David Blitzer, chairman of the index committee at Standard and Poor's. "Most of the nation appears to remain on a downward path, with all of the 20 metro areas reporting annual declines, and nine of the MSAs (metropolitan statistical areas) falling more than 20% in the last year."
All told, prices have plunged 29.1% nationally since they peaked during the second quarter of 2006, according to Case-Shiller.
This all sounds like good news to me. The forecast is for even bigger bargains.
Brett Arends of the Wall Street Journal says housing prices are still too high to be bargains.
Even today, prices overall have only reverted to levels seen in late 2003. Yet by that stage the bubble was already well inflated. You would expect a crash of this scale to retrace its steps much further. To find pre-bubble prices you have to go back to about 2000 – when values overall were about a third lower than they are today.
It's true that mortgage rates, now at 4.5% to 5%, are currently very low. But relying just on that is far too simplistic. Rates were also low from 2003 through 2005 – as many pointed out, disastrously, at the time.
So we are waiting for the real bargains.
NEW YORK (CNNMoney.com) -- The Obama administration is looking at subsidizing the mortgage payments of struggling borrowers before they default, according to sources familiar with the discussions.
This plan subsidizes imprudent borrowers and imprudent lenders.
One of the goals is to prevent housing prices from declining. But doing that just slows the correction process.
Assisting borrowers before they default would help stop the wave of foreclosures, which are estimated to top two million this year. That, in turn, will help stabilize home prices.
"This will help put a floor on home values," said one person familiar with the negotiations.
When prices have been inflated to ridiculous bubble levels then prices must come back down to Earth. Trying to prevent the complete deflation of the housing bubble just delays the inevitable.
Also, propping up debtors is a bad idea when the biggest financial problem we face is too much private sector debt. We need to deleverage as rapidly as possible. Recovery isn't possible without deleveraging.
Declining home prices are good news. Lower prices are better than higher prices. Lower prices make goods and services more affordable and raise living standards. You do not hear that in the news media coverage of the financial crisis. But first time home buyers are finding much more affordable housing than just 2 or 3 years ago.
The housing bust is creating a new group of winners: first-time home buyers. People who sat on the sidelines -- often watching wistfully as their friends became homeowners -- are suddenly in a position to grab some great deals. Indeed, first-time home buyers made up 41% of all buyers at the end of 2008, up from 36% in 2006, according to a recent survey from the National Association of Realtors.
The new buyers are being lured in by home prices that are down about 25% from their peak levels in mid-2006, according to the S&P/Case-Schiller Index. In some markets, prices have dropped even further -- slumping around 40% in Phoenix, Miami and Las Vegas. Lower mortgage rates have also helped make real estate more affordable, and as houses languish on the market longer, more homeowners are willing to negotiate. With Congress considering plans to sweeten a tax credit for first-time home buyers, the picture could get even brighter.
Incentives for first-time home buyers are a bad idea. We are still trying to get over one housing bubble. This is not the time to try to start up a new bubble.
High prices make the large number of existing owners feel good. That biases politicians toward favoring high prices. But low prices are good, not high prices.
What I want to know: have lot prices fallen more or less than house prices? Construction costs have fallen too. So in each market have housing prices dropped below lot cost plus construction cost?
The wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.
The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.
With unemployment rising the loan-default rate will probably rise too. This particular bond isn't even on the principle mortgages. It is on secondary mortgages and the decline of home values makes the sale of many foreclosed houses worth less than their primary mortgages, let alone their secondaries.
The Standard & Poor’s group, Market, Credit and Risk Strategies, which operates independently from the company’s credit ratings business, has been studying troubled securities for investors and banks. The bond that is trading at 38 cents provides a vivid illustration of the dilemma in valuing these assets.
The bond is backed by 9,000 second mortgages used by borrowers who put down little or no money to buy homes. Nearly a quarter of the loans are delinquent, and losses on defaulted mortgages are averaging 40 percent. The security once had a top rating, triple-A.
It amazes me that credit ratings agencies ever triple-A rated secondary mortgages, let alone doing this at the top of a housing bubble when housing price-to-rent and price-to-income ratios were so far out of whack from historical averages. Spain, Ireland, Canada, and Britain were even more out of whack. These sorts of charts ought to be used when rating securities. Do S&P, Fitch, and Moody's use these sorts of ratios when calculating bond ratings?
S&P is making it harder for the banks to continue to carry mortgage-backed securities (MBS) on their books at unrealistic valuations. But closing the barn door after the horses have fled doesn't help as much as doing it before they gallop away.
There’s a saying about death by a thousand paper cuts, and that’s clearly been taking place for most of the private mortgage-backed securities market over the course of the past twelve months. On Monday, Standard & Poor’s Ratings Services lowered the boom — again — on thousands of Alt-A and subprime RMBS, moving them all to a ‘D’ rating, as well as cutting hundreds of formerly AAA-rated securities multiple notches from their previous perch atop the ratings heap. The agency also began cutting ratings on prime deals, as well.
This cuts the incentive of banks to hold onto these MBSs as the prices implied by their ratings are now closer to their market prices.
Which ratings agency has moved most quickly to get realistic about the ratings of MBSs? Is one of the ratings agencies less bad?
Update: The US homeownership rate has declined back down to the year 2000 level. The Rove-Bush plan for increased minority housing ownership has totally failed. In its wake lower income minorities are burdened with housing costs they can't afford.
The AP's analysis reveals the enormous scope of the U.S. housing market bust and how unevenly the burdens are spread, both geographically and demographically. And the situation is worsening — a record 10 percent of U.S. homeowners with a mortgage are at least one payment behind or were in foreclosure as of last fall, compared with 7.5 percent a year earlier and just under 6 percent in 2006.
The burden is clearly more arduous among minority households, the AP analysis found. Just under a third of Hispanic homeowners spend at least 38 percent of their income on housing expenses, compared with about a quarter of Asian and black households and nearly 16 percent of white households.
Do-gooders too often do bad.
About $6.1 trillion of value has been lost since the housing market peaked in the second quarter of 2006 and last year’s decline was almost triple the $1.3 trillion lost in 2007, Zillow said.
How many trillions more to the bottom? How many more banks fail along the way? How many will we bail out via the money we pay in taxes? We can't tell because as Mish Shedlock points out banks are hiding lots of assets off-balance sheet.
Although it is notoriously difficult to quantify the state of the rental market, rents fell in almost every sector of the Manhattan market last year, according to the Real Estate Group, a New York brokerage. The steepest drop was in one-bedrooms, down 5.7 percent in buildings with doormen and 6.53 percent in buildings without. The only category that rose: rents for two-bedroom apartments in doorman buildings, up just a bit, by 0.61 percent. But these numbers, like most available data, represent asking rents rather than the final price. Anecdotal evidence suggests that some people are negotiating rents as much as 20 percent lower than the original prices asked by landlords. These figures also leave out incentives, like a month of free rent or a landlord’s paying the broker fee, which can add up to real savings.
Still not affordable for the vast bulk of the US population.
Ms. Hsiao, 23, and her roommate, David Liu, 24, settled on a two-bedroom two-bathroom apartment in Midtown on the West Side. It was listed for $4,200. They offered $3,650 a month and were accepted. After one month free and a $2,000 signing bonus, the total came to $3,215 monthly, and they did not have to pay the broker’s fee.
The article also mentions a 3 bedroom apartment in Midtown for $7,400. That amount of money would pay the monthly mortgage on a house for over $1 million borrowed.
The average 30-year fixed jumbo loan rate was 7.32 percent on Dec. 22, compared with 5.38 percent for a conforming loan, according to BanxQuote of White Plains, New York.
The difference between the two averaged 2.13 percentage points in December, 10 times the spread from 2000 to 2006 and above last month’s 1.95 percentage points that was the highest on record. If current rates reflected the historical difference of 0.2 percentage points, jumbo borrowers with an $800,000 mortgage would save $913 a month.
This provides a measure of how much Freddie Mac and Fannie Mae lower the cost of mortgages. Freddie and Fannie will only buy mortgages worth $417,000 or less (actually, there are exceptions that range as high as $729,750 depending on local housing costs). That higher cost for mortgages on more expensive houses is causing them to fall more in price than houses that qualify for cheaper mortgages. Note, however, that the more expensive market of California saw much more housing price inflation than most of the US. So these housing price declines are bringing houses down to a less distorted level.
The elite expert response continues to be that we should reflate the housing bubble.
“The real elephant in the room is falling house prices,” Glenn Hubbard, former chairman of the Council of Economic Advisers under President George W. Bush who is now dean of the Columbia University Graduate Business School, said in an interview Dec. 22. “We can fix this by lowering mortgage interest rates.”
Any dumb idea worth doing once is worth doing twice? Why is that? Let me bore you with repetition: The housing price-to-rent ratio and price-to-income ratio have to return to historical trends.
Some people took exception to a recent post about how alt-A and option ARM mortgages will be the next financial disaster. The argument in the comments of that post is that interest rates are so low that resetting of interest rates won't make the monthly payments higher but rather lower. But a lot of option ARM mortgage holders were not even paying enough per month to cover interest in the first place.
Known as an option ARM — and named “Pick-A-Pay” by World Savings — it is now seen by an array of housing analysts and regulators as the Typhoid Mary of the mortgage industry.
Pick-A-Pay allowed homeowners to make monthly mortgage payments that were so small they did not cover their interest charges. That meant the total principal owed would actually grow over time, not shrink as is normally the case.
Now held by an estimated two million homeowners, the option adjustable rate mortgage will be at the forefront of a further wave of homeowner distress that could greatly delay or even derail an economic recovery, mortgage industry analysts say.
Option ARM is yet another financial weapon of mass destruction.
“This product is the most destructive financial weapon ever deployed against the American middle class,” said William J. Purdy III, a housing lawyer in California who is representing elderly World Savings customers struggling to repay their loans. “People who have this loan are now trapped, and they can’t get another loan.”
People become less willing to make their suddenly higher payments as the price of their house drops and they find themselves financially under water - owing more than their house is worth. In some cases they never would have been able to make the higher monthly payments once the mortgage readjusted to cover interest costs. Some were probably counting on flipping and moving on to another home at that point. But in the game of housing musical chairs when the game stops it is those who are sitting in chairs who lose. These mortgage holders and their banks and the American taxpayers all became losers.
Once upon a time in a distant era regulators didn't think federally insured financial institutions should offer such risky loans.
When Reagan era deregulation arrived, the Sandlers and two other competitors were able to market option ARMs for the first time in 1981. Before that, lawmakers balked at the loan because of its potential peril to borrowers.
World Savings initially attracted borrowers whose incomes fluctuated, like professionals with big year-end bonuses. In the recent housing boom, when World Savings started calling the loan Pick-A-Pay, they began marketing it to a much broader audience, including people with financial troubles, like deeply indebted blue-collar workers.
The risky loans didn't just pull in people who had no business buying houses. These loans so boosted demand for housing that they had the macroeconomic effect of driving up the prices of houses. The rising prices pulled in more fools and so when the bubble inevitably popped it caused the deep long recession and big costs for the net taxpayers.
While lots of sub-prime mortgages have failed after their mortgages reset to higher interest rates far above what their holders could ever afford most of the Alt-A and option ARM resets are still coming up and will bring a second big wave of mortgage defaults.
Just look at a projection from the investment bank of Credit Suisse: there are the billions of dollars in sub-prime mortgages that reset last year and this year. But what hasn't hit yet are Alt-A and option ARM resets, when homeowners will pay higher interest rates in the next three years. We're at the beginning of a second wave.
"How big is the potential damage from the Alt As compared to what we just saw in the sub-primes?" Pelley asks.
"Well, the sub-prime is, was approaching $1 trillion, the Alt-A is about $1 trillion. And then you have option ARMs on top of that. That's probably another $500 billion to $600 billion on top of that," Tilson says.
Asked how many of these option ARMs he imagines are going to fail, Tilson says, "Well north of 50 percent. My gut would be 70 percent of these option ARMs will default."
Politicians in Washington DC are trying to find a way to put Humpty Dumpty back together again. Basically, they want to reflate the bubble. But lots of people who were granted mortgages never should have gotten mortgages in the first place. Trying to renegotiate their mortgages is pointless and just delays the inevitable. The housing price-to-rent ratio and price-to-income ratio have to return to historical trends.
Innovest said that credit-card charge-offs could hit $18.6 billion in the first quarter of next year, and $96 billion by the end of the year, forcing banks to search for other ways to generate revenue from customers.
Delinquencies tend to follow unemployment, which were 554,000 first-time claims in the week ended Dec. 13, near a 26- year high reached the week before. Net worth for U.S. households and nonprofit groups fell $2.81 trillion from July to September, the most since tracking began in 1952. That means consumers are more strapped for cash, contributing to a slowdown in spending, which accounts for two-thirds of the economy.
Speculative grade bonds might default at a higher rate than in 1933. Of course the market could be wrong. After all, it was wrong to buy so many of these bonds in the first place.
Dec. 3 (Bloomberg) -- Yields on speculative-grade bonds imply a U.S. default rate of 21 percent, higher than the record set during the Great Depression in 1933, according to John Lonski, chief economist at Moody’s Investors Service.
The extra yield investors demand to own U.S. high-yield bonds was 19.19 percentage points on Dec. 1, according to Moody’s. Assuming a 20 percent recovery rate, the spread implies a default rate of 20.9 percent, Lonski said yesterday in a market commentary. That compares with a rate of 11 percent in January 2001, 12.1 percent in June 1991 and 15.4 percent in 1933.
There's the default rate on junk bonds. But there's also the percentage of all bonds that junk bonds represent. Anyone have an idea where we stand on that score?
According to Deutsche Bank, current spreads imply a 50 per cent default rate for high-yield credits and an "inconceivable" default rate for investment-grade companies: government intervention to prevent defaults on such a scale, they believe, would be inevitable.
The high interest rates charged to higher quality companies are most interesting. Do these higher rates accurately forecast future default rates?
It is by far the worst I've seen in the 35 years I've been in business. It's just gone right off the cliff. For retailers, I don't think there's going to be any Christmas to speak of. Some of our high-end retailers reported sales down 25%.
That big sales drop means lots of manufacturers and retailers will go bankrupt in 2009. How many? BorgWarner CEO Timothy Manganello is planning for a long recession.
We're preparing for nothing good until mid-2010. If things get uglier, it's possible it won't improve by then.
Junk-bond yields are at unprecedented high levels. As rattled investors dump everything but U.S. Treasury bonds, the average yield on below-investment-grade debt is over 20% for the first time ever.
So far massive US government intervention in financial markets hasn't stopped the contraction. Will the US government just keep upping the ante? By that point will inflation break out in a big way?
Some people are still deluded that we can put the Humpty Dumpty back together again. Harvard economist Edward Glaeser says that lending subsidies can't restore housing prices back to their distorted highs.
THE GREAT housing cycle of the aughts - the 73 percent increase in housing prices between 2001 and 2006 and the 22 percent decline since then - was built on three illusions. Too many homebuyers thought housing prices would go up forever. Too many investors thought they could lend without risk to subprime borrowers. Too many policy makers thought the magic of subsidized credit could permanently achieve a vote-winning trifecta of bigger homes, rising prices, and more homeownership.
The cruel reality of the market has shattered the first two illusions, but somehow the misconception persists that more lending subsidies can take us back to the housing markets of 2006.
Did regulatory pressure and other forms of government intervention into the mortgage market (e.g. government sponsored entities Fannie Mae and Freddie Mac) cause the real estate bubble? Steve Sailer argues that government policies aimed at increasing non-Asian minority (NAM) home ownership caused a lowering of mortgage standards, the housing price bubble, and the resulting financial crisis. Steve presents additional evidence for this view.(full article here)
The conventional wisdom that emerged from the crisis of the Great Depression dominated American ideology until almost 1980. Similarly, the reigning ideas that congeal in the next few weeks about the causes of this crash may determine the course of politics for decades to come.
The truth is, we were never as rich as we thought we were. The last decade’s growth was largely driven by huge flows of lending dollars to dubious borrowers. At the bottom of an unknown but frightening number of convoluted new-fangled debt instruments were homebuyers who had no chance in hell of paying the mortgages back when the music stopped and the price of houses in California (and a few similar states) stopped heading toward infinity.
Federal Home Mortgage Disclosure Act data dug up by reader Tino suggests that the recent American Housing Bubble was, more than anything else, a Hispanic Housing bubble, as total mortgage dollars handed out to to Hispanics more than septupled from 1999 to 2006! (Is "septupled" even a word?)
Moreover, in 2006, according to Tino, 51% of subprime and other "higher priced" mortgages (for purchasing homes and for refinancing older mortgages) went to minorities. The higher priced mortgages are, of course, where most of the unexpected defaults have shown up.
UPDATE: Tino has added up all the subprime mortgage dollars for the entire disastrous 2004-2007 period. Among borrowers whose ethnicity is unambiguous, he comes up with $900 billion subprime dollars going to non-Hispanic whites, $887 billion to minorities.
Someday, we'll get a count of defaulted dollars by race.
Lowered lending standards brought a large group of people into the home buyer market in a relatively short period of time. They didn't have the buying power and job stability needed to keep up with their mortgages. The lowered standards also brought in con artists and novice investors.
I couldn't find usable numbers in the database on subprime dollars alone, although a more assiduous researcher may well be able to tease out the facts. But if minorities in 2006 accounted for 35% of all mortgages (see above), they would have accounted for a higher share of subprime dollars mortgages. Defaults so far have been concentrated in subprime adjustable rate mortgages. They accounted for 6% of mortgages and 39% of defaults.
Therefore, it's likely that it will turn out that the majority of unexpected default dollars, above normal trend lines, in 2007 were from defaults by minorities.
The conventional wisdom that emerged from the crisis of the Great Depression dominated American ideology until almost 1980. Similarly, the reigning ideas that congeal in the next few weeks about the causes of this crash will determine the course of politics for decades to come. Right now, the elite consensus (as in the 1930s) is that the free market failed. The truth, to which we blinded ourselves in an orgy of political correctness, is that the America of 2008 doesn't have the human capital to justify the valuations of wealth it thought it had.
It took decades (and lots of research by Milton Friedman, Anna Schwartz, and others) for a more accurate interpretation of the causes of the Great Depression to gain widespread acceptance. Even today many ideologues in the Democratic Party still tout the Great Depression as a great failure of capitalism and a justification for larger government.
Karl Rove, George W. Bush, and other Republicans along with a large contingent of Democrats pressed for higher minority (non-Asian minority or NAM) housing ownership. They blinded themselves to the reasons why this was a bad idea. Elite unwillingness to confront The Bell Curve and its implications for housing policy does not help.
The New York Times, liberal bastion, documents the liberal political pressure to make Fannie Mae into a drunken lending fool. (and what does Roger Mudd think of his son's involvement in this debacle?)
“Almost no one expected what was coming. It’s not fair to blame us for not predicting the unthinkable.“— Daniel H. Mudd, former chief executive, Fannie Mae
When the mortgage giant Fannie Mae recruited Daniel H. Mudd, he told a friend he wanted to work for an altruistic business.
An altruistic business! No wonder it was a disaster. He claims almost no one saw it coming. Just who is included in that almost exception? His own staff warned him.
But by the time Mr. Mudd became Fannie’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.
So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives.
I think Mudd's comment reflects the stars he looked to for navigation on the political and financial seas. Almost no Democrat politicians warned Mudd that problems were brewing. In fact, Barney Frank only saw trouble emanating from those who opposed low lending standards.
Why did Fannie Mae and Freddie Mac behave so recklessly? Because they came under intense political pressure to do so--often from the chairman of the House Committee on Financial Services, Barney Frank. In the name of "affordable housing"--a term, we now know, that refers to putting people into homes they cannot afford--Frank leaned on Fannie Mae and Freddie Mac repeatedly. Ignoring credit risks, he declared, was their "mission." When analysts questioned Fannie Mae and Freddie Mac's solvency, Frank exclaimed, in effect, "How dare they?"
"The more people exaggerate a threat of safety and soundness," he said. "Then the less I think we see in terms of affordable housing."
The invisible hand of Adam Smith didn't create this mess. That honor belongs to ham-fisted politicians such as Barney Frank.
Liberal Barney Frank and liberal diversity advocate George W. Bush were on the same side in this debacle: promoting it vigorously.
Republicans joined with Democrats in promoting home ownership for low income people with low credit ratings. Fannie and Freddie showed the way. Keep in mind that private lenders were able too issue so many dodgy mortgages in large part because Fannie and Freddie were willing to buy the mortgages. Fannie and Freddie could do that using their ability as government-sponsored enterprises (GSEs) to borrow money at low rates.
Under political pressure to make home loans easier to obtain, Fannie and Freddie let down the standards of the loans they made and bought subprime loans from private lenders, said Mike Rosser, a 43-year veteran of the mortgage-banking and insurance industries and co-chairman of the Colorado Foreclosure Prevention Task Force.
Private lenders followed Fannie's and Freddie's lead, he said."Word gets around. If Fannie Mae is doing it, it must be all right," he said. "They pushed very strongly on these affordable-housing goals."
Read this collection of quotes of prominent House Democrats in 2003 and later trying to prevent restraint on Fannie and Freddie lending practices. Maxine Waters, Barney Frank, and others of their ilk defended lending to people who are too poor and irresponsible to pay a mortgage. Said Barney:
These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis, the more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing . . . I think it is clear that Fannie Mae and Freddie Mac are sufficiently secure so they are in no great danger. . . I don't think we face a crisis; I don't think that we have an impending disaster. . . . Fannie Mae and Freddie Mac do very good work, and they are not endangering the fiscal health of this country.
We are coming near the end of the Lost Decade. Steve Sailer says the financial disaster demonstrates ideas have consequences.
In retrospect, the basic political-economic idea of the decade was that the financial elites would wind up with all the financial assets while the masses would be kept pacified with lots of nice consumer gadgets and big houses paid for by borrowing from the financial elites. A foolproof plan!
The key issue is that there was nothing going on in America in this decade that would suggest that below, say, the 75% percentile that human capital -- and thus the ability to earn income and to repay debt -- was increasing. Or was ever likely to increase.
In fact, the signs pointed toward a declining per capita ability to pay as the U.S. became increasingly Hispanic. But, no, you couldn't talk about that in polite society. Instead, we had an increasingly diverse, vibrant society so we must have an increasingly diverse, vibrant economy.
Ideas have consequences.
This disaster shows the utter irrelevance of the US Presidential campaign. The real causes of the financial crisis don't even get discussed by the candidates. The conventional wisdom of America in the year 2008 is very unwise.
Now, over the last couple of weeks there has been a lot of fingerpainting over who is to blame. And that's a good thing. But the efforts to pin the positive blame on one party or another seem fairly hopeless, since they were all in on it. Sure, the Bush Administration raised qualms about Democrat-infested Fannie Mae in 2003, but Bush was simultaneously pushing zero down payment mortgages to promote minority homeownership, so the Bushies were not interested in dealing with the real problem, just in fighting Democrats over the spoils.
More realistically, there's a lot of negative blame to hand out because nobody in a position of power or influence -- Bush, Clinton, Greenspan, Frank, Dodd, etc. -- was willing to be seen as to stand athwart history, yelling Stop. What if the federal government had imposed a minimum 5% down payment on mortgages right after the 2004 election? That doesn't seem like too much to ask, but it was, because the "promoting minority homeownership" narrative was crucial in dissuading anybody from yelling Stop because that would be, in effect, yelling that minorities were lousier credit risks on average. And that's racism (because it's true, which is what make it so intolerable to mention in public), so that's unthinkable, so nobody thought about it.
So, here we are.
The first attempt at a bailout bill failed 228-205. One complaint about the bailout is that it does not help mortgage holders hang onto their partially-owned houses (or 0 owned if they owe more than market price). But housing is overpriced compared to various historical ratios of housing prices versus income and rents. Housing prices need to fall to market-clearing levels. Trying to prop up people in mortgages they can't afford delays that correction and rewards real estate speculators to boot. The idea that Wall Street is evil but home buyers are innocent doesn't hold up to close scrutiny.
A more compelling argument against the bailout is that it will cause more harm than good. I can't tell. Some think that absent a bailout we'll go into a depression. A recent Wall Street Journal article outline how the Lehmann failure caused a crisis in confidence that made the AIG bailout necessary. If these people are being honest then, hey, economic depression seems plausible.
Then there is the form of the bailout. Buy bonds? Or get preferred stock to be sold later? I like the idea that some CEOs should lose their jobs and that at least stockholders should get wiped out. I think Paulson's plan doesn't inflict enough pain on top management and stockholders. So I prefer a plan that doesn't just buy up bonds from banks. But I most just want to avoid a global economic depression.
I agree with those who argue that Congress set the ball in motion that led to the massive irresponsible lending in the first place. So to blame it all on CEOs and traders is unfair and misleading.
Update: I'm watching CNBC. Some Democratic Congressmen had constituents 100:1 against this bailout bill. Main Street has contempt for Wall Street. I suspect the feeling is mutual. My guess is the elites will find ways to basically go around the democratic process. The Fed will come up with moves to inject money that do not involve appropriated funds. But will the non-democratic methods of intervention be strong enough? Another possibility: put some seemingly innocuous changes into legislation that really open the door for more radical policy changes.
We can't have a financial system that even 110 IQ people can't understand. Complex systems require complex minds to support them. We might have a depression just because the public are mad. Is there some stopping point short of a depression that'll shock people to support bigger policy changes to prevent a financial meltdown?
Steve Sailer has made the argument that the real estate bubble and subsequent collapse was caused the pressure from the diversity cultists on the political Left to issue more mortgages to lower performing (Non-Asian or NAM) minorities. A correspondent of Steve's has argued that surely blacks and Hispanics had too little money to play an important role in the housing price bubble and Steve asked for reader comments on that argument. Reader "tommy" points to a Dallas Federal Reserve document that shows the huge growth in subprime and other non-prime mortgage lending during the bubble.
Some 80 percent of outstanding U.S. mortgages are prime, while 14 percent are subprime and 6 percent fall into the near-prime category. These numbers, however, mask the explosive growth of nonprime mortgages. Subprime and near-prime loans shot up from 9 percent of newly originated securitized mortgages in 2001 to 40 percent in 2006.1
Lower lending standards made this disaster possible.
These new practices opened the housing market to millions of Americans, pushing the homeownership rate from 63.8 percent in 1994 to a record 69.2 percent in 2004. Although low interest rates bolstered homebuying early in the decade, the expansion of nonprime mortgages clearly played a role in the surge of homeownership.
The mortgage industry threw background checking out the window.
Another form of easing facilitated the rapid rise of mortgages that didn’t require borrowers to fully document their incomes. In 2006, these low- or no-doc loans comprised 81 percent of near-prime, 55 percent of jumbo, 50 percent of subprime and 36 percent of prime securitized mortgages.
I want more mortgage companies to go bankrupt.
So an explosion of low quality lending obviously played a very big role in the bubble. There's still a key piece of the puzzle needed: What was the ethnic make-up of these recipients of subprime and Alt-A mortgages? Were they the NAM (Non-Asian Minority) borrowers that the Democrats pressured the financial institutions to lend to?
Also, did whites find subprime and Alt-A mortgages easier to get because the banks had to lower standards for everyone in order to be able to lower standards for blacks and Hispanics?
Another question: How much of the run-up in housing prices in the bubble was caused by the growth in the rate of home ownership? That rate grew from 64% to just under 70%. The suggests a huge growth in the number of potential buyers competing for the existing housing stock.
What I'd also like to know: On a state level what was the change in rates of home ownership? A small number of states experienced the biggest bubble popping action. Here are the states with the highest foreclosure rates.
- Nevada: 1 in 91 homes
- California: 1 in 130 homes
- Arizona: 1 in 182 homes
- Florida: 1 in 194 homes
- Michigan: 1 in 332 homes
- Georgia: 1 in 422 homes
- Ohio: 1 in 444 homes
- Colorado: 1 in 452 homes
- Illinois: 1 in 483 homes
- Indiana: 1 in 522 homes
Michigan and Ohio are hard hit by auto industry declines. But how much of these high foreclosure rates can be accounted for by growth in home ownership during the bubble, especially among NAMs? We need more data. Anyone know some relevant information?
Stockton, Calif., documented one foreclosure filing for every 31 households during the quarter, the highest foreclosure rate among the nation's 100 largest metro areas. A total of 7,116 foreclosure filings on 4,409 properties were reported in the metro area during the quarter, up more than 30 percent from the previous quarter.Detroit's third-quarter foreclosure rate of one foreclosure filing for every 33 households ranked second highest among the nation's 100 largest metro areas. A total of 25,708 foreclosure filings on 16,079 properties were reported in the metro area during the quarter, more than twice the number of filings reported in the previous quarter.The Riverside-San Bernardino, Calif., metropolitan area in Southern California documented the nation's third highest metro foreclosure rate, one foreclosure filing for every 43 households. A total of 31,661 foreclosure filings 20,664 properties were reported in the metro area during the quarter, up more than 30 percent from the previous month.Other cities in the top 10 metro foreclosure rates: Fort Lauderdale, Fla.; Las Vegas; Sacramento, Calif.; Cleveland; Miami; Bakersfield, Calif.; and Oakland, Calif. California cities accounted for seven of the top 25 metro foreclosure rates, while Florida and Ohio each accounted for five of the top 25 spots.
Update: Starting from here you can find a set of useful documents from a 2006 Harvard report on the demographics of housing and lending.
Accounting for nearly two-thirds of household growth in 1995–2005, minorities contributed 49 percent of the 12.5 million rise in homeowners over the decade. But even with these strong numerical gains, increases in homeownership rates of minorities barely exceeded those of whites. As a result, the gap between white and minority rates remains near 25 percentage points (Figure 19). In large measure, the stubbornly wide homeownership gap reflects the rapid growth in young minority households. Because young households have lower homeownership rates than older households, they bring down the overall rate for minorities. Part of the disparity in rates also reflects the fact that minorities continue to lag whites in average income. Indeed, the lower average incomes and ages of minorities together account for about 15 percentage points of the gap in the homeownership rates.
If you look at figure 24 in that report you can see a higher rate of higher risk loans made to low income (NAM) minorities (about 33% of all loans to NAMs versus about 18% for whites - I'm reading these numbers from a graph so not exact) as compared to whites at similar income levels. This supports the argument for a diversity recession.
It’s a perfect storm. It started with Congress encouraging lending to lower-income people. You went from subprime loans being 2% of total loans in 2002 to 30% of total loans in 2006. That kind of enormous increase swept into the net people who shouldn’t have been borrowing.
Those loans were packaged into CDOs rated AAA, which led the investment-banking firms [buying them] to do little to no due diligence, and the securities were distributed throughout the world, where they started defaulting.
When they started defaulting, out of bad luck or bad judgment, we implemented fair value accounting….You had wildly different marks for this kind of security, which led to massive write-offs by the commercial banking and investment-banking system.
Click thru and read the rest of it. He basically lays out what went wrong. But what caused Congress to make the initial disastrous step? Politically correct intellectually bankrupt leftist multicultural ideology. Oh, and they do not learn from their mistakes. Bush embraces this ideology too.
Update III: Keep sight of a basic fact: Housing prices are too high and must correct. The housing price-to-rent ratio is still well above historical norms. So is the price of a single family home as a percentage of median household income. These things must correct. Attempts to keep people in homes they can not afford will just stretch out the correction period and make the downturn last longer.
Bankruptcy expert Wilbur Ross says the attempt to stop the financial meltdown is not addressing the problem of people who can't afford their mortgages.
"The reason I think it will take that long is that none of these actions that have just been taken make it any easier for Middle America to meet their mortgage payments -- it doesn't address that whole problem, and that problem is what really caused this to begin with."
But that is not a solvable problem, at least not in any way that Washington DC politicians would try to sell. Why? Because Americans are living beyond their means. There's no way to get from where we are to financial sanity without millions of people losing their homes that they can not afford. The financial crisis can't end until housing prices correct downward and people who can't afford their homes step down to cheaper dwellings.
Ross at least recognizes that it takes two to tango: both borrowers and lenders had to be irresponsible to get us into this crisis.
Ross said that in some ways, the financial crisis could be blamed on the American consumer for wanting to improve their standard of living without having the wages and means to do so.
"In one sense, the American consumer is the victim; but on the other hand, the perpetrator of it," he said.
But the borrowers and lenders are not the only actors on the stage. Or perhaps they are but puppeteers hover above them pulling strings. At the behest of Congressional Democrats (who wanted to lift up poor people - but ended up dragging them down) Fannie Mae and Freddie Mac bought the subprime loans that Countrywide and other failed lenders created. Chinese central bankers bought the Fannie/Freddie bonds because the Congress made Fannie and Freddie appear like no risk bets. The Chinese central bankers were buying the bonds in order to lower the value of China's currency so that Americans would live further beyond their means and buy more Chinese goods.
The lower IQ poor people who took out unaffordable loans are the victims of the political party that sought to help them. Being of lower IQ they had less capacity to judge the deals they were agreeing to. The smart people in Congress, at the top of Fannie Mae and Freddie Mac, and in charge of assorted mortgage banks are more culpable because they are more capable. Though I wonder whether Congressman Barney Frank is capable of understanding how his own actions contributed to this disaster.
A disaster this big requires many willing participants. Unluckily many willing participants were available. Now even those not foolish enough to play will have to pay.
Happy days. Housing prices are down in California. This means the financial institutions holding all those mortgages and derivatives have bigger losses in store. Their loss is your gain if you want to buy a house.
The figures released Thursday by MDA DataQuick showed 37,988 new and preowned homes were sold statewide last month, up 13.6 percent from August 2007 but down 3.8 percent from July.
The firm said 46.9 percent of all homes sold last month were foreclosed properties.
That helped send the statewide median home price plunging 35.3 percent to $301,000 during the year ended in August.
Now if you have a mere $447k you can afford to live in the Bay Area.
Other data released by MDA DataQuick showed a 31.8 percent plunge in the median home price in the San Francisco Bay Area last month to $447,000, from $655,000 in August 2007.
Who says this collapse is bad? I see better lower prices. Lower prices are good. Don't forget that - no matter what the bankers say.
San Diego is an even better deal - only $350k per house. Nice weather too.
Weighted down by ever more low-priced foreclosure sales, San Diego County's median home price fell to $350,000 last month, the lowest level in 5½ years, MDA DataQuick Information Systems reported yesterday.
The 3.8 percent drop from July marked the 13th time in 14 months prices have fallen locally, with the median off 26.3 percent from a year earlier.
Around LA the rate of new foreclosures is running faster than the rate of foreclosure sales. So the percentage of houses sold that are foreclosures looks set to exceed 50%.
In August, about 8,800 of the 19,366 homes sold in Los Angeles, Orange, Riverside, San Bernardino, Ventura and San Diego counties were in foreclosure, according to San Diego-based MDA DataQuick.
But as those homes were selling, even more were being repossessed, building up an inventory of foreclosed properties that will take months to move.Banks and other financial institutions took back about 12,900 homes last month in the region, O'Toole said, thousands more than they managed to sell.
More supplies are building up and so better deals are coming. Obama should be celebrating how these price drops are making housing more affordable for poor and working class people. McCain should celebrate how the free market is making housing cheaper. Okay, so the market has been distorted by the Chinese central bank with lots of help from the SEC, Fannie Mae, Freddie Mac, and other instruments of US federal government policy. Still, this is a market at work and it is making housing cheaper. Hurray!
In Ventura County, just north of LA County, housing prices have fallen to a mere $400k. Hey, if this keeps up Ventura housing might become affordable.
The median price, the point where half the homes sold for more and half for less, is still being tugged down by distressed sales. In August, the median fell to $400,000, a 30.4 percent decline from $575,000 a year ago, according to DataQuick.
The last time the median was below the $400,000 level was in June 2003, when it was $396,000. The county's median peaked at $634,000 in July 2006, according to the San Diego-based real estate information service.
You can see why all the mortgage-granting banks are tanking. More mortgages are going underwater and people are walking from mortgages for amounts larger than their houses are worth. Meanwhile, rumour has it that the Bush Administration is going to resurrect the Resolution Trust Corporation concept to hold all the bad debts.
The Bush administration is urgently preparing a massive intervention to revive the U.S. financial system, including a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers.
The financial crisis continues to unfold very quickly. An electronic equivalent of a bank run appears to be starting with certificates of deposit.
Regulators and the banking industry are increasingly concerned about customer withdrawals from money-market funds. Crane Data, which tracks the industry, said total deposits in money-market funds fell Wednesday by at least $79 billion, or about 2.6 percent. Financial executives have told government officials in recent conversations that the rising pace of withdrawals is the equivalent of a bank run and that if it continues, it will drain a massive and critical source of funding.
There is the beginning of a silent bank run as depositors are nervous about their assets. The panic is mounting in the financial markets, and the credit default swap market is frozen because of the Lehman collapse and the state of affairs at AIG, WaMu and other financial institutions. Many hedge funds are now teetering as their losses mount. Investors in fixed income--including preferred stocks--have experienced massive losses and the financial turmoil is becoming global as stock markets all over the world plunge. Worst of all, policymakers are running out of bullets. Think Spaghetti Westerns and a parched desperado in a dry gulch.
The Lehman collapse is leading to the risk of a generalized run on the shadow banking system. The policy reaction is to try to build a new set of levees after the financial perfect storm of the century destroyed the first set.
The TED Spread was at 3.13% on Sept 18. 2008. That means the banks are afraid to loan to each other overnight and indicates parts of the capital markets are freezing up.
So RTC The Sequel is coming. Calculated Risk says RTC Part 2 will be different. Sounds like the US government will buy massive amounts of financial assets. Just that buying will drive up their value - at least until the underlying assets fail due to foreclosures and the like.
However this new entity would be very different from the RTC in a number of ways. The RTC was created to dispose of assets accumulated from failed Savings & Loans.
The new entity, according to the WSJ, would purchase illiquid assets "at a steep discount from solvent financial institutions and then eventually sell them back into the market".
With the RTC, the government already had direct responsibility for the assets since they acquired them from insured S&Ls that had failed. The role of the RTC was to liquidate certain of these assets.
In the current situation, the government has no financial responsibility for the assets, except for a few exceptions like the assets of Fannie and Freddie, and the NY Fed's assets acquired in the JPMorgan / Bear Stearns deal. The new entity will both buy assets "at a steep discount" and eventually sell the assets. So unlike the RTC, this new entity puts the taxpayers at risk.
Will an aging population, more childless families, and high gasoline prices push affluent people into the cities and drive poor folks out into exurban communities?
Recent market research indicates that up to 40 percent of households surveyed in selected metropolitan areas want to live in walkable urban areas, said Leinberger. The desire is also substantiated by real estate prices for urban residential space, which are 40 to 200 percent higher than in traditional suburban neighborhoods -- this price variation can be found both in cities and small communities equipped with walkable infrastructure, he said.
The result is an oversupply of depreciating suburban housing and a pent-up demand for walkable urban space, which is unlikely to be met for a number of years.
Developers can put up condos and apartment buildings in cities pretty quickly. So I do not see why this demand will be unmet for years unless city zoning prevents new construction.
Will McMansions get converted into multi-family dwellings for the poor?
But as the market catches up to the demand for more mixed use communities, the United States could see a notable structural transformation in the way its population lives -- Arthur C. Nelson, director of Virginia Tech's Metropolitan Institute, estimates, for example, that half of the real-estate development built by 2025 will not have existed in 2000.
Yet Nelson also estimates that in 2025 there will be a surplus of 22 million large-lot homes that will not be left vacant in a suburban wasteland but instead occupied by lower classes who have been driven out of their once affordable inner-city apartments and houses.
The so-called McMansion, he said, will become the new multi-family home for the poor.
I am not convinced by this argument. The most distant suburbs could become residences for those who can telecommute and those who control their own business locations. Developers could build office space in areas where housing is cheap so that companies can site offices where the workers can afford to live. Also, long distant commuters can trade up to compact hybrids and diesels.
But the poor have to wind up somewhere. Seems to me it makes the most sense for the poor to gravitate toward the most run-down inner suburbs while the upper class take over some city cores and other inner suburbs. Some inner suburbs could be built up into higher density housing for the poor with light rail lines to bring them to city jobs.
Sky-high gasoline prices aren't just raising the cost of Eugene Marino's 120-mile (193-kilometer) round-trip to his job in the Washington area. They're reducing his wealth, too.
House prices in his rural subdivision beyond the Blue Ridge Mountains in Charles Town, West Virginia, have plunged as commuting expenses have soared. A four-bedroom home down the street from his is listed for $239,000, after selling new for $360,000 five years ago.
High gasoline prices are nature's way of telling you to not do that.
In the Franklin Reserve neighborhood of Elk Grove, California, south of Sacramento, the houses are nicer than those at Windy Ridge—many once sold for well over $500,000—but the phenomenon is the same. At the height of the boom, 10,000 new homes were built there in just four years. Now many are empty; renters of dubious character occupy others. Graffiti, broken windows, and other markers of decay have multiplied. Susan McDonald, president of the local residents’ association and an executive at a local bank, told the Associated Press, “There’s been gang activity. Things have really been changing, the last few years.”
In the first half of last year, residential burglaries rose by 35 percent and robberies by 58 percent in suburban Lee County, Florida, where one in four houses stands empty. Charlotte’s crime rates have stayed flat overall in recent years—but from 2003 to 2006, in the 10 suburbs of the city that have experienced the highest foreclosure rates, crime rose 33 percent. Civic organizations in some suburbs have begun to mow the lawns around empty houses to keep up the appearance of stability. Police departments are mapping foreclosures in an effort to identify emerging criminal hot spots.
Price drops were especially steep in far-flung suburbs. The median price fell 38% in Lancaster and 42% in Palmdale, compared with 23% in Los Angeles County overall.
San Bernardino County saw prices drop by 31%, but it was worse in the remote town of Victorville, where values declined 43%.
Bargains are to be had for those who can telecommute.
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.
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).
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.
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.
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
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.
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.
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.
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.
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.
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. 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.
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.
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.
"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.
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.
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?
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.
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.
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?
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.
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.
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.
"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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
If you are a renter now's the time to start saving for a down payment. Get ready for the bargains.
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.
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.
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?
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?
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.
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?
WASHINGTON, October 25, 2006 -
Existing-home sales eased last month, as did the number of homes available for sale – indicating the housing market is stabilizing, according to the National Association of Realtors®.
Total existing-home sales – including single-family, townhomes, condominiums and co-ops – dipped 1.9 percent to a seasonally adjusted annual rate1 of 6.18 million units in September from a level of 6.30 million in August, and were 14.2 percent below the 7.20 million-unit pace in September 2005, which was the third strongest month on record.
David Lereah, NAR’s chief economist, said stabilizing sales should build confidence in the housing market. “Considering that existing-home sales are based on closed transactions, this is a lagging indicator and the worst is behind us as far as a market correction – this is likely the trough for sales,” he said. “When consumers recognize that home sales are stabilizing, we’ll see the buyers who’ve been on the sidelines get back into the market, and sales will be at more normal levels in the wake of the unsustainable boom that we saw last year.” He noted sales already are improving in some areas.
Total housing inventory levels fell 2.4 percent at the end of September to 3.75 million existing homes available for sale, which represents a 7.3-month supply at the current sales pace.
The median price of a home sold in September fell 2.2 percent to $220,000 from $225,000 a year ago. It was the biggest year-over-year drop since the trade group began tracking median home prices in 1968.
Statewide, home sales decreased 31.7 percent in September, the association reported, while the median price of an existing house increased 1.8 percent.
The Wall Street Journal has an interesting discussion between housing economists Celia Chen, Christopher Mayer, and Susan Wachter about the likely macroeconomic effcts of the housing market correction. Mayer expects declining interest rates and construction costs to limit the extent of the drop. They have a spirited and well informed discussion on whether adjustable rate mortgages increase the sizes of both housing booms and busts. Chen's estimate for the GDP impact of the housing correction is too small to kick the US economy into a recession.
The bad news is that the correction will take about one half of one percentage point off of GDP growth this year and another three quarters of a percentage point off of growth next year, as the slowing in housing hurts employment, construction activity and reverses the wealth effect.
The good news is that the market is correcting, not crashing -- and other economic drivers are strong enough to withstand the hit.
They also argue that regional differences in the housing market are so large that you have to to look at your own region closely rather than just look at national aggregate numbers.
A recession at this point would amplify the housing price drop and increase the number of mortgage foreclosures. New Jersey is seeing early indications of problems with mortgage payments.
According to statistics compiled by the state's leading real estate foreclosure data service, SheriffSalesOnline.com -- http://sheriffsalesonline.com -- the number of lis pendens filed in the state of New Jersey has risen from 967 in September of 2005 to 1649 in September of 2006 – a breathtaking rise of 71%.
And a year-to-year third quarter comparison for the state of New Jersey reveals an equally dramatic increase of 44% -- from 2486 New Jersey lis pendens filed in the third quarter of 2005, to 3577 filed in the third quarter of 2006.
"Lis pendens court filings are the first legal step taken in the home foreclosure process that indicate a homeowner is behind in his or her payments and headed for foreclosure," says Jeffrey Posner, president of the Fairlawn-based SheriffSalesOnline.com, which provides comprehensive and timely advance notice of such troubled properties in the Lis Pendens, Public Notice and Sheriff List stages to his subscribers.
Still, a few thousand mortgages with late payments is small stuff for a state with millions of people.
Prices of existing homes fell for the first time in 11 years and the backlog of available homes for sale was at its highest since current measures began, underlining the significant slowdown in the housing market.
Existing-home sales slipped 0.5 per cent to an annual rate of 6.30m units in August from a level of 6.33m July, according to the National Association of Realtors. They were 12.6 per cent down on the year before
Washington — Prices of existing houses in the U.S. fell last month for the first time in 11 years as sales declined to the lowest level since early 2004. Despite the August decline, the National Association of Realtors still expects housing prices to rise slightly this year.
The median price of a previously owned house dropped 1.7 percent in August from the same month last year, the National Association of Realtors said Monday. Purchases dropped 0.5 percent to an annual rate of 6.3 million.
Sellers may have to keep lowering prices after the supply of houses on the market jumped to the highest in more than 13 years.
First, although existing-home sales have fallen more than 10% since last year, they remain comfortably above 2003 levels. And in the long-term context of the data series, the figures represent only a correction to the overall upward trend. This fact, however, is a double-edged sword: You could conclude that the housing market is still healthy because it's still at relatively high levels, but you could also conclude that the housing market has a lot further to fall if the economy falters significantly. Similarly, although median resale prices have reached a plateau over the past year and may be starting to fall, they remain fully 25% higher than they were in 2003 -- not the triple-digit growth that some areas of the country have come to take for granted, but a reasonable return on investment, nevertheless.
Rising inventories, on the other hand, are more unusual. The current backlog of inventory on the market, representing about seven months of sales activity, represents the highest level of inventory since the mid-1990s. In the context of regular businesses that produce goods, high levels of inventory generally indicate falling demand, which can cause sharp reductions in cash flow for a given business, threatening its ongoing operations and often requiring substantial shifts in business strategy in order to survive.
The National Association of Realtors said sales fell for the fifth month in a row to an annualized rate of 6.3 million units. Sales are down 12.6 per cent from the same month in 2005.
The supply of homes for sale grew to 3.92 million, the highest number of listings in more than 13 years.
"We've been anticipating a price correction, and now it's here,'' said the realtors association's chief economist, David Lereah.
This will cut into consumer spending since people with declining home values will become more reluctant to borrow against their houses or run up other forms of debt.
Luckily energy prices are declining rapidly and that'll put more cash into people's pockets to spend on other things. The oil price decline might cancel out the effects of the housing price decline and prevent a recession.
More than 92,000 homes entered into some stage of foreclosure nationwide this July - up about 5 percent from June and 18 percent higher than in July 2005, according to RealtyTrac, an on-line marketplace for foreclosed properties.
Michigan was one of the hardest hit of all the states, with a 25 percent spike from a year earlier.
Dave Webb, owner of the Hudson & Marshall, reports that the majority of the 250 Michigan properties primed for auction, about 150 in all, lie within 60 miles of Detroit.
Now is a cheap time to move to Michigan.
Statewide, house sales dropped by 29.9 percent from a year ago, according to the California Association of Realtors.
That translates to an unsold inventory index statewide of 7.5 months, compared to an index of 2.9 a year ago. The California Association of Realtors uses the index to measure the number of months it would take to deplete the supply of homes on the market at the current sales rate.
For Monterey County, July's unsold inventory index was 14 months; Salinas was 15. Last year in July, Monterey County had an unsold inventory index of just under 4, according to Sandy Haney, chief executive officer of the Monterey County Association of Realtors.
RealtyTrac, an online marketplace for foreclosure properties, said Wednesday it has been listed in the top 500 fastest-growing private U.S. companies by Inc. magazine.
In recent years rising consumer demand was driven by rising housing prices. People were willing to spend on a wide range of goods because they felt more affluent as the prices of their houses and condominiums rose in a bull real estate market. The national savings rate went negative in the United States. But now with the real estate bubble bursting in most parts of the US we run the real risk of a recession in 2007. That recession would likely turn into a world recession.
Home prices were 10 percent higher in the three months ended June 30, compared with the corresponding period last year. The quarterly appreciation rate of 1.17 percent, however, was the slowest since the fourth quarter of 1999, according to the analysis by the Office of Federal Housing Enterprise Oversight.
In contrast, in the second quarter of last year -- which many analysts describe as the height of the recent boom -- the quarterly rate was 3.65 percent. The change in the rate between those two quarters was the sharpest decline since the agency began tracking the data in 1975.
The housing boom replaced the dot com boom. What's going to be the next boom?
The full text of the report is online (PDF format).
WASHINGTON, D.C. – U.S. home prices continued to rise in the second quarter of this year but the rate of increase fell sharply. Home prices were 10.06 percent higher in the second quarter of 2006 than they were one year earlier. Appreciation for the most recent quarter was 1.17 percent, or an annualized rate of 4.68 percent. The quarterly rate reflects a sharp decline of more than one percentage point from the previous quarter and is the lowest rate of appreciation since the fourth quarter of 1999. The decline in the quarterly rate over the past year is the sharpest since the beginning of OFHEO’s House Price Index (HPI) in 1975. The figures were released today by OFHEO Director James B. Lockhart, as part of the HPI, a quarterly report analyzing housing price appreciation trends.
“These data are a strong indication that the housing market is cooling in a very significant way,” said Lockhart. “Indeed, the deceleration appears in almost every region of the country.”
Possible causes of the decrease in appreciation rates include higher interest rates, a drop in speculative activity, and rising inventories of homes. “The very high appreciation rates we’ve seen in recent years spurred increased construction,” said OFHEO Chief Economist Patrick Lawler. “That coupled with slower sales has led to higher inventories and these inventories will continue to constrain future appreciation rates,” Lawler said.
House prices grew faster over the past year than did prices of non-housing goods and services reflected in the Consumer Price Index. While house prices rose 10.06 percent, prices of other goods and services rose only 4.41 percent. The pace of house price appreciation in the most recent quarter more closely resembles the non-housing inflation rate.
Will housing price rises drop below the overall inflation rate?
The downturn in housing is overlapping with the retirement of the baby boom generation, which starts officially in 2008, when the first of 77 million boomers become eligible for Social Security. Most of them are homeowners, and many of them will presumably want to sell their homes, extracting some cash for retirement in the process.
Some analysts think both the stock and housing markets will go bearish when the huge post WWII cohort passes into retirement.