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High-End RE = "Dead Money"
Two articles this morning lead me to conclude that housing still has no upside. The first from the NYT the other from Bloomberg.
The Times reports on what I (and others) have been warning about for
some time. The lending limits for the GSEs and FHA are scheduled to be
cut on 9/30/2011. Bloomberg reports on a growing trend, seller financing.
The GSE lending limits were increased as part of the 2008 HERA (bailout)
package. Housing was in free fallback then; there were no private
lenders. It (sort of) made sense to increase the limits in the overall
effort to stop the economy from tanking.
The limits have already been extended once (end of last year). I’m sure
that there is going to be a push by some in Congress to extend them
again. I think the effort will fall flat. Fannie and Freddie have cost
hundreds of billions. Extending the limits just keeps them alive and
helps them grow. That is not a very popular position to take one year before an election. The additional argument will be made that the higher limits just support rich people. To some extent that is true.
The big change in limits will come from the areas that have the highest home values. These are pretty significant drops:
Monterey Co., CA down $247,000 (34%)
Monroe Co., FL down $201,000 (28%)
Hawaii Co.,HI down 250,750 (41%)
Some interesting changes. Blaine Co. ID (home of Sun Valley) has its limit cut by $272,000 (37%) while Eagle Co. Co (Vail) gets a haircut of only $104k (14%). The new limit for Vail will be $625,000 while the poor people up in Sun Valley will be capped at a lousy $458k. Look for the folks up in Idaho to make a stink over this.
In my neck of the woods the very toney Fairfield Co. Ct (home of
very-very toney Greenwich) gets whacked by $195k down to a max of $514k
while neighboring (and much less toney) Westchester has it’s limits cut
by a more modest $104k keeping the lid at $626k. I assure you that there is not logic to this.
There are 88 counties across the country that will see their limit cut by more than $100,000.
The Bloomberg bit on seller financing is an interesting development. I
have been seeing this in action in S. Florida. These are not the
distressed properties owned by banks that go for auction. Those are cash
buyers. There is a separate market for higher end (and Uber high-end)
properties that have been trying to get sold for several years. Finding
buyers is very hard. Prices have come down a bunch. As much as 50%; but
there is still too many properties. Sellers who are looking to
distinguish their home are offering cheap financing to lure buyers. Low
interest rates and a five-year bullet are common terms. These are
million dollar notes. By definition, there is no liquidity in these
notes. In reality this type of financing is just a rental with an option
to buy. Depending on the size of the down payment there is a very good
prospect that these “sold” homes are going to revert back to the
original owner in the not too distant future.
My conclusion from these two reads is that the availability of mortgages
is going to shrink quite substantially in a few months. That there is
already an evolving ‘solution’ to the problem called ‘seller financing’
is like we are reverting back to the stone ages of mortgage finance.
I think the steps to downsize Fannie, Freddie and FHA are necessary. I
hope the cries to keep the ‘emergency’ limits are ignored. But there
most certainly will be consequences from this. High-end real estate
is going to fall a fair bit in the next year. It will continue to act as
a dead weight on the broader economy.
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Oh if only I had 1.3 laying around. Would make my end of world suicide plunge that much easier.
I just refied a jumbo at 80LTV at sub-3.5% on a 5-1 ARM. Jumbo guidelines are actually getting looser, a year ago they wouldn't have done that at 80, more like 70.
Who cares if high-end real estate crashes? Aren't we all tired of subsidizing the wealthy? For that matter, let's reduce or eliminate mortgage interest deductions for mortgages over $750k and begin indexing for inflation. Let's get the wealthy off the dole.
Subsidizing the wealthy? Ya mean like the owners of the Federal Reserve? The real wealthy don't pay taxes, they collect yours. As for your class warfare, it's obvious you're one of the entitlement welfare bums living off of MY income. So shut up and be grateful people like me produce something.
You're way out of line Swamp scum. Assuming makes an ass out of you, now doesn't it? What do you know about me? Obviously nothing, which makes you nothing. Get over yourself.
"That there is already an evolving ‘solution’ to the problem called ‘seller financing’ is like we are reverting back to the stone ages of mortgage finance. "
Oh really. Sounds more like cutting out the middle man (some paper pushing greedy fuck) to those of us with capital. By the way Bruce, we wouldn't be reverting to the stone age if those paper pushing fucks didn't drive up the market, make bad loans, and then sell the trash to the world while betting against it all to have one massive gang-rape of the taxpayer (which continues today).
Hmmm. I understand that you hate the banks. So do I. But this business about cutting out the middlemen is wrong headed.
Normally when a home is sold the seller has some cash and could reinvest it as they please. Buy another house or even some stocks. That is a "good thing". The normal process allows for freeing up of equity and a reduction of debt.
The middle man once facilated this process. Then they screwed up. The price will be that all real estate is much less liquid. That is not a good thing for anyone.
I understand your concerns about seller financing and the loss of liquidity, Bruce, but the limits should never have been raised in the first place, and it is madness to think that they could remain that high. I assume you are not saying that continuing to kick the can of correction down the road is a good thing. The pain is inescapable. The losses are already guaranteed. The only real choices are whether we want a 7-10 year malaise, with losses spread across the economic spectrum, including to the banks, or a 10-15 and counting Japan-style funk with the losses slowly but surely absorbed completely by us.
"The price will be that all real estate is much less liquid. That is not a good thing for anyone." ...
Really? Or just anyone one accustomed to BusinessAsUsual? Like fraudsters and robocrims.
Your generality is unassailable...as generalities often say much and mean nothing.
Give a detailed example and work it through without "talking your book". The real world is an eye-opener.
I agree that real estate is much less liquid, but for an additional reason other than financing. Negative equity handcuffs sellers when they must come to the closing with big bucks just to get out and move on.
"The price will be that all real estate is much less liquid."
And will continue to be untill there is the final purge.
This is like a commodity market that is "locked limit sellers" the exchanged close for the day and the government refuses to allow it to reopen the next day.
All market participants, banks, property owners and potential buyers have no idea where the bid & offer are because the selling climax has not taken place.
This will not end well because there are way too many people hoping for an orderly outcome after trillions have been wiped off Americas balance sheet. Streaching it out for years & years living in denial only makes the inevitable "selling climax" something that will go hand in hand with civil war .
Yep, trillions that was spent by the banking and financial elites to buy private islands of real value that has now been transferred as a massive loss to the public. Here is an idea. Don't fight in the civil war. Go find those islands!
am I the only one thinking that RE real estal estat being less liquid than it is now is a good thing. I think it decreases speculation in the realestate market and, thereby decreasing volatility and setlling at something closer to the true economic value of RE real estate.
Sorry Bruce, I am going to call bullshit on that. Bad for who? I stayed ahead of the herd and have liquidity, how come I (and others like me) don't get a chance to call the shots for a while. Sounds pretty hypocritical Bruce, step away from the kool-aid. Everything will become a lot less "liquid" the way things are going but more to the point; What, you don't think that there are good people out there controlling capital that would make honest bankers. I have a good banker friend tell me once that banking is easy, so long as you don't get greedy. He followed the 3-6-3 rule and was very successful. Give your depositors 3% interest on their money, charge 6% interest on a loan and get on the golf course by 3 PM so you don't fuck the whole thing up.
There is a real cost for creating capital. In order for the system to work, responsible monetary policy (and making a loan to someone is making your own monetary policy) must be reward and irresponsible behavior and irresponsible monetary policy (at all levels) must be punished. Otherwise, there really is no choice other than to revert to the stone-age.
Cheap money from the Fed, liar loans, Congressional mandate for everyone having access to the American Dream, greedy real estate agents, appraisers, mortgage lenders, underwriters, servicers, investors, and the criminal syndicate known as Wall Street all had their fingers in this pie. And so a huge bubble was blown, it burst and we are all getting back to basics, and, reasonable valuations. What is wrong with that?
What we need are loans on properties that people can afford to pay and they have skin in the game. Reverting to more liquid conditions will once again promote flipping and investment euphoria that will only create another bubble. Haven't we seen enough of bubbles?
As the inflation continues, and the hyperinflation gets going, we are likely to get to a place where there just aren't any loans available. Prices will decline until we reach Cash Value. Houses might be sold, if at all, for cash or cash equivalents like gold and silver. As we move into the third phase of PM's, those individuals who own their property outright (and there are still significant numbers of these) might be willing to take some silver bars or a small stack of gold coins in exchange. Boy will that be a nightmare for the tax collector. Imagine a transaction that only involves the county record keepers and nowhere is there a bank transaction to be tracked. Makes me shiver all over.
Hence why you buy property not houses.
The silver lining is wrapped around rental income. Even if prices for homes are collapsing no one can get a loan. Ergo everyone has to rent.
Something anticipated.
WTF makes you think that deadbeats who walked away from a mortgage would be any more likely to pay rent?
You mean deadbeats who have had their jobs shipped overseas? How about deadbeats, whose employer went out of business because they couldn't sell expensiver RV's any more? How about deadbeats who are no longer employed in the construction industry? How about deadbeat families where both husband and wife have lost their jobs? do you mean those kind of deadbeats?
+1
Amusing to me how the real leechf*cks, the bankster and politico class have enjoyed anal access to this country's citizens over two generations...but still some dongle slurping dullards point and scream at their fellow cellmates, instead of the treasonous race-traitors (and by race, I mean traitors to the Human race), as the prison burns. Truly amazin'.
apples and oranges.
mortgage = fucked for life.
rent = basic life necessity.
Yep. Buying up mid-range rentals in college towns for some time now. All renters are currently backed with the parents co-signing. I figured this was the safest rental market around.
Have you considered the potential college unaffordability meltdown?
Yes, hence the parental requirement to co-sign. Moreover, I only have four rentals and two of the tenants work part-time for me. They can afford their rent.
It does seem to be the case that residential RE in some high end areas in the country never deflated that much and are doing OK right now: NY/New England area in the $1-$5mm range for instance and not destination resort communities or one-of-a-kind vanity castles etc.
Times may be tough but I think that many people who have the means/access to financing are making a good home in a good area a priority over other lifestyle bells and whistles these days....and thus driving demand for that segment of the market.
Not coincidentally those areas were more likely to use conventional financing - ie amortizing loans (usually hybrid arms, which will now be resetting to even lower rates than during origination, providing an even bigger benefit to those homeowners).
The areas that are getting hit the hardest, not surprisingly, are those that used a lot of Option ARMs - SoCal, Florida - and/or Alt A - NV, AZ, etc.
Again, I think the jumbo limit change will have a marginal impact - the bigger impact is the increase in FHA premiums and gfees, and if it ever happens, increases in down payments. I think over 40% of FHA production is at 3.5% down payment. Unbelievable.
Bruce,
Any chance you could get the tax receipts for the same comparisons? Property values down, lender limits down, let me guess - property tax receipts UP?
LoP,
You nailed it. Several referendums in my state alone to remove the homestead exemption. Tax receipts must go up. I just calculated my own property tax would climb by 6k without the exemption. There used to be a substantial market to sell (liquidate) seller-financed contracts and contracts for deed (incl. deed-of-trust). Metropolitan used to buy millions each month. That market has an extremely low default rate. FYI, sell property on contract and sell the contract (and servicing) to a company like Metro. Those with capital do even better. Why not let them make the secondary market?
a lot of these are second or third homes? what happens when a middle class home owner hs to change jobs, and he can't sell his home? one suspects the joys of renting will be a new subject on the Suze Orman show.
federal reserve notes, bitchez!