This page has been archived and commenting is disabled.
The Sword Hanging Over the Housing Market
That is how much bankrupt federal agencies Fannie Mae and Freddie Mac are taking down in loan guarantees to the residential housing market.
Created in the wake of the Great Depression (the last one, not this one), these agencies were created to provide subsidies to the homeowners to revive a moribund market. These agencies entered prime time by accepting the securitization of these loans in 1968.
They worked in quite obscurity in Washington for decades, quietly fueling successive postwar real estate bubbles. Much of their debt was sold to foreign investors looking to pick up a small premium over Treasuries.
That was until they went one bubble too far, funding the explosion of borrowing that took place during the early part of the 2000’s. In 2004, a deregulation move resulting in the dropping of rules against using government guarantees to finance predatory, high cost lending to subprime borrowers.
It was all over but the crying. Once the market broke, default rates skyrocketed, and it suddenly became abundantly clear that these agencies had been grotesquely underpricing risk for decades. Borrowers starting making claims on their guaranties en masse, wiping out their entire capital. In 2008, the two agencies entered a conservatorship administered by the Federal Housing Finance Agency (FHFA), a de facto bankruptcy.
These lenders have been operating in limbo ever since. Like the other sacred cows of entitlements and defense spending, federal home financing is an issue our leaders would rather keep their heads in the sand over. It is clear they need to be recapitalized. But the chance of this congress, fueled by populist, libertarian fantasies, providing another $100 billion in bail out money for a federal agency is zero. That leaves the possibility that they will be eventually be phased out, leaving the private sector to take up the slack.
What will a fully privatized home loan market look like? Try a lot more expensive. That is where you find the jumbo market, which is already fully privatized, as there was never a government mandate to finance the homes of millionaires.
If you have a FICO score over 750, move all of your assets to you lender, including your IRA, 401k, 529 plan, and all of your securities business, you might get a jumbo loan for a 100 basis point premium over a convention FHA loan under $729,750. If you don’t jump through all these hoops and refuse to offer your first born child up as collateral, expect to pay a premium of up to 250 basis points, or 7.5% at today’s rates. This is why abandoned McMansions have soared across the land like a great blight, and can be rented for 30% of the cash flow demanded by an outright purchase.
What does this mean for residential real estate prices? I’ll attempt some quick, back of the envelop calculations here. Raise the cost of financing by 40%, and you can knock 40% off the value of your property. That is off of today’s prices, which are already down 40%-60% from the 2007 peak, depending on your neighborhood.
This will inevitably lead to a secondary banking crisis and another stock market crash. If you are wondering about those Armageddon type forecasts that have the Dow plunging down to 3,000, this is the intellectual foundation behind them. That is when we find out how much freedom really costs.
Rent, don’t buy. If the roof leaks, the furnace breaks, and the toilet blocks, you just call the landlord, as I have done with my wonderful new rental here in sunny California.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
»
- advertisements -
Many thoughts:
1) The FNE/FRE prospectus clearly states that the agencies - not the government - back the loans. There has always been an implicit government guarantee. What the H is an implicit guarantee? Is that like being a little pregnant.
2) WRT #1 above, I call my congressman regularly and tell him to default on the FNE/FRE paper - which Timmy Geithner explicitly backed on the Christmas Eve massacre in 2009. Why do I do this? Simple. I don't want to pay to make whole the fools who bought the FNE/FRE paper back in '05-'07 secured against ridiculous house prices. And it was explicilty not guaranteed by me. F' em.
3) One article of the Bill of Rights proclaims that "all taxation shall be equal." I don't know what taxation is. Is that the net of what you pay vice what you get - get being exemplified by $8K house purchase credits. I didn't get such a credit. Doesn't sound equal to me. But to the point, MHFT shines the light on the fact that FNE/FRE misspriced its (implicit) insurance for decades. That means that all of the "homeowners"' with FNE/FRE loans were underpaying - getting a tax credit so to speak - or a free ride on their mortgge insurance. I would much enjoy Turbo Timmy going out and collecting the premia underpayments for these last few decades. Only just.
4) I went to a conference on Monday to hear my friend/colleague Chris Whalen, banking expert, expound on the state of affairs. He proclaimed that the current FNE/FRE restructuring proposal would lower the caps (jumbo divide line) and further paste the market. That is not hard to follow. His political sense is that there will be no reform - the liar loans will continue. Why? Becuase people want loans and fiscal sanity/normalacy will prevent that. IOW the government whores have learned nothing. Whalen also expects that house prices will drop another 10% during 2011, and he thinks that conservative. He sees duration growth - meaning that the average life of a mortgage is growing - because people can't refi because they are underwater. As a result, banks' interest rate sensitivity rises and they can't loan as much. Also home default rates rise.
5) My opinion. Sooner or later the markets will clear. I am with MHFT. The government can slow the return of normal home prices and interest rates but it can't prevent it.
6) Oh. Whalen also stated that this crisis will take 5-20 years to resolve itself.
House prices will collapse back to mid 90s levels at least , before they were hyper-inflated by Clintons assfuck administration that took socialized housing to a new level.
+5
Hmm, am I misunderstanding something here? Did MHFT just explain how government subsidizing the housing market caused the great recession, and he suggests that it should continue - instead of returning to an unmanipulated non-subsidized market? WTF!
He said that the government caused the crisis by: 1) calling FNE/FRE into existence and then 2) removing all sensible fiduciary constraints on these agencies.
He suggests that it can't continue and that things must/will crash. That is why he is renting.
It was all over but the crying. .......yup. let me tell you how I'm crying ! Sitting here in MICHIGAN with a gorgeous condo that I bought with CASH at the top of the real estate market (back in 2005 when I was stupid, before I started reading ZEROHEDGE) . Spring is breaking, I've already reduced it & will be taking a cash loss of over $50,000 . ........... NOT A BUYER IN SIGHT ! ...... this was when i was insanely stupid .......... what an idiot (me) ..... if only i'd just put it in gold & silver .......... have you ever just wanted to slap yourself silly !!!!!!
That is when we find out how much freedom really costs.
Actually freedom costs zero.... it's the cost of authority (Govt) that is the real cost, an expensive one we cannot afford, as the colossal bill for Fannie and Freddie patently demonstrates, the wars, the healthcare, welfare, education, the socialism and the fascism of the freedom and wealth sapping State
What will a fully privatized home loan market look like? Try a lot more expensive.
Well, we just tried an almost fully socialized home loan market, and it turned out to be damned expensive for everybody, even those not in the home loan market.
What more expensive non-government loans mean is that my taxes don't subsidize stupid loans, and my pension fund gets better returns. I really don't see the downside.
As far as folks priced out of the home market, well they couldn't afford it anyway, but it'll be easier for them to save until they can afford it. Well, that is if the banks pass through the higher rates to depositors.
Yeah, I don't agree that a fully privatized loan market will be more expensive. Sure, interest rates will be higher, but home prices will be a lot lower due to the decreased demand. A lot of people (erroneously) bought homes for the tax deduction. Get rid of that demand and see where real estate prices end up.
Personally, I live in an ocean front condo and rent for $3100/month. If I bought the place, and put 20% down, my monthly payment would be over $6000, and that doesn't include property taxes and HOA's. This isn't difficult math.
Correct. No one comes out ahead, everyone suffers except bankers and no one is blamed. Perfect Crime !
http://www.huffingtonpost.com/2011/03/10/fed-reports-finds-no-wron_n_834...
Basic question is who comes out ahead; the prudent guy who saved all his life or the spender who lived a life on credit exposure ?
So far, the spender has been ahead, and same for US government, but it is about to change and everyone loses including democracy. Only bankers win whats left and it wont be much
The government subsidized home loans with tax deductions and guaranties for loans. The result? Home prices rose and Americans went into debt to live. The government subsidizes universities and tuition skyrockets and Americans have to go into debt to get educated. The government subsidizes medicine so the prices explode and Americans go into debt.
Meanwhile, the government fights illegal drugs to the death and what happens? They're cheaper than ever!
Is there a lesson in all this?
A decent article about job creation. As expected, lower wage service jobs dominate the job creation numbers.
http://news.yahoo.com/s/yblog_thelookout/20110309/ts_yblog_thelookout/jo...
Painful as it is, subsidization has got to end in order for a more sustainable and sane life to emerge. House prices are insanely unrealistic. The idea, accepted as "normal," that a person should spend nearly 30% of his income for the majority of his or her productive lifetime (30 yrs) to acquire "shelter," (at the end of which is still not "owned," because subject to perpetual expropriation for failure to pay even $1 of property taxes), is absolutely insane and illustrates only how much we have been brainwashed by banksters into accepting their rentier status and sociopathology.
That is my principled objection to property taxes in general. The idea the government can seize your property for this specific tax means that the government has a lifelong lien on your home that you can never pay off. Consider places like NJ where property taxes approach 5% of the assessed value. It means you will pay for your house AGAIN every 20 years on top of your mortgage. You are also more exposed to all the various bubbles the government creates with its monetary policies.
Renting is not a complete escape as those same costs are built into your rent, but you can stay more mobile and divide the costs. It actually puts the landlord in a squeeze, too. For example, a landlord can only charge what the market will bear (outside of rent control) and rents tend to drop as the economy drops. However, the state may raise taxes and other costs. This can create a squeeze for the landlord. I have friends who own rental properties and I would never do it...for lots of reasons economic and personal. However, your tax point is well made.
good thing I didn't write your lease MHFT, toilet blockages due to foreign objects, and not system defects, are NOT covered, and are billable repairs.
Bank Run.. Bank Run... your money isn't in the Bank!! Better get what little they have left out.
How to start a bank run by The Bernank.
i dont like the idea of paying rent to the Landlord , who isnt paying the mortgage.....i rather cut out the middle man and not pay the mortgage myself
I just have to throw in another anecdote. You children of the '60s might remember a horrible Bob Dylan song, "The Lonesome Death of Hattie Carrol." Dylan's ballad describes how one William Zantzinger of the Maryland tobacco region just SE of Washington DC got drunk one night, slapped a black waitress with a "cane that he twirled around his diamond ring finger" and was racially verbally abusive. Hattie being elderly, overweight and a walking heart attack, had one and died. Zantzinger was prosecuted for manslaughter and got a slap on the wrist. The correct decision, but in no way exonorating Zantzinger from being a complete a&^hole.
Fast forward 25 years. Zantzinger was jailed because he evicted tennants from his dirt floored rentals for non-payment of rent. Zantzinger's difficulties arose from the fact that he no longer owned the properties because the government had foreclosed, because Zantzinger never paid the taxes. I guess that that is a little like OJ. If you narrowly dodge a bullet you might have once deserved, it pays to keep your head down for life.
+15
+22.5
+10
I enjoy seeing someone who really understands the rules.
The problem is the banks don't have the deposits.. they loaned it all out on the leaky roof and moldy wall structures. That mold is the underpinning of the Financial/Banking system.
to big to fail
not to proud to beg
certainly to big to succeed
They will find a way to keep Fanny/Freddie going. It's too big too fail.
Is our federal government itself too big to fail? I think not. It just takes longer with much larger consequences.
You are correct, the powers that run things will cave to pressure once the prices begin to dive. It would kill much more paper wealth than the 2008 crash. All the tea party retirees in their power chairs will be crying tears bigger than horse turds.
If the roof leaks, the furnace breaks, and the toilet blocks, you just call the landlord.
Yeah, but the landlord won't be able to afford to fix it, so you are still living under a leaky roof and a smelly house from the clogged toilet.
But you touched on my biggest concern right now- what to do with my IRAs? Right now earning very little income. Does it not make sense to start tapping into my IRA even with the 10% early withdrawal, as my newer lower tax rate will make the tax effect a wash? I think my IRAs will be more valuable if I use the money wisely (farm? solar panels? etc) now rather than wait for it to melt away from inflation or even worse, hyperinflation.
I wonder how many people are making early withdrawals from their IRAs to pay the bills?
But then again, I still see the arguments of deflation...kind of like 1/2 half the world's water is locked up in Antarctica as ice, and unavailable...until it melts. But if all the hidden trillions do get unleashed, the dollar will be worthless. If the dollars are sequestered by the money masters, then deflation I suppose is theoretically possible. But then they could buy up everything on the cheap. They can screw the sheeple coming and going at every pass.
Good points and questions in this thread. Let me add a consideration to liquidating your 401k. I recently met our 401k managers at a company event and I pointed out that we are offered a limited choice of funds and that not one of them protects against inflation, at least very well. There are no commodity funds of any sort. Most are traditional stock and bond and the newer target retirement date funds. I suggested there is a liability issue if high or hyperinflation ensues and we are all locked into losing funds. I suggested that we do a 401k with unlimited choices through someone like Fidelity and then accept the investing risk ourselves. They, the HR dept and fund managers could certainly offer advice, but not limit choices. You can imagine the look I got. HR people and even the benefit contractors are not great investment people.
So, my point is that it might be worth it to take the 10% hit and go for it on your own. It's a one time hit but the tax benefits you've had over the years probably balance it out.
Last thought is if you are putting it in a tax deferred account as most of us are, do you expect taxes to be lower or higher in the future? I say they will be dramatically higher barring a Federal and State default...which is possible. Again, the tax hit MIGHT be worth it. It's a call we all have to make. However, I think the traditional conservative investing rules are changing dramatically because of government and Fed actions. The Feds keeping changing the dynamics of the market which actually turns all of us into financial gamblers even if we don't mean to be.
Saying that, I gambled, cashed out what remained of an old 401k and bought $15k in silver last September. It's appreciated about $10-11k as of now. That beats any tax penalty I took cashing out one of my funds. I eliminated future tax liablity, as well. I also reduced all revolving debt to zero.
Last, to one poster, paying off the house early only really pays in a stable money environment. If you have a fixed loan and you expect high or hyperinflation, just make the standard payments and invest your other money in appreciating real assets or at least things that have a higher return than your mortgage. If you predict dollar/inflationary stability then you can save big money paying off early, not to mention improving equity in case of a sale. Right now, it is probably a depreciating asset, though. Good luck. These are hard long term calls for all of us to make...because of our profoundly irresponsible and even corrupted government.
FG - I got the same incredulous cross-eyed looks at the recent 401k meeting my firm held when I observed that the paint-by-numbers funds we offer are all losers in the current environment. Your point about future levels of taxation is one that doesn't figure into their growth models, just like 8% annual appreciation. Good post.
Exactly. I would add with the enormous proliferation of funds that now just attempt to "buy" the S&P 500 that real value type investing is out the windows. The funds are the market and they do "bot" buying and selling regardless of value. That in and of itself is a bad sign but to me increases the need to fend for yourself. The mutual funds themselves have become the herd of lemmings...right off the cliff in all likelihood. The dynamics for investing have changed since the 80's and 90's but our 401k's and the advice we get are still about the same.
A lot of good questions,thinking and posts on this thread.
HR types do exactly what?
Guard the firm's "resources" and, ahem, maintain freindly
"contacts" in financial industries, I guess.
In a small way, also using the silver commodity. Jolly good for you. So far!
Good post, but I disagree that you have eliminated future tax liability. Cap gains rates on silver are punitive.
That depends how you "liquidate" it. It also depends on our future currency scenario. For now I have both investment and a sort of currency/inflationary insurance policy as I see it.
My wife just took all her IRA money and purchased a rental property. She found a custodian who charges $350/yr. This type of transaction is called a: “real estate IRA” or “self-directed IRA.” Barring any monster vacancies etc. she'll earn about 5% on her money. Better than 0.5% in a traditional IRA.
The good part about doing this is it gets the money out of the hands of Wall Street.
Be very careful with this one. Owning real estate in an IRA can get you into trouble with the IRS in many ways.
You are always at risk of accidentally disqualifying the IRA because of prohibited transactions. This can happen easily, and the penalties are harsh.
You also are going to run up a lot of excessive expenses when the time comes to take required minimum distributions. This requires paying an appraiser and a lawyer each and every year.
On another level, why would one want to put a tax-advantaged asset into a tax deferred account?
What is the net after factoring in the principal loss on investment? (housing values will decline)
Housing values will decline, but you will still have something. The dollar is going straight to zero.
Right, but are there other possible places for your money that might not go down as much?
Yes, of course, and more mobile too.
Create a Rollover IRA and put it into PSLV
I'm struggling with exactly the same question. Extract my 401k funds now, take the hit and buy something I can use long term (bent shit can, house, farmland, etc). Paying off a house with a 401k now may be a better solution than taking the chance of being forced into "investing" in treasuries when the congress critters decide to confiscate.
Of course, having your house paid off may simply put a big target on your wallet as the local government will know it's free and clear and therefore, "that rich bastard" can offord to pay higher property taxes.
If you want to own real property other than residential rental property, then I would suggest owning property in counties with small populaces, predominantly agrarian.... and purchasing farm land instead. Those who own farms in counties with large cities are going to be handed some unfortunate presents via taxation (out voted).
Also, out of curiosity, given both deflation and inflation cause the prices of homes to decline in our present environment, why would you want to purchase? How long is your timeline/expectation of normalcy? If we're talking about a $100k house and $1k/mo. rent, then I could understand... but, that's a far cry from the majority I think... just curious.
Depending on how close to retirement you are of course, I would suggest using 401k funds, presuming you are going to withdraw them, on one part deleveraging one part inflation adjusting assets. If purchasing your home provides you the former and you're willing to stay there no matter what, then so be it... but, under no circumstances will it fulfill the second part.
It also might not hurt to keep a little liquidity... certainly enough to keep your inflation adjusting assets in your possession.
Stalin eliminated the kulaks. They will do the same here. The only option is to GTFO. But where?
We won't have a stalin... we'll have an impotent lincoln. They may get to the uber police state before it all crumbles, but not for long. They're up against basic math, a populace that has tasted freedom (albeit relatively of course), and a diverse populace...
I believe the answer to your question is wherever has a cultural unity sufficient to shake off barbarians... the problem, of course, is that in a time of heightened awareness of world events and suspect motives, outsiders will be viewed as spies and destructors... especially us americans. If you have not already moved to your "back-up" country, you're here... maybe canada prolongs a little... and offers some solace in the barren wastelands... but there are many potential complications.
There is a pool of liquidity, as yet untouched, that could douse the flickering flames before they rage out of control. Uncle Sam just needs to find a way to "convert" the $6T to $12T of assets held by private retirement accounts and the cash "hoards" on corporate balance sheets. Outright theft isn't possible (yet), but the next crisis could provide the opportunity for some creative deal making.
Together we thrive...
Yep, housing prices back to the 1960's...salaries to follow!
D-E-F-L-A-T-I-O-N... suck on your gold coins, les biches!
Currency collapse => hyperinflation. Deflation in terms of real money, gold. See Weimar.
Salaries have already followed...
"In 2008,the average taxpayer earned just $33,000 a year, which is actually down from twenty years ago."
http://www.allvoices.com/s/event-8432447/aHR0cDovL21vbmV5LmNubi5jb20vMjAxMS8wMy8wOC9uZXdzL2Vjb25vbXkvZm9vZF9wcmljZXMvaW5kZXguaHRt
The dismantling of the American middle class is just about complete