This page has been archived and commenting is disabled.
Why The Housing Market Is (Still) In Trouble
From The Daily Capitalist
December 3, 2009
Since the biggest financial collapse in world history was built on credit related to housing, it is pretty obvious that we should be paying very close attention to that market. The reasons are complex, but a recovery must be based on the liquidation of bad debt. The sooner that happens the quicker a recovery will happen.
When we mean "liquidation of debt" we are talking about a mountain of credit built on the housing bubble. This phony bubble wealth permeated the entire economy. When home owners saw the price of their home rising, they saw it as a source of capital to use for a variety of things, but let's face it, most people spent it.
New stores opened, malls were built, financial institutions grew, cars and boats, second homes, vacations, and restaurants all flourished. Credit card debt mushroomed. Home mortgages were increased to pull cash out for spending. Yes, some of it went to good things, like our children's education, helping our aged parents, and paying off bills. But the reality was that our debt kept growing.
The clever lads created even more phony wealth under the guise of insurance, but as we found out, companies like AIG really had no idea how large their obligations were for credit default swaps written against almost any financial risk. And these instruments were further leveraged without understanding the magnitude of these triple-counted obligations or their relationship to housing.
It all comes back to housing as the fuel for the 70% of our economy that was consumer spending. The thought was that housing has always gone up, and if it went down, it really never went down if you averaged growth since the post-WWII-period. A drop of 10%? Never has happened. 20%? Not even a 6th deviation possibility.
My thesis has been that this was all fueled by the Fed through monetary policies that created and supported the bubble. Aided and abetted by governmental policies and financing schemes that favored housing and risky loans. This was not a "free market" phenomenon. Far, far from it.
My thesis has also been that we can't recover until all this bad debt is liquidated, and capital generated by savings is created and ultimately invested in profitable enterprises. It would be a mistake to rekindle the bubble. But, as we know, that's what our government is trying to do. The government creates uncertainty as it flails around with programs, spending, and debt schemes to revive the economy. As a result mark-to-market accounting is thing of the past and banks are guarding their balance sheets, corporations are sitting on a lot of cash, cutting costs, and becoming leaner, and Mr. and Mrs. America still favor savings and debt instruments over equities and spending.
The big question: is the housing market bottoming out? Because once it does, debtors and debt holders will then have a handle on how great their losses are. When the bottom is falling out, it is difficult to get lenders to lend if they are afraid their remaining cash reserves will be needed to shore up the bank because of loan losses. The holders of subprime debt find it difficult to value their assets while housing values are still dropping.
Lenders have been shepherding their cash, reducing debt obligations, and cutting back lending and new investments because they do not know how deep their hole will be until housing bottoms out. Keynes called this a "liquidity trap." More reasonable people, especially the Austrian school economists, call this a reasonable and necessary response to uncertainty.
The Fed and the federal government have been flogging this liquidity trap issue without let up and basically credit is still drying up. A 0.25% Fed Funds rate is basically a negative rate and they still can't get banks to lend. The Fed's balance sheet is at a record high. They have bought $850 million of mortgage backed securities. They are injecting cash into lenders. They have basically suspended mark-to-market accounting.
In Q3, the FDIC reported that bank lending still contracted by 3%:
Loans and leases held by U.S. commercial banks have declined for 10 straight months, falling to $6.7 trillion as of Oct. 28 from $7.2 trillion at the end of 2008, according to a separate statistical release from the Fed.
Commercial and industrial loans have dropped to $1.37 trillion from $1.6 trillion, commercial real-estate loans have declined to $1.66 trillion from $1.72 trillion, and consumer loans have fallen to $847 billion from $857 billion at the end of last year.
What do banks do? They have decided they would rather hold Treasury paper instead of make loans. This chart shows what's been happening. No wonder T-rates have stayed so low despite massive deficit financing.
This is what makes Bernanke, Geithner, and Summers lose sleep at night. "It's supposed to work, dammit!" Maybe this is why Summers is always falling asleep. No matter what they've tried, they can't get banks to lend. I think they are very worried about this and while they say the economy is recovering nicely, they are crossing their fingers at the same time.
Back to housing.
I have been saying that I think the housing market is finding a bottom. I thought that low prices and rising affordability was the main driver of the housing market. If this were so, then housing prices would reflect real market valuations and this would finally bring about the liquidation of assets and debt wastefully invested during the prior artificial credit cycle. Lenders would know where they stood financially and would liquidate bad assets and rebuild their balance sheets. No more waiting around wondering what the Fed or the government would do to save housing.
I was wrong.
The housing market I now believe is being sustained almost entirely by the Fed and the federal government. This rekindling of the housing bubble is counterproductive and will hinder a real recovery of the economy because an artificially backed market will delay the necessary liquidation of the prior cycle's malinvestment of capital.
Here is why I changed my mind:
First, 59% of new home buyers are relying on government-backed FHA, the Veterans Administration, and the Department of Agriculture loans. Most of these sales are driven by the first-time home buyers tax credit. The tax credit program has been extended through April, 2010.
Second, existing home sales are being driven by the tax credit and by foreclosure and short sales. Existing home sales are up 10.1%. Distressed sales -- mainly foreclosures and short sales -- accounted for 30% of transactions in the third quarter. And. according to the NAR, home sales are being driven by first time home buyers trying to make the previous November deadline.
This will have a negative impact on future sales. Like Cash for Clunkers, these government-driven sales may just be eating into sales that would have occurred in 2010. Many economists are referring to this phenomenon as "payback."
Third, mortgage rates are now at 30 year lows. Another Fed related gift to home buyers. The average 30-year mortgage rate was 4.95% in October, down from 5.06% in September, according to Freddie Mac. Today, Freddie said the rate was down to 4.7%.
But ... home prices are still falling. The S&P/Case-Shiller index of prices fell 8.9% for the July-through-September period from a year earlier. That was an improvement from the 14.7% drop in the second quarter and the 19% decline in the first three months of 2009. Median prices of existing homes fell in 123 of 153 metropolitan areas during the third quarter compared with a year earlier. The national median price was $177,900, down 11.2% from the third quarter of 2008. [Don't ask me to explain the disparity. Case-Shiller and NAR measure this differently.] Last month the median price for an existing home was $173,100, down 7.1% from $186,400 in October 2008.
Thus, despite record interference in the housing market by the government, home prices are still falling. There are several reasons why it is likely that home prices will continue to fall.
Almost 25% of home owners are upside down with their mortgages. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic. This shadow market is huge:
Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American. ...
But negative equity "is an outstanding risk hanging over the mortgage market," said Mark Fleming, chief economist of First American Core Logic. "It lowers homeowners' mobility because they can't sell, even if they want to move to get a new job." Borrowers who owe more than 120% of their home's value, he said, were more likely to default.
Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay -- more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. "The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that," the study said.
This overhang will continue to drive prices down. There is no way the Feds can force lenders to modify enough loans to make a serious dent in this overhang. It's imply too big. Eventually the losses from forced modifications will mount and the FHA or any other agency will not be able to pay off their guarantees to lender. Nor should they try.
Mark Zandi, who correctly predicted a crisis in the housing market, but not the Crash, said on Wednesday, "The housing crash is not over." He said the lull in foreclosure sales for the past few months, due to the government's pressure on lenders to modify loans, has resulting in higher prices. He expects Case-Shiller to bottom by Q3 2010 with an overall price decline of 38% (now at 32%).
"Foreclosure sales will increase, and home prices will resume their decline by early 2010 as mortgage servicers figure out who will not qualify for a modification," he said.
Zandi said 7.5 million foreclosure sales will have taken place between 2006 and 2011. The majority of these sales, however, have not emerged yet, with 4.8 million foreclosure sales expected between 2009 and 2011.
What this means is that the housing supply, now down to a 7+ months supply, will rise again, and prices will continue to decline. We haven't seen the bottom yet.
»
- advertisements -
We need to come back to an understanding that a home is a place to live, sleep, protect your ass from the elements, and preferably a place to engage in sustainable living (i.e. farmland).
This isn't going to happen until two things take place.
-Prices are allowed to collapse to a point that anyone sitting in a decent amount of cash can own a property free and clear (or at least hold a very small mortgage). This means forcing mark-to-market and allowing the banks to fail, the FDIC to liquidate its assets and to sell homes at auction. You over-leveraged yourself or got caught trying to flip at the peak? Too bad, you get to rent now.
-Property taxes are abolished. This is especially important as it prevents true ownership as well as being truly secure on one's property. Out of all the forms of tax fleecing in this country, property taxes are by far the most distasteful and immoral.
Some interesting charts for home prices and sales. You can really see the trend:
http://www.crystalbull.com/stock-market-timing/CB-Home-Price-chart
http://www.crystalbull.com/stock-market-timing/CB-Home-Sales-chart
With the shadow inventory of foreclosures, it will take many months to get back to where people want.
What a useless essay.
The only thing that matters is a return to complete loan underwriting --> 20% downpayment, no more than 28% of monthly income goes to mortgage payment.
A colleage who worked at Freddie Mac in early 1990's said that this was the stable underwriting, proven over many many years.
Without solid underwriting, it's just a continuing con-game of getting Gov money to back-stop loans that fail.
"Almost 25% of home owners are upside down with their mortgages."
Just to clarify: About 12% of homeowners are upside down. About 25% of homeowners who have a mortgage are upside down. (About 50% of homeowners have no mortgage...)
Yes, and what about US? People without mortgages took a beating, too. It's just that some of the people with mortgages are able to walk away, passing their "beating" on to the rest of us. I am tired of hearing plans to help people who are upside down. Privatize the gains, socialize the risk. Only in America.
As one who is in the homebuilding industry, talked to Zandi last month, and sat in on Ivy Zelman's "state of the union" conference call this past week, let me say that the data is mixed, and one could legitimately argue some of the data augers a housing rebound. But there are a few threads winding through housing you need to keep in mind as you ponder its influence on the economy, and consider my belief that a second leg down is coming that will fuel the deflationary forces at work.
First, housing is local and regional. A foreclosure created surplus in Phoenix does not do anything to the local market in Cleveland. Many of the overbuilt markets will remain so for quite a while, and consequently depress housing prices in those areas. This is where the blending of regional realities into one national statistic is quite misleading, particularly if you are interested in investing in the homebuilding silo (homebuilders, products, raw materials, etc.) The answer to "how we doing" is "depends, where are you?" For instance, Case-Shiller's monthly report on 20 or so "key" markets might as well be viewed as a "bubble market" report, since it focuses almost exclusively on markets that were hot, and now not, but it is not a reflection of the activity and pricing as a whole. As such, over time it will over-report percentage declines, and also swing the other way, in an exaggerated fashion. It is worth reading, but it is also deceptive.
Second, housing's counterpart, mortgages and debt, are national in scope. Bad mortgages in Phoenix will influence pricing of mortgages in Cleveland, since unlike housing, cash is fungible and "non-local." This national factor affects markets locally by affecting the pricing, and the real issue, availability and ability to qualify of buyers of the homes, which have as one of their pricing factors the cost to finance their purchase, but also, the demand, which drops precipitously if folks cannot get a mortgage.
Third, government is supporting this market, in a big way. It is suddenly very important to figure out whether FHA, VA, GNMA, FNMA or Freddie loans can be obtained to finance your customers' purchase. If government were to pull out, I'll throw out the notion that 75% of all home purchases could not be financed. If I'm off, it's not by much. Now, take a look at those government programs. On the one hand, you have tax credits, that are really a disguised form of "seller assists." They help the buyer afford to go to closing, and provide some level of urgency to do so in a Cash-For-Clunkers sense. Next look at the government loan programs themselves, like FHA. They are black holes. One in every five FHA mortgages in behind or in default. The Fed says it will stop buying the processed debt sausage by March 2010. Think the banks will invest in that stuff? Think anyone will? Think again. Another headwind coming that very few commentators have even picked up (I should probably write a ZH contribution on it) is that the financing of new or half built condominiums is about to become, well, nigh on impossible in many instances thanks to the policies announced in HUD Mortgagee Letter 2009-46B. If your project cannot be approved, no financing will be available through any of these government programs, and that will be the death knell for that segment of the market (think of the affordable townhomes and flats that are this market) and also squash the hopes of any banks holding those AD&C loans as far as prospects of reasonable recovery. Add in the new rules that are coming to increase credit scores, increase down payments (i.e., require FHA to be a responsible lender) for all forms of housing as the GSEs decide to get religion and permanently shutter the barn door and the stage is set for a rather massive pullback in residential housing in 2010 - the second leg down.
This affects Main Street more than it does Wall Street. I see coming the continued resurgence of Wall street and statistics blaring about how our economy is growing again, and on the mend, while despair and increased poverty in the heartland grows. Interest rates may well rise, and mortgage financing become more scare and expensive, thus insuring robust growth in at least one sector of the economy: debt slavery, foreclosures and the seemingly determined impoverishment of the American middle class. Hopes and dreams will be dashed by the millions. To the globalist elites who run our country, this is nothing but good news, as long as we put up with it. Consider John Silva's (Wells Fargo Securities) pronouncement this past week that raising the minimum wage was a mistake, and that it ought to be lowered, since "making $5.00 an hour is better than making nothing." (Paraphrased) Soon manufacturing will return from China, but not because it is smart national policy, but because it will be profitable for the global corporations to do so.
Let that sink in, and the attitude behind it. I think more and more lately about the wisdom of "free markets and trade" and wonder aloud who it really benefits in the long run.
Ned,
Good comment, until I got to the end. I should point out that I worked for a home builder until the crash. And I have built stuff on my own over the years. You mix oranges and apples in your analysis. Free markets always work. What you see as "free market" just isn't. The greatest expansion ever of human health and wealth occurred in America during the so-called laissez-faire days of the robber barons. The complexity that has become our modern economy is a mixture of somewhat free enterprise layered over with intervention, regulation, and taxation. Lots of problems as you point out, but don't lay the blame on capitalism.
Thanks for the hands-on observations straight from the industry. It is reports such as this that puts Zero Hedge even farther ahead of the pack.
Meredith Whitney said during a recent CNBC interview, “I don’t know what’s going on in the market right now because it makes no sense to me… It’s rallying and there’s no root in fundamentals.”(Nov 16, 2009 CNBC Meredith Whitney Stays Dark)
http://www.itulip.com/forums/showthread.php?t=12997
And Whitney, as Michael Shulman said, is “what we all need - an agnostic - a fundamentals driven analyst. She was then (on the fateful 'day she broke the bank stocks soon after she put out a report on Citigroup in October of 2007') and she is now. And, over time, fundamentals do not lie - they drive stocks and markets.”
When markets are based on central planning, even the smartest investor is disadvantaged.
Central planners normally are engaged in picking winners and losers, but lately the Federal Reserve and its action arm, the Obama Administration, have gone a step further. Now, in making their selections, they have literally forced their influence into every phase of our economic society. They have put their ham-handed hands on the scales of housing, of government jobs, of immigrant labor, of assistance to all levels of government, of banking, of commodities, of construction, of corporations, of currencies, of big bank bailouts and small bank closures…you name it. And with an additional stroke, they are, with the public’s purse, buying equities for their friends.
Given this action, now involving trillions of dollars, how could any investor guess what happens next? Here it is Saturday. Where are we going to be Monday? It’s impossible for an investor to know, because the central planners are deciding which things are going to go up or fail, this minute. Without the working signals of fundamentals, all an investor can do is guess what the Obama Administation is going to do next. If the Fed wants to, on Monday morning when the bell rings, it could start buying aluminum. Aluminum goes through the ceiling and nobody knows why. And they’ve got you!
And, of course, Goldman et al. walk off with the cash, because they know the direction that will be taken before it happens. And if something severe happens to their investments, they and the Fed can take the opposite the direction
They are the deciders. Anybody who says, “here’s the way you can pick a stock” is now just guessing—or an insider. IMO.
We haven't had free markets and trade in this country, not for decades.
Let's examine the reasons why mortgages are considered necessary at all. First, government programs which interfere in the market and encourage high leverage, and regulations that make every aspect of home building more expensive. Secondly, a smorgasbord of local, state, and federal taxes that affect even the poorest of citizens.
Think about what a California resident has to endure. 10% income taxes. 10% sales tax on nearly everything. You want to drive your own car? Expect $500 a year in registration fees and 10 cents on the dollar on top of sales taxes, for every gallon of gas you buy. You want to run a business? Be prepared to pay three bucks an hour over the federal minimum wage, unemployment insurance, and all sorts of lovely business taxes. And Uncle Sam hasn't even taken his bite out of you yet.
And after all this, if you still manage to afford a home, California's Prop. 13 ensures that as a new homeowner you will take the brunt of property taxes since it shifts the burden away from long-time owners (and I know this well...my friend and his wife bought a home two years ago and pay over $12K a year in property taxes, while my wife and I shell out a mere $1100 on the home I inherited from my grandmother).
If we allowed free markets to work, housing prices would collapse to a point where anyone with the foresight to have a good chunk of savings could pounce on the dip and own a house free and clear. That's called stability.
"Almost 25% of home owners are upside down with their mortgages."
Actually, this is not a true statement. The truth is that 25% of homeowners with mortgages are upside down. The key words are "with mortgages." Since 50% of homeowners own their home outright, the correct math is that about 12% of homeowners are upside down. Still horrendous, though...
Trying to predict housing prices based on fundementals of wages and rents is like trying to predict stock prices based on fundementals of general economy and price-to-earnings ratio....in the very long run, fundementals matter, but....there is both herding tendencies that defy fundementals and there is also manipulation of both these markets.
To me housing market is all about the banks.
And when it comes to the banks both private market forces and public forces are at work. While I agree with author Econophile that the government and Fed (not the government)involvement in housing market great contributed to housing bubble, if you look at Cali housing market in mid 2000s, it went crazy on loans that had no government backing, as their houses were much too expensive, it was manic investors via mortgage backed securities lending to manic homebuyers, both the ivnestor and homebuyers thinking their highly risky leveraged plays could not go wrong because house prices always went up. No govt involvement needed.
And Econophile, you contradict yourself, as you mention Geitner, Summer, Bernanke can't manipulate their way out of this....so apparently market forces do matter...so which is it? I believe manias are reflected in both private market forces and in govt policies, it is not simply all the fault of the guvment (Ron Paul) or all the fault of capitalism (Michael Moore) but rather the fault of human nature reflected in either markets of govt policy or, most usually, both.
So back to housing and its all the banks...when I say its all the banks, I mean this in regards to private market forces and govt intereference.
Anything govt seems to do in regards to housing is about helping the banks, and if regular people get a teeny tiny bit of help at great tax dollar expense, the govt will play up this horribly inefficient teeny tiny help as the reason for their intervention, but the real reason is that it helps the banks. The banks are backed by housing, mortgages...and to a lessor extent, commercial property. They are moving to Tbills now, but its too late.
So when pondering house prices don't think about rents and wages, rather, think about banks and herding behavior of markets, and how much we do not know about what either is going to do, when. I agree with other posters that once deflationary pressures come to bear, there may be little the Fed, govt, et al can do to resist it, but exactly when the music stops is, IMO, very hard to time. Fact is, extend and pretend works in the short term, and sometimes works for a very long time.
Go on, try to predict what the most powerful, mobbed-up institutions, in this country will do to protect themselves, what they will get the govt to do to protect them. My cat brother buries his crap in his kitty litter like he's fooling someone, like no one knows there is crap in that box. And yet, he keeps burying. Reminds me of the banks. And when I'm on the hunt in the neighborhood, I try so hard, but I never know when that bunny I'm chasing is going to change direction, so they get away everytime. So after you prdict what the banks are going to do, then go on, and try to predict when herds will suddenly shift directions in the private market, ...once you know those things, you may be able to predict. I think you'll have a much chance as I have of getting a bunny.
Moneymutt,
Ask yourself what forces act to create a bubble. It's not greed. Greed is a trait of human nature, ever present in markets. Something has to change on the playing field. That something in our crisis happened to be the Fed: 1% interest rates to bail us out of Dot bomb. Cheap money is the cause of all business cycles. Then ask, why housing? Specifically, why would anyone lend to a borrower with a 500 credit score, a 5% down, and liar docs? Well, no one in their right mind unless ... the government supports that market and makes it attractive to investors (Fannie, Freddie, FHA, etc.). Human nature took off from there. Add to that the risk models that were used. They were based on faulty science, as pointed out by Nassim Taleb in his books (Black Swan, etc.). So Wall St. it to blame as well, but without cheap money, no bubble goes anywhere.
Thanks for your comments, good points.
I do not disagree with much of your contentions, and I heartily agree your emphasis on the ever-lowering interest rates in a not so bad economy really setting fire to last of the housing mania. However, I think it is a bit sloppy to conflate Fed interest rate actions, with "government is the whole reason for all economic problems", because first, the Fed is not government. Second, once the Fed kept reducing interest rates in a not so bad economy, (it basically printed "house dollars" and caused housing inflation when we were not in a horrible housing recession to begin with) then it is my contention, housing mania would occur with or without any govt intervention/action.
Personally, I think once everybody wanted in hosuing market (as it just kept going up thanks to Fed) then both private markets and government erred fairly equally in falling for mania. Dems supported getting more low income people as homeowners because why should they miss out on the profits of this great asset bubble just because they did not have a down payment? Investors buying houses erred because why should they stop at just making money on the hosue the live in, why not have two or three or more?
MBS market supported loans to low-income people because as long as housing assets were going up, they could make big money charging usurous rates til they crushed homeonwer and took house back. MBS investors also erred in lending to higher-income people with good credit in much too highly leveraged fashion (as long as you had a good FICO score and six figure salary, you could get a million or two in Cali, as it was secured by houses).
Repubs embraced ownership society and gave banks whatever they asked for, including deregulation allowing more risk and leverage than allowed in past decades. Save some decent state watchdogs fighting mortgage fraud and some clear-headed housing nay-sayers investors like say John Paulson, no one, not the markets, not the government, wanted to end the party or had the sense as a mass majority to see what is coming.
And I agree, some steady portion of people are always greedy. But I can not automatically conclude from this that all economic evil and mania, boom/busts is then due to govt. There are many historic examples of boom/busts that, try as I might, I can find no government cause. Tulip mania, many boom/busts in this country in the 1800's when we had no central bank and very little government involvement in economy etc. And when I compare very centralized, socialized economies in this century to markets with the the least government influenced economies, I do not see a great difference in boom/bust behavior, there have been failures and successes in both, as Sweden and China have done decently, as has Cayman Islands, New Zealand, Australia etc...
Not that I'm any great student of all this, but I see enough examples to reject "goverment is all bad and completed free and unregulated markets are all good", just as much as I reject "free markets are all bad and government is all good".
I tend to side with the likes of Prechter/wavers that see both market and government actions to be, not the cause, but rather, the result of social/cultural forces. I think these forces and cycles would exist in some degree in a completely free market economy and also in a completely goverment-run economy.
In either a very free market economy or a governemnt-run economy, some greedy people will attempt to game system, concentrate money/power in elite/corrupt hands that will result in protected, inefficient monopolies and also people as a whole will often over-react in boom/busts, manias/overly-bearish attitudes, to the detriment of the general common wealth of the economy.
Never catch a falling knife. I agree that bubbles are irrational and fundamentals may take awhile to reestablish equilibrium. However, there is something interesting in the historical Price/Rent ratio: it doesn't undershoot from equilibrium that much. I'm looking for a longer time series but these graphs illustrate the point,
US market, equilibrium ratio seem to be 1995-97 level,
http://www.princeton.edu/~pkrugman/cbo_price_rent.jpg
http://www.irvinehousingblog.com/images/uploads/2008sept2/Projected%20Or...
other markets, again 1995-97 seem to be the equilibrium level,
http://1.bp.blogspot.com/_Et4TQ-a0gGU/Sg7WE-vBCII/AAAAAAAACEM/FQKqA_G5XO...
I love all of the discussions, but I would like to come back to the central theme for a moment.... When will housing bottom?
I have been toying with certain thoughts and have come to several conclusions that result in the following...
National Housing Prices will bottom at:
1) 1996 prices - if we are very lucky,
2) 1990 prices - if we avoid the worst, or
3) 1882 prices - if things get bad.
This is national and average, local markets will reflect the change in their demofraphics and industry base against the national average.
I would enjoy hearing your thoughts.
That is impossible to predict. Zandi made a guess, but it all depends where you are. Some areas are stabilizing. Some are deep in it. The best way to tell is to keep following the inventory and try to judge when supply = demand. Normal is a 4 to 6 month inventory. But ... there are too many intervening factors, mainly what the government will do or not do, to screw up the market. What I think this all leads to is eventual stagflation. Anyone who tells you they know with certainty is a fraud.
Good summation. Some comments:
The real housing bottom should be tied to mean wages, through % of net income, usually 35% max for mortgage alone. My price reduction guess Q2 2009 was around 40% from peak. To levels at about the real beginning of the bubble around early 2002 levels. But, I have since changed my mind.
Granted, housing prices still need to fall a bit, but my new guess now includes a protracted undershoot in price which will last about 9 months. This is based on the effects created by withdrawal of government housing intervention (FED + Gov +FHA). So I am more in the 50% off peak price range going into 2011.
----------
The real battle is over price. The FED may call it price stabilization, but it is really price manipulation. Lets look some popular questions, and please feel free to comment.
1) How fast can the FED and Government programs elevate housing prices?
The FED is trying its best, and spending a lot of money to buy bad real estate debt from the banks. The FHA is backing questionable loans, and we now have a new home buyer credit extension. But, even after all of this effort, price has just stabilized to a certain extent.
2) Why do they care about inflating housing prices once again?
There are a lot of macroeconomic-isms why you would want to inflate, but I think the real reason for price increase is to benefit the banks who had significant loss exposure.
Its all about keeping the banks solvent. Obviously, the big banks took precedence.
That is why the FED extended the MBS buy program, because the banks have not de-leveraged enough to weather the storm. Its all about extend and pretend, in an effort to stall for time so the banks can move debts to the FED or minimize the actual loss when they are recognized.
The extension on the FED MBS buy, signals that the banks are fundamentally at risk. But, probably much better off than this time last year.
3) Are these higher prices sustainable?
No. To not let the free market work, and have housing reach equilibrium within the market, is a huge waste of tax payer money. Worse than this, interference of this magnitude when removed will tank the market even further. Producing the price undershoot effect.
Also, the FED has no idea on how to tighten with MBS and Agency paper. How can you sell something in the market, anywhere close to your purchase price, to someone at an immediate loss. The premise is, for these assets to attract real buyers, real estate price would have to return to near peak levels. Which we know is not what the market will bear.
----------
Just think, if we gave $1T to the Small Business Administration to loan out, rather than buy bad debt from the GSEs, how we could spur growth.
Mark Beck
People overestimate what the Fed and other interventions can do to stop the asset correction. Assets stock is 10-15x GDP in developed economies, Asset deflation in balance sheet recessions can be temporarily delayed but not stopped IMO. Eventually equilibrium will be restored and the best indicator to watch is Price/Rent. The risk is that rents may fall and prices chase rent down in a vicious cycle, like in Ireland.
http://rutledgecapital.com/2009/05/24/total-assets-of-the-us-economy-188...
Around 1997 levels, based on Price/Rent, it might undershoot a bit though.
http://www.youtube.com/watch?v=BRW1IJ7Un3s
But some countries in the EU have a long way to go and that's the weakest point in the global system,
http://1.bp.blogspot.com/_Et4TQ-a0gGU/Sg7WE-vBCII/AAAAAAAACEM/FQKqA_G5XO...
About banks lending (or not), here is what happened to me recently (last month). I started shopping for loans, and approached a big bank named ... let's not give names, I'll just call it WFC. I picked them based on some reports that said they are #1 small business lender in the country, and my 1 year old business was doing well, so I thought about expanding it.
I asked for a $25,000 loan, to be paid of over 3 or 4 years. They pretty promptly refused me, but were all to kind to forward my request to another entity, a sister company of some sort, called WF Financial, who invited me at the local branch, and said they were able to secure a line of credit of $2,500, and I should get an offer in the mail, which I will be able to accept or not at that point.
Sure enough, I got mail from them about 1 week later, and the line of credit is in fact a credit card, with a limit of $2,300 and a variable APR of 31.90%. To top it off, they also included a convenience check, with which I can tap into my credit at just 36.00% (privilege for which I’d pay a 4% fee). Is anyone interested in that? I could probably take the offer, and loan it to you - just to grab this “excellent” opportunity </sarcasm end>. This is just crazy…
This is the worst experience I had with a bank in years... They pulled my credit report 4 times (?!), and offered me something that falls well out of the range published very recently in Smart Money, where it said this bank proudly offers loans between $3,000 and $100,000 with rates between 8.5% and 26.25% (http://www.smartmoney.com/Personal-Finance/Debt/For-Cash-Seekers-Persona...) . Of course the offer depends on the credit, but I have good credit (not excellent, yes, but good nevertheless... depending on which bureau you inquire, is between 697 and 724). In the end, I got approved at 9.29% by my local credit union, who’s probably not in the deep shit WFC and the other big banks are…
Everytime they pull your credit report it drops your score. So they probably had to pull it enough to get you bracketed into that.
Here in Kansas, I borrowed $10k today from my credit union at 5.25%.
thanks for sharing.. this is common now - but have we ever seen loan rates this high while saving rates this low?? -
the banks have to be so fucked for them to try to do business this way...i tried shorting BAC but it was a joke and seems to be allowed to play with mythical numbers for as long as they want
So 20% of the median price underwater times 10.7 million is only 364 Billion these folks are underwater to the banks not counting other leveraged 10 to 1 debt they borrowed on their equity.
Stocks down.
Real estate up.
IF you are upside down, quit paying. NOW. Use the money to pay down your credit cards, your car, any other debt. Live free for a year or so. Then move (RENT) for 2-5 years. Save money.
Do it. Don't be afraid. Don't listen to some moron who tells you that you should "do the right thing" by supporting a criminal banking enterprise. Do the right thing for YOU.
The 25-40 crowd seems to be waking up to this reality more quickly than more " grizzled elders ".
Within 2 years the younger homebuyer woke up to being 200+ large in the hole in Cali. They still have good jobs, but the underwater payouts make no sense economically for 10+/- years . Plus many have adjustable ARMs they can't refinance. Several I've talked with truly believe the situation relative to their credit due to strategic default ( keeping their revolving debts current ) will be an asterisk on their credit reports anyway. They might be right.
This is the New Normal, that's for sure.
again, ANYONE who took an ARM loan was just fooling their own smug selves. Sure they should just walk - hell I dicked over the banks for $18k in unsecured debt in '00 because the dot com bomb explosion tossed all my paper wealth away and BK laws were still written to give you a mulligan back then
screw the banks on anything you can, but you should try to get a house soon if you do not have one, because interest rates will go up faster than prices will go down from here on out.
Wrong. Interest rates may rise to the MOON, but the prices will fall to near Zero as a result. It makes no sense to buy even at close to zero interest as long as you believe the prices will fall. You simply wait until the price falls low enough to buy a property for cash. Then it doesn't MATTER if banks are charging 20% or more interest, you won't have to pay that interest.
The number of houses in shadow inventory is beyond belief. It has to eventually come to market. If you have the money to pay the back taxes, that is what the property will cost you. Buying now at what remains inflated value is complete idiocy.
RE
It does depend on the individual's situation (current housing payments vs equivalent rent, etc), but definitely do not hesitate due to some feeling of "morality". Your mortgage payment includes a payment for a default option. If it makes sense, excercise it.
But definitely, stopping paying a mortgage where you are grossly underwater can save you a lot of money on something you are unlikely to repay anyway.
Renting the new American DREAM
As collapse and hyperflation loom, Americans need to begin to look to financial safety and survival. It may even be too late now to get out of the US dollar in time to avoid major losses. John Williams of shadowstats.com, a cum laude in economics, expects that “the contraction in U.S. economic activity likely will accelerate anew in the early months of 2010 (article for subscribers only).”
Says Williams, “The only way that personal consumption — the dominant component of GDP — can grow in such a circumstance is for the consumer to take on new debt or to liquidate savings. Both those factors are short-lived and have reached unsustainable extremes. Debt expansion and savings liquidation both were encouraged by the investment bubbles created by Alan Greenspan; he knew that economic growth could not be had otherwise. Part of what is happening today is payback for those policies.”
Where do holders of dollars flee other than to gold and silver and more stable foreign currencies? And what is the best timing to keep from getting hurt? Williams has his suggestions. Could housing, as it falls further, be one? Or could it become a debt trap, a rent trap? I don’t know, but I’m leaning toward real estate. In the end, each man must decide for himself.
Devaluation of the dollar, perhaps something like $1,000,000 to 1 amero (the “new North American common currency—a circled A its proposed symbol chosen by Herb Grubel)--would be a terrible thing for Americans. There will be no black market in dollars here as in Zimbabwe. In Weimar Germany, by late 1923, it took 200 billion marks to buy a loaf of bread.
“In November 1923, a currency reform was undertaken. A new bank, the Rentenbank, was created to issue a new currency--the Rentenmark. This money was exchangeable for bonds supposedly backed up by land and industrial plant. A total of 2.4 billion Rentenmarks was created, and each Rentenmark was valued at one trillion old paper marks…
“[A]fter April 1924…businessmen were required to repay loans in gold marks, equal to the original value of the loan. Thereafter, incentive was gone to borrow except for legitimate needs.” (The Nightmare German Inflation by Scientific Market Analysis, 1970.)
http://www.usagold.com/germannightmare.html
Hyperinflation happens quickly, in a flash:
“Starting with a gold mark worth about a dollar in 1920, Germans ended up with a worthless paper mark that, in November 1923 was replaced by a new gold-backed mark, at the rate of 1,000,000,000,000 (one trillion) old paper marks to one new gold mark…
“The statistics presented show that the peak of the inflation was from early 1922 through November 1923, a little over a year. The last three months appear to have been the most intense… Landlords lost, since rents were fixed. Mortgage holders lost, seeing their holdings diminish to one trillionth of their original gold value…”
http://www.globalresearch.ca/index.php?context=va&aid=15034
Below is a quotation from Vampire banker$ (or the nuts and bolts of the scam): do we define economics as “the science of scarcity” [as most high school texts do] or as “the art of wealth-creation,” emphasizing that it has social, political, and environmental consequences? by Morgan Ibarra, a history and economics instructor who recently published Scamming God, a novel about the roots of the current crisis.
[W]hat happened to Germany in 1923--overlooks the fact that the Reichsbank (made independent of the government in May 1922) went way overboard, running the presses round the clock.
Lord D'Abernon, the British Ambassador to the Weimar Republic from 1923-1926, wrote that the situation was "like giving maniacs control of the asylum..."
“There is a spot on the lending curve where the Rule of 72 kicks in with an exponential vengeance. Remember that the Weimar Republic's mark was worth one-trillionth of its 1922 value at the end of 1923, the year of hyperinflation. Writers like Ellen Brown (whose latest book is Web of Debt) have theorized that the hyperinflation was caused by short-selling. But that was merely part of the problem. I would argue that even though usury laws were in place in the Weimar Republic, bankers ignored them and issued adjustable-rate loans, which not only edged out the runaway inflation, except when the rate of inflation/interest was so high (say, a billion percent) that bankers offered borrowers a discounted rate. The short-selling was merely the delicious icing on the structural cake of compounding interest.
”Using the Rule of 72, a loan of 10,000 Papiermarks, at 10,000,000 percent interest, would double in less than two minutes. If we divide 72 by 10 percent, we get 7.2 years. If we divide it by 10,000,000, we get 0.0000072 years. Convert this from years to seconds and the answer is 113.5 seconds--less than two minutes. Now, let's double the 10,000 Papiermarks an arbitrary nine times. (113.5 times 9 equals 1,021.5 seconds; divide by 60 seconds = 17.02 minutes.) So, in seventeen minutes the German banker had earned 5,120,000 Papiermarks through compound interest. Combined with the fiat money the banker created by issuing loans, the Rule of 72 kicks in making the Reichsbank's presses run at a ferocious pace and jacking up the denominations to astronomical levels to cover the hyperinflation caused by the banks' turbo-compounding. These bankers were entrepreneurs, short-selling the crisis they created during the window of opportunity before the government converted the Papiermark to Rentenmarks.
”If our private bankers aren't reined in, this is what may be in store for us. The awesome shock of Naomi Klein's Shock Doctrine that takes us down the road to dictatorship may just be depression combined with hyperinflation--not hyperinflation followed nine or ten years later by depression.”
http://www.thefreelibrary.com/Vampire+banker$+(or+the+nuts+and+bolts+of+the+scam):+do+we+define...-a0207350183
Sir, great post. Thanks.
This is a good synopsis. Housing has not yet hit a bottom, anyone who suggests so is lying, to themselves and others.
The evidence? Delinquency inventories are still rising. Worse, the pace of the rise isn't even slowing. See for example table 9:
http://www.fanniemae.com/ir/pdf/monthly/2009/103109.pdf
That's not a recovery.
But the bottom is coming. Like the bottom in any market, it only comes after capitulation, and we are seeing signs of it. As I said in another post, the single most important news story for me today was this:
http://www.bloomberg.com/apps/news?pid=20601103&sid=ait0imcXREtI
Banks are finally sucking up their losses, not only through short sales, but through stepping up foreclosures as well (there was separate news from the government showing foreclosure starts are now outpacing modification starts).
This means that delinquencies will start to fall as more loans are resolved than new delinquencies start (I expect this to start showing up by Feb/March). It will also mean housing prices will decline. I expect the decline to last through next year's spring selling season, about 5-6 months starting in Dec (Case Schiller is reported on a lag, so might not show a decline for awhile).
Of course this also means losses will be realized for the banks (who may or may not have reserved for them), but also for insurance companies (like the financial guarantors and mortgage insurers). And we also know that means the government will try to paper over the losses with public debt and money printing.
Bottom line - real losses will start to hit financials (not just reserve accrual) - those that survive will be those that are adequately reserved - and for those that aren't, public dbet and money printing will cover it up, meaning the dollar will fall further relative to real money.
All IMHO.
housing isn't some commodity trade even though many fools tried to force that during this decade. People who avoided those retarded ARM loans do not have to sell their homes - they can just sit put and enjoy their home. Sure if they lost their job, good chance they lose it but that is true anytime
anyone who thought the new way to live was to get interest only loans and keep hopping from home to home while raking in profits is a total moron and why their life is how everyone is suppose to view the housing industry is madness
All my friends in the philly burbs are making their payments and keeping their homes.. you wouldn't even know there was a problem without the headlines blasting it all the time.
"Those that survive will be those that are adequately reserved."
As in the trillion dollars of "excess" (meaning beyond the required ratio to outstanding loans) reserves the Fed created and plopped in certain banks (could we please have a public accounting of this, at least?), on which said banks currently are paid interest to insure they keep those funds in reserve rather than loan them out.
I point this out for the benefit of those who loudly proclaim impending hyperinflation because "someday" those reserves are supposedly going to explode into actual loans and create "enormous" demand pressure on prices. The reality is that those reserves are parked in the accounts of those banks solely to keep them from being closed by the FDIC, and they will stay there until the banks fail anyway or manage to get the balls to make loans again, at which point the Fed will switch to charging interest on the reserves, which will cause the banks to send them directly and swiftly back to the Fed. Inflation may happen, but if it does it will have nothing to do with those reserves.
We are all upside down Keynesians now.
Looks like everyone will become mini-dubai's----hey Mertal grease up the cat
Housing is a joke. Poor fools who buy a home now. Prices will never go back up. Wages and salaries make even existing house prices unaffordable. Wake up America! Take your losses like a man. Fancy accounting gimmicks, and I mean really off-the-wall and completely made up transactions, are rampant. I'm glad I got out of the accounting business. There was no ethics there. and we can continue to build a solid economy only after debts are properly put to rest.
defaults aren't everywhere guys - buying a house now is a decent move if you have a decent wage (twice the national avg can get you a house $300k range)
i bought my house in April and all the Zillow type sites have shown my area go up notch or two since then
You can't liquidate the debt without liquidating the lenders. That would require building enough prisons to house all of Wall Street and much of FNM, FRE and the big 5 banks employees as well. We are probably looking at $5 trillion in losses. What suffers worse than housing, which if not for debt would correct itself to about 30 cents on the dollar and lay there is the trillion dollar annual flow for consumer spending. That needs to be liquidated so the super wealthy and political criminals can be liquidated with it. The average Joe has already lost everything he own as who will they tap once the international bankers decide the US can't borrow any more money.
(posted elsewhere, but belongs here)
*now not* OT:
Not one to usually raise the white-flag of surrender but here goes.
I need advice. I can't rationally figure this one out and I admit, I'm in a mess.
I'm in SRS way too deep.
Gut tells me dump and run
Brain says gotta turn around sometime. Avg'd at 9.87. It's barely treading water at 8 today.
I'm open to suggestions. An idea? A plan?
I freely admit I'm an ass for getting involved with it so, berate all you want, I'm beyond that...
I just need a logical plan.
Thanks in advance.
As others have explained from time to time, the math of inverse ETFs virtually guarantees that they will generate terrible returns over time. The more they're leveraged the worse they are because the day to day volatility will eat you alive.
Here's an extreme but simple example of the math erosion. The underlying index goes up 25% one day, from $10.00 to $12.50. The next day it goes down 20%, from $12.50 right back to $10 for a return of 0. The 2X inverse fund, if it does its job of 2X the inverse of daily price moves in the index, goes down 50% the first day, then up 40% the next day. So on the first day the 2X inverse ETF goes to $5, the next day it goes to $7, down 30% versus a flat index.
You can be right about the long-term direction of the index you're betting against and still get creamed over time in the 2X leveraged index ETF because of the volatility. Your gut is right. You would have better odds throwing your money down at the roulette wheel than in buying or continuing to hold inverse leveraged ETFs.
I got killed in srs and faz. your thinking is right, the market is so far from rational, it amazes me, how radically they can manipulate it. I'm sitting on my faz, it's been very painful, and I wonder if I should have jumped in and out instead of holding. I don't buy on margin anymore, I'm risking my money. I thought yesterday was a likely bottom,In srs and today it goes lower.when it turns, it will move fast, but I just don't know how much further they can push RE and financials. I might decrease my position, with the plan, to get back in when it turns. a half a loaf of bread, is better than no bread at all. ( I'm an amateur, this is just my opinion)
Recommend Mark Hanson's blog (monthly blog post) for ZH readers.
http://mhanson.com/blog/
they feel they have too keep prices up, if they do not counties are toast because of real estate taxes are approximately 60% of there income, and with sales taxes declining, all the states goo ka blewey
if you talk to any company that buys the foreclosed properties in bulk, a huge amount of inventory, huge, is being held back, they anticipate it to come online at firesale prices mid year
I have heard this, too. This, plus the homes whose payments are in arrears ninety days but the banks aren't foreclosing means that we have a glut in the wings.
How big is huge?
I'm in SoCal......ground zero for this mess. But my sister-in-law lives in Arizona. I saw her at Thanksgiving.
She's sitting in a home bought for $1.6 M in 2006. She has not made a payment in 15 months ( option ARM of course ) !! And she still lives in the home. Two short sale offers are in for $ 500k and $550k, which I doubt the bank will accept. Meanwhile, the County ( Pinal ) has raised her taxes from $ 2500 to $ 13,000 because the County's going broke. She doesn't plan to pay that either, along with other troubled prop owners who are boycotting the prop tax in an act of defiance. Letting the banks and the county fight over the carcass, so to speak.
Banks are moving the lower-end stuff and hunkering down with the big stuff. I see it in Cali, too. If the bankstas are going to be whacked with a big number, they get quiet.
My deadbeat sister-in-law.....a notorious flipper in her heyday.......is my most reliable barometer on the higher end defaults. There's many thousands of shadow defaults between CA , AZ , FL, NV. Count on it.
Thanks for the great story, I see the raw data but it is great to see the stories behind them.
15 months of no payments and counting - I have seen plenty of these. Good for her that she stayed in the house, this is what I have been saying for months, this is the common person's bailout. Even on an OA her payment was probably several thousand a month.
I fool with housing as well and went through the 1980's bust here in DFW. I too get the idea that the normal chanels of property liquidation are not being utilized to a great extent, rather the sales are being handled through the back door. DFW is a tough read because it has grown so fast, but the problems with financing were apparent here most of this decade, as postings for foreclosure were in the 4000 monthly range, the same as single family home construction. There was only a bubble in North Dallas that I could see, yuppies bidding for old homes in close in areas. There can't be a recovery and low interest rates in this game too. There is going to be mounting pressure to sell.