drhousingbubble's blog

FHA insured loans have been a big booster for the current market.  Historically FHA insured loans made up roughly 8 to 12 percent of all mortgage originations but in 2009 they hit 30 percent.  For first time home buyers it was a stunning 50 percent showing that most people can only purchase a home today with a very small down payment.  Yet small down payments create instant negative equity positions if the market moves sideways or pops lower (aka our current market).  For example, the 3.5 percent standard FHA down payment is wiped away by the 5 to 6 percent selling costs.  What is interesting with this is that the FHA insured loan market is fully backed by the government (i.e., you) so any losses will be completely shouldered by the public.

Over the weekend it was announced that California’s large $9 billion budget deficit was no longer $9 billion but $16 billion.  Whoops.

The California housing market sits in an odd stage of limbo.

US home prices have once again made a post-bubble low in spite of all the artificial intervention and massive bailouts to financial institutions.  The bottom line unfortunately is that US household incomes have been strained for well over a decade.  You can slice it up by nominal or inflation adjusted data but household incomes have been moving in a negative direction during the 00s and continuing into this decade.  Keep in mind there is a massive pipeline of problems still in the housing market with over 5.5 million mortgage holders in some stage of foreclosure or simply not paying on their mortgage.  This is more than a housing crisis but a crisis of quality job growth.

For the first time since March, the stock market actually showed a little reaction to reality based information. As it turns out, even removing any hint of stimulus will cause the market to retreat. We already expected the cash for clunkers program was largely a gimmick with auto sales dropping like a stone in the last reading. Home sales are being artificially juiced by the $8,000 tax credit and the Federal Reserve keeping 30 year mortgages near historical lows. You can expect that if the Fed and the tax credit were removed we would see a similar reaction as the cash for clunkers program in the housing market. It is amazing that so much energy and focus is being put on bailouts, gimmicks, and transient market forces all the while ignoring one major component. Jobs.

If you had to create a mortgage that was more toxic and more destructive than a subprime loan, you would have a very hard time creating that product. Yet leave it to creative finance to spawn a devilish product with the unique name of option ARMs.

Anytime someone tells you that a mortgage is less risky than “subprime” you know you have a problem. The Alt-A mortgage is largely absent from the current mainstream housing debate but is really the next wave that will further depress housing prices. Data produced from a June 2009 OTS and OCC report highlighting market conditions for 64 percent of U.S. mortgages finds that some 3.5 million loans are categorized as Alt-A. California issuing IOUs is home to many of the Alt-A mortgages.