drhousingbubble's blog

Another thesis regarding the housing market’s future path is that of a bounce and slog market. The theory focuses on the negative equity home owners and also the low inventory on the current market. This view point actually holds some solid ground. As of last count, there are over 11 million negative equity home owners in the US. This data is usually put out quarterly but with the stronger home price movement this summer, many will move out of the negative equity position. The theory proposes that many are not selling today simply because they cannot without bringing cash to the table. Out of the 11 million underwater home owners, how many would like to sell but simply do not because they would actually lose money on their sale? This is an interesting perspective on the underwater segment of the market. Yet the outcome is probably not as clean cut as one would expect.

The dramatic rise in FHA insured loans in a time of historically low rates demonstrates two key aspects of the current American economy. The first point is that many US households have the inability to save for an adequate down payment on housing. Forget about the historical 20 percent down payment but many households cannot scrimp up even a modest 10 percent down payment.

The Consumer Financial Protection Bureau (CFPB) came out with a report that confirmed what many of us were projecting. 

10,000 baby boomers are retiring per day.  This two decade trend has only started but will certainly have an impact on the housing situation moving forward.  In most economic reports the boom and bust of the housing market was not factored into the equation.  Many boomers will downsize or sell as they age.  This is just a matter of demographics.  While trends are harder to predict, we know that 10,000 baby boomers will be retiring on a daily basis for well over a decade.  What does this do to housing?  The challenge we will face is that the younger home buying generation is less affluent and more in debt prior to purchasing a home.  Instead of growing households, we saw over 2 million young adults move back home to live with their parents.  So much for household formation taking up all that excess demand.  The recipe for the moment has been to constrain inventory and artificially push rates lower but this has done very little to increase actual financial security.  What happens when millions of baby boomers retire?

The decrease in nationwide inventory is an ongoing trend. 

 What is going on with the housing market?

The housing market is sending mixed signals in 2012.

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.