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Guest Post: The Unsafe Foundation of Our Housing 'Recovery'

Tyler Durden's picture


Submitted by Charles Hugh-Smith via Peak Prosperity,

What could go wrong with the housing 'recovery' in 2013?

To answer this question, we need to understand that housing is the key component in household wealth. And, that Central Planning policies are aimed at creating a resurgent “wealth effect,” as follows: When people perceive their wealth as rising, they tend to borrow and spend more freely. This is a major goal of U.S. Central Planning.

Another key goal of Central Planning is to strengthen the balance sheets of banks and households. And the broadest way to accomplish this is to boost the value of housing. This adds then collateral to banks holding mortgages and increases the equity of homeowners.

Some analysts have noted that housing construction and renovation has declined to a modest percentage of the gross domestic product (GDP). This perspective understates the importance of the family house as the largest asset for most households and housing’s critical role as collateral in the banking system.

The family home remains the core asset for all but the poorest and wealthiest Americans. Roughly two thirds of all households "own" a home, and primary residences comprised roughly 65% of household assets of the middle 60% of households – those between the bottom 20% and the top 20%, as measured by income. (The U.S. Census Bureau typically divides all households into five quintiles; i.e., 20% each.)

Since housing is the largest component of most households’ net worth, it is also the primary basis of their assessment of rising (or falling) wealth (i.e., the "wealth effect.") No wonder Central Planners are so anxious to reflate housing prices. With real incomes stagnant and stock ownership concentrated in the top 10%, there is no other lever for a broad-based wealth effect other than housing.

Extreme Measures

Given the preponderance of housing in bank assets, household wealth, and the perception of wealth, the key policies of Central Planning largely revolve around housing: keeping interest rates (and thus mortgage rates) low, flooding the banking sector with liquidity to ease lending, guaranteeing low-down-payment mortgages via FHA, and numerous other subsidies of homeownership.

At least three aspects of this broad-based support are historically unprecedented:

1) The purchase of $1.9 trillion of mortgage-backed securities (MBS) by the Federal Reserve.

The Fed purchased $1.1 trillion in mortgages in 2009-10 and it recently launched an open-ended program of buying $40+ billion in mortgages every month. Recent analysis by Ramsey Su found that Fed purchases have substantially exceeded the announced target sums; the Fed is on track to buy another $800 billion within the next year or so. This extraordinary program is, in effect, buying 100% of all newly-issued mortgages and a majority of refinancing mortgages.

Never before has the nation’s central bank directly bought almost 20% of all outstanding mortgages this raises the question: Why has the Fed intervened so aggressively in the mortgage market? There is no other plausible reason other than to take impaired mortgages off the books of insolvent lenders, freeing them to repair their balance sheets.

Regardless of the policy’s goal, the Fed now essentially controls a tremendous percentage of the mortgage market.

2) After the insolvency of the two agencies that backed many of the mortgages originated in the bubble years (Fannie Mae and Freddie Mac), the minor-league backer of mortgages (FHA) suddenly expanded to fill the void left by Fannie and Freddie.

Many of these mortgages require only 3% down in cash, just the sort of risky “no skin in the game” mortgages that melted down in 2008.

Given this mass issuance of low-collateral loans to marginal buyers, it is no surprise that the FHA will soon require a taxpayer bailout to cover its crushing losses from rising defaults.

In 2010, 97% (!!) of all mortgages were backed by government agencies, an unprecedented socialization of the mortgage market. (Source)

This raises two questions: Where would the mortgage and housing markets be if Central Planning hadn’t effectively socialized the entire mortgage market? What will happen to the market when Central Planning support is reduced?

3) Official measures of inflation are viewed by many with a healthy skepticism, but even this likely-understated rate has recently exceeded 2.5% annually.

In this context, it is unprecedented that one-year Treasury bonds have near-zero yields, effectively costing owners a 2%+ annual fee for the privilege of owning short-term Treasurys.

Even more astonishing, rates for conventional 15-year mortgages are comparable to official inflation (the Consumer Price Index, or "CPI"). Lenders are earning near-zero premiums on these mortgages. How sustainable is this imbalance of risk and return?

The enabler of these extremes is, once again, the Federal Reserve, which has purchased hundreds of billions of dollars in Treasury bonds and flooded the banking sector with zero-interest “free money.”

This formidable Central Planning support of housing has placed a bid (i.e., a floor) under housing, resulting in two bounces since the housing bubble popped in 2007-9.

The first heavily subsidized rise faltered. Will the latest pop also reverse? Or is the much-desired “housing bottom” in, from which prices will continue their ascent?

In the macro context, what housing bulls are counting on is the emergence of an “organic,” self-sustaining recovery in housing, based not on Central Planning subsidies but on private demand and non-agency mortgages.

Housing skeptics are looking for signs of what will happen when unprecedented support and intervention in the mortgage and housing markets is reduced or withdrawn.

The Foundation of Housing: Debt and Federal Subsidies

About two-thirds of all homeowners have mortgages. As I noted in The Rise and Fall of Phantom Housing Collateral, mortgage debt doubled from about $5 trillion in 1997, before the housing bubble, to $10.5 trillion in 2007, at the top of the bubble.

This reliance on debt informs the Central Planning policies of lowering interest rates and guaranteeing mortgages via Federal agencies such as the FHA. The only way debt can increase is if incomes rise or the costs and qualification standards of borrowing decline. Since income for 90% of households has been stagnant for decades, the only way debt can expand is by lowering interest rates and reducing the risk exposure of debt issuers via Federal guarantees.

These policies have been pushed to the maximum. As a result, the policy tool bag to further boost housing is now empty.

Now there is only one direction left for interest rates (up) and for housing subsidies and guarantees (down).

Another support of housing recovery is the restriction of homes on the market. Lenders are limiting the inventory of homes for sale by keeping many distressed/foreclosed homes in the off-market shadow inventory. This artificial restriction, coupled with low rates and government subsidies, has supported the modest recovery shown on this chart (courtesy of Lance Roberts) of total housing activity:

While housing has recovered to 2010 levels, what is not visible is the collapse in housing’s share of net worth displayed in this chart:

Housing equity as a percentage of total net worth declines when the stock market rises strongly while housing gains at a much lower rate (for example, during the Bull markets of 1952-1968 and 1982-2000) and rises as stock equity falls (for example, 1969-1981) while housing rose. In the 2001-2008 era, both equities and housing both climbed sharply, but since housing is the larger share of most households’ net assets, housing’s rise overshadowed the expansion of stock net worth, causing home equity to rise as a percentage of total net worth.

The collapse of the housing bubble and the stock market pushed home equity as a percentage of net worth to new lows. The subsequent doubling in the stock market has had little effect on the bottom 90% of households, as the top 10% of households own 85% to 90% of all stocks. (Source)

In broad brush, the wealth of middle class of homeowners has been influenced by four trends:

  1. The stagnation of real income
  2. A rapid rise in mortgage and other debt
  3. The use of debt to fund consumption
  4. The collapse of housing equity as the basis of debt-based consumption

In other words, Federal subsidies and Federal Reserve policies enabled a vast expansion of debt that masked the stagnation of income. Now that the housing bubble has burst, this substitution of housing-equity debt for income has ground to a halt.

This created a reverse wealth effect: The 70% between the bottom 20% and the top 10% have seen their net worth plummet while their debt load remains stubbornly elevated. 

Americans saw wealth plummet 40 percent from 2007 to 2010, Federal Reserve says. (Source)

This chart is nominal rather than real (adjusted), but the relative expansion of debt is clearly visible:

While charts like this lump all household debt and income together, this masks the reality that there is a clear divide between the top 10% and the bottom 90% in terms of income and debt. The debt load of the top 10% is considerably lighter than that of the bottom 90%, while income and wealth gains have flowed almost exclusively to the top 20%.

The top quintile accrued 89% of the total growth in wealth, while the bottom 80 percent accounted for 11%. (Source)

Unsustainable Pricing Will Introduce the "Poverty Effect"

If we put all this together, we get a picture of a middle class squeezed by historically high debt loads, stagnant incomes, and a net worth largely dependent on housing.

In response, Central Planners have pulled out all the stops to reflate housing as the only available means to spark a broad-based “wealth effect” that would support higher spending and an expansion of household debt.

This returns us to the key question: Are all these Central Planning interventions sustainable, or might they falter in 2013?  

Once markets become dependent on intervention and support to price risk and assets, they are intrinsically vulnerable to any reduction in that support.

Should these supports diminish or lose their effectiveness, it will be sink-or-swim for housing. Either organic demand rises without subsidies and lenders originate mortgages without agency guarantees, or the market could resume the fall in valuations Central Planning halted in 2009.

In Part II: The Forces That Will Reverse Housing's Recent Gains, we examine the statistical, historical, and demographic trends that suggest the market recovery is now dangerously vulnerable to a relapse, regardless of Central Planning intervention.

Should housing prices resume a protracted march downwards, as we've detailed here is quite possible, get ready for the "poverty effect" to drain the financial markets of their current euphoria. As the middle 60% of households begin losing a substantial percentage of their net worth, expect consumer spending to dry up and recessionary forces to return in force.  (Source: Part II)

Click here to read Part II of this report


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Tue, 02/26/2013 - 13:27 | 3278174 Tsar Pointless
Tsar Pointless's picture


Tue, 02/26/2013 - 13:38 | 3278189 nope-1004
nope-1004's picture

Was "unsafe" before the crisis, built on easy lending and a credit binge.  Houses are places to live, not a commodity to flip.  Flippers have this unrealistic view that there is a never ending well of idiots standing ready to pay more than they did.


Tue, 02/26/2013 - 14:32 | 3278432 CheapBastard
CheapBastard's picture

More and more Flipping ads on TV and the radio every day. Lots moar correction downward to go I'm afraid.

Tue, 02/26/2013 - 14:54 | 3278502 smlbizman
smlbizman's picture

trust me...flippers are like gamblers they only tell you when they win.....

Tue, 02/26/2013 - 15:08 | 3278560 Stock Tips Inve...
Stock Tips Investment's picture

With an economy so manipulated, it is likely that the increase in this sector continue a while longer. There are also some other factors that are helping this behavior. In some states, we see a strong demand from foreign investors.

Tue, 02/26/2013 - 14:39 | 3278446 Dingleberry
Dingleberry's picture

People stopped "buying" houses long ago. They buy payments.  Which are largely dependent on the 10-yr.

Just like bonds. When interest rates rise, prices will fall.  At least in real terms.

Every homeowner (whose house is above water) needs to send Ben a thank-you card for keeping the market propped. He's doing it. No one else.

Tue, 02/26/2013 - 13:32 | 3278190 Cognitive Dissonance
Cognitive Dissonance's picture

As Todd Harrison of first said back in 2008 they sold the car crash and bought the cancer. It looks like the cancer is kicking our ass. Terminal phase coming up.

<"Take two QE and call me in the morning." - Bernanke>

Tue, 02/26/2013 - 14:30 | 3278425 DaveyJones
DaveyJones's picture

They've injected houses with GMO nutrition and it has rot away the very system

Tue, 02/26/2013 - 13:33 | 3278199 JustObserving
JustObserving's picture

And our equally unsafe recovery of stocks supported by $3.6 trillion of printing by the Fed.

What is doing well in this economy without intervention by the Fed?  

Tue, 02/26/2013 - 13:37 | 3278215 Tsar Pointless
Tsar Pointless's picture

Porn was going to be my answer, but even it benefits.

So, I'm not sure.

Tue, 02/26/2013 - 13:40 | 3278231 espirit
espirit's picture

Sec propping it up?

Tue, 02/26/2013 - 13:52 | 3278282 McMolotov
McMolotov's picture

SEC flipping it up into their waistbands?

Tue, 02/26/2013 - 13:34 | 3278204 Sach Mahoney
Sach Mahoney's picture

Thousands, if not tens of thousands of homes are getting scooped up by private equity types and speculators thinking they found the bottom and that they can rent these things out until they sell them.  If you take these speculators and private equity types out of the buying equation, then we still have a market with no demand, is too expensive, has not available credit but for those with perfect credit  and has no fundamental reason to once again go higher.  As rates go higher, fewer will be able to afford a home without prices dropping and with rising rates, foreclosures will be priced more aggressively.   Housing is dead for a decade more.  

Tue, 02/26/2013 - 13:38 | 3278221 FecundaGoat
FecundaGoat's picture

"private equity types and speculators" understand the inflation brewing....Real Assets are going straight up and you can always raise rents to keep up with inflation.....

Get yourself locked into a cheap 30 year loan!!

Tue, 02/26/2013 - 13:40 | 3278230 tarsubil
tarsubil's picture

The rich get richer.

Tue, 02/26/2013 - 13:38 | 3278222 reader2010
reader2010's picture

When Greenspan openly urged marginal buyers into housing market using interest only mortgage, you would have thought they had run out of potential buyers. 

Tue, 02/26/2013 - 18:03 | 3279428 Poetic injustice
Poetic injustice's picture

Well, section 8 is constantly expanding and need new houses.

Tue, 02/26/2013 - 13:42 | 3278236 Cognitive Dissonance
Cognitive Dissonance's picture

When the Fed and both political parties (begin to) see the whites of the enemy's eyes (a serious deflationary impulse) and their lives flash before their own professional and financial eyes they will finally bring out the big guns and massive stimulus shall begin. It will be do or die time for the Ponzi and they have no intention of dying without the mother of all fights.

In my opinion we ain't seen nuttin' yet.

Tue, 02/26/2013 - 13:49 | 3278267 tip e. canoe
tip e. canoe's picture

not even close

Tue, 02/26/2013 - 13:46 | 3278248 Winston Churchill
Winston Churchill's picture

Three decades IMO.

Tue, 02/26/2013 - 13:54 | 3278288 McMolotov
McMolotov's picture

The New American Dream is to rent a small apartment with one of your Boomer parents, work a few part-time jobs, and have a leased GM automobile. If you can still "afford" an iPhone after that, you know you've hit it big.

Tue, 02/26/2013 - 18:05 | 3279434 Poetic injustice
Poetic injustice's picture

While really successful people take 100,000 loan for studies, spend it in nonstop parties, then apply for disabilities and other forms of aid without having to work even one day in their life.

Tue, 02/26/2013 - 18:31 | 3279555 Snoopy the Economist
Snoopy the Economist's picture

Iphones will be cheap compared to the phone and data plan

Tue, 02/26/2013 - 14:32 | 3278433 DaveyJones
DaveyJones's picture

impossible to believe that as the middle class gets destroyed, the largest purchase they make suffers a similar consequence 

Tue, 02/26/2013 - 13:37 | 3278212 buzzsaw99
buzzsaw99's picture

As with everything else the banks get the profits and the gubbermint eats the losses.

Tue, 02/26/2013 - 13:39 | 3278227 tarsubil
tarsubil's picture

You mean the People eat the losses.

Tue, 02/26/2013 - 13:45 | 3278243 Cognitive Dissonance
Cognitive Dissonance's picture

I've been told I can have a spoon full of sugar to help the medicine losses go down.

Tue, 02/26/2013 - 13:58 | 3278306 DeadFinks
DeadFinks's picture

Or a broom handle to help the losses go up.

Tue, 02/26/2013 - 14:14 | 3278343 Cognitive Dissonance
Cognitive Dissonance's picture

I was gonna mention that, but then I figured I would let someone else bring up the rear. :)

Tue, 02/26/2013 - 14:03 | 3278321 Alcoholic Nativ...
Alcoholic Native American's picture

Publically pooled debt, socialism at its finest.

Tue, 02/26/2013 - 13:37 | 3278216 espirit
espirit's picture

Gone full circle.  The Fed is the bagholder of last resort.

Gotta love it.

Tue, 02/26/2013 - 14:12 | 3278350 Cognitive Dissonance
Cognitive Dissonance's picture

I can't wait until they declare the Fed to be the 'bad bank'. The good news is that by that time it will already be filled to the brim with all the bad 'assets'.

<"Those assets aren't bad, just misunderstood." - Bernanke>

Tue, 02/26/2013 - 14:35 | 3278437 DaveyJones
DaveyJones's picture

just our wars

Tue, 02/26/2013 - 23:20 | 3280550 NumNutt
NumNutt's picture

I think it is time that the average Joe and his broke ass ex-middleclass friends start taking things into their own hands. How about forming small local groups that identify vacant foreclosed homes, then hit them with a bolt of jewish lightning in the middle of the night, and let them burn to the ground. Not hard to rig up a  delayed flaming device that can be easily obtained from your local hardware or walmart. (Break fluid in a paper milk carton sitting on a pile of crushed up pool chlorine comes to mind...). It is a simple supply and demand thing. You start eliminating the extra housing inventory in your area and at some point housing prices will start going up. The only loosers will be the banks, and the FEDs but oh well, we won't have to wait 20 years to see a positive result.

Tue, 02/26/2013 - 13:41 | 3278234 Shizzmoney
Shizzmoney's picture

The key for the average person: just refuse to take on the debt.

Watch the system crumble if this happened en masse. 

Tue, 02/26/2013 - 13:56 | 3278296 TrumpXVI
TrumpXVI's picture

Unfortunately, one cannot even do that.  Because the backstop of final resort is the taxpayer.  Even if you are carrying zero personal debt, you will still end up on the hook (in the form of taxes) for all the debt which will be socialized by the criminal government.

Tue, 02/26/2013 - 14:10 | 3278348 g speed
g speed's picture

More propaganda--you can hide assets--and you can hide income--- and yoou can be like a banker or a politico and just lie-- don't believe for a minuite that the gov't is omnipotent--it is not--the US is becoming more and more like Greece every day so just play the Greek National Game -- If you don't have debt you can live quite nicely-- and do what you were put on earth for-(to smell the roses)

Tue, 02/26/2013 - 15:14 | 3278585 TrumpXVI
TrumpXVI's picture

Well actually, I agree with you.  The government is fucking incompetent, but that doesn't mean they will go quietly, or without first doing an incredible amount of damage.  And it's little use to hide assets if you must liquidate them in the end in order to pay property taxes; where the fuck do you think you're going to live?

Tue, 02/26/2013 - 18:34 | 3279564 Snoopy the Economist
Snoopy the Economist's picture

"just refuse to take on the debt"

There will always be plenty of losers to take on the debt that they never intend to repay. Sadly, the banks will continue to give it to them so they can continue the game.

Tue, 02/26/2013 - 13:42 | 3278235 DoChenRollingBearing
DoChenRollingBearing's picture

O/T but of interest to anyone wanting more income or interest.  Barron's looked at energy MLPs last weekend, it took some time for me to read the article and digest it, but this class of investments is worth a look.  They are more complex than I had thought in the past, that is why I needed time to understand them better.

"Barron's Article on MLPs -- 25 Feb 2013"

Tue, 02/26/2013 - 14:53 | 3278498 slightlyskeptical
slightlyskeptical's picture

I'll wait until they are all paying near 8% again, thank you very much.

Tue, 02/26/2013 - 13:43 | 3278240 slightlyskeptical
slightlyskeptical's picture

Blah. blah, blah. The government just needs to take ownership of the primary housing market. We already back it, let's just buy the bonds. Refinance them, help out the consumer, and we still get paid back ALL the money put out for the program. If anyone in the Fed or the governemnt really cared about us, then this would already be a done deal. Buy the bonds...send a letter....done deal. Who would refuse principal reduction and lower payments? It's a moral hazard not do this.

Then let social security fund take over the future lending in the primary mortgage market. Trying stiffing them when they control your future payments.

Tue, 02/26/2013 - 13:52 | 3278280 g speed
g speed's picture

blah blah back at ya--troll--

 you are for sure another full of shit realestate agent.

Tue, 02/26/2013 - 13:45 | 3278246 Tsar Pointless
Tsar Pointless's picture

Actually, I'm going to pat myself on the back here for gaming the system as well as I did.

Back in January 2010, I took full advantage of the "first-time home buyer" 10% tax credit and purchased my first home. At that time, I was paying $550/month in rent. By now, that same apartment is likely around $600/mo.

My mortgage is $510/mo, and my interest rate is 5.5%. I didn't allow my eyes to become larger than my debt-to-loan ratio, purchasing an all-brick home with hardwood floors and a built-in one-car garage for under $60,000. And, the three-year penalty period has expired, so I am literally home free.

Yeah, I know. You never technically "own" a home (taxes), but I am not throwing $600 down the toilet every month, either.

Tue, 02/26/2013 - 13:58 | 3278254 socalbeach
socalbeach's picture

CHS obviously doesn't understand how the monetary system works.  From the article,

"Even more astonishing, rates for conventional 15-year mortgages are comparable to official inflation (the Consumer Price Index, or "CPI"). Lenders are earning near-zero premiums on these mortgages. How sustainable is this imbalance of risk and return?"

Banks get to borrow for nearly 0%, so if they're loaning at 3.5% they're making lots of money on their loans at current inflation rates.  It's the savers, bank depositors, who are losing.  The banking system as a whole mostly loans out multiples of customer deposits.

Tue, 02/26/2013 - 13:49 | 3278258 Peter Pan
Peter Pan's picture

Any wealth effect engineered by manipulating house prices will be short lived. If you want to see a real and sustainable wealth effect you need to create secure and well paying jobs and people need to buy houses with at least 25% deposit. Failure to do so makes them potential debt slaves and bankruptcy candidates.

In addition housing needs to become smaller and less lavish to avoid the previous ill conceived notion that houses were somehow a spring of eternal wealth.

Tue, 02/26/2013 - 14:01 | 3278317 g speed
g speed's picture

There is no "weath effect" in a ball and chain. At least you see that smaller is the trend and are agreeing with it-- 


Tue, 02/26/2013 - 16:06 | 3278843 Peter Pan
Peter Pan's picture

You have misread my comment.

We DID have a welth effect from housing while it was going through a false boom. A boom of course that was not predicated on undamentals but on low lending standrds and cheap rates.

Tue, 02/26/2013 - 16:19 | 3278878 akak
akak's picture

Fundamentally, of course, there was and is no such thing as a "wealth effect", as mere (paper) valuations are not wealth.

What we had in the housing market was the illusion of rising wealth.

If my bank suddenly tells me one day that I have $1,000,000 in my checking account, when in reality I have only $1000, and then later does an about-face and tells me that it was all a mistake and that that $1,000,000 was never really there, did I ever truly experience any real if temporary 'gain' --- or any real loss?

Tue, 02/26/2013 - 17:49 | 3279360 Peter Pan
Peter Pan's picture

Once again, I have to insist that there was a wealth effect for the early birds who geared themselves and bought property with both hands as their prices rose. As their debt lost value they did in fact experience a wealth effect at least based on valuation. Those that sold out actually realised the wealth effect of the scam that was being played out.

Tue, 02/26/2013 - 13:48 | 3278262 tony bonn
tony bonn's picture

who believes that stupid fairy tale wealth effect? it is propaganda to get a few bottom 80% iq people to load up on debt but there aren't enough idiots to create a wealth is blather from politburo types to justify a massive transfer of wealth from the bottom 90% to the top .1%

Tue, 02/26/2013 - 17:51 | 3279369 Peter Pan
Peter Pan's picture

Please read my comment above. There was a wealth effect for those that were clever enough to gear themselves early on, make the gains and then sell before the whole show came crumbling down.

I was one of those people who did so. I cashed out a little early in 2006 but have never regretted it.

Tue, 02/26/2013 - 13:49 | 3278265 bonzo112358
bonzo112358's picture

A friend of mine recently inherited a house in the Southern California area with two other siblings.  They decided to sell the house and split the proceeds.  The original asking price was 299k (I've seen the property and thought they would be lucky to get even this amount) because they wanted to unload it quickly.  The first weekend that it was on the market the realtor brought over a van full of Asian investors and within an hour had the house bid up to 350k.

This friend (annual salary of about 40k) is now convinced of what he saw that housing prices will only go higher from here.  He wants to now take his piece of the pie and buy a house because 'they can't go lower because there are lots of buyers.'  He is actually convinced that if he buys a house now that the value will double in a couple of years.

On another socal note, this house is actually pending!  Only$823/square foot and it can be yours!

Tue, 02/26/2013 - 14:15 | 3278366 g speed
g speed's picture

I think they made a mistake at the printers--put an extra zero on the end of the price.

Tue, 02/26/2013 - 13:52 | 3278279 Atlantis Consigliore
Atlantis Consigliore's picture

1 Million hooker realtors cant be wrong, on the tv pimping and squeeling;

its a Bull market Reel estate;   its not a home,  its an investment. 

Tue, 02/26/2013 - 13:55 | 3278294 Bungalow
Bungalow's picture

Never ending horror show.

Tue, 02/26/2013 - 14:10 | 3278349 NoWayJose
NoWayJose's picture

Central banks could care less about any wealth effect from housing. What they want to do is inflate housing prices so that all the underwater mortgages held by their banking friends become 'whole' again, and all the shadow inventory of foreclosed homes currently held off the market suddenly turn green on the balance sheet instead of being written off as a red loss.

Tue, 02/26/2013 - 14:26 | 3278414 orangegeek
orangegeek's picture

Monthly Philly Housing Index was riding high in January.


It's at 175 and falling since then.

Tue, 02/26/2013 - 14:52 | 3278467 shovelhead
shovelhead's picture

Wealth effect. Ha...Morons.

'Wealth' from unaffordable HELOC's... AGAIN?

HEY YOU! Put down the Krugman crack pipe.

Unless you buy income producing property, housing is a COST.

May appreciate...maybe not, but it certainly will not produce any wealth, real or fictitious.


A myth is more insidious than a bald faced lie.

Edit: Not directed at you, Chuck, but at the econ-resurrectionistas.

Tue, 02/26/2013 - 14:52 | 3278491 Jack Burton
Jack Burton's picture

I had to take advantage of the manipulated mortgage market and the central planners desire to boost housing and all that goes with it.

I took my 4.86%  15 year fixed and refinanced at minimal closing costs down to a 3.10%  15 year fixed.

I cashed out 25 K in equity to get some medical problems fixed and still have a payment lower than before.

Now I owe 50K on a 150K little home on a lake. My payment went down from 468 a month to 365 a month and I got 25K to pay for dental and medical treatments I needed. It was clearly time to take advantage of the manipulations. I still hold 100K equity position and have much lower monthly payments. My daughter did much the same with their home.

Tue, 02/26/2013 - 14:56 | 3278511 slightlyskeptical
slightlyskeptical's picture

But you added 10 years to your repayment term? Not saying it ain't worth it, but you are not saving any money over the long term. If you had no other way to get yourself fixed up then it was a great move. if you had other funds laying around, maybe not.

Tue, 02/26/2013 - 17:09 | 3279174 Jack Burton
Jack Burton's picture

Indeed! You don't get 25K for free. It is about cash flow and getting needed issues taken care of. My monthly cash flow is improved, but of course I must pay back the 25K in equity I cashed out, though at a tax deductable 3.1%. Not going to get that deal anywhere else!

Tue, 02/26/2013 - 17:55 | 3279393 Peter Pan
Peter Pan's picture

He would not be adding ten years to his loan if he maintained the same repayments as he used to have before taking out the extra $25K.

Tue, 02/26/2013 - 15:26 | 3278634 FecundaGoat
FecundaGoat's picture

I would rather be rich than bitter....I took advantage of the dip in 2009 and bought my 5th home at a 50% discount....Now I have a 15Yr 3% loan, rent covers mortgage, and a 30% increase over my purchase price.....

Am I Bad?

Tue, 02/26/2013 - 17:58 | 3279414 Peter Pan
Peter Pan's picture

You are right. When timing, cash flow and interest rates are aligned it's always a good time. The one thing you do not mention but which you need to be mindful of is gearing.

Tue, 02/26/2013 - 15:38 | 3278678 alfbell
alfbell's picture

Owning income real estate and personally being a renter (which also makes me flexible and mobile) is my formula for current times and the future. Make lots of FRNs and then turn them into income real estate until the people lose confidence in FRNs and the high inflation really begins. By then I won't need any more FRNs. And my rental income will be in whatever new currency is put together by the clowns that are "in charge".


I'm still long... Texas secession.

Tue, 02/26/2013 - 16:05 | 3278840 FecundaGoat
FecundaGoat's picture

I am an optomist....My optomistic veiw is that people need a home and love home ownership.  I also believe that property offers flexibility, sensible leverage, and tax advantage that no other investment offers...

Baby boomers are going to live a LONG time and stay in the thier homes a LONG time....There is going to be a demographically caused shortage in housing for years!!

Replacement cost for homes is also SKY HIGH...

When people start to voluntarily live on the streets, I may get pessimistic....

Tue, 02/26/2013 - 17:45 | 3279342 alfbell
alfbell's picture



FecundaGoat: To be the devil's advocate for your assumptions...

Property taxes, maintenance and repair makes home ownership expensive and the unemployment/wage/future for our country isn't conducive to people buying homes. Boomers retiring will be downsizing to smaller homes and condos and renting apartments. Boomers are also going to be living in assisted living and specialized nursing facilities. Gen X and the Millenials will not be able to afford houses. There is a huge inventory of houses being covered up and held back by the banks (they aren't foreclosing so as to protect themselves). Eventually the govmt and The Fed will not be able to continue propping up real estate and it will come down further. Don't be an optimist... be a realist.

Tue, 02/26/2013 - 18:23 | 3279525 tryinsohard
tryinsohard's picture

There is another reason to anticipate a drop in home sales that I've never seen discussed.  Lowering mortgage rates increases the number of buyers that can afford to buy a home.  Increasing the pool of buyers increases demand and of course, price.  However, when rates are first lowered it causes a step change in the number of buyers (home demand).  After some interval of time this surge in demand recedes to a steady-state level of home purchases.  This new level of home purchases is higher than the demand before the interest rate change - BUT it is lower than the demand caused by the initial step change in rates.  For years we have had many small step changes adding to the pool of buyers.  That appears to have ended (and mortgage rates may even be climbing).  The fact that rates are no longer falling means that we are now working off the surge in buyer demand and trending to a lower level.  Yes, that new level will be higher than it would be if interest rates hadn't come down.  But the new level of demand will be much lower than we've seen the last several years in a FALLING rate environment.

Tue, 02/26/2013 - 18:49 | 3279606 FecundaGoat
FecundaGoat's picture

In 20+ years there will be boomer rush into assisted living...No argument....Boomers will also be withdrawing thier live savings from the stock and bond markets....Hard to invest anywhere in that environment...

Picking a home is like picking a stock....find one with intrinsic value at a low price at the bottom of the market and lever up....Sell on the upswing....I hope to sell one this year and one next year....

Guys....I've made $2.5 Million doing this....Don't let these silver and gold cassadra's freak you out!!  In the 70's, with Jimmy Peanut Farmer running the White House we were all CERTAIN the U.S. was done....Then came a guy named Reagan!!

Stay Optomistic....No Pessimist ever got Rich!!

Tue, 02/26/2013 - 21:09 | 3280070 alfbell
alfbell's picture


This "upswing" is artificial. No one knows how long it will last. Gov or Fed policy changes could create an instantaneous change (unintended consequences can also blindside one). When there is a lot of debt and govt intervention you have a very volatile and unpredictable economy. You speak as if natural residential real estate cycles still exist. They don't. You may be successful, but you're taking a risk... basically gambling in real estate. Eventually, the true underlying value of residential real estate will emerge and it is going to hurt a lot of people.

Tue, 02/26/2013 - 22:11 | 3280280 FecundaGoat
FecundaGoat's picture

This "upswing" is artificial.  Strongly Disagree!!

2003-2007 the "upswing" was artifical....Zero down stated income loans with appraisels citing whatever number made the deal go through....People who should have never qualified were given homes they couldn't afford.

Starting in 2008, appraisels have been incredibly low and loans are 20% down and almost impossible to get....It's been an absolute bitch even getting a refinance to go through!!

Quote from Warren Buffet in 2008 "Everyday thousands of foreclosed and short sale homes move from people who should have never bought them to incredibly well qualified buyers".

Capatalism is BASED on property rights and Capital Formation through home ownership.  The government cannot simply let it go down!!  They will continue to support it using any means neccassary.

I Strongly believe that housing valuations are currently on a stronger foundation than anytime in my life!!  (and I'm an old fart)

Your Turn ;-)

Wed, 02/27/2013 - 00:33 | 3280772 alfbell
alfbell's picture


My prediction. And it is just a prediction... an opinion...

Home prices are going to be a lot cheaper by the end of another 5 years.

(Banks have tons of REOs. And tons of houses, with delinquent borrowers, they should but won't foreclose on. Homes are all about jobs and wages—if they are up, demand for houses will be up, if they are down it is the reverse. Middle class is being wiped out. Jobs aren't coming, wages aren't going up, unemployment is bad and will worsen = home prices have to come down to the new affordability level. Plus boomers are going to be downsizing and putting even more homes on the market for the next decade or more. Big inventory (hidden REOs and foreclosures), unemployment, stagnant wages, boomers downsizing, etc. are not good dynamics for home valuations.) Go...

Tue, 02/26/2013 - 21:39 | 3280149 honestann
honestann's picture

Where would the mortgage and housing markets be if Central Planning hadn’t effectively socialized the entire mortgage market? What will happen to the market when Central Planning support is reduced?

The answer is simple.  If the manipulators got out of the game, home prices would COLLAPSE.

However, contrary to bankster propaganda this is a very good thing.

They have "the wealth effect" completely backasswards.  This is easy to prove --- all you have to do is ignore everything you've ever been told, and observe the facts of reality.  Consider the opposite scenarios.

#1:  Homes are extremely expensive.  This is the so-called wealth effect.  What are the consequences?  First, most people can't afford a home, because they are way too expensive [compared to their income].  Second, those who "buy anyway" and those who barely can afford an expensive home must spend the vast majority of their income on mortgage payments for their entire adult lives... if not more.  Therefore, they become lifetime debt slaves to the banksters (who create the money they loan out of thin air), and the entire rest of the economy (demand for every other kind of product) is massively damaged, because there's no money left after mortgage payments.

#2:  Homes are extremely inexpensive.  This is the real wealth effect.  What are the consequences?  First, homes are so cheap that parents can afford to give their kids a home as a wedding present, or at worst, give them a 20% to 50% down payment.  Even if the parents don't help, the kids can save enough to buy a home in 5 or 10 years if they live frugally (which they should).  After they buy a home for cash, or after they pay off a 5 to 10 year mortgage, for the rest of their life their entire income is available for other spending --- no rent, no mortgage.  They therefore can spend the rest of their lives spending like drunken sailors... without ever going into debt!  This massively but naturally stimulates the economy for all goods.

The only people who benefit from high home prices are banksters, and politicians with voters so stupid they vote for predators who promise them HIGH prices (as if that's a benefit).  Talk about dumb.

Tue, 02/26/2013 - 22:27 | 3280351 NihilistZero
NihilistZero's picture


It's so simple a caveman can understand it!

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