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Guest Post: Headwinds For Housing
Submitted from ChrisMartenson.com contributor Charles Hugh Smith
Headwinds For Housing
It’s no secret that housing and employment are correlated, and the causation is intuitive. If more people have jobs, then more people have incomes that support the purchase of a home. In the other direction, the more houses that are built to meet rising demand, the more jobs will be created in construction and real estate.
We can see the correlation in this chart from the St. Louis Federal Reserve displaying one measure of employment for workers age 45-54 and the index of home prices.
As employment of those in their peak earning years rose, so did home prices. This is partly a function of basic supply and demand: Rising demand pushes prices higher.
As employment fell, demand declined, and so did home prices.
The Federal Reserve famously has a dual mandate: to maintain stable inflation and employment. The Fed attempts to pursue these goals with monetary tools such as setting interest rate targets, while the Federal government supports housing by subsidizing mortgage interest via tax policy and guaranteeing mortgages via the housing-lending agencies of Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA).
The Fed’s primary tool for stimulating demand for housing has been to lower mortgage interest rates, by buying the US Treasuries that set the baseline cost of long-term debt and also mortgage securities. Indeed, the Fed’s first quantitative easing (QE) program was to buy about $1 trillion in distressed mortgage debt outright. This removed the impaired debt from banks’ balance sheets and also served to lower mortgage rates.
The Fed’s assumption was that lower rates would stimulate demand for houses. As this chart illustrates, lower rates have stimulated precious little demand.
(Source)
Part of this failure can be traced to the decline in employment. Fewer people have the wherewithal to support buying a house. But demand is only part of the picture, as millions of foreclosures and defaults have created a huge overhang of excess supply that is estimated to number some 2.5 million homes.
What is not expressed in charts of mortgage rates, employment, and housing inventory is the implosion of housing as a speculative market. Millions of households bought more than one home as a speculative play; according to a recent report from the New York Fed, one-third of all home mortgages issued in 2006 were to people who already owned another home.
Millions of others bought homes with low down payments, while millions more added second mortgages or home equity lines of credit (HELOCs) to their existing first mortgages to extract equity.
As a result, “owner equity as percentage of household real estate,” as measured by the Federal Reserve, has fallen from 60% in 2005 to a mere 38.6% in the third quarter of 2011. When we consider that roughly one-third (33%) of all homes in the US are owned free and clear (i.e., have no mortgage), then we can see that equity in the remaining two-thirds with mortgages is a razor-thin 5%-6%.
Interestingly, despite millions of foreclosures and write-downs, mortgage debt has actually risen from its 2006 level of $9.86 trillion to $9.93 trillion in the third quarter of 2011. (So much for deleveraging.)
With this dramatic contraction of equity in mind, it is understandable that 10.7 million (22%) of all homeowners with a mortgage are “underwater” -- that is, they owe more on their mortgage than their home is worth, while another 5% have negligible equity.
Another aspect of the Fed’s failure to boost demand by lowering rates results from the Fed’s misunderstanding of how risk is priced when interest rates are kept artificially low via official intervention and manipulation. If we place ourselves in the shoes of a mortgage issuer, we realize that artificially low rates deprive the lender of a means to price risk. In an open, transparent market, interest rates rise and fall according to the perceived risk that the borrower might default and/or the asset underlying the loan might decline substantially in value.
In the current housing market, falling prices make it clear that there is still downside risk of homes declining further in value going forward. Furthermore, the unstable employment environment means that a household could shift quickly from low-risk to high-risk if the principal breadwinner's job was lost and could not be replaced.
Since rates have been artificially suppressed to goose demand, lenders have no way to compensate for the risk of issuing a mortgage except to insist on very substantial down payments or to simply avoid lending to all but those with the very best credit scores.
Anecdotally, this is precisely what we see happening. Households that easily qualified for jumbo mortgages in the boom years are being turned down for refinancing mortgages. From the point of view of the mortgage issuer/lender, why take a chance of massive future losses for a paltry 4% interest rate?
The tragic irony of the Fed’s policies of buying impaired mortgage debt and suppressing mortgage rates is that this has impeded the market from properly pricing houses, mortgages, and risk. And when the price of assets, debt, and risk cannot be discovered by transparent market forces, then participants must remain wary of future price discovery.
In other words, manipulating and impeding the market only increases the risk, driving the risk-averse out of the market. That leaves only the reckless in the housing market — those plunking down 3% for an FHA-backed mortgage and those lenders who have transferred the risk of default to the Federal agencies: Fannie, Freddie, and FHA.
This “moral hazard” — the separation of risk from gain/loss — leaves the taxpayer on the hook for not only making good the staggering losses already recorded by Fannie Mae and Freddie Mac, but also for future losses in mortgages backed by FHA, which has seen its mortgage portfolio explode from 3.8 million to 5.7 million in just the past two years. As anyone could predict when down payments get as tiny as 3%, a slide in home values of a few percentage points can easily put the homeowner underwater, and consequently the default rate on FHA mortgages has been rising.
With a paper-thin supplemental cash reserve of $2.6 billion supposedly backing up its $1.1 trillion mortgage portfolio — a mere one-quarter percent of the portfolio -- FHA will soon need a taxpayer-funded bailout in the billions of dollars to keep afloat.
The Federal Reserve and the Federal government have attempted to boost the housing market’s demand and valuations by introducing moral hazard on a vast scale and by making it impossible for the open market to discover the price of housing, mortgages, and risk. Prudent lenders and buyers have been forced by this systemic risk to withdraw from the market, even as artificially low mortgage rates, near-zero down payments, and government-backed mortgages have created generous incentives for the most reckless buyers and lenders to take their chances. After all, if you can’t lose more than 3% by buying a spot on the real estate roulette wheel, and all mortgage losses will be made good by the taxpayers, then why not gamble?
In this manipulated market, the reckless have nothing to lose, while the prudent cannot possibly assess the real risk or price of assets and debt. The grand irony is that in attempting to “save” the housing market by suppressing mortgage rates and the market’s discovery of the price of homes, debt, and risk, the Fed has systemically crippled the housing market.
There is a subtext to the Fed’s fervent intervention in the mortgage and housing markets: By propping up housing prices, it also props up the sagging balance sheets of its favored (and politically powerful) “too big to fail” banks. From this perspective, we can see that the Fed’s public concern for employment masks its real concern, which is keeping the “too big to fail” banks from a market recognition of their insolvency.
When will the housing market “recover”? Housing can only find solid footing if the market is freed to discover the prices of property, mortgages, and risk. Until then, the market will drift along in a haze of moral hazard and official support of the imprudent and reckless.
In Part II: How Low Will Housing Prices Go?, we explore the macro-economic trends likely to further depress housing prices in the coming years, as well as look at several time-tested models for determining how much downside is left for housing prices and how we'll be able to estimate when the housing market finally reaches a bottom.
Click here to access Part II of this report (free executive summary, enrollment required for full access).
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That reminds me... PrimeX updates need to become a series.
Gale Force Winds, biychez
Ragin' Contagion, holmez
Shit storm, shit blizzard, shiticane, shitnomi ....... Housing has fallen into the shitabyss.
Chris Mertenson is among the select few pundits who DOES get it.
Housing values, build rates, new/used sell rates, etc. do NOT drove employment.
THE LEVEL OF EMPLOYMENT, and corollary wage/benefit levels) drive housing values, build rates, new/used sell rates, etc.
The other major factor is demographics: If Generation C had an average of 5.5 kids per family, and the next generation, Generation D, has an average of 1.7 children per family, this will have a profound impact over time.
*In historically good or bad economic times, this demographic effect can be mitigated, in some ways, as more people buy more homes for fewer average occupants in boom times, and fewer people buy fewer homes for more average occupants in doom times (adult children moving back with mom&dad or mom&dad moving in with adult children).
Mortgage interest rates have only a large effect on the housing market, contrary to popular opinion, when they make major and historical 'breaks' either to the upside or downside, and these effects wane the longer the rates hold at the new 'floors' or 'ceilings'.
The level of EMPLOYMENT and the corollary wage/benefits levels drives housing, and not the popularly twisted fairy tale that so many alleged 'experts' claim.
The housing boom accounted for millions of domestic jobs, they have all gone away as this bust enters year six. Kyle Bass has said the busts usually last 7-8 years historically. I think we are in for a multi-decade housing slump. The free fall in prices may stabilize for the time being with limited production, shadow inventory being withheld, low interest rates, etc... The damage has been done. No one is thinking of housing as a sure thing investment, and this will stick with millions of potential home buyers for years to come.
Rental demand and rents are up like 13% this year. People either do not qualify to own, or have sworn off home ownership. Occupancy rates are above 90% in most areas.
Burning the 45-55 yr-olds with real estate, job loss, and health insurance just prior to retirement will create a 10-yr or longer lag in housing recovery. Even as this group returns to single-family ownership, their homes will be smaller and outside of prime school districts to minimize taxes and energy expense as they attempt to recover from these lost prime earning years.
Young people will also be playing catch-up after the current delay in getting their careers underway. They will seek out the better school districts, but will continue to negotiate hard during home buying, holding down appreciation long after any real recovery takes hold. Demographics will help their case, too.
The often repeated "no one saw this coming" gets another strike from the article that points out in 2006, one third of home sales were to people who already owned at least one home.
Preventing a housing bubble is easy:
Only one government-backed mortgage per household.
Must primarily reside in any home backed by a government-guaranteed loan. (Some exceptions for foreign service, etc. where non-residence will not permanent).
No new government-backed loans issued when homes in a zip code are appreciating or depreciating at a rate more than double the national average.
Minimum 15% skin in the game, including down payment, fees, second mortgages, etc. There's lots of outcry about higher down payments in this lousy market. It seems like a lot after 0% down, 3% down, and even cash back at closing deals, but the taxpayer backing more than 85% of any private deal is rediculous, too.
Stating the obvious. The Feds job should be to keep interest rates at the inflation rate plus 3%. If Greenspan and Bernanke had done their job we would not be talking about this crap.
There is no inflation, lol. Speaking of which I went to my local grocer last night to buy a few steaks for the BBQ..........$11.48 a fucking pound. (up from about $5/lb six months ago) No steak for me. A can of soup is damned near three bucks........I digress.
Stock up when you see a sale. Soup on rice the new American meal (they even have ads on TV promoting it).
Welcome to the world of hedonics.
Reagan said ketchup and hot dog relish were vegatables.
Obama says pizza sauce is a vegatable.
You can't afford $11/lb for steak....well....that's ok because people are still eating meat because dogfood is now the new meat.
We don't have no stinkin' inflation.
Therefore we don't have to raise COLA for all the old farts who are retiring and there won't be as many to pay a COLA to soon enough once we kick in the death panels.
Life's good.
Once the slaughterhouses get ramped up again for all that horsemeat coming there way.....
Ruth's Chris Steakhouse.....home of the sizzling Prime grade porterhouse cut of horseflesh.....
YUMMMmmmm....YUMmmmmmm !!!!!!
And much cheaper than cow.
Better profit margins and once again,......NO INFLATION !!!! YIPPEEEEE !!!!!
Soylent Green is people!!!
http://www.youtube.com/watch?v=9IKVj4l5GU4
Miss Mew is cheaper than soup.
I substituted hamburger for steak.
Deflation, bitchez.
When I was at Sam's Club last week, I noticed the elCheapo $1.20/lb hamburger patties were $2.50/lb.
Deflatin' like a MFer!
50lb bags of rice went from $18 to $20 last month.
That dual mandate means Free $ for the banksters and Structural insecurity for the rest of us.
Coup after coup in Europe and people still defend the federal reserve - it's unbelievable.
economics1996
You are right. But the criminals that benefit from free money don't give a damn about the economy and other peoples lives.
I appove the above statement.
OT: The update to the OWS arrest post broke the thread.
Housing is the only commodity that the Fed wants to rise. Because they have all the liability, and people have all the debt.
Why are high home prices good for anyone? They are not, just as high food and energy prices are not good.
Homes are like Airlines. Governments hook multiple embilical cords to them, and suck every and any value out of them from purchase to end sale.
A horrible investment. Unless you own the water and mineral rights. Which by the way is owned by the top one percent.
The tragic irony of the Fed’s policies of buying impaired mortgage debt and suppressing mortgage rates is that this has impeded the market from properly pricing houses, mortgages, and risk. And when the price of assets, debt, and risk cannot be discovered by transparent market forces, then participants must remain wary of future price discovery.
Free Market, Bitchez!
"Free Market, Bitchez!"
Never has been...never will be.
A dream of the elites and/or the ones who aspire to be elites that is always manipulated for the benefit of the elites and those who aspire to be elites
I'm going to dispense with statistics on this one and go with feel. The Boomers all wanted stuff. Big stuff, lots of stuff. Gen X didn't get crap because they were faced with the wreckage of mulitple Boomer bubbles. As a younger member of Gen X, I think I know what's coming. Younger people don't want stuff, they want experience. Who really cares if you have a big fancy house or car. The younger generation wants to skydive or run marathons. Or travel, or meet people, etc. They don't want 2,500 square foot piles of wood and copper, especially after twelve years of financial bubbles. Housing isn't getting better any time soon.
Add to that the statistical reality of Boomers getting older and selling down and housing still is not coming back, other than maybe the low end bouncing along the bottom.
That will change when you hook up, and she pushes out a couple of tax deductions. More space, good schools, a yard for the dog and swing set. The question is will you rent it or buy it?
The weight of the entire boomer generation will be on your backs (1 retiree for every 2 workers). You will be the ones to tell grandma she can't have the half-million dollar heart operation when she's 80 years old, talk about people who demand entitlements! It's not the lazy Mr. and Mrs. "Gaming the system" EBTs that will crash the system, it's the boomers who "paid in" to the system demanding what they believe is theirs to collect.
The trend is to not push out deductions. Even welfare moms are cutting back. The only
hot business left is anchor babies.
As for half million dollar heart operations, another bubble probably just passed peak.
Oh the pain! Oh the whining docs and nurses! I'm already hearing it here in medical
paradise.
Baby boomers will piss and moan and talk shit the young cannon fodder will crash the system when they trade in their game controllers for real weapons.
Gen X, as a group, is hitting a career speedbump, but don't overlook your advantages. One big plus right now is housing. It's a buyer's market, rates are extremely low (my first mortgage was at 12%), and as you mention, there is no rush to buy because this situation will be in place for several more years.
The boomers did not have all boom years. Many boomers began their careers around the time of the 1974 oil embargo that turned into the high inflation years of the late-70s. Tail-end boomers who bought in the early 80's had to buy at prices that were 40-60% higher than they were just six years earlier. The Fed rate topped out at 21-24%.
Late boomers who hit the job market from 81-83 had a job market very similar to that of today. No jobs to be had without experience, 12% unemployment in many areas, and inflation (stagflation, misery index) in full force. Like today, Iran was in the news.
Hang in there Gen X and Gen Y. Early boomers traveled too, but they traveled to Canada or to wherever the draft board told them to go. No generation gets a free pass, and hopefully, no generation will have a worse deal than The Greatest Generation whose efforts and sacrifice we have all benefited from since the last depression.
The divergence between the declining prices of homes and the inflating cost of the commodities used to build them cannot last forever. Beyond turning the US into a nation of renters similar to Europe. One or the other has to give or going to hit a point where houses are deconstructed for the underlying commodities.
It's decoupling people. Cash flows have decoupled themselves from the underlying assets.
And for the criminal TBTF, Bernanke is peddling as fast as he can to make up the difference.
Headwinds. (snicker!)
When was the last tailwind not fueled by CRA, Rapid Re-score & F/F insanity?!
At what point does one say - 'It can't be about bad planning and/or bad decisions anymore'? Or that it EVER was?
And that it is something else? Thinking that its bad decisions, or bad planning or bad leadership or bad whatever the fuck... is not thinking outside the box. They are way smarter than us.
That is the plan - for the whole fucking thing to turn on top of its head. What can be thrown on top of its head - will be. Everything. That is the plan and aint nothing going to stop that juggernaught of a force.
"Oh, it was a bad decision...its a bad plan... bad leadership... bad this and that"... what? - for the next 300 years?
Wages are no where keeping up with mortgages. How the hell can I afford a house, even with a job, when I'm not even keeping up with gas? When banks aren't handing out loans?
The generation will mostly be a nation of renters. It's NOT a good sign.
Who will they be renting from?
Whoever was able to convert their ethereal dollars into real assets quickly enough... or, alternatively, the first to deleverage.
Appraisals are down - many foreclosures can't be financed so they sell for cash which brings the prices down -
Jobs are scare and the ave pay is dropping -
Inflation on commodities and health care thru the roof.
Corporations with corrupt leaders, Central banks run by the wickedly corrupt, watched over by corrupt ratings agencies and on the take accounting firms, investment firms short-selling the stocks they push on investors all watched over by a captured government.
Housing may suck but buying a rock bottom priced foreclosure for cash and renting is providing a great return right now - And no matter what there'll still be a lot of real property and a stick built house.
Personally I'd like to see a 30% across the board drop in home prices.
The trick is getting into a position to be able to benefit from the short sales, foreclosures, and other distressed sales. Locally, we have a club that loves to buy up all of this... ensuring that the rest of us get no access and thus no depressed prices... Every once and a while I can land a scrap...
Anything that comes up is like a damn game of hungry hippos locally... everything not depressed and on the low end of the spectrum is mercilessly bid up... too attractive returns as compared to CD prices, et al.
it's way past generational,fraud/greed knows no age just your money
When cap rates on prime rentals in prime markets reach 10 then you will know the bottom is in. I base that judgment on what happened in Japan who did the same thing to save their banking system that the FED is. The market stabilized when cap rates hit 10.
btw: In my area, cap rates are between 5 and 6 which means we have at least another 40% to go.
40% sounds right. Due to continued government interference in the housing market, the correction will take a generation. Everyone loses.
Zero Down Neighborhoods are turning into slums:
http://gas2.org/2011/10/28/from-suburbs-to-slums-age-of-the-new-suburban...
Bes tto stay out of the housing market for a few more years until it stops dropping AND they stop handing out more zero-down houses. Right now with a combination of FHA and other subsidies people can still pay zero and move in. I have no idea why someone would want to do it but many still are willing to take on massive debt if it is handed to them....
Go figure.
Doesn't really matter if you're paying with cash and have no leverage... the likelihood of that cash being there when you want to withdraw it (in a hurry) is pretty small anyway... especially the longer we go... some return is better than none... and I can't fathom that a "balanced" portfolio doesn't include some RR. Buy low... not hard to get 10% return atm...
A lot of housing analysis is good for pointing out trends but not good for forecasts because there aren't convenient statistics for the critical bottleneck: funds for down payments.
It makes no difference what interest rates are if a nice house in a good area of a popular city costs between $500-800K. What matters is, no one has a fucking $100,000 petty cash stash laying around to make a 15-20% down payment, and the deals don't close without a solid down payment.
The middle class has little free cash flow; if they can't sell an existing home at a decent return, there won't be any housing recovery. The 30% or so of the market that was on spec anyway is gone too.
THERE IS NO NEW CASH IN THE SYSTEM PEOPLE FIGURE IT OUT ALREADY
And people who do have cash will wait for a screaming deal as the deflationary mindset has already fully taken hold.
I have cash and I would buy, but the bottom is nowhere near and won't be in my lifetime. I used to watch the real estate market closely. I don't bother anymore. The market has been destroyed.
So you'd rather get burned by 8%+ inflation on that cash? What is your viable alternative?
MachoMan
What is your viable alternative? Viable ? As in, preserve your capital type of viable ? As in we don't know where your money has gone type of viable ?
Liquidity is King. Don't put your money in the system.
Ag/Au/Pd/Pt & Pb!
i have $100,000 sitting around but i dont want it to disappear in less than 12 months and whatever little equity of the $100,000 to go to property taxes .......the ponzi theft has been exposed
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."
-Thomas Jefferson
I am having informations from snoping that the quotation you are posting for having peoples to read is not true. You should not be posting bad words that are not being true because it is making peoples who believe it doing what the bad words that are comming from bankeers being like the same thing and then you are having not credibileness.
^^^^^ Thread winner.
Spot on. The surplus in a fiat system can only come from expanding it. The economy can only run on the added delta of new credit because the rest is locked up as promises to pay back. Lacking expansion of the credit structure, any visible surplus then starts to disappears as if pulled by a massive magnet into the credit black hole which grows by means of the interest payments that exponentially cumulates. The primary rule of fiat credit money is simple but brutal: You must keep inflating the system, or it dies by immediate implosion of cascading defaults that reverses all lending deals until there is no credit left, only commodity money.
You say all that like it's a bad thing! The Great Implosion™ is coming...
But, but, housing prices can only go up, right? Banks know this, as they have pledged every scrap of earth on the planet 20 times over as collateral. Fucking idiots. They've sold us out! The bastards have changed the rules through FASB and government cooperation so that they can continue using YOUR property as collateral by marking to Fucking unicorn! Meanwhile, your equity is vanishing faster than a CEO of MFG! Still think the banks give any flying fuck what-so-ever about YOU? Go apply for an unsecured loan. Good Fucking luck! Our money is no longer safe! The banks have turned our fiat (already questionable) into toilet paper (with the help of a whole lot of gready consumers). Your assets no longer belong to you! Wake up! Fascism is too nice a word for what is actually going on! /rant
Rewrite; the following items have been ignored;
clear title can not be established, ownership of the property can not be established except for the party of record, ie; the home owner, a party to receive a payout for closing a loan can not be established, ownership of the note and deed can not be established. Ownership of the note and deed can not be determined to be the same party as required by ancient law. Title companies won't write policies on clouded title. legal boundaries are wrong due to MERS issues, control fraud was responsible for the creation of the original debt since circa 1995, (at latest) parties that purchased a home don't typically know that their loan was paid off by the government, insurance, TARP, thus there is no obligation. The claims by attorneys representing banks evaporate in states where the attorney is liable for false statements, 50%+ of the county records are forgeries, none show the MERS chain of ownership to trusts that never legally existed. Foreclosures are instigated without legal ownership by the acting party. Want me to go on?
Why would anyone with this knowledge leave their home, for many their last asset after being raped by their country?
Everyone makes great and amazing points - and you all will make great points regarding something else financial, political, etc... for the next 100's of years - but the end result will be the same. And that is we are not progressing, but digressing, and its not going to get any better.
So - if we are thinking smart - as ZH is full of smart Mofo's (i mean that with the utmost respect) - than why dont the switches go off in some of your minds and say - "Hmmm, something else is going on?" That we are being ruled and controlled on BOTH sides, because thats how you control the outcome - by controlling both sides (makes sense)
No on predicted Bp Oil spill - but it happened. No one predicted 9/11 - but it happened. No one predicted ' XX war(s)' - but it happenned. No one predicted Fukashima - but it happened. Etc... and all these had or still have HUGE implications.
I hate being ruled by this ruling POS bloodline.
The Federal Reserve famously has a dual mandate: to maintain stable inflation and employment... The Fed’s assumption was that lower rates would stimulate demand for houses. As this chart illustrates, lower rates have stimulated precious little demand.
Full employment - FAIL
Stimulate House prices - FAIL
Stable inflation - FAIL
What a record of failures the Fed has?
Benny would really be sacked in any other job... but this is a public-private bank/quango ...it has different criteria to doing a good job, like ingratiating yourself in a hierachy of crapheads... Govt always attract failures like flies around shit ...and they 'stick'
The Federal Reserve has one mandate and one mandate only.
To Provide Liquidity and Cover for the Criminals.
Some residential real estate and mortgage numbers to ponder... (this shit is real):
Source: Amherst Securities Group. http://www.amherst.com/
- Then, in addition, there is the commercial real estate market to consider...
Andy Miller: Everybody in Commercial Real Estate is Lying - http://www.youtube.com/watch?v=XK4nsYOgLe4 The pending Commercial Real Estate Collapse - http://www.youtube.com/watch?v=1vtFk_JMhaUso...
Bottom Line IMHO:
The US Mortgage and Mortgage Banking Market is pretty much fcked (therefore so is everything related: construction, materials, unwinding investment, etc. etc.) , but the US government will certainly discuss some way to find some way to foist the shortage and the bill on the few remaining tax payers, to the general slavery via inflation, or future generations (if their is a future generation under this type of plutocracy). But some ZH readers might understand that what will ultimately happen is a total currency breakdown.
Other than that, Mrs Lincoln, the play was pretty humourous, yes?
i loled
The so-called potential stimulus of QE^X where MBS will be purchased just goes to show how much the fed has lied in their efforts to help price stability and employment.
So while homeowners have been saddled with loans that are valued at more than they should be the banks have already benefited from writing down the debt and re-established making money off the securitization of these loans only to have the fed (really tax payer) give them another exit strategy.
All the while the real economy continues to burn. In the end, the fed has failed and is nothing more than an institution devised to give the banking sector undue power and profits.
From the trenches in southern California......
Entry level housing (<250K) that is priced correctly is selling well. Both to cash buyers for rentals and to zero down folks (3% FHA with 10K seller cash credit.)
Fact is that buying is cheaper than renting. So investors who are a little tired of counterparty risk on financial securities can make a five or six percent return on an asset that probablyt won't fall in value more than that.
And the money down folks get cheaper than rent, and a long call and a long put at the strike price of their purchase.
Wait until you see your prop tax bill before you call victory on rent vs own. You need to consider the return on the 20% I'm not handing to the bank while I rent to compare apples with apples.
Yes - let's not get confused here. No one needs to pay the costs of property ownership so long as they are ready to relinquish their rights to remain.
All you give up is the call option at the strike of the purchase price.
You can exercise the put anytime the cash flow becomes greater than rent, and live free for a while besides.
Have posted the headwinds story droves of times. http://confoundedinterest.wordpress.com
Tonight will be my Senate testimony for tomorrow with the slides on the housing market and The Fed.
Also, will be testifying in the House on the Fed's and imf's role in trying to bailout out Europe. Stay tuned!
Also, will be testifying in the House on the Fed's and imf's role in trying to bailout out Europe. Stay tuned!
"then we can see that equity in the remaining two-thirds with mortgages is a razor-thin 5%-6%"
Conclusion: After sales costs, every home is underwater.
Here is my Senate Testimony for tomorrow with the economic and mortgage headwinds. I am just saying that we need a growing economy and stop screwing around with the housing and mortgage market. You may disagree. My Senate Banking Testimony on Foreclosure Review by Fed, OCC and OTS
http://confoundedinterest.wordpress.com/