Archive for July, 2014

Seasonally adjusted home prices fell in may for the first time in over two years. Robert Shiller warns of possible turning point in the housing market. When a housing market reaches a top, it's usually preceded by an unexpected drop in sales during the prime selling season. In June of 2006, sales fell off a cliff, and prices soon followed, and in July of 2010 after expiration of the tax credits, sales again suddenly collapsed, and home prices fell for another 18 months. Here we are in 2014, and sales volumes have been weak all year, and new home sales took a large and unexpected dip. Are we on the cusp of another market downturn? US seasonally adjusted home prices…[READ MORE]

The housing bubble deniers in China use poor reasoning and macroeconomic arguments to ignore their massive Ponzi scheme. Here in America, the bubble deniers — and Never forget the bulls and bubble deniers were completely and totally wrong — the bubble deniers succumb to their optimism bias and comforted themselves with fallacies and wishful thinking, even past the point where denying the obvious was no longer operative. The same is true in China. China's Property Market Is No Bubble A correction is coming, but not a crash. By YUKON HUANG, July 24, 2014 12:44 p.m. ET Will China's property bubble trigger a financial crisis? Concern is high this year thanks to deteriorating sales figures and reports of large price cuts.…[READ MORE]

In apparent recognition that principal reduction is a bad idea, Mel Watt is not forgiving debts on underwater loans owned by the GSEs. Principal reduction is the worst policy option. The economy is weighed down by excessive mortgage debt, causing borrowers to pay money to lenders that would otherwise be spent on goods and services stimulating the economy. The proper macro-economic solution suggests removing this debt would boost economic growth, but how should this be accomplished? There are two options: (1) foreclosure and bankruptcy, and (2) widespread principal forgiveness. Advocates on the political left want to see principal forgiveness. Conservatives, on the other hand, point to the problems of moral hazard, the central issue in the housing bust. Every decision…[READ MORE]

Stymied by high prices amidst weak job and wage growth, new home construction fell dramatically in June. This wasn't supposed to happen. Reflating the housing bubble was supposed to lift distressed loanowners above water, stimulate building (and construction employment), and create "escape velocity" in the housing market. Economists had it all figured out, and they advised policymakers to stimulate housing at all costs. Instead, high house prices made housing unaffordable to marginal buyers, and caused sales volumes to plummet. Since builders can't sell homes, they aren't building them, and they aren't hiring construction related trades, so the sought after economic boost isn't happening. So why did it turn out this way? The new mortgage regulations changed how real estate markets…[READ MORE]

In the absence of rising wages, when mortgage interest rates go up, one of two things will happen: either sales will fall, or prices will fall. I recently wrote that higher mortgage interest rates would either slow sales or cause house prices to drop. Since most real estate analysts still consider declining home prices impossible, when forced to pick between the two potential outcomes, they pick slower home sales. Assuming a consistent payment, higher mortgage rates decrease the size of the loan and reduce the amount borrowers can bid on real estate. While it is possible the federal reserve may print enough money to spark wage inflation, given the high levels of residual unemployment and a low labor participation rate,…[READ MORE]

Housing market optimists expected owner-occupants to pick up the slack from declining investor purchases. It isn't happening. In 2011, lenders aggressively pursued loan modifications to avoid foreclosures. They offered any deadbeat who would play along a sweetheart deal just to get some money back on otherwise non-performing loans. It beat the alternative of foreclosing on another property and selling it for a huge loss. As this policy began working, the number of properties entering foreclosure began to drop considerably -- the distress is still there, as the owner is unable or unwilling to make the contracted payment -- but the negative results of this distress, delinquencies and foreclosures, were removed from the market. Some pundits have suggested this improvement comes…[READ MORE]

Ed DeMarco was a conscientious bureaucrat who was forced out of his position for doing a good job protecting the US taxpayer from looting politicians. The list of evil0doers and nefarious characters of the housing bubble includes famous names like Anthony Mozilo, David J. Stern, and not-so-famous names like David Sparks, Michael T. Pines, Brent Arthur Wilson, Blair Christopher Hanloh, Robin and Chris Duncan, and many others. We had incompetence at many levels including famous names like Alan Greenspan and Robert Rubin, and millions of ordinary fools who bought the can't-lose investment opportunity of the 00s, the housing bubble, and got burned. While the deeds of the criminals and fools is titillating and instructive, it's worth looking at the few…[READ MORE]

 Punishing shareholders with corporate fines does little to deter bad behavior among corporate executives. Some of them need to go to jail. If I had to narrow my list down to the people most responsible for the housing bubble, Anthony Mozilo would be near the top of the list. The Option ARM loan was the primary loan product that inflated the housing bubble. Using negative amortization and teaser interest rates, people were able to borrow more than twice the amount than they could afford with a conventional 30-year fixed-rate amortizing mortgage. Once the Option ARM imploded and lending retreated to conventional mortgages, prices needed to fall significantly to rebalance affordability. The Option ARM was the Ponzi virus that caused the…[READ MORE]

When lenders began denying short sales, underwater owners were forced to wait for higher prices to sell, and with flattening prices, they are stuck. Lenders caused the housing market to bottom and to rally in 2012 and 2013 by favoring loan modification over foreclosure and by denying short sales to greatly reduce distressed inventories and overall supply. It worked fabulously for them, and prices rocketed upward for nearly 18 months. The abrupt rise in interest rates in mid-2013 lowered the ceiling of affordability, and the house price rally was stopped dead in its tracks. When lenders began denying short sales, both they and the borrowers believed they would all be above water in a few years, and the loanowners would…[READ MORE]

British legislators want to curb housing bubbles to avoid the economic pain, whereas American legislators want to reflate our housing bubble. During the 00s lenders attempted foolish financial innovations that proved dismal failures; these loan products, deterioration of standards, and securitization of mortgages inflated massive housing bubbles in several countries around the world. Each country dealt with the problem in its own way. China, Canada, Norway, and Australia still deny their market bubbles, and so far, none popped (although China's may be bursting now). Housing bubbles deflated in Spain, Great Britain, Ireland, and many other countries. Iceland decided not to bail out its bankers when the Ponzi scheme imploded, and they endured a deep recession, but Iceland is doing fine…[READ MORE]

In Memoriam: Tony Bliss 1966-2012