Feb182013
Affordable house prices are the best economic stimulus
Affordable house prices are the best economic stimulus. Housing costs make up the largest proportion of a households monthly budget (besides taxes). If this amount were smaller, if it made up a smaller portion of a household’s monthly budget, then they would have more money to spend on other goods and services and stimulate the local economy. It isn’t rocket science; it’s just common sense. However, greed and shortsightedness cause many to desire house prices that increase in price rapidly and attain levels of affordability that price most out of the market. Eventually such extremes lead to a crash, but since so many profit for the short time prices shoot skyward, people deny the possibility of a crash and let the good times roll. It isn’t in all our best interests for this to go on. Unfortunately, most don’t see it that way.
The Great Mania
By MARTIN CONRAD — SATURDAY, FEBRUARY 9, 2013
The full story about housing and the economy has been ignored too long. Like all manias, it was a long time building.
The boom of the 1950s and 1960s, featuring rising incomes and wealth, occurred in a well-balanced economy. The benefits of economic growth were fairly evenly distributed. That was an economy where the U.S. manufacturing sector was competitive and flourishing, its infrastructure was adequate and being improved, and housing valuations were at least fair, if not cheap. The value of housing averaged 80% to 90% of gross domestic product in this era — about half of the peak value set in the mania that ended so badly in 2008.
During the 1970s and 1980s, as the large baby-boom generation grew to adulthood and formed households, housing markets were distorted. The result: about a 50% rise in the aggregate value of housing, to 120% of GDP. At the end of this period, there was a solvency crisis in the thrifts and banks that had financed the housing sector. A few thousand of them had to be liquidated by the federal government.
During the 1990s, the U.S. enjoyed renewed prosperity, with a booming stock market and the creation of 20 million jobs. Housing valuations moderated, and the aggregate value of housing declined to a bit over 100% of GDP, not much higher than the average during the postwar boom.
More ominously, the few thousand thrifts and banks that had been lost during the savings-and-loans crisis were mostly being replaced by a mortgage-securitization process, not by new banks and thrifts using traditional credit standards. The new home-loan system soon came to be dominated by Wall Street investment banks.
In the late 1990s, there was a major banking reform. The Glass-Steagall Act, a reform of the Depression era that had separated investment banking from commercial banking and had given only the latter government-supported deposit insurance, was repealed. This began an era of mass securitization of mortgages, which enabled large-scale lending to subprime borrowers. Other features of the period included making loans with little or no documentation of borrowers’ ability to pay, and loans with low or no down payments. The easy money for homeowners stimulated widespread speculation in everything related to housing, including precarious financing.
This culminated in a final manic race to the top, when the aggregate value of housing exceeded 170% of GDP.
THE INEVITABLE BUT UNEXPECTED RESULT was a wave of mortgage defaults and a catastrophic decline in housing values. The market for securitized mortgages declined and then collapsed in 2008. In that year, houses with mortgages had about $11 trillion in aggregate mortgage debt that was collateralized by a net equity of zero.
At its peak in 2006, 2007, and 2008, this mania had overallocated as much as $10 trillion to the housing sector, based on the long-term average of housing value to GDP. This misallocation came at the expense of more productive and more sustainable economic opportunities in manufacturing, infrastructure, and technological innovation. The catastrophic losses also were a major factor in the extremely unequal distribution of national wealth, as the middle class lost approximately 40% of its net worth, most of it on overpriced and overleveraged housing.
Knowledgeable insiders who were aware of the distortions and the dangers headed for the exits early, leaving the masses with gigantic losses and unmanageable debt. There was an enormous rise of insider selling in 2005 by senior management of the major home builders, and in 2008 there was an epidemic use of derivatives to speculate against overleveraged Wall Street securitizers.
Eventually, the huge unknown risk associated with these complex derivatives led to a crisis of confidence: Could the counterparties pay on their losing bets? Would they pay, even if they could? This lingering destructive counterparty risk is still huge and its many connections mostly unknown, and hence it continues to paralyze investment confidence.
Manias occur for many reasons, but great manias are made possible and sustained by errant government policies that may seem to have good reasons, none of them with any long-term economic value. Housing, despite high leverage, high transaction costs, and poor liquidity, was promoted as a dream investment for everyone. Massive intervention in this market by populist government policies and agencies fostering affordability exacerbated these normal defects and disastrously distorted the market. It was a “dream,” in the sense of confused, wishful thinking. But to think and act this way with many trillions of dollars, most of it borrowed, was irresponsible on an historic scale.
There is now much media commentary that no sustained and robust recovery is possible until the housing sector recovers (that is, until house prices rise again). This desire to simply reinflate the collapsed bubble would likely yield the same disastrous result again. Another course would likely be more effective: restructuring away from so much dependence on leveraged, expensive, and speculative housing values. We should no more regret the demise of expensive housing than we should the decline of expensive oil, both of which are poorly correlated with productive, sustainable economic growth, but strongly correlated with damaging inflation.
Disciplined buyers — too long unfairly disadvantaged by government policies — are now sitting on trillions in savings that are earning, doing, and financing nothing. This money could clear the housing market, but only at lower, fairer prices. That would finally be “affordable housing.”
Manias begin in obscurity and pessimism, rise with confidence and imitation, reach a state of euphoria and finally end in tragedy. They often change history in ways that are not foreseeable.
I hope you are enjoying your President’s Day holiday.
I can’t think of one other consumer item in which rising prices are considered a good thing.
Until our instant gratification society somehow morphs into a culture of saving/investment its hard to imagine these manias coming to an end.
In primitive cultures owning lots of cows was considered a store of wealth. At least cows are productive. Somehow along the way we transitioned from cows -> square footage.
The reason housing must inflate is becuase it is the only commodity (yes housing is a commodidty) that is heavily financed. the banks are stuck in this Ponzi. I hate the finance industry in housig. I am one of the many sitting on cash who know its stupid to dump it all on one thing (liability.) It is likely that I may never buy a home in my lifetime in CA. Becuase this ponzi will go on indefinately. the Fed doesnt care if the populace cant afford it. It is forced to play the wealth effect game becuase that is the only card left! If we didn’t, all the banks would go BK and the system as well…
This is the problem when you create a ponzi system and all your eggs fall into one basket.
That is a sad but accurate assessment of the situation. It’s frustrating to have to participate in a Ponzi scheme just to get a house for your family.
But this time the game is up… Or at least going nowhere for some time in areas such as housing and education. But this is what happens when you let banks get involved in financing. Thomas Jefferson warned the country.
The borrower is slave to the lender.
Isn’t holding “all cash” putting all your eggs in one ponzi basket too?
Cash=liquid investments.
I didn’t mean it literally.
Banks should start increasing their foreclosure processing soon. Now that they have met their settlement obligations, they don’t need to show preference for short sales.
Ally Completes Consumer Relief Obligations Under Settlement
Ally Financial has satisfied its consumer relief obligations required under last year’s National Mortgage Settlement (NMS), according to a report filed by settlement monitor Joseph Smith Jr.
Smith filed his report with the Federal District Court for the District of Columbia, certifying that “Residential Capital, LLC, Ally Financial, Inc. and GMAC Mortgage, LLC (collectively, Ally) have satisfied their consumer relief obligations.”
According to the settlement terms, Ally was required to provide $200 million in relief to customers in the form of loan modifications, short sales, principal forgiveness, and other forms of relief. Smith confirmed that the bank provided more than $257 million to that end.
Smith also stated that Ally has been found to be “in substantial compliance with its mandatory solicitation requirements under NMS,” having established loan modification and refinance programs that meet the obligation.
“I will continue my work with Ally and its successors to ensure that they are following the servicing standards, fulfilling their mandatory solicitation obligations and appropriately working with their customers over the next two years,” Smith said in a statement. “I hope that the consumer relief and the servicing standards the crafters of this bipartisan, state-federal Settlement negotiated will continue to help homeowners across the nation.”
As NMS Monitor, Smith will release his third report on servicer progress later this month. The report will include data on the consumer relief activity of Ally, Bank of America, Citi, Chase, and Wells Fargo five banks involved in the $25 billion mortgage settlement reached last year.
The banks were given three years to complete consumer relief obligations starting March 2012.
IR,
Pardon my doubt. It’s been 5 years expecting significant price reductions for Irvine and NPB. But all I’ve seen is a few FC of those slightly underwater and none for dramatic HELOC abusers. What make you think that this time it will be for real?
I don’t think prices will fall significantly in OC. Unless interest rates suddenly spike higher, I think prices will keep going up, at least for a while. Eventually, the distressed properties will be sold either as short sales or REO, and the price level of those liquidations will depend largely on interest rates. I do think we will see more foreclosures, but those will just be failed short sales. The banks have figured out how to liquidate their bad loans without crashing the market, and I expect more of the same going forward.
Report: Price Recovery Appears Unsustainable in Arizona, Nevada
Certain states are seeing stronger, above average gains in home prices, but concerns have been raised that some states are seeing “unsustainable, investor-fueled” increases, Capital Economics pointed out in a recent report.
In response to those concerns, the research firm conducted an analysis of seven states plus the District of Columbia to see if price gains are merely investor led or truly sustainable.
Out of the 8 places covered, the firm concluded five states appear to be sustainable based on factors such as income and employment growth.
“[W]e think that in most of these markets, the fundamentals are supportive of a sustained housing recovery, not just a temporary rebound,” the report stated.
The seven states the research firm observed were Arizona, California, Florida, Idaho, Nevada, North Dakota, and Utah, as well as D.C.
While the Federal Housing Finance Agency’s (FHFA) index registered a 4 percent year-over-year gain in the third quarter of 212, those particular states saw even higher gains, ranging from around 7 percent in California and Florida to 20 percent in Arizona during the same time period.
In the analysis, the states that were of particular concern to Capital Economics were Arizona and Nevada, as well as D.C.
In Arizona, prices have recovered 20 percent from their trough, while Nevada has recovered 12 percent from its bottom.
No Credibility: Realtors Say Prices Will Rise in 2013
Conditions are “ripe” for home values in 2013, according to data collected by Realtor.com.
Realtor.com’s national housing data for January 2013 shows last year’s trends are set to continue this year, creating opportunities in certain markets for both buyers and sellers.
At the national level, listing inventories decreased 16.47 percent year-over-year in January, dropping to their lowest level since January 2007, when Realtor.com began collecting this data. On a monthly basis, the for-sale inventory was down 5.63 percent.
“The significant year-over-year decline in homes for sale shows that the real estate market has worked through much of its excess inventory and, if these conditions continue, sellers are more likely to receive their asking price,” Realtor.com said in a release.
Sellers don’t appear to be taking advantage just yet, however: According to the data, the national median list price for single-family homes, condos, townhomes, and co-ops in January was $187,000, up only 0.80 percent year-over-year.
The low inventory did apparently have an effect on the average amount of time that homes spent on the market.
The median age of inventory of for-sale listings was 108 days in January, down 2.70 percent month-over-month and 9.24 percent year-over-year.
These factors all point to continued gains in value for the next year, said Steve Berkowitz, CEO of Realtor.com operator Move, Inc.
“If inventories remain low and list prices begin to rise over the next few months, as they did last year, conditions will be ripe for additional markets to appreciate in 2013,” Berkowitz said.
The only commodity that seems to the rising this year is gas prices. I heard once the national price reaches above $5, some parts of the economy will undergo major pull back.
Everyone knows that social security is going bankrupt. Yet, that is not motivating people to save for retirement. In 2007 I would thought it’s going to change, but it didn’t. It’s the same mentality as over paying for housing, but it’s going to take a Depression to reset culture into savings culture.
We are in the midst of a reset simply because in economic systems where usury is the primary business model (such as in the US), the model fails spectacularly once people come to the realization (either by force or by choice) that credit is the currency of slaves.
This “reset” feels more like a loooooong pause.
That’s my perception as well. I think Ponzis are just waiting for a chance to inflate another housing bubble so they can get more free money — this time at taxpayer expense.
The long pause lulls everyone out on the risk curve. It is entirely possible that a reset or revaluation by government decree can happen overnight. The unsustainable nature of the situation guarantees devaluation. Nobody would do a thing about it either, because we are whipped dogs.
The interest rates need to rise to have the reset button on housing and stocks. With low interest, the 1/(interest+risk) price formula has high priced stocks and WS with almost zero percent borrowing cost. All WS needs is the public to buy at the high price, just before interest rates goes up. Same for housing, except a refinance essentially counts the same a sale. The GSE takes over the liability.
“All WS needs is the public to buy at the high price, just before interest rates goes up.”
That is exactly their plan. Once they liquidate, I don’t think they really care what happens to interest rates, but in all likelihood, interest rates will go up after they sell what they need to sell.
Nothing better for the masters than willing slaves to flight to maintain their slavery.
If you own a small amount with equity, the lender controls the game. If you own billions without equity, the lenders are in trouble.
The Second-Mortgage Shell Game
Published: February 17, 2013
IN January, federal regulators announced an $8.5 billion agreement with 10 mortgage servicers to settle claims of foreclosure abuses, including bungled loan modifications and the wrongful evictions of borrowers who were either current on their payments or making reduced monthly payments.
Under the deal, announced by the Federal Reserve and the Office of the Comptroller of the Currency, the mortgage servicers will pay $3.3 billion to borrowers who went through foreclosure in 2009 and 2010 and an additional $5.2 billion to reduce the principal or the monthly payments of borrowers in danger of losing their homes.
Those numbers might look impressive, but the deal is far too modest to be a credible deterrent to reckless foreclosure practices.
Consider the last big mortgage settlement. Last February, the federal government and 49 state attorneys general reached a $25 billion deal with the country’s five largest mortgage servicers — Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial (formerly GMAC). They promised to help save homeowners from unnecessary foreclosure.
A year later, it’s clear that the settlement hasn’t worked as planned. Banks have dragged their feet in modifying first mortgages, much less agreeing to forgive part of the principal on homes that are underwater. In fact, the deal contained a few flaws. It has allowed banks to push homeowners into short sales, an alternative to foreclosure whereby the distressed homeowner sells the property for less than the debt that is owed. Not all short sales are bad — some homeowners are happy to walk away with the debt cleared — but as a matter of social policy, the program has failed to keep people in their homes.
A lesser-known but equally grave problem is that banks have been given a backdoor mechanism to continue foreclosures at the same pace as before.
The problem involves second mortgages, which millions of homeowners took out during the housing bubble. It’s estimated that as much as a quarter of all mortgage debt in the United States is in the form of second mortgages. Some of these loans were taken out to finance home improvements; others were part of a subprime product known as an “80/20 mortgage,” in which 80 percent of the purchase price was covered by a first, adjustable-rate mortgage, and the remainder by a second mortgage, often with a much higher interest rate.
The second mortgages have given the banks a loophole: each dollar a bank forgives goes toward fulfilling its obligation under last year’s settlement. But many lenders have made it a point to almost exclusively modify secondary loans while all but ignoring the troubled, larger primary mortgages.
It’s a real problem: when it comes to keeping your home, it’s the first mortgage that counts.
Take Tiberio Toro, a Queens resident who took out an 80/20 mortgage in 2006 when he purchased his home, and who now owes far more to the bank than his house is currently worth. Recently, Wells Fargo told him that it completely forgave his second loan. But at the same time, it declined to modify his first mortgage — an adjustment Mr. Toro needs to get his monthly payment to a level he can afford.
Why would a bank forgive a second mortgage completely but move forward with foreclosure on the first mortgage?
Surprisingly, such a tactic often makes sense for banks. When a lender forecloses on a first mortgage, the house in question is typically sold at auction. If the house is worth less than the loan amount, the bank gets only part of its money back. But after the sale, of course, there’s no asset left to pay off any of the second loan. The holder of that second loan — which has lower priority than the holder of the first — gets nothing.
So a lender can forgive a second mortgage — which in the event of foreclosure would be worthless anyway — and under the settlement claim credits for “modifying” the mortgage, while at the same time it or another bank forecloses on the first loan. The upshot, of course, is that the people the settlement was designed to protect keep losing their homes.
The five banks covered under last year’s settlement are wiping out second mortgages in record numbers. In New York State, for example, during the first six months of the settlement period, three times as many homeowners received second-mortgage forgiveness (2,933) as received permanent modifications on first mortgages (967).
In New York State, 36.2 percent of the banks’ credits under the settlement have been related to second loans, compared with only 18.2 percent for first mortgages.
In 2011, the five banks that are subject to last year’s settlement sent 230,678 pre-foreclosure notices to New York State homeowners, according to data I obtained from the Finance Department through the Freedom of Information Law.
As is well known, many of those at greatest risk of losing their homes are African-American or Latino. Under the settlement, banks get more credit for forgiving mortgages that they own (“portfolio loans”) than those they sold to Wall Street and currently only service. These portfolio loans are largely conventional loans; those sold to Wall Street were subprime. It was these notorious subprime loans that were marketed, often through predatory lending practices, to black and Latino borrowers during the housing bubble.
There is a lesson to be learned from the deficiencies of the National Mortgage Settlement. And the new deal reached by the Fed and the comptroller of the currency provides an opportunity to get right what the 49 attorneys general got wrong. At a Senate Banking Committee hearing on Thursday, Senator Elizabeth Warren, Democrat of Massachusetts, called on regulators to take tough enforcement actions and not settle for negotiated agreements with banks.
To do that, the government must clearly require that relief be given in the form of first-mortgage modifications. In addition, the settlement should direct the banks to provide relief in the ZIP codes hardest hit by predatory lending.
Finally, we need real transparency to monitor the new settlement. That means that the public should easily be able to determine who is getting relief, and how. Until that’s done, as we’ve seen, banks are likely to keep playing the same old shell game.
Doesn’t matter how egregious the behavior, the government will always bail out the banks.
Late last Wednesday, the New York Fed said in a court filing that in July it had released Bank of America from all legal claims arising from losses in some mortgage-backed securities the Fed received when the government bailed out the American International Group in 2008. One surprise in the filing, which was part of a case brought by A.I.G., was that the New York Fed let Bank of America off the hook even as A.I.G. was seeking to recover $7 billion in losses on those very mortgage securities.
What’s going on here, is this accurate?
Did the Orange County, CA inventory really drop by 2900 homes in one week (2/4-2/11) and the median home price jumped $80k?
http://www.deptofnumbers.com/asking-prices/california/orange-county/
This is a glitch right?
The week to week numbers are volatile. If he isn’t using some kind of moving average to smooth the results, these things can happen. I suspect such a dramatic one-week change was a data error.
Look closely, it’s consistent with the following week too. Look at the graph.
I checked the LA area too, nearly the same jump/drop! Redfin, searching Market Trends for all of Orange County area shows a similar Leap in asking and Decline in for sale.
http://www.redfin.com/county/332/CA/Orange-County
Asking prices appear to be up 20% month over month.
We’re actively house shopping right now, and I’ve seen at least a 10% (50k) jump in asking prices in our neighborhood, but I thought it was localized.
That increase in asking prices is remarkable. What it really shows is that all the reasonably priced homes have sold, and all we’re left with is all the WTF asking prices. The lack of inventory will motivate some to pay those prices. The banks are succeeding in reflating the bubble, but they risk causing the market to stall with a lack of transaction volume. High prices with little or no volume doesn’t really serve them. Once they get prices up, they need to bring their bad loan properties to the market to liquidate them. For now, I imagine their quite happy watching prices rise.
IR,
This may be a dumb question but it’s something I’ve curious about for a long time – It’s my understanding that most (if not all) mortgages are securitized and the resulting bonds were heavily ‘sliced ‘n diced’ into a bunch of different securities that were purchased by various pension funds, investment banks, sovereign wealth funds, wealthy individuals, hedge funds & via the GSEs, the federal government. Also many of these bonds were hedged with CDS instruments. If the massive wave of foreclosures (which needs to happen IMHO) were to happen all of a sudden there would be an enormous number of securities that would have to be revalued as ‘mark to model’ would be replaced w/ ‘mark to market’. My question is this, were this to happen who would take the financial hit? Would the pain be shared or (my suspicion) would it be us, the 99%? And wouldn’t that explain the extreme reluctance of servicers to foreclose, even on those allowed to squat for years?
It depends on who owns the ABS pools and whether or not they are GSE or FHA insured. Nobody wants to recognize a loss, and with the mark-to-fantasy accounting regulators currently encourage, there is no real need to take losses. Right now banks are withholding inventory to reflate the bubble to put collateral back behind their bad loans. If they simply wait until prices rise, they are made whole again. Of course, while everyone waits for the bubble to reflate, a lot of people are squatting in homes and paying nothing.
Thank you for an interesting article.
Why didnt the housing bubble occur in Texas and the rest of middle North America ?
tThis years 9th Annual Demographia International Housing Affordability Survey http://www.demographia.com may be of assistance in answering this question .
Strangling land supply is the housing bubble “trigger” … finance is simply the “fuel”
There is considerable political progress being masde in New Zealand to address these issues.
Hugh Pavletich
Co author – Annual Demographia International Housing Affordability Survey
http://www.PerformanceUrbanPlanning.org
Christchurch
New Zealand
“Why didnt the housing bubble occur in Texas and the rest of middle North America ?”
You ask the right question, but you get the wrong answer.
Restrictive zoning ordinances contribute to the problem, but it has nothing to do with why California bubbled and Texas didn’t. The root of the problem was the ability to get mortgage equity withdrawal. Texas doesn’t permit homeowners to extract home equity at more than 80% of the appraised value. Further, Texas property taxes are much higher. The combination of the two made higher house prices much less desirable in Texas than it was in California.
Further evidence of your faulty assumptions:
Why did Nevada bubble when Texas didn’t? Nevada has very few zoning restrictions just like Texas, but Nevada inflated a massive housing bubble. If your restrictive zoning premise were true, we wouldn’t have seen a bubble in Nevada or in Arizona for that matter.
IR, You’re right that lending was the main driving for price increases. Restrictive zoning only limits the supply, but HELOC all the equity out make essentially a zero down loan requirement and huge leveraging x limited supply = pie in the sky prices.
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“Affordable house prices are the best economic stimulus. Housing costs make up the largest proportion of a households monthly budget (besides taxes).”. DON’T FORGET INSURANCE. HEALTH AUTO HOMEOWERS LIABILITY these really add up.