It looks like the bottom-callers of 2012 were right. Continued interference in the mortgage market by the federal reserve lowered mortgage interest rates to record low levels. Plus, changes in policy at the major banks held back the tide of foreclosures and greatly restricted the MLS inventory. Demand was up slightly, mostly due to investors as owner-occupants remained absent from the market. First-time homebuyer participation fell to very low levels. The small uptick in demand, fueled by record low interest rates, and the dramatic decline in for-sale inventories caused prices to bottom in 2012. It isn’t how the bottom callers thought it would happen (most predicted a surge in demand), but being right for the wrong reasons is good enough. It certainly beats being wrong for the right reasons like the bears were.
The Great Housing Rebound of 2012: How the Fed Helped Sellers Beat the Odds
By Christopher Matthews — Dec. 27, 2012
Without a doubt, the U.S. housing market has been the most successful sector of the economy this year, …
The housing-market “bottom” was one of the biggest business stories of 2012. After years of falling home values, the data clearly showed that the bleeding stopped somewhere in the first part of 2012 and that home prices have actually begun to slowly rise since then. In addition, other indicators like housing starts, new home sales and foreclosure statistics all point toward a healing housing sector.
Note the tiny uptick similar to the tax-credit surge of 2009…
These dynamics have gotten some economists and market analysts excited about the growth prospects for the U.S. economy in 2013. Robert Johnson, director of economic analysis for Morningstar, called housing “the big change factor in 2013″ and believes that “direct housing investment will be a meaningful contributor” to economic growth in 2013. He also sees industries related to housing — like furniture manufacturing and sales — adding to economic growth in 2013 as the housing market begins to pick up.
Wishful thinking…
There’s no doubt that we’re finally seeing the beginnings of what economists call a positive feedback loop when it comes to housing. Rising home prices allow lenders to be more generous with home financing, which allows even more prospective home buyers to access the market, further driving up home prices. And higher home values give consumers and builders more confidence to go out and spend money or make investments, which also stimulates the real estate market and broader economy.
Actually, there is significant doubt whether or not we are in a positive feedback loop. Lenders are not becoming more generous with home financing. FHA is facing a bailout, and the GSEs are suing banks with buy-backs on bad loans forcing banks to become even tighter with their lending standards. The positive feedback loop meme is what everyone hopes for, but that isn’t what’s happening in the real world.
But with all this enthusiasm for the housing-market recovery, it’s important to take a step back and think about the real driving force behind rising home prices. Jonathan Miller, president and CEO of the real estate appraisal and consulting firm Miller Samuel Inc., astutely asks the question of how home prices can rise in an environment in which unemployment remains high, there is little growth in take-home pay, taxes seem poised to rise and lending standards continue to be tight.
That is a very good question. Those are what economists ordinarily label as the fundamentals of the housing market, and they are all weak.
One of the answers to this riddle, according to Miller, is the Federal Reserve. Record low mortgage rates, primarily (though not exclusively) due to the Fed’s decision to buy up mortgage-backed securities, have done much to boost home prices. Last month I wrote about an analysis done by Tim Iacono of Iacono Research that illustrated just how significant Fed stimulus efforts can be when it comes to home prices. He showed that today’s superlow rates can enable a home buyer to purchase a house that is 50% more expensive than she would have been able to afford under the average mortgage rates over the past 20 years.
The cost of ownership on a monthly payment basis is less expensive relative to rent than any point in the last 25 years. That’s the main bullish signal in the housing market.
In addition, there is reason to be concerned that distressed home sales — like foreclosures or short sales — will hamper the housing recovery in 2013. Miller notes that distressed home sales began to increase yet again in the second quarter of 2012, as banks started to ramp up their foreclosure mechanisms after the resolution of the robo-signing scandal earlier this year. Homes sold under these conditions are usually done so at a steep discount, and large amounts of distressed properties on the market will drive down home prices more generally.
This is where the housing markets across the country diverge. In judicial foreclosures states, mostly on the east coast, prices are falling and will continue to fall throughout 2013. They did not experience the big drops of 2008 that the non-judicial foreclosure states of the west coast went through. Their pain was merely delayed, but not avoided like they hoped.
This is not to say that the recent trend of rising home prices isn’t a good thing. It’s very difficult to imagine a significant economic recovery in an environment of falling real estate prices, as a house is most Americans’ single most significant asset.
Realistically, why would this matter? Only in an economy dependent upon HELOC abuse would fluctuations in asset prices make a difference. For most homeowners, at least those who don’t tap their home equity, a change in asset value is irrelevant to their spending. The wealth effect is an illusion. The Ponzi effect is real. Only through rising home prices, and people spending those increases, do we see an economic boost from rising home prices.
But any sober analysis of the recovery must admit that Federal Reserve stimulus is probably the single most important factor driving rising home prices. And until we see a significant drop in unemployment, or a significant increase in wages, we won’t get a housing-market recovery that can sustain itself without unprecedented intervention from the central bank.
That is the reality of life. The federal reserve will keep printing money to monetize government debt to keep mortgage interest rates low until wage inflation kicks in enough to support higher interest rates. If the federal reserve doesn’t keep printing money, house prices will fall again, and the member banks of the federal reserve will recover less on their bad loans and will be insolvent. This is the main reason I don’t believe the predictions of rising interest rates in 2013. They may tick up slightly, but even 4% interest rates would remove about 15% of the affordability stimulus from the market. The banks can’t afford that, at least not now while they have so many bad loans yet to process. I believe low interest rates will be with us for quite a while, inflation be damned.
The template for the future
The federal reserve is counting on the “wealth effect” of Ponzi borrowing to stimulate the economy going forward. Rather than discouraging borrowers to take out loans they can’t repay, the federal reserve encourages it. Apparently, allowing the irresponsible to steal from the prudent is justified by the positive effect it has on the economy when the irresponsible spend their ill-gotten money.
Since most first-time homebuyers and Ponzis who reenter the market are using FHA financing, we will see much more of what the former owners of today’s featured property were doing. They put very little down, and they extracted and spent their equity as it materialized. Many more people will follow their example during the next bubble because these people were handsomely rewarded for doing so.
- This house was purchased on 8/11/2000 for $259,000. The owners used a $246,050 first mortgage and a $12,950 down payment.
- On 10/21/2002 they refinanced with a $243,000 first mortgage. At least they started on the right path.
- On 7/28/2003 they refinanced with a $262,500 first mortgage
- On 2/23/2004 they obtained a $85,000 HELOC.
- On 9/22/2006 they refinanced with a $560,000 first mortgage completing the extraction of $313,950 in mortgage equity withdrawal. That’s an excellent return on their $12,950 initial investment.
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Proprietary OC Housing News home purchase analysis
5412 EDINGER Ave Huntington Beach, CA 92649
$459,900 …….. Asking Price
$259,000 ………. Purchase Price
8/11/2000 ………. Purchase Date
$200,900 ………. Gross Gain (Loss)
($36,792) ………… Commissions and Costs at 8%
============================================
$164,108 ………. Net Gain (Loss)
============================================
77.6% ………. Gross Percent Change
63.4% ………. Net Percent Change
4.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$459,900 …….. Asking Price
$16,097 ………… 3.5% Down FHA Financing
3.41% …………. Mortgage Interest Rate
30 ……………… Number of Years
$443,804 …….. Mortgage
$114,058 ………. Income Requirement
$1,971 ………… Monthly Mortgage Payment
$399 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$115 ………… Homeowners Insurance at 0.3%
$462 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,946 ………. Monthly Cash Outlays
($290) ………. Tax Savings
($710) ………. Equity Hidden in Payment
$17 ………….. Lost Income to Down Payment
$135 ………….. Maintenance and Replacement Reserves
============================================
$2,099 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,099 ………… Furnishing and Move In at 1% + $1,500
$6,099 ………… Closing Costs at 1% + $1,500
$4,438 ………… Interest Points
$16,097 ………… Down Payment
============================================
$32,733 ………. Total Cash Costs
$32,100 ………. Emergency Cash Reserves
============================================
$64,833 ………. Total Savings Needed
The property above is available for sale on the MLS.
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18 Responses to “2012: the year housing market manipulations paid off”
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“This is the main reason I don’t believe the predictions of rising interest rates in 2013. They may tick up slightly, but even 4% interest rates would remove about 15% of the affordability stimulus from the market. The banks can’t afford that, at least not now while they have so many bad loans yet to process. I believe low interest rates will be with us for quite a while, inflation be damned.”
In 2013, we are going to see how high the printing pressing will set. We are creating $85 billion a month just on QE 3 and QE 4. Soon that affects these two QE will wear off and then you will get even a greater QE.
I think Bernanke is committed to QE infinity. I think he believes the shock to the economy from higher interest rates will be greater than the damage of devalued currency and inflation.
Unfortunately, since most
investorsspeculators have decided to jump-back-in based on data formed in reaction to constant interventionism, the rush to the exits will be epic.Most people who pay too much for real estate don’t sell in a panic. They will just hold on and be pissed about the market not giving them the free money they feel they deserve.
I’m talking about the speculators who’ve been the bulk of market support over the past couple of years (NOT “most people”). They typically don’t pay too much for RE but tend to be heavily leveraged in other arenas. Once a trend shifts or positive ‘returns’ suddenly go neg, they certainly won’t be holding on.
Oh…. and then there are those pesky margin calls
I think we posted an article this weekend where “investors” that purchased in real estate in 2009 and 2010 were trying to cash out. Hmmm, it sounds and feels like last bubble.
Quote from the article
“The business of investing in portfolios of distressed single-family homes has come to the point in its current cycle that investors who got into the game early are beginning to cash out.”
Most of the hedge funds won’t cash out for another five years. Right when the market does start to overheat, the supply from these hedge funds liquidating their portfolios will keep appreciation in check.
First, the banks must flush out the squatters. That will take three more years.
Second, the hedge funds must liquidate their holdings into the increased demand. That will take another three years or more.
Finally, we will reach a market with no overhead supply… perhaps in a decade.
Och-Ziff Calls Top Of “REO-To-Rental”, And Distressed Housing Demand, With Exit Of Landlord Business
http://www.zerohedge.com/news/2012-10-17/och-ziff-calls-top-reo-rental-exit-landlord-business
Settlement Expected on Past Abuses in Home Loans
Banking regulators are close to a $10 billion settlement with 14 banks that would end the government’s efforts to hold lenders responsible for foreclosure abuses like faulty paperwork and excessive fees that may have led to evictions, according to people with knowledge of the discussions.
Under the settlement, a significant amount of the money, $3.75 billion, would go to people who have already lost their homes, making it potentially more generous to former homeowners than a broad-reaching pact in February between state attorneys general and five large banks. That set aside $1.5 billion in cash relief for Americans.
Most of the relief in both agreements is meant for people who are struggling to stay in their homes and need the banks to reduce their payments or lower the amount of principal they owe.
The $10 billion pact would be the latest in a series of settlements that regulators and law enforcement officials have reached with banks to hold them accountable for their role in the 2008 financial crisis that sent the housing market into the deepest slump since the Great Depression. As of early 2012, four million Americans had been foreclosed upon since the beginning of 2007, and a huge amount of abandoned homes swamped many states, including California, Florida and Arizona.
Federal agencies like the Securities and Exchange Commission and the Justice Department are continuing to pursue the banks for their packaging and sale of troubled mortgage securities that imploded during the financial crisis.
Losses on reverse mortgages prompt FHA to make changes
WASHINGTON — You’ve probably seen the reverse mortgage pitchmen at work on your TV screen — former Sen. Fred Thompson and actors Robert Wagner and Henry “Fonzie” Winkler prominent among them — urging seniors to pull cash out of their homes through a loan program guaranteed by the federal government.
But it looks as if the pitchmen will have fewer and smaller mortgages to sell in 2013. In a move aimed at controlling losses to its insurance funds, the Federal Housing Administration is clamping a moratorium on the most popular form of reverse mortgage — the so-called standard version, which allows large lump-sum drawdowns of cash at fixed interest rates.
The FHA also plans to institute other changes that could make obtaining a reverse mortgage tougher for some applicants, such as financial qualification standards and escrow set-asides for taxes and property insurance.
Reverse mortgages, marketed to those 62 and older, can play important roles in retirement planning and enable owners to “age in place” — stay in their homes for as long as they want. Unlike other mortgages, reverse loans do not require periodic repayments of principal and interest; borrowers generally need not repay the amounts drawn down until they move out or otherwise sell the property.
The FHA supports the dominant program in the field, known as the Home Equity Conversion Mortgage (HECM), which insures private lenders against loss and accounts for more than 90% of all new and outstanding reverse loans in this country.
The FHA’s program grew rapidly in volume from 2001 onward, producing 108,000 new loans in 2007, 112,000 in 2008 and 115,000 in the peak year of 2009. Since then, however, volumes have been sagging. Major lenders such as Bank of America, MetLife, Wells Fargo and Citibank have stopped originating new HECM loans altogether. Total originations sank to 54,800 in the fiscal year that ended in September, according to federal data.
But shrinking volume hasn’t been the only problem. The HECM program has been racking up outsized losses for the FHA, in part attributable to foreclosures on homes whose market values have fallen below the insured amounts provided to the borrowers. In the FHA’s annual independent audit report to Congress, losses on reverse mortgages contributed $2.8 billion to the agency’s capital reserve deficiency and increased the chances that the FHA might have to seek a bailout from the Treasury next year.
No resolution on mortgage deduction caps anticipated until summer
President Obama and Congress were working Friday on a last-ditch effort to save Americans from tax hikes set to take effect in January, but issues related to housing are most likely postponed at this point.
Two issues tied to fiscal cliff negotiations and deficit reduction talks have a direct impact on the mortgage industry.
First, the Mortgage Forgiveness Debt Relief Act expires at year-end without a move by Congress to extend it.
The act was originally passed in 2007 so struggling homeowners could go through short sales, loan modifications and other resolutions without getting zapped with taxes on forgiven debt.
Second, policymakers have been throwing around the idea of tossing out the mortgage interest tax deduction to help reduce the nation’s deficit while protecting most Americans from tax hikes. Such a move would take away a popular tax benefit for homeowners. …
Yun anticipates a more extensive agreement over how to reduce the nation’s deficit next summer. That is when the mortgage interest tax deduction could end up back on the bargaining table.
But Yun admits, homeowners worried about losing mortgage interest tax deductions may still view a lack of closure on that issue as too much uncertainty, causing them to hold off on buying a home.
“For some homebuyers they may want to wait it out until they see what is in it (the grand bargain) and what is not.”
Wow, I need to retitled this weekend article. So, now have to wait 6 months to recheck your affordability.
Seriously WTF? Make a decision and move on.
I think a change in the MID is significant event in the real estate market, unlike let’s say PMI. Prices will be knocked down and buyers are going to realize qualified for up to 20% less mortgage. In addition, existing homeowners are going to find out they have $400 or more less take home pay during a period a 5 year period where income has decreased and cost of living as increased.
I would think you are right if I was saying rates are 6.5%, I’m going to wait until they hit 6.0%, then that would be silly. However, the biggest purchase of your life needs to be done carefully. Don’t want to be caught with your pants down.
Today’s mortgage rates pre-date Rock and Roll. And it goes well with today’s post.
2012 mortgage rates reach 65-year lows
“Mortgage rates ended this year near record lows,” Frank Nothaft, vice president and chief economist at Freddie Mac, said in a statement. “The 30-year fixed-rate mortgage averaged 3.66% for 2012, the lowest annual average in at least 65 years.”
I think we will see the bottom of the interest rate cycle in 2013, but rates won’t rise much off the bottom for quite a while.
We are going over the fiscal cliff. I was trying to find some animation with people, animals, objects, money, etc going over the fiscal cliff.