The banking cartel began restricting MLS inventory in 2012 by refusing to foreclose on delinquent mortgage squatters. Instead, they embarked on an aggressive can-kicking campaign of loan modifications to reduce the number of foreclosures overall and spread them over time. As a result of the reduced flow of REOs onto the market, MLS inventories plummeted, and prices began to go up. The policy was so successful in 2012, the banking cartel plans more of the same in 2013. Lenders know they are bagholders, so they hope with restricted supply and a compliant media willing to pour on the kool aid, lenders can raise the value of the sack of shit they hold on their balance sheets. Since we no longer have a free market — we now have a series of government and banking cartel policies — lenders just might be successful in pushing prices much higher next year.
By Al Yoon — December 14, 2012, 4:36 PM
Home-price forecasts for 2013 are on the rise.
J.P. Morgan Chase & Co. expects U.S. home prices to rise 3.4% in its base-case estimate and up to 9.7% in its most bullish scenario of economic growth. Standard & Poor’s, which rates private-issue mortgage bonds, on Friday said it expects a 5% rise in 2013.
Since J.P. Morgan Chase & Co. is one of the biggest bagholders, their wishful thinking is not surprising. They stand to benefit tremendously if house prices rose 10%. Unfortunately, since they are part of a cartel, the other cartel members may decide to increase their foreclosures and push out a few more squatters. Any increase in supply would serve to dampen their enthusiasm.
The J.P. Morgan analysts boosted their base-case estimate from 1.5% after a convincing rise in the “net demand” for housing this year has surpassed 2 million homes for the first time since 2006, said John Sim, a strategist at the investment bank. Net demand is the pace of existing home sales minus the inventory of homes available for sale.
This increase in net demand came from two ephemeral sources: restricted supply and investor demand. Restricted supply can change at any moment as it’s determined by banking policy rather than organic sales. The investor demand can evaporate in a nanosecond if investors no longer believe in the opportunity. The hedge funds are buying because the cashflow is superior. If prices go up, that will no longer be the case, and the hedge funds will stop buying.
“Net demand has picked up a lot in 2012,” said Mr. Sim. “Once you get north of the 2 million territory, you are in the positive growth area
He is implying that 2 million units is some magic threshold where demand becomes self-fueling and the market has escape velocity. Unfortunately, this just isn’t so. For a housing market to have sustained momentum, it requires an increase in job creation and greater demand from owner occupants. If that were the fuel, the “escape velocity” meme might have validity. However, since that isn’t what we have the idea of market momentum is purely a fantasy.
unless you get a lot of distressed inventory, which this year hit a low point” since at least 2008, he added.
His caveat of increased distressed inventory may also come to pass. It won’t really take a lot of it to slow appreciation. Prices in Southern California rose 10% last year after a 60% decline in for-sale inventory. If we get even half that inventory back, appreciation will stop dead in its tracks. Plus, the higher prices get, the less inventory it takes to cause a problem as affordability starts to become an issue.
J.P. Morgan predicts that net demand to rise from 2.7 million next year from 2.3 million this year.
An expected increase in home prices in 2012 triggered a run into some of the riskiest real estate assets, such as subprime mortgage-backed securities from the real estate boom,
No. An expected increase in home prices is not what was responsible for the flight to riskier assets. Hedge funds started buying these assets because valuations were low relative to the cashflow these assets produced. It was a value play not a momentum play.
and analysts including Mr. Sim expect that trend to continue. Rising home prices and the quest for yield has also given a tailwind to new mortgage bond issuance that has been mired in the fallout of the housing crisis and regulatory uncertainty for the past four years.
U.S. home prices nationwide increased on a year-over-year basis by 6.3% in October, the biggest increase since June 2006, according to CoreLogic. Investors zoning in on the increases bought subprime mortgage bonds, which have posted returns of more than 40% since December.
Home price increases could exceed J.P. Morgan’s base forecast if investors seeking yield push deeper into real estate, according to Mr. Sim’s home price report.
Investors seeking yield do not push prices higher. These investors put in a floor, but they don’t bid prices up.
That may already be happening, considering recent comments by Luke Scolastico, a vice president at Credit Suisse, one of two issuers of mortgage bonds without government backing since the financial crisis. Credit Suisse is increasing its purchases of jumbo loans to meet demand for securities it sees from investors, he said on an American Securitization Forum panel this week.
“We’re buying loans, every day…and (on the month,) more than the month before,” Mr. Scolastico said. Part of the reason is because of home price appreciation, but also because of the “technical demand” for relatively higher yielding assets as Federal Reserve policies depress interest rates, he said.
Rising home prices give mortgage-backed securities investors greater comfort that collateral backs their loans, but it does not make them any more money. The “technical demand” caused by the federal reserve’s manipulation of the bond market is very real. Investors chasing yield have bought longer maturing bonds. These investors will get killed when interest rates rise. It’s only a matter of when.
New mortgage bond sales from other issuers, including investment banks, could boost issuance of private label bonds this year as high as $30 billion, Mr. Sim said. That’s up from almost $5 billion this year but paltry compared with annual volume above $1 trillion generated as the housing bubble neared its breaking point in 2006.
This guy is touting a “tailwind” in bonds because what once was a $1 trillion business just went from $25 billion to $30 billion. Give me a break. A 97.5% decrease in activity is now only a 97% decrease in activity. Not exactly a robust recovery.
Mortgage bonds issued by Fannie Mae, Freddie Mac and Ginnie Mae still fund more than 90% of new home loans. Bank portfolios and other private lending make up the rest.
Considering risks, J.P. Morgan analysts conceded that the economy is “gloomy” and tight lending standards can stop a bullish homebuyer from proceeding with a purchase. On the supply side, the “shadow inventory” of more than four million homes near or stuck in foreclosure still looms, though that is dropping, the analysts said.
Those problems will persist for several more years. Perhaps by early 2016 we will be discussing a housing market where reduced credit quality and shadow inventory are not major issues, but until then, those are the elephants in the room.
What’s more, just the uncertainty over whether politicians will be able to steer clear of the “fiscal cliff,” the scheduled tax increases and spending cuts next month, may hurt investor confidence, the J.P. Morgan analysts said.
If taxes rise, reduced income for the potential homebuyers will damp housing demand, they added.
It’s not just an increase in personal income taxes. The reduction or elimination of the home mortgage interest deduction is a big deal, particularly where high wage earners dominate the market.
But the expectations for higher home prices are still widespread. Nearly three-quarters of investors polled by J.P. Morgan expect home prices to rise 5% in 2013.
Kool aid will never die. Faith in the market is eternal.
Sticking it to BofA
The former owner of today’s featured property was not a Ponzi. He did have some mortgage activity, but where was no mortgage equity withdrawal until 10/12/2007 when he refinanced with a $417,000 first mortgage and got a $78,000 HELOC. His timing couldn’t have been better. He took is mortgage from $150,000 to $495,000 just past the peak when such loans were still be underwritten. He defaulted shortly thereafter and left BofA holding the bag.
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Proprietary OC Housing News home purchase analysis
$319,000 …….. Asking Price
$146,500 ………. Purchase Price
1/3/1995 ………. Purchase Date
$172,500 ………. Gross Gain (Loss)
($25,520) ………… Commissions and Costs at 8%
$146,980 ………. Net Gain (Loss)
117.7% ………. Gross Percent Change
100.3% ………. Net Percent Change
4.4% ………… Annual Appreciation
Cost of Home Ownership
$319,000 …….. Asking Price
$11,165 ………… 3.5% Down FHA Financing
3.40% …………. Mortgage Interest Rate
30 ……………… Number of Years
$307,835 …….. Mortgage
$79,048 ………. Income Requirement
$1,365 ………… Monthly Mortgage Payment
$276 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$80 ………… Homeowners Insurance at 0.3%
$321 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,042 ………. Monthly Cash Outlays
($201) ………. Tax Savings
($493) ………. Equity Hidden in Payment
$12 ………….. Lost Income to Down Payment
$100 ………….. Maintenance and Replacement Reserves
$1,460 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$4,690 ………… Furnishing and Move In at 1% + $1,500
$4,690 ………… Closing Costs at 1% + $1,500
$3,078 ………… Interest Points
$11,165 ………… Down Payment
$23,623 ………. Total Cash Costs
$22,300 ………. Emergency Cash Reserves
$45,923 ………. Total Savings Needed