Super low interest rates have allowed today’s homebuyers to bid home prices up near peak levels in many areas. This helps lenders recover more capital from the bad loans they made during the housing bubble, which is why the federal reserve is intent on driving mortgage interest rates even lower. As a result of all this artificial stimulus, price-to-income ratios have remained elevated far above historic norms. Unless interest rates are going to remain this low forever, one of three things must happen: either house prices must go down further, debt-to-income ratios must increase, or wages must go up. Higher debt-to-income ratios proved disastrous because borrowers cannot sustain the payments, so that outcome isn’t likely. Since the federal reserve will not let house prices fall further to ensure the solvency of it’s member banks, that means interest rates will remain low until wages catch up. With very high unemployment and millions of discouraged workers, the federal reserve is committed to is low interest rate program for many years to come.
The low interest rate policy is not without side effects. Federal Reserve’s policy to save housing is forcing seniors into foreclosure. And with prices being elevated much higher relative to incomes than historic norms, some are starting to wonder if the middle class will be forced to abandon home ownership as part of the American Dream.
How Is Federal Housing Policy Populist When Prices Are Rising?
By Robert Bridges — 9/27/2012
It would seem that a government seeking to display a true populist streak by helping its citizens buy houses would do so in a way to ensure prices as low as possible. For those who are not yet homeowners, how is it populism when recovery makes houses more expensive rather than more affordable?
In the eyes of a banker, lower interest rates makes a house more affordable. My reports bear this out as well. As interest rates go down, rental parity goes up. On a payment affordability basis, houses are as affordable as they’ve ever been despite the high prices. Affordability is relative to the cost of money, either the opportunity cost of savings or the borrowing cost of debt, and federal reserve policy has lowered both.
For some time now, demand for houses has been artificially boosted by federal and state tax policies, rising governmental involvement in residential-debt financing, and persistently low interest rates orchestrated by the Federal Reserve.
Yes, it has. We have tried every financial stimulant possible to stop prices from falling further.
This intensified demand has not been relieved by sufficient new supply of houses, resulting in intractable upward pricing pressure that has put home-ownership beyond the reach of growing numbers of moderate-income buyers.
Actually, that’s not true. The super low interest rates have made houses affordable to more people than ever before. The limitation is not income, it’s credit qualification. And contrary to what realtors believe, lowering credit standards is not the answer. Credit qualification must be based on the borrower’s ability and willingness to repay loans. Unfortunately, we trained an entire generation of Ponzis who are not responsible enough to sustain home ownership, so credit qualification must remain a barrier until the borrower pool learns prudence and responsibility all over again.
Future housing markets are likely to be increasingly vulnerable to destructive price swings if credit-fueled demand and no-growth sentiment continue to flourish.
We are seeing this now with the jump in prices this spring and summer.
The middle class and those aspiring to be part of it are discovering that owning a home has not been a great financial planning option when compared to other long-term investments. Ownership ties up credit and investment capital, saps income and constrains geographic mobility. Even the traditional 80%, 30-year, fixed-rate mortgage now has its skeptics. Little principal is repaid in the early years of such loans, and the housing bust has made it painfully apparent that prices can move more than 20% to the downside.
It will be painful to watch how quickly people will forget the grim realities exposed by the collapse of the housing bubble. The harsh truths of the housing bubble will be glossed over with realtor lies and eagerly lapped up by a public who would rather believe the fantasy of kool aid.
Despite a more sophisticated investing public and the recent housing debacle, a nascent market revival is taking hold with the old policies intact – all but assuring results at odds with the egalitarian rhetoric. Meanwhile, the federal government has virtually nationalized residential lending through the Federal Housing Administration, Fannie, Freddie and other programs, thereby substituting political control for market forces.
It will be interesting to see if the government does relinquish control of housing finance or if nationalized housing finance is here to stay. I think nationalized housing finance is an aberration that exposes taxpayers to needless risk. Banks see it as a way to generate fees and make riskless transactions.
The push to put people in homes and save the casualties of housing downturns has caused a gradual long-term divergence between housing prices and incomes, paradoxically putting us on an inexorable path to redefine the middle class as property-less.
For as much as I would like to embrace his rhetoric, it simply isn’t so. Low interest rates are making properties available. The people who will end up property-less are the squatters who get forced out while prices recover. They will endure their period of recovery while prices make their steepest ascent.
For young, immigrant, wage-earning families with average incomes of $49,445 in 2010, the simple truth is that a home remains unaffordable despite a 22% drop in its median price between 2006 and 2010. Consider:
In 1990, the median price of a home was about 3.25 times median annual income. At the peak of the housing bubble in 2005, the multiple climbed to 4.73, but even in 2010, ostensibly a point of historic affordability, it was still 3.5. To return to the 1990 multiple, the median price of a home would have had to drop another 7.2% below 2010 levels.
If prices are only 7.2% elevated from the 1990s price-to-income multiple, then real estate is significantly undervalued considering interest rates in the 1990s were around 8% and they are less than 3.5% today.
Prior to the housing collapse, fluctuation in house prices was the familiar story of supply and demand. New building activity constrained speculation by putting a lid on outsized run-ups in prices. Substantial down-payment requirements – the FHA still backstops loans with as little as 3.5% down – made homeowners less prone to panic selling. Houses were not ideal rental candidates because there was no shortage of apartment units and other for-rent housing options. In such circumstances, downturns occurred when too much supply hit the market at the wrong time.
The trigger for the recent crash was very different: The reversal in fortunes came when demand, fueled by easy money and rampant speculation, collapsed.
If history is any indication and political realities being what they are, once government programs are put in place to help one group of troubled borrowers or another, they will never disappear, thereby locking in the government as a perpetual source of demand stimulus.
A sad but true state of affairs. The government may never get back out of residential property lending.
As markets recover, it’s likely that additional efforts will be made to expand credit availability and reduce the cost of financing. The Federal Reserve may be complicit in all this, as its mandate to boost employment sweeps the entire nation’s housing markets into a basket with all other assets sensitive to interest rates, whatever the needs of local markets.
It’s natural for credit standards to loosen up when the economy expands. That’s part of the natural credit cycle. Unfortunately, lenders never know where to stop. Rising prices bails out lenders who make bad loans, so over time those loans proliferate and actually contribute to the price rally. The system goes on until the defaults get so rampant that lenders stop lending, and the whole system collapses with a massive credit crunch (see subprime lending for details). Part of what fueled the housing bubble was the complete abdication of lending standards. We can only hope that mistake is not repeated.
Another danger for future housing cycles is that the sources of ever-increasing demand — intensified by policy and population pressures – seem irreversible. Raw land in desirable residential locations has largely run out. Extreme no-growth zoning and building policies have made all but small-scale development impossible, particularly on the coasts. Changes in zoning and building codes continue to transfer many infrastructure and social costs from the public to developers. New construction, forced to the periphery by restrictions and the high costs of urban development, will promote sprawl and dependence on expensive transportation options. And if the supply of apartments continues to be constrained, rents and the prices of homes converted to rentals will continue to support higher housing prices.
The result will be future speculative feedback loops with prices simply running up until the bottom falls out again, leaving in its aftermath the familiar story of the aggrieved looking to the government – complicit in the tragedy – to be rescued, protected and ostensibly made whole.
That is exactly what will happen. I see nothing to prevent it. That’s what saddens me most about this situation.
To make room for a future middle class, policymakers need to abandon the idea that the fortunes of the economy turn on rising home prices rather than the reverse. It’s in everyone’s interest that home values gradually increase. But when housing prices rise faster than middle-class incomes, that’s nobody’s populism and may indeed bring about the end to the cornerstone of middle- class life — the owner-occupied home.
It’s true that we want house prices to rise with wages. Gently rising house prices is sustainable, and real estate equity can be a source of retirement savings. However, what we get is unlimited HELOC access which exacerbates the desirability of real estate which causes wild swings in pricing. Some participants win, and some lose. The winners include the irresponsible Ponzis who game the system and those who through good luck manage to time the housing cycle. The responsible and the unlucky get screwed. What an awful system. Welcome to the American middle class.
You’re supposed to pay down the mortgage
Since everyone is convinced the bottom is in, perhaps it’s time to review mortgage 101. You borrow money to acquire a house, then you pay it off as quickly as possible. You don’t increase the loan balance except perhaps for a significant property improvement. You never borrow money against your family home to support consumer spending because it can cost you the house — as it did for the former owners of today’s featured property.
- This house was purchased 19 years ago on 8/13/1993 for $245,000. At this point, they shouldn’t owe more than $100,000 on the property.
- On 2/15/2000 they refinanced with a $250,000 first mortgage.
- On 10/4/2002 they refinanced with a $297,000 first mortgage.
- On 8/11/2003 they refinanced with a $345,000 first mortgage.
- On 10/27/2003 they obtained a $23,000 HELOC.
- On 7/7/2004 they obtained a $500,000 first mortgage.
- On 8/30/2005 they refinanced with a $700,000 Option ARM with a 1% teaser rate.
They weren’t issued an NOD until 2/7/2012, but given the loan type and amount, it’s possible they were in shadow inventory for much longer. Either way, they lost their house after 19 years of ownership on 8/22/2012.
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Proprietary OC Housing News home purchase analysis
2820 VIA BLANCO San Clemente, CA 92673
$515,000 …….. Asking Price
$245,000 ………. Purchase Price
8/13/1993 ………. Purchase Date
$270,000 ………. Gross Gain (Loss)
($19,600) ………… Commissions and Costs at 8%
============================================
$250,400 ………. Net Gain (Loss)
============================================
110.2% ………. Gross Percent Change
102.2% ………. Net Percent Change
3.8% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$515,000 …….. Asking Price
$18,025 ………… 3.5% Down FHA Financing
3.51% …………. Mortgage Interest Rate
30 ……………… Number of Years
$496,975 …….. Mortgage
$132,278 ………. Income Requirement
$2,234 ………… Monthly Mortgage Payment
$446 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$129 ………… Homeowners Insurance at 0.3%
$518 ………… Private Mortgage Insurance
$90 ………… Homeowners Association Fees
============================================
$3,417 ………. Monthly Cash Outlays
($332) ………. Tax Savings
($781) ………. Equity Hidden in Payment
$20 ………….. Lost Income to Down Payment
$84 ………….. Maintenance and Replacement Reserves
============================================
$2,408 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,650 ………… Furnishing and Move In at 1% + $1,500
$6,650 ………… Closing Costs at 1% + $1,500
$4,970 ………… Interest Points
$18,025 ………… Down Payment
============================================
$36,295 ………. Total Cash Costs
$36,900 ………. Emergency Cash Reserves
============================================
$73,195 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Home Prices Forecast to Weather Winter, but Will Congress Ice Gains?
Home prices continued to reclaim lost ground in September with increases recorded for every corner of the country, Clear Capital reported Tuesday. Improvements have been so strong, in fact, the real estate valuation firm says yearly growth is forecast to shake off winter’s chill and continue through the first quarter of 2013.
That is, if federal lawmakers can keep from squashing consumer confidence, and before coming head-to-head with the end-of-year deadline, can agree on a resolution for the $500 billion in tax increases and spending cuts scheduled to take effect—a looming cloud of financial uncertainty that pundits have dubbed the “fiscal cliff.”
National home prices closed out the third quarter 3.6 percent higher than the previous year, according to Clear Capital’s latest Home Data Index (HDI). If the fiscal cliff is averted, the company projects a 2.2 percent gain nationally through the first quarter of next year with home prices defying the typical seasonal trajectory that follows the thermometer’s mercury lower.
Clear Capital’s Dr. Alex Villacorta says housing is making notable progress, with enough momentum to carry improvements well into the new year, but he warns it could all be undone by the 535 delegates representing the American people that sit atop Capitol Hill.
“[W]e’ve turned our focus to the impending fiscal cliff,” said Villacorta, Clear Capital’s director of research and analytics. “With forecasted gains of 2.2 percent over the next six months, the threat of the fiscal cliff could throw a wrench into the recovery.”
Even if Congress grinds out a fix as the curtain falls on 2012 and the cliff is avoided, Villacorta says they run the risk of damaging consumer confidence—particularly among potential homebuyers—if a resolution fails to materialize until just before the year-end deadline. “Confidence is key to turning the recovery’s near-term sprint into a marathon,” Villacorta said. “The sooner businesses and consumers are reassured, the more likely they are to build, purchase, or loan on a house.”
According to Clear Capital, the housing recovery now lies in Congress’ hands. The company draws parallels between recent bouts of economic uncertainty and declines in both consumer confidence and home prices in its latest report.
Consumers reacted negatively to the debt ceiling spectacle last summer with a 14.3 percent drop in sentiment—the largest since the end of the recession—and concurrently, home prices experienced their worst annual declines since the bottom of the market in 2009, Clear Capital reports.
The company also points to May 2011, when the debt ceiling debate really began to intensify and consequently, when home prices dropped 6.8 percent year-over-year. Annual home price declines persisted through 2011, until finally finding some relief in early 2012, coinciding with recorded improvements in consumer sentiment.
Clear Capital’s data indicates strength in consumer sentiment also corresponded with the only two notable housing improvements since 2009. The company says between March 2009 and June 2010, consumer sentiment rebounded 32.6 percent. Over the same period, home prices went from seeing yearly declines of 22.7 percent to yearly growth of 4.0 percent. Similarly, between December 2011 and September 2012, consumer sentiment gained 12.0 percent, and home prices moved from yearly losses of 2.3 percent to gains of 3.6 percent by Clear Capital’s assessment.
Now, the valuation company says, economic and housing improvements are priming pent up homebuyer demand for a breakout. Consumer sentiment has finally rebounded from the debt ceiling debate lows of last year, up 31.8 percent, and homebuilders are echoing consumers, with confidence at a five-year high.
While the Federal Reserve’s recent announcement of QE3 should further improve housing affordability with lower mortgage rates and boost expectations for the market, Clear Capital contends it might not be enough to overcome “fear of the cliff.”
Recovery continued to take hold in September at the national and regional levels, according to the company’s report. The West continued to dominate with 9.4 percent in annual gains — the highest yearly gain the region has recorded since the second quarter in 2006.
Clear Capital says what it calls the “first in, first out recovery” has been driven by harder hit markets, many of which reside in the West. Projected gains of 5.3 percent over the next six months in the West are expected to drive a sustained recovery at the national level through the winter months, the company explained.
The South and Midwest saw yearly gains in September of 3.2 percent and 1.5 percent, respectively. Clear Capital expects the South to see further price advances of 1.9 percent through March 2013 and the Midwest to post a 0.8 percent rise in home prices.
The Northeast continues to see annual gains soften, with prices in September rising just 0.9 percent over the previous year. Home prices in the Northeast are expected to do more of the same and remain relatively flat, growing 0.9 percent over the next six months, according to Clear Capital’s forecast.
The good news, Clear Capital says, is that far more markets are improving than are declining. The company’s forecast shows the recovery will sustain the typically slow winter, and start the spring buying season strong.
But as we approach the end of 2012, will fear from the impending fiscal cliff sway consumer confidence and discourage potential homebuyers?
“We say yes, it can,” Clear Capital stated. “Congress must make tough decisions before the 11th hour.”
Strategic default cloaked as civil disobedience? Foreclose on them and be done with it.
Underwater Ohioans Rebel for Principal Reduction Cause
Sometimes, to bring attention to what one considers to be an unjust law or policy, an act of rebellion occurs.
In Ohio, three current but underwater borrowers have decided to go on a mortgage strike as an act of civil disobedience against FHFA’s stance on principal reduction the lack of help to address underwater mortgages.
According to CoreLogic, 10.8 million, or 22.3 percent, of residential properties with a mortgage are underwater. One proposal to address the issue is to offer principal reductions on these underwater mortgages. However, FHFA Acting Director Edward DeMarco has decided not to allow principal reductions on Fannie Mae and Freddie Mac-backed mortgages, citing taxpayer losses and a moral hazard issue.
Empowering & Strengthening Ohio’s People (ESOP) is the organization that introduced the idea of the mortgage strike. In a document from the organization, ESOP explained that the decision came about after “long and careful consideration.”
“[T]he continuing lack of concern from Washington about this devastating problem left us little choice but to use ‘civil disobedience’ to petition the government for relief from unjust debt oppression,” the group said.
The strike takes after a statutory section of Ohio law that allows for a court supervised structure for organizing a rent strike against a landlord who refuses to make repairs. In a document, ESOP explained ORC 5321.08 allows tenants to pay rent to the court instead of the landlord, and the landlord must answer to the court for the alleged violations and correct the violations in order to receive the funds.
Rather than paying their servicer, the three Ohio homeowners will pay their principal and interest to an attorney who will hold their payments in an escrow account.
Paul Bellamy, director of development and research at ESOP, said they want to emphasize that the strike is not a way to avoid paying one’s mortgage since the participants are current and will continue to pay their principal and interest. Instead, it is a way for the borrower to make their voices heard.
Anita Gardner, one of the mortgage strikers, is underwater by around $62,000. The other two, Sally Fluker and George Robinson, are upside down on their mortgage by around $38,000 and $44,000, respectively.
According to data from ESOP, 530,000 households, or 25 percent of homeowners, are underwater. Another 125,000 households are on the verge of falling into negative equity.
In order to become a mortgage striker, ESOP outlined rules, one of which is that a participant must understand the potential consequences of becoming a striker, which are an impaired credit profile; decrease in FICO credit score; default status; and foreclosure and other litigation.
Bellamy said that while foreclosure is a possibility, he said they don’t anticipate a foreclosure, and they are not going to let anyone lose their home.
The funds accumulated from the strike will be released to the servicer at the striker’s request or if the court orders release of the payment.
Aside from understanding the rules, a mortgage striker must be current and underwater, make full payments into an escrow account, cover taxes and insurance, and comply with strike rules for handling monthly payments into escrow.
This month will be the first month the strikers will make their payments into an escrow account rather than to their mortgage company.
The mortgage strike does not offer any assurance of results, and the participants understand the potential consequences. Despite these things, they still wanted participate for the sake of getting a message across.
The point we’re trying to make is not about particular servicers or investors or banks; it has to do with a national policy and no one seems to be confronting it, said Bellamy.
I don’t understand? What’s their problem? The value of your house is currently below your loan amount. How does that affect anything?
Should I strike against making 401k contributions if my 401k’s principal value declines? And if I’m made whole by my 401k provider, and the value then returns above water, then what?
Will anyone in the mainstream media ask these simple questions?
It’s all part of the deeper pathology created by the false idea that real estate prices can never go down. Houses have become the income and savings vehicle of choice. Rising house prices are considered an entitlement.
What will happen to all the people who got principal reductions when prices go back up? Will any of them volunteer to give the money back?
If we’d received principal reduction down to FMV in 2009, it could have been as much as $200k. Today, those mortgages’ balances would be less than $100k underwater. Would I just be entitled to this windfall?
The only person I know who’s received principal reduction, got a token reduction spread-out over three years. e.g. On a $600k mortgage and house worth $400k, he received a $20k reduction immediately with a modification, and $20k in each of the next two years if payments were timely.
That token amount is about what I expected from these programs. Banks are betting the few additional payments will return them more than what they give up in the principal reduction. I bet that most people who receive principal reductions end up short selling before they ever see equity again.
Where the Single-Family Rental Market Is Heading: Capital Economics
No doubt, the potential of the REO to rental market has caught the attention of both individual and institutional investors. But, what is the potential of the REO to rental market, and how long will it continue? In a recent report authored by economist Paul Diggle, Capital Economics addressed those questions.
So far, Capital Economics said those who seized the opportunity early on appear to have achieved gross rental yields between 8 percent and 12 percent, a sufficient amount to cover the price tag of managing single-family rentals.
The sufficient rental yields, however, will only last as long as there are enough discounted properties to purchase.
Recently, the National Association of Realtors reported pending home sales slipped month-over-month in August, noting shortages of lower priced inventory in much of the country, especially in the West.
While recent housing data points to a decrease in the supply of distressed inventory, Capital Economics said, “the potential supply of distressed homes is considerable,” noting an estimated 3.8 million homeowners who are either deeply delinquent or already in foreclosure.
In addition, there are about 375,000 REOs, but “the actual supply on the market has been dropping rapidly, particularly in the cities being targeted by investors,” Diggle wrote.
Prices are also rising.
RealtyTrac recently reported a 6 percent quarterly increase in the average price of foreclosure-related sales.
In Phoenix, where prices fell drastically and are now rapidly rising, Capital Economics said the three-month annualized increase in prices is currently at 25 percent, a rate that will lead to the market becoming overvalued in a little over a year.
Thus, with distressed inventory shrinking and prices rising, the research firm said, “Investors will not continue acquiring single-family homes beyond a few more years.”
Once interest in the REO to rental market wanes, the focus will be on two exit strategies – selling the property or spinning off the rental portfolio to a property manager, Capital Economics explained.
The research firm concluded the report by stating, “The bottom line is that small-scale, ‘Mom and Pop’ investors will continue to provide the bulk of the homes to the single-family rental market. Nevertheless, depending on how efficiently institutional investors can acquire single-family homes over the next few years, there is scope for them to make a significant contribution to the housing recovery.”
What will sway consumer confidence and discourage potential homebuyers has nothing to do with the fiscal cliff, but everything to do with this….
http://4.bp.blogspot.com/-pCheQTPyqd4/UGhogd2Fs0I/AAAAAAAADYA/P_rJqA–I60/s1600/%28%29+mean+household+income+growth.gif
Usually the end of a recession is also the bottom of any decline in personal income. According to that chart, incomes are still dropping, probably due to high unemployment.
Housing needs incomes to rise. Lower interest rates can compensate for falling incomes, but that will only help prices tread water.
All is well,
While the US nationalizes the house lending process, the federal govt assumes almost all the liability and realizes none of the profits. Great system for the banksters. Better than real ownership. The banksters will have almost no skin in the game, but reap almost all the profit.
el BOGEY has data from 2010? Somebody alert the Huffington Post.
Bored at work today? aka… nothing for you to do in ‘originations’ ?? Ah…. that’s what I thought
OK, here’s 2011.
oh look, income growth is still tanking. (worse than 2010)
http://advisorperspectives.com/dshort/charts/census/median-household-income-age-brackets.html?household-income-age-45-54-median-real-growth.gif
Nice comeback. That chart is worse.
I’d say the only thing worse than your data manipulation skills is your deductive reasoning. About 9 months ago you were convinced that I was Redfin agent, but now that I make passing mention of FHA refi’s, I must be in ‘originations’. Brilliant Watson! LOL…..
As for your chart, if you were to plot US median home values priced in real 2011 dollars, you would see they have fallen by an almost identical amount as incomes, since 1999. Unfortunately, once you switch to nominal pricing, both incomes and home values have risen by double digits over that time period. Your chart is dramatic, yes, but essentially meaningless when talking about nominal home values.
And if you really want to know what I do, we’ll have to meet for that cerveza sometime. Otherwise you’ll have to continue reading my work in the paper.
I figured you two knew one another. Funny that you don’t.
Larry, his id is MR for good reason
MR, please provide a link to the post where I said I was convinced you were a Redfin agent.
Thx in advance.
You aren’t getting senile in your old age are you?
http://ochousingnews.com/news/grifters-for-god-fraudulently-occupying-a-1-3m-home-for-five-years#comment-1461
Larry – We are acquainted only through real estate blogging. We were supposed to get together for a drink at Javiers about a year ago, but he backed out at the last minute. If not for your blog, we might have lost contact completely. :’-(
I want you both to know I greatly appreciate how much you participate in the comments. You add life to this blog, and both of you provide interesting and thoughtful comments. Thank you.
Bernanke vows to run printing press indefinitely
Chairman Ben S. Bernanke defended the Federal Reserve’s unprecedented bond buying in his first comments since the Fed renewed the purchases last month, saying the program will spur growth, cut unemployment, help savers and support the dollar.
The central bank will sustain record stimulus even after the expansion gains strength, and policy makers don’t expect the economy to remain weak through 2015, Bernanke said today in a speech in Indianapolis. The U.S. probably won’t fall back into a recession even with growth too weak to reduce a jobless rate stuck above 8 percent since February 2009, he said in response to an audience question.
“We expect the economy to continue to grow,” Bernanke said to the Economic Club of Indiana. “Our concern is not really a recession. Our concern is that growth will continue but at a pace that’s insufficient to put people back to work.”
Bernanke, 58, stood behind his unconventional policies by saying the late Nobel Prize-winning economist Milton Friedman “would have supported what we are doing.” The Federal Open Market Committee said last month it will keep the main interest rate near zero until at least mid-2015 and buy $40 billion of mortgage debt a month in a third round of quantitative easing until the labor market shows “sustained improvement.”
“We expect that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economy strengthens,” Bernanke said in the speech. Still, policy makers’ forecast for the main interest rate “doesn’t mean that we expect the economy to be weak through” mid-2015, Bernanke said.
OK, this guy needs to go, I’ve had it with this moron. He’s becoming a enemy of the state. It reminds when I read history about crazy dictators and insane kings.
When we finally get rid of this tool, the whole Federal Reserve process needs to re-evaluated.
Would you prefer an inactive Fed or no Fed at all, if that comes with a massive depression in which not only do all asset classes drop substantially in value but the “official” unemployment rate exceeds 25%? Is that preferable?
Doesn’t the implied backstop of a federal reserve create the very instability it seeks to alleviate? I question whether or not we would have inflated a massive housing bubble without a federal reserve. Interest rates wouldn’t have dropped in 2002-2004, and investors wouldn’t have taken such large risks without the Greenspan Put.
On the other hand, crushing asset deflation that wipes out everyone isn’t desirable either. Once the problem is created, most are happy the federal reserve is there to make the consequences less brutal. There is no easy answer.
That’s the main point – there is no easy answer. If we’re all participating in an economy where we trade time/labor for goods, we need a currency. Even if that currency is based on a basket of commodities (gold, silver, oil, etc), there will be fluctuations and externalities that will affect all of us – some positively, some negatively.
I say we need a more limited Fed, they just need to fight inflation that was their mission. Or at least one that open to audits and transparent.
What also made me mad and it’s not 100% the Fed’s fault, the owners shareholders and bond holders needed to take a major haircut on these banks, not just transfer the problem to taxpayers. It’s all crony.
Transferring the losses to taxpayers and seniors is the most irritating part of this whole debacle.
“I think nationalized housing finance is an aberration that exposes taxpayers to needless risk.”
I use to agree with that, but now I just don’t know. The government has done everything in it’s power possible to hold up home prices to bailout banks and their bad debt. I never thought that they use their power to extreme that it has. Now, I don’t think it can last forever, but other things could happen to slow the return to a normal market.
Instead of a GSE phase out over a few years from government, it take 10 years until the early 2020′s.
FHA permanently changes market down payments under 5%, instead of the normal 20%.
QE infinity and other Fed operations keeps mortgage rates under 6% until 2017.
I see a lot of feet dragging by the government on these issues. Fact, Americans no longer want to save 20% and start with a “starter home”.
I really hope I’m wrong on these issues. But it’s getting close to 5 years of total market manipulation. In any normal market we should have bottomed in 2010 or 2011.
Once the government reflates the bubble to bail out the banks, it will get more difficult to remove the government props. It’s rare to see a government subsidy removed once it’s put in place. I think nationalized housing is with us for at least a decade and perhaps permanently.
So if you are on the fence, might as well buy?
If you cant beat them, join them?
That’s the conclusion I am coming to. My reports are showing prices well below historic norms based on rents and payment affordability, and with everything the government is doing to prop up prices, I think their manipulations may succeed.
Banks can hold properties forever due to zero borrowing costs and mark-to-fantasy accounting, and the Fed is committed to zero percent rates until forever. The shadow inventory can be slowly disposed of at relatively high prices due to those circumstances. Unless those circumstances change, prices won’t go down further.
Sometime down the road, those who accept/participate in ‘gifts’ from bureaucrats and don’t expect to give something back in-return are going to face a rude awakening.
Every time I ponder this possibility, I think of my physical therapist, my hairdresser, and a few other locals I know under 30 who are (a) earning less than $40K, and (b) yoked to more than $25K in student loan debt.
How do you get entry-level purchases out of people like this without lowering prices? The only route I can imagine is massive student-loan forgiveness and/or wage inflation, both of which will make money cheaper for everyone.
It wouldn’t be too bad to have a huge mortgage under such circumstances – inflation is kind to debtors – but it would be even better to save your cash in the interim, and then get a mortgage the moment you believe we’re off and running toward wage inflation.
I think one can argue sensibly either way about the existence of inflation at this point, but I just don’t see classic wage inflation happening for another few years. Too goddamned much outsourcing and contempt for non-management workers as incompetent, greedy proles and peons.
After the govt assumes enough of the liability, the market will be allowed to drop. The govt will cover the loans and the PTB will buy the houses after the market crashes. That will be the next phase of wealth transfer.
Of course after the buy outs at low prices, the market will reinflate. It’s designed that way/
BofA to Forgive Worthless Second Mortgages for Principal Reduction Credits Toward Settlement Agreement
Borrowers with second liens owned and serviced by Bank of America ($8.96 0%) may qualify to get their subordinate debt extinguished entirely.
The banking giant mailed 150,000 letters to pre-qualified homeowners who are eligible to have their Bank of America second-lien mortgages eliminated.
The program was designed to ease the pains of struggling borrowers who are also dealing with issues on first mortgages and to help more individuals create equity in their properties.
Borrowers receiving the letter will have second liens on collateral property completely removed unless the customer decides to opt out of the automatic relief by sending a response within 30 days of receiving the letter.
The offer takes care of the entire unpaid principal balance on second liens. Only second liens owned and serviced by BofA that meet certain delinquency and property value guidelines are qualified for the program.
Second lien mortgages associated with a severly delinquent first lien mortgage also qualify as long as the second-lien is serviced or fully owned by BofA. Ownership of the first lien mortgage does not matter as long as BofA has control of the subordinate lien.
Mailings to eligible customers began in July. Only customers who receive pre-qualified letters will be able to use the program today.
The bank points out that eliminating a second lien does not resolve issues with the first. If a first lien mortgage is delinquent or in foreclosure, the borrower still has to work with the servicer to resolve those issues. The extinguishment of the second debt is an attempt to limit other financial concerns, but it cannot resolve issues with the first lien.
“The elimination of the second lien mortgage is completely separate from any actions being taken regarding the first mortgage,” BofA said in a statement. “If the first mortgage is in foreclosure, those foreclosure activities may continue.”
Since rising prices are a result of gov largesse (sector welfare) + leverage + curency debasement + suppressing inventory (NOT rising incomes/productivity) what good is reflating housing when the further debasement of money causes the further debasement of society?
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From Currency Debasement To Social Collapse:
In 1921, Keynes said: “By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some …. Those to whom the system brings windfalls …. become “profiteers” who are the object of the hatred … the process of wealth-getting degenerates into a gamble and a lottery .. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
http://www.zerohedge.com/news/2012-10-02/currency-debasement-social-collapse-4-case-studies
That is the real argument that should be made against the federal reserve’s current policy to reflate housing. The cost of the housing market rescue will be hidden from most who don’t recognize the roots of the inflation we will all endure.
Keyes was probably right as experienced by multiple failures of civilizations (Romans come to mind) who were stretched too thin financially. However, the world of 1921 when he wrote that is much different than that of 2012.
I think the intention of the current government is to inflate away the dollar to the point where it is much cheaper for them to pay back their loans to China as well as for homeowners to not be underwater and actually pay their mortgage. This, combined with Banks are loving the less than 1% savings rates and +5% lending rates, should help drive the financial sector. This will in turn help boost the economy.
The only real question is will salary growth match inflation growth and I don’t think we will see this. This is the redistribution of wealth Keynes correct about.
IR, is the cabal starting to fall apart? Or is it a side show?
Government: We plan to sue more banks
WASHINGTON (CNNMoney) — Wall Street banks should be prepared for more lawsuits, a taskforce of federal and state investigators said Tuesday.
The warning came one day after New York Attorney General Eric Schneiderman sued JPMorgan Chase-owned Bear Stearns, alleging that bankers committed systemic fraud against investors. The suit was the government’s latest attempt to hold the big banks accountable for the financial crisis.
“There are more cases to come,” Schneiderman said in a news conference. “We’re investigating the misconduct of folks … that brought about the crash of 2008.”
The case against JPMorgan Chase (JPM, Fortune 500) is the first by President Obama’s Residential Mortgage Backed Securities working group, which was formed in January. It includes the Justice Department, the Securities and Exchange Commission, the New York Attorney General’s Office, as well as the Federal Housing Administration Inspector General.
Mortgage-backed securities are financial products of home loans pooled together and sold to investors. Many of those securities became worthless when the value of homes fell precipitously after the housing bubble burst in 2007 and 2008. Many people lost homes to foreclosure in the aftermath.
Investigations since then have revealed that many banks were aware of the risks associated with the housing bubble but continued to package poor quality home loans and sell them, collecting hefty fees along the way.
During the financial crisis, large Wall Street banks loaded with the bad securities received big government bailouts. Investors who lost their money from those securities have sued the banks and some have received payouts.
Meanwhile, homeowners hurt by the financial crisis have struggled to get help. It’s unclear if homeowners will receive anything from the latest government lawsuits.
The suit seeks unspecified damages and claims that risky mortgage-backed securities issued by Bear Stearns in 2006 and 2007 caused investors some $22.5 billion in losses.
The government task force has been under pressure to deliver. President Obama touted the group for holding “accountable those who broke the law,” during his State of the Union address in January.
The clock is ticking for the task force. Lawsuits have to be filed within five years of the fraud. When Jan. 1 rolls around, sales of mortgage-backed securities from 2007 can’t be pursued.
“As the go-go years for many alleged violations were 2006 and 2007, the ability to bring more of these suits is rapidly disappearing,” said Jaret Seiberg, a financial services analyst with Guggenheim Washington Research Group, in a note for investors.
Election year theatre, nothing more. Expect wrist-slaps and small fines.
What’s comical is the banksters essentially own the entity that’s suing them.
I would like to believe the government will actually go after the banks, but I suspect el O is right, this is probably just political theater.
I welcome the inflation. Americans consume way too much shit. They need to lose weight and cut back on the crap. This fiscal policy will purge America.
Let the wealthy get fat. They will be easier to eat.