Apr272017
The next housing bust will see small price drops and large volume declines
Since lenders will can-kick during future times of economic weakness, houses may not be affordable, bringing sales volumes down, but prices probably won’t decline much.
In 2004-2006, the pundits said that appreciation would moderate and resume its “normal” 5%+ yearly rates in the future. Gary Watts even assured us that “Fifteen percent is pretty much in the bag for Orange County in 2006,” he says. “It’s impossible for prices to go down this year.”
It’s difficult to imagine a statement that was more wrong.
But Gary Watts wasn’t alone in his delusions. Most people who bought property in 2004-2006 assumed house prices were going to rise 10%+ per year forever. Recency bias pervades financial markets and taints investors’ decisions.
Prices fell steeply in the bust from 2007-2009. Real estate markets ordinarily don’t move down quickly, so the bust from 2007-2009 was relatively quick and severe. Residential real estate prices rarely fall, and when they do, prices are generally “sticky” on the way down because discretionary sellers loathe selling at a loss. The only way residential real estate prices fall quickly is if must-sell inventory comes to market — which probably will not happen again, at least through bank foreclosures.
Housing bears of the era noted that the toxic loans of the bubble rally were due to go bad on a roughly predefined schedule starting in 2007, with or without a weakened economy or recession. Once these loans reset their interest rates and recast to fully amortized payments, the payment shock would cause huge numbers of delinquencies. In turn, these delinquencies would be promptly processed by banks who needed the capital and liquidated as REO.
In fact, this is exactly what happened in 2007 through early 2009, and the first wave of foreclosures decimated prices in subprime lending areas because those loans recast first. A second wave was due to wipe out everything else from 2009 to 2011.
As we all know, the much-anticipated wave of foreclosures from the 2009 to 2011 delinquencies did not materialize, as you can see if you click here. The delinquencies occurred as expected, but the foreclosures did not. Many bulls erroneously claimed the bears were wrong.
With millions of delinquent and unhappy borrowers, the foreclosure process became politicized. Government regulators allowed the banks to change their accounting rules to avoid foreclosing on their legions of delinquent borrowers.
The delinquent borrowers who couldn’t afford the payment under the terms of their toxic mortgages became squatters. The banks wouldn’t or couldn’t foreclose, and the borrowers enjoyed a payment-free life. Over time, others recognized the predicament of the banks and strategically defaulted so they too could enjoy the benefits of free housing.
Lenders began cutting deals with delinquent borrowers to try to get them to pay something until prices rose enough to allow the bank to foreclose without a loss. Other than the housing bears, few in 2009 realized just how severe the troubles for the housing market were. Failed stimulus in 2009 and 2010 created a false rally which was followed by 18 consecutive months of falling prices.
What the banks learned throughout this ordeal was that they needed to limit the must-sell inventory on the market in order to stop house prices from crashing. Once the accounting rules were changed in 2009, the rate of price decline slowed, partly due to stimulus, but mostly due to a reduction in foreclosure inventories.
However, with prices inflated above levels of payment affordability, no amount of supply restriction could turn the tide. In early 2012 interest rates were at record lows which made houses relatively affordable in nearly every market. Further, can-kicking loan modifications were selected over foreclosures which greatly reduced must-sell REO inventories. High affordability and low inventory caused the market to bottom.
Unfortunately, interest rate stimulus is a blunt instrument. It applies stimulus everywhere rather than in selected markets that need it. As a result, markets like Coastal California reflated back to the limits of affordability, and with the ultra-low supply, there is growing concern of a new bubble. By the time interest rate stimulus brought prices back in Riverside County, prices in Orange County were approaching bubble territory.
The best analysis I’ve seen of the differential impact of interest rate stimulus — and its ultimate removal — comes from Fitch. The best markets (think San Francisco) will probably overshoot to the upside from the stimulus, then slowly deflate as the stimulus is removed. The weaker markets that are still well below their affordability limits (think Las Vegas) will likely continue to rise.
If we do overshoot fundamental values to the upside from excessive housing market stimulation, we will have to endure another market decline. With the lessons from the last crash, lenders will be hesitant to process their foreclosures quickly and flood the market with REO. Plus, most of the loans today are 30-year fixed-rate mortgages which historically have proven much more stable. In all likelihood, the next market deflation will be a long, slow grind as prices gently fall along with affordability limits.
These cornball proposals from Trump is bordering on looking cartoonish and crazy. He makes executive orders that are immediately overtuned by the courts, and he can’t get his own party to agree on anything in Congress. His first 100 days were not a success, and DOA proposals like this one aren’t helping any.
Mnuchin: “Trump To Propose Biggest Tax Cut In History”, But It May Be DOA In Congress
Speaking at at an event hosted by The Hill this morning, Treasury Secretary Steven Mnuchin made a grand introduction for today’s main event: he said President Trump’s forthcoming tax plan will be the “biggest” tax cut in history, even if he provided few clues as to what will actually be contained in the package, set to be unveiled at 1:30pm today.
As previewed last night, Mnuchin confirmed that the proposal would cut tax rates for businesses to 15%, with the rate applying to both corporations and owner-operated businesses known as “pass-throughs.” The 15% rate was also part of Trump’s campaign plan. Mnuchin said that Trump thinks that’s “absolutely critical” for driving economic growth. As the Hill adds, Mnuchin also said that the administration wants to simplify the personal tax system and that most Americans should be able to file their taxes on a large postcard, although so far there has been virtually no discussion, or leaks, on whether personal income taxes would be affected
“The average American should have simple taxes,” Mnuchin said, adding that many people won’t end up paying any taxes under the administration’s plan.
Mnuchin also said that Trump’s proposal won’t include infrastructure spending. “This plan is just tax reform,” he said.
According to The Hill, the Treasury secretary and National Economic Council Director Gary Cohn met Tuesday night with Brady and other top GOP lawmakers. Mnuchin called the meeting “very successful” and that lawmakers are all in agreement that tax reform is a top priority in order to help boost the economy.
Still, many questions remained unanswered, especially since as Mnuchin said, the BAT is now effectively gone as a revenue offset. As a result, the new White House plan is likely to resemble Trump’s campaign tax plan, which was estimated to cost trillions of dollars over 10 years. In fact, while the leaks have been generous on the spending boosts, so far little if nothing at all has been revealed on how Trump’s plan will be funded, aside from “3% growth”, which not even the ever cheerful Goldman Sachs believes is possible.
Addressing this issue, earlier today JPM said that “it will be virtually impossible to pass through Congress.” In other words, for all its huge bluster, absent substantial trimming, the plan is Dead on Arrival in the House. That is also a structural problem since a tax-reform bill that increases the deficit could be challenging to pass with just Republican votes under budget reconciliation, since reconciliation bills cannot add to the deficit outside of the 10-year budget window. Tax cuts that lose revenue either need to pass with Democratic support or expire.
I think it’s gotten trendy to declare Trump’s first 100 days a failure, yet he has accomplished some pretty major things:
-He approved the Keystone XL and Dakota Access pipelines
-Withdrawal from the Trans Pacific Partnership
-Illegal immigration is down by 40%
-Every economic indicator imaginable has been on fire since his election/inauguration
-A confirmed Supreme Court justice
-China has stopped accepting coal exports from North Korea and halted flights to Pyongyang
-Eight American prisoners have been returned from Egypt
-Syria (and Russia) were put on notice that chemical weapons will not be tolerated
-94 ISIS militants were killed in their underground bunkers by the MOAB bomb
-Initiated talks for renegotiation of NAFTA
His supposed failures include:
-A temporary halt to his immigration ban
-Failure to get a vote on the first draft health care plan
-Blocked from removing federal law enforcement funds from sanctuary cities
-Failure to secure border wall funds due to a looming government shutdown
Add any other “failures” that I might be missing, but none of the above is permanently dead. The lower court decisions may be overturned. Health care will likely get a vote at some point, and the border wall is a guarantee.
The list isn’t very substantive. You could probably add that he ate breakfast and dinner 100 times, and played golf more than most.
His Supreme Court justice confirmation was a pyrrhic victory because now without the filibuster on Supreme Court nominations, the next time Democrats control the presidency and the Senate, they will appoint extreme, far-left justices. While some Republicans are reveling in the right-winger they got, the payback will be hell.
The economy is doing well for reasons outside Trump’s control or actions, but his taking credit for it has been amusing. I particularly enjoyed the comment about how good results were fake news when Obama was president, but now they are real.
You forgot to add that Trump has singularly made Saturday Night Live interesting again, with some help from Alec Baldwin.
What would be the definition of success in your mind?
(1) If he and the Republicans has passed something on healthcare, and/or (2) if he had managed to craft a directive on immigration that wasn’t stricken down by the courts. Those two failures tipped the balance in my opinion.
I actually like the direction he is headed on foreign relations and international trade. I believe he will negotiate better deals for the US, and he will make significant strides in foreign policy.
If you want a bold, long-term prediction from me, I think Trump will be remembered as a great foreign policy president. His achievements in this area will surprise everyone. Unfortunately, I think his domestic agenda, to the degree that he has one, will go nowhere.
Foreign policy was the number one reason I voted for him. The supreme court was the second reason. After that, I’m comfortable that our system will prevent him from doing very much damage domestically. He will have to pursue a moderate Republican agenda in order to get things done.
If they can’t afford the debt service, they shouldn’t get the loan. Converting a student loan to 30-year debt isn’t doing them a service.
Fannie Mae announces new programs to break through student loan roadblock
Confirming what sources told HousingWire yesterday, Fannie Mae this morning announced a significant expansion of its student loan cash-out refinance program and introduced new policies to help borrowers with student loan debt get qualified for mortgage loans.
“We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take on a mortgage, and we want to be a part of the solution,” said Jonathan Lawless, vice president of customer solutions at Fannie Mae. “These new policies provide three flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers.”
The level of student debt in the U.S. has spiraled over the last decade to $1.4 trillion, effectively locking out millions of potential homebuyers from the market. The new Fannie Mae programs address specific roadblocks that these borrowers face, providing a jump-start to a whole generation of homebuyers.
Fannie Mae’s new solutions include:
Student loan cash-out refinance: Offers homeowners the flexibility to pay off high interest rate student debt while potentially refinancing to a lower mortgage interest rate.
Debt paid by others: Widens borrower eligibility to qualify for a home loan by excluding from the borrower’s debt-to-income ratio non-mortgage debt, such as credit cards, auto loans, and student loans, paid by someone else.
Student debt payment calculation: Makes it more likely for borrowers with student debt to qualify for a loan by allowing lenders to accept student loan payment information on credit reports.
The new student loan cash-out refinance option expands a program Fannie Mae rolled out with SoFi in November. Lawless said the overwhelmingly positive reaction to that program convinced Fannie Mae to broaden its scope.
“We were really testing market reception and we got a lot of interest from consumers and a lot form interest from lenders who wanted to have access to this same type of program. The market reception was such that we were really confident this was needed,” Lawless said.
We are back to the low inventory excuse again.
Homebuyer demand suddenly falling off as inventory keeps shrinking
It may be the strongest seller’s market ever for housing, but buyer frustration is now taking its toll.
Some would-be homebuyers are even choosing to sit the spring market out.
[Actually, the are getting priced out. That’s the real problem.]
The story has been the same for a while — high buyer demand plus a short supply of homes for sale equals higher home prices and plenty of buyer frustration.
It may be the strongest seller’s market ever, but buyer frustration is now taking its toll. Some would-be shoppers are even choosing to sit the spring market out.
Demand from homebuyers fell 14 percent in March from February, according to Redfin, a national real estate brokerage. Redfin measures demand by looking at the number of customers requesting home tours and writing offers.
Demand had hit a record in January, as consumers felt better about the economy and anticipated a strong spring market. They clearly did not anticipate how few homes they’d find for sale.
Compared with February, the seasonally adjusted number of buyers requesting tours fell 5.5 percent in March, and the number of buyers writing offers dropped nearly 23 percent.
It’s not that Americans don’t want to buy homes, it’s that there are just too few homes for sale. Across the 15 metros covered by Redfin’s index, there were 12.5 percent fewer homes for sale than in March 2016. Inventory has now been falling annually for 22-straight months.
“The market is missing its moment because of too-low inventory,” said Redfin chief economist Nela Richardson. “Low unemployment rates and high consumer confidence should create continued momentum in homebuyer demand. But, instead, we’re seeing demand cooling when it should be peaking.”
It it normal for demand to decrease going into spring?
Went and looked up their demand index. It has dropped from February to March for 2015 and 2016 as well.
Ordinarily, demand increases steadily for the first half of the year and decreases steadily for the second half. Sometimes, month-to-month variations occur, but that is the exception to the rule. If we see this trend continue, like it did in 2011, then we know something else is going on.
A demand problem signals a price problem.
EVERYTHING else put forth is nothing more than sell-side shill PR flack… noise.
Yes, exactly.
Experts: Spring home-buying season starts off with a bang
The spring home-buying season is in full swing and it started off with a bang.
Home prices increased in February to a new high for the fourth consecutive month, according to the S&P CoreLogic Case-Shiller Indices, released Tuesday by S&P Dow Jones and CoreLogic.
And another release Tuesday from the Federal Housing Finance Agency showed home prices rose 6.4% annually and 0.2% from the prior month.
But these rising home prices didn’t hold back new home sales, which increased a full 5.8% monthly and 15.6% annually, according to Tuesday’s release from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.
“The 2017 spring home shopping season has started off with a bang, and at this point the strength of the market shouldn’t come as much of a surprise,” Zillow Chief Economist Svenja Gudell said. “February Case-Shiller numbers point to more fierce competition in the housing market.”
“The thing to watch for now is when market conditions will shift, and change does seem to loom on the horizon, with rising mortgage interest rates and flattening rents,” Gudell said. “Both could put a dent in home-buyer demand and overall price growth and affordability.”
Another expert confirmed that the market is strong for now, but explains high home prices and low inventory create significant headwinds for first-time homebuyers.
“Strong demand bolstered by income and job growth sets the stage for intense competition and continued price growth in the housing market,” Trulia Senior Economist Cheryl Young said.
“Consumers are likely to also take advantage of mortgage rates as they remain low,” Young said. “While the housing market looks to be recovering, these high prices impact the affordability of homes, directing the strongest headwinds towards starter-home buyers.”
But one expert explained that while new home sales were above expectations in March, home prices are actually beginning to level out.
“New home sales for March were above our expectations,” said Tian Liu, Genworth Mortgage Insurance chief economist. “Strong demand from homebuyers and very tight supply conditions in the overall housing market are fueling demand for new homes.”
“In addition, prices on new homes are stabilizing, suggesting more affordable homes are coming to the market, which will help builders capture more demand from first-time homebuyers,” Liu said.
CAUTION! The word “expert” in this piece is being deployed rather loosely
If they used the more accurate word “shill”, the headline wouldn’t have been as convincing or compelling.
Trump should have won this one. I don’t understand how a federal judge can possibly claim it’s okay for any jurisdiction to ignore federal law. I thought Abe Lincoln settled that one about 150 years ago. I guess not.
Trump’s Sanctuary Cities Order Blocked by Federal Judge
The Trump administration vowed to keep fighting to cut funding to so-called sanctuary cities and accused the federal judge who blocked its plans of ignoring immigration law.
The ruling Tuesday bars President Donald Trump from withholding funds from jurisdictions that refuse to cooperate with federal agencies to deport undocumented immigrants, marking his second setback in court on immigration. As with its temporary travel ban on six mostly Muslim nations now on appeal, the White House said it expected to ultimately win its case against sanctuary cities in the U.S. Supreme Court.
“Once again, a single district judge — this time in San Francisco — has ignored federal immigration law to set a new immigration policy for the entire country,” the White House said in a statement. “San Francisco, and cities like it, are putting the well-being of criminal aliens before the safety of our citizens, and those city officials who authored these policies have the blood of dead Americans on their hands.”
Trump added on Twitter on Wednesday, “First the Ninth Circuit rules against the ban & now it hits again on sanctuary cities-both ridiculous rulings. See you in the Supreme Court!”
Forcing sanctuary cities to cooperate with deporting undocumented immigrants was a key component of the president’s campaign vow to rid the U.S. of “bad hombres” entering from Mexico. The ruling further frustrates an administration mired in litigation over immigration policy since its ninth day.
The win by the city of San Francisco and its Silicon Valley neighbor, Santa Clara County, reinforces similar sanctuary policies in some of the nation’s largest cities, including New York, Los Angeles and Chicago. The decision was applauded by Democratic leaders and groups that also fought Trump’s travel ban, which was found by judges to violate the Constitution’s ban on religious bias.
California Resistance
The ruling also bolsters California’s aspirations to lead the resistance against the Trump administration’s agenda. This month, the state Senate passed the California Values Act, a measure that would give the entire state sanctuary status by prohibiting its agencies from sharing certain information with U.S. counterparts or detaining individuals on orders from Washington.
I don’t think the 9th circuit judges have really considered what they are exactly doing. If a state is able to completely ignore federal laws they better stand by for the consequences.
This was one instance where I believed Trump’s rhetoric at face value. These 9th circuit judges in this instance were being political rather than judicial.
It’s common to “shop” courts when filing these lawsuits at the district level. Trump couldn’t control for that, but both of these cases are certain to reach the Supreme Court, and the 9th circuit is the most overturned at that level.
I think Trump will win that case at the Supreme Court, and it won’t be a 5-4 split.
I disagree. I think the next bust will see significant home price declines. And, I am the biggest real estate bull. I also think this real estate up cycle is in the 7 inning. Real estate will drop when the next recession hits. And, it will happen.
Astute!!
The Bay Area might see more significant declines in price because their rents also usually decline significantly in recessions. Southern California didn’t see so much rent declines during the last bust, and that plus the can-kicking will keep prices up.
Interesting to see you post bearish statements.
I agree, and in the more desirable parts of the Bay Area is it again cheaper to rent than buy. I’m not sure how much it will go down though. I have the down payment and the will, but I don’t want to increase my monthly payment by a grand just to tell people I’m a homeowner. When the nicer parts of the Bay Area start to undershoot rental parity by a little I’ll most likely buy and I assume there are a lot of people like me who will put a floor on house price declines.
What is a “small” drop? 5%? Do we ever revert to a more normal long-term price curve? Would you advise buying into this market or waiting for a slowdown, even if it has minimal impact on prices?
As long as nimbys oppose all new housing supply in the area, it will never get back to anything like normal in the rest of the US.
The problem with waiting for a slowdown is that you never know when it will happen. What if we get five more years of expansion?
Do you see OC becoming more like the Bay Area, out of reach for almost all entry-level home buyers? Is that kind of market sustainable here?
OC has the problem to a lesser degree. I think you will see San Diego’s market resemble San Francisco soon. The entry level is almost priced out there now. OC still has many pockets of affordability, and we are building a lot of high-density housing, so I don’t think it will ever be as bad in OC as it is in San Francisco or San Diego.
“Since lenders will can-kick during future times of economic weakness”
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Problem: the longer the can continues to be kicked, the more ‘insurance’ costs.
Where do financiers buy insurance?
The repo market.
They also will face a much larger bust as they resist market forces.