There are few important distinctions between the housing bubble rally and the bubble reflation rally worth noting. First, the housing bubble rally was fueled almost entirely by ordinary mom and pop speculators given dangerous loan products that allowed them to borrow double what their incomes could support. The bubble was built entirely on leverage. Everything about the housing bubble rally was unstable — loan terms, borrower capacity, credit history, collateral value — all bogus.
The bubble reflation rally of 2012-2013 was driven by cash investors, a group that never defaults or faces foreclosure, and artificial interest rate stimulus; however, this time the stimulus was delivered through stable 30-year conventional loans, and the income of borrowers was rigorously verified. While it can be cogently argued the mortgage interest rate stimulus may have hangover effects, the way this stimulus was applied was safe and effective.
Oct072015
When should pundits admit their mistakes?
Is it better to be widely known as a permabear or permabull? Or is it better to change with the times and gain credibility through being right?
Pundits who issue forecasts want to be right, and they want to be acknowledged as being right. In the world of punditry, credibility is everything, and the best forecasters really are right more often than they are wrong — or at least they convince people that’s true. The ability to shamelessly revise history is the mark of a truly successful forecaster fraudster.
Paul Krugman and Peter Schiff
If you read either Paul Krugman or Peter Schiff, both write from the opposite ends of the political and economic spectrum. They often make predictions diametrically opposed to the other, but both of them claim near infallibility and vehemently claim they were right — about everything.
Paul Krugman has a modicum of self-reflection, and he admits he was wrong about a few things, but he also claims to be right about many things still open to debate.
I recently came across an article where Peter Schiff claimed to be right about everything. Since he makes this claim so often, these articles aren’t hard to find. However, he’s been a consistent gold bug, and over the last four years he’s been consistently wrong — and he will likely to continue to be consistently wrong about gold. At what point does he throw in the towel and admit he was a fool?
I was wrong too
I’ve been wrong about many things over the eight and a half years of writing in the public realm. I am completely clueless when it comes to the direction of interest rates. I don’t think I’ve made a single correct prediction about rates. It’s so bad that now when I write about rates, I simply state what I believe will happen if rates move one way or the other. I suck at predicting interest rates.
I was wrong about the housing bottom in 2012. It took me until October of 2012 to change my mind. I didn’t believe a cartel of lenders could succeed in their effort to dry up the MLS inventory. I was wrong. Those six months of 2012 from March through September were the low point in my writing.
I would like to believe I get more right than wrong, but more importantly, I like to believe I am strong enough to admit my mistakes and change my mind when the facts support a different position. I remain true to what I believe, and I have the courage to change. It’s surprisingly difficult to admit mistakes, particularly if your opinion is deeply entrenched and widely known.
Mark Hanson
Mark Hanson denies it, but he is a permabear with regards to housing. Like clockwork, every October he gets in the news with another bearish prediction about housing.
On October 7, 2013, he predicted a 20% decline in house prices over the next 12 months. At the time I stated the following:
No matter how bad market conditions get, the only way I see prices going down is if must-sell inventory comes to market. We could see a dramatic drop in sales volumes as buyers and seller reach an impasse, but for prices to go down 20% in such a short time, it would require massive sales of distressed inventory. Further, it would require the private equity funds to remain on the sideline while this happened. I don’t believe either will occur. There is no source of must-sell inventory, and the hedge funds would likely pick up their buying if prices came down again.
From October 2013 to October 2014, prices went up nationally more than 5%. Mark was off by at least 25%, and most importantly, he was wrong on the direction of prices.
Undaunted by the previous bad call, on October 7, 2014, he didn’t make a specific prediction, but he stated the stimulus hangover would be a doozy. In that post he claimed the removal of stimulus would lead to a crash. At the time, I made the following observation:
In early 2015, rather than admit a mistake, he doubled down: “It simply isn’t different this time around. I am in full-blown, black-swan look-out mode over here. And Bubble 2.0 could end up being a lot more volatile than from 2008-10 due to the sheer amount of capital and liquidity in the sector that blew the bubble …”
Here we are on October 7, 2015, and since Mark has been clearly and consistently wrong, is he ready to admit his mistake and move on?
Nope.
Housing today: A ‘bubble larger than 2006’
Diana Olick, October 6, 2015
While home prices nationally have not yet returned to their peak of the last housing boom, some local markets have surpassed it. Now, some claim the housing market is in a bubble far worse than the devastating one in 2006. The argument: Housing is far less affordable today than it was back then, and the home price gains are driven not by healthy, end-user demand but by a lack of construction, artificially low interest rates, and institutional and foreign all-cash buyers.
“In the days of ‘anything goes,’ ninja financing caused housing prices to lurch higher, which forced people to rush in and buy, which in turn pushed prices higher, thus increasing volume more, and so on. But when it comes to the new-era, end-user buyer, that can’t happen any longer, as buyers actually have to fundamentally ‘qualify’ for the mortgage for which they apply,” wrote housing analyst Mark Hanson in a note to clients.
If buyers must qualify for mortgages on stable loan terms, how can affordability possibly be worse than 2006? My reports clearly show otherwise.
Hanson, often criticized for being a housing bear, points to the institutional and foreign buyers who have flooded the market since 2012, buying up distressed and lower-priced homes, as well as some new construction, all with cash. He calls it an exact replay of the last housing boom, “when unorthodox demand with unorthodox capital would pay any price it took to hit the bid.”
This particular form of unorthodox demand is based on both all-cash buying and 30-year fixed-rate mortgages. Neither source of demand is prone to foreclosure, so even if that demand were to vanish, it won’t result in must-sell inventory, a requirement to push prices lower.
California-based real estate analyst John Burns, of John Burns Real Estate Consulting, called Hanson’s premise “ridiculous.”
John Burns, the local darling of the MSM, once said of Mark Hanson, “I give him zero credibility.” Ouch!
He said you cannot compare affordability today to the heady days of the housing boom when anyone could get a loan with no money down and artificial — now illegal — teaser rates.
“That was an awkward, unusual period that is not coming back,” said Burns, who claims 90 percent of the nation’s local markets are “affordable” when home prices are weighed against income.
I don’t have the national data to confirm his statement, but given that Coastal California is always among the most expensive markets, if prices are affordable here, which they are, then it’s likely prices are affordable everywhere.
That said, rising mortgage rates are a concern, Burns said, admitting home prices have been inflated in part by artificially low rates.
“We will have a problem if rates go up,” he added.
A candid admission from an analyst who is usually overly bullish.
“In short, end-users today are being handed a red-hot potato market already in a bubble larger than 2006,” noted Hanson.
When will Mark give up on these bearish predictions? Is he too far gone to turn back? If he admits he was wrong now, will he no longer get interviews on CNBC or from Diana Olick? Perhaps house prices will crash and Mark will be vindicated. Personally, I’m not holding my breath.
Why I believe many like my writing
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[…] When should pundits admit their mistakes? Undaunted by the previous bad call, on October 7, 2014, he didn't make a specific prediction, but he stated the stimulus hangover would be a doozy. In that post he claimed the removal of stimulus … This particular form of unorthodox demand is based … Read more on OC Housing News (blog) […]
Public figures don’t admit they were wrong because they are only very rarely called on it. Extremely rarely. Politicians especially are guilty of this because they’ve learned they can say anything they want practically at any time and get away with it, especially if what they said isn’t offensive to a specific group.
I remember in the mid-90s epic predictions from Newt Gingrich and his crew about how Clinton’s tax plan would kill jobs and the economy. The late 90s were the best economy we had since the 60s.
Remember all the predictions that Obamacare would send us back into recession? And that health care costs would explode? The opposite happened.
I’m not trying to pick on the Republicans but they seem a bit more prone to bombastic howlers. I wish more of them were like Eisenhower.
Getting back to real estate, false predictions are just par for the course. For example, how can it possibly ever be a good time to buy or sell a house?
People make bold predictions because it is safe. If they’re right… wow, they’re a genius! If they’re wrong, well, who cares? They’ll make another prediction next year and maybe they’ll be right.
Not enough people pay attention to blogs like this to really turn the tide.
A major problem with the government trying to alleviate a problem is that we can spend billions and never prove any effect, positive or negative. Even if there is improvement, but the problem still exists, pundits and extremists will not only claim failure, but they’ll also blame the government intervention for the pre-existing problem!
An example of this is Dave Ramsey’s regular blaming of Obamacare for his business’ increased healthcare costs, despite all of the evidence that Obamacare has dramatically bent the curve on increasing healthcare costs. What makes Ramsey’s radical ranting evil is that ~90% of his listeners are benefiting from Obamacare, ESPECIALLY the entrepreneurs. Yet he’s confirming their naive political bias against Big Gubmint.
How are 90% of his listeners benefiting?
Perspective obviously exaggerated, but I agree with him in principle. Entrepreneurs definitely benefit from Obamacare because they aren’t dependent on staying in a job to ensure they have affordable insurance for themselves and their families.
Also, many of Ramsey’s listeners are lower middle class, hardworking people just trying to get by and get out of debt. Many of them are uninsured. At least 4 members of my extended family have solid, long-term health insurance for the first time in their adult lives thanks to Obamacare. I think it’s a good thing.
It will be a good thing just like Social Security, GSEs, etc, etc, proved to be good things.
Agreed, SSI is a great thing.
wait til demographics and rising interest rates…
what is the SS trust fund invested in?
Demographics and an aging population are a concern, but easily manageable with slight changes. I don’t support lifting the cap ($118,500), but we can increase the rate (6.2%) slightly (~25 bps I’ve read) and solve most of the solvency issues. I support adjusting the payment ratios slightly too that would lower retirement payments to households with income in the eightieth percentile.
You’re right, things were much better when most elderly Americans lived in poverty. We’re still the richest country in the world. We can afford to do the right thing.
I gotta go with Perspective on this one. Social Security has been a very effective program, as has Medicare and Medicaid. The GSEs turned out to be bad partly because they weren’t true government entities. Politicians wanted to have their cake and not pay for it, and that one blew up in their faces. FHA has also been effective. If it hadn’t been used as a subprime replacement during the crash, it would still be solvent with low insurance rates.
true gov entities would have erased the moral hazard of gov guaranteed loans?
If you’re not paying the 0.9% ACA Medicare Tax on joint income exceeding ~$250K, and you’re not paying the 3.8% ACA Net Investment Income Tax applicable to joint income exceeding ~$450K, then you’re only benefiting from the healthcare cost curve lowering. I’m assuming 90% of his listeners aren’t affected by the ACA taxes. Some of his listeners might be affected soon by the Cadillac tax on very expensive plans popular with public and private unions; but this is also a good feature of Obamacare.
I’m not disputing that some people have benefited, but what is your source for saying that 90% of people are benefiting from a bending cost curve?
Everything I’ve seen says premiums are increasing anywhere from 20-50% in 2016.
Hmm, I could try to find some of The Economist articles I’ve read on this topic. Much of the hyperbole around claims of 20%+ premium increases tends to be intentional misrepresentation – many people bought high-deductible low-coverage policies pre-Obamacare because they were much cheaper. The bar was set higher for minimal coverage standards and therefore those types of policies adjusted coverage and increased prices accordingly.
Well, as expected, you can find whatever conclusion you desire on a highly political issue like this when you Google it. I know Krugman writes about this all of the time, but here’s a conservative source (Forbes) identifying the bending cost curve:
http://www.forbes.com/sites/rickungar/2013/02/12/new-data-suggests-obamacare-is-actually-bending-the-healthcare-cost-curve/
I read that one but the date stamp is from 2 1/2 years ago. Also, I don’t think a deflationary recession makes for a good sample period; i.e. the cost curve for everything was bending at the time.
The thing is both sides are guilty of manipulating statistics and most people will latch on to the argument that supports their preconceived beliefs on this issue. There’s really no point in debating it. If premiums increase 20-50% it’s going to hit people in the pocketbook hard and the truth will be known. Let’s just see what happens and people will either love Obamacare because it’s saving them money, or they will hate it passionately because it’s crippling their finances. If the latter scenario plays out, I wouldn’t want to be running as a Democrat in 2016.
Obamacare cost us hundreds last year in additional taxes, and likely over a grand this year.
Yes, but that’s chump change for you. The median family pulling $50k, not so much.
The magnitude of being right matters more than frequency. A lot more!
LOL!! Broken clocks meet this standard perfectly.
+1 Yep. A broken clock is completely accurate twice a day, just as permabears are completely accurate during each recession.
Do you hear that???
It’s the sound of inevitability.
————————————————-
Something occurred in the banking system in September that required a massive reverse repo operation in order to force the largest ever Treasury collateral injection into the repo market. Ordinarily the Fed might engage in routine reverse repos as a means of managing the Fed funds rate. However, as you can see from the graph below, there have been sudden spikes up in the amount of reverse repos that tend to correspond the some kind of crisis – the obvious one being the de facto collapse of the financial system in 2008:
You can also see from this graph…
http://investmentresearchdynamics.com/wp-content/uploads/2015/10/REPO1.png
… that the size of the “spike” occurrences in reverse repo operations has significantly increased since 2014 relative to the spike up in 2008. In fact, the latest two-week spike is by far the largest reverse repo operation on record.
Besides using repos to manage term banking reserves in order to target the Fed funds rate, reverse repos put Treasury collateral on to bank balance sheets. We know that in 2008 there was a derivatives counter-party default melt-down. This required the Fed to “inject” Treasury collateral into the banking system which could be used as margin collateral by banks or hedge funds/financial firms holding losing derivatives positions OR to “patch up” counter-party defaults (see AIG/Goldman).
What’s eerie about the pattern in the graph above is that since 2014, the “spike” occurrences have occurred more frequently and are much larger in size than the one in 2008. This would suggest that whatever is imploding behind the scenes is far worse than what occurred in 2008.
What’s even more interesting is that the spike-up in reverse repos occurred at the same time – September 16 – that the stock market embarked on an 8-day cliff dive, with the S&P 500 falling 6% in that time period. You’ll note that this is around the same time that a crash in Glencore stock and bonds began. It has been suggested by analysts that a default on Glencore credit derivatives either by Glencore or by financial entities using derivatives to bet against that event would be analogous to the “Lehman moment” that triggered the 2008 collapse.
The blame on the general stock market plunge was cast on the Fed’s inability to raise interest rates. However that seems to be nothing more than a clever cover story for something much more catastrophic which began to develop out sight in the general liquidity functions of the global banking system.
http://investmentresearchdynamics.com/a-liquidity-crisis-hit-the-banking-in-september/#8230
new fed tools = new activity patterns
Teaser rates aren’t “illegal.” You can make a perfectly legal loan fixed at 0% for five years and fully-amortized thereafter. ATR solely requires that the borrower’s real income be used to qualify the borrower based on the real fully-amortized payment applicable on the 61st payment.
e.g. If teaser rates were illegal, then a creditor couldn’t allow a borrower to buy-down the rate for the first year or two.
It seems to me that legislators found a good balance with the ATR rules. While teaser rates are allowed, since they can’t be used to increase the loan balance, they are useless as affordability products. They didn’t need to ban them and wait for lobbyists to overturn the ban. By making them useless, they accomplish the same end without the political problems of passing a ban.
Thanks for the coverage of my recent post. You have always been fair in looking at both sides and astute at seeing through the smoke and mirrors of “this” housing market “recovery”. But this time you got it wrong.
First off, I have acknowledged I was wrong this time around about the timing of my prediction for a give-back of 50% to 61% of the post Fed nuclear monetary policy gains. You just don’t see all of my work.
Secondly, after nailing the big crash of 2007-2011 two years before it happened; the official “double-dip” in 2010/11 following the Homebuyer Tax Credit; the interim house price bottom in Mid-2011; and the severe stimulus induced demand hangover from 2013 to 2014, I was bound for a miss sooner or later. But, housing is a game of years, not quarters. While I am “structurally”, long-term bearish, I have always been one to be opportunistically bullish especially when it comes to builder stocks and related while I await the inevitable.
With respect when HOUSE PRICES would roll back over and start giving back 50% to 61% of their post Fed nuclear policy gains, yes, I have been wrong. But, I haven’t been wrong about “housing” itself.
Rather, I have been totally wrong about how bad the macro economy really was and is in the eyes of the Fed. Hear me out…this is an important distinction. With respect to how the Fed views this economy, I have been far too macro “BULLISH” for years now, thinking the Fed would take it’s foot off the accelerator when instead it jammed it’s foot through the floor of the car.
Note, while wrong about when prices would roll over, I have been totally spot on with respect to the anemic sales demand plaguing the sector for years,especially in single-family builder product, which is the most important. I also nailed the double-dip in 2011/12 and stimulus demand hangover from 2013 to 2014 that lead to over a year of y/y demand declines and stagnant prices.
Back to the point…people think I am uber-bearish on “housing”, which is not necessarily the case. Rather, I have been overly bullish the macro economy and totally wrong about how long the Fed would step on rates and how many dollars it would print in order create a new bubble.
I knew housing and jobs were a disaster but I thought the Fed was in over its skis a long time ago and had a window to start “normalizing” interest rate and money printing policy a couple of years ago (around the time of the taper tantrum) and instead they did the opposite and printed more, creating even larger bubbles in more asset classes.
Remember, this epic house price bubble that continues to blow (and asset price bubbles are strange things) is largely a function of the Fed stepping on interest rates and the dollar forcing institutions and foreigners to buy hard assets that yield “something” greater than they could get in “risk-free” bonds (US Treasuries) or in their home country.
Secondarily, this epic house price bubble is a function of end-users who every 18-months open their eyes to mortgage rates 100bps lower, creating 10% to 15% increased “purchasing power”, which of course they need due to the continued loss of purchasing power they are experiencing due to taxes, weak income, healthcare etc, and is less than how much house prices have increased over the past 2 years of you break down the data, which I have done for you in the following section.
HOUSE PRICES…
Let’s to a deep dive into what house prices have really done since.
BOTTOM LINE: A full 88% of builder and 89% of RESALE price gains over the past 3.5 years CAME BETWEEN NOV 2011 and JUNE 2013, or 20 MONTHS. Since June 2013 national prices are up negligibly by comparison. In short, on Twist and QE house prices “reset” higher over a very short period of time and have been largely “bouncing along the top” ever since.
First, off in Q3 2011 I predicted an interim bottom to prices off of Twist and the European LTRO, as builder stocks were at record lows. The absolute low came in Nov 2011 for builder and Jan 2012 for resale, not coincidentally exactly when the Fed unleashed Armageddon monetary policy, which gave the green light to unorthodox speculators with unorthodox capital to flood into the market to buy rental properties. Likewise to foreigners due to their dollars surging off the crashing US dollar.
Also, remember, on the way down I was bearish far longer than anybody else all the way into mid 2011 when most others were calling for a hard bottom shortly after the stock market made a V bottom in March 2009. For 2.5 YEARS following the stock market V bottom house prices kept going lower shocking everybody including several large named money managers who bet on TWO different recoveries during that time only to get taken to the woodshed by the double-dip in 2010/11 and subsequent stimulus hangover in 2013 and 2014.
Moving along…
RESALE PRICES
Based on NAR data, which is publicly available, the bottom in resale houses came in Jan 12 with an average price of $200k. From then for another 18 months resale prices soared over 30% to $261k in June 2013. This was the largest house price gain in such a short period in history. HOWEVER, from June 2013 through LAST MONTH, August 2015, A FULL 2.2 YEARS, house price only gained $11k to $272k.
BOTTOM LINE ON RESALE: The vast majority of house price gains came in 18 months ending June 2013 and have been sloshing around the top for over 2 years. And much of the small 4.5% gains over the past 2.2 YEARS has come from houses being fixed up and sold for higher prices. Remember, paired sales post-crash are NOT true apples to apples because such a large percentage have been rehabbed, which artificially pushes up the average because it’s factoring in labor and materials and that weren’t put into the original house. So, backing out rehabs and flips, and true house prices are probably flat from mid- 2011.
BUILDER PRICES
Based The bottom in builder house prices came in Nov 2011 with an average price of $250k, which makes sense because builder data is counted two months before lagging resale data (essentially the entire housing market bottomed in price exactly when the Fed kicked off Twist, which is no coincidence). In April 2013, just 18 MONTHS LATER, average builder prices were at $337k, or a surge of 35%, the largest over such a short period of time in history. SINCE April 2013, or for the past 2.5 YEARS, building pricing power has only grown to $353k as of Aug 2015, paltry gains relative to the Fed induced price “reset” with much of the “gains” coming because builders changed the mix of houses they sell since 2013 towards larger, more expensive houses. Like with resales, apples to apples, it’s questionable whether “like” house prices have grown at all over the past two years, as you can barely see it in the data.
I wish I had a way of posting charts in here…they are staggering…
BOTTOM LINE: nearly 90% of all the house price gains since NOV 2011, the “bottom”, came during a short 18 to 20 MONTH window ending TWO YEARS AGO and since then the gains have been “moderate” at best and mostly due to housing and financial engineering; remodeled resales, larger builder houses, and lower mortgage.
NOW, the Fed is in the process of normalizing policy and capital flows have notably changed. It won’t be too long before the complexion of lagging US housing market changes as well.
In fact, in housing, the hand-off from the speculator to the end-user is very evident and also a huge house price headwind, as unlike speculators using “all cash” and looking at subjective models in order to justify overpaying for a house, end-users actually have to qualify for a mortgage and get an appraisal that comes in near the purchase price.
All of the research and work I did leading into what I thought was a Fed normalizing policy a couple of years ago that has led to a continual call of a top and inevitable give back of 50% to 61% of the past 4 years of price gains is still in effect and in play. It simply got pushed out due to the Armageddon policies of the Fed. And in the process of getting pushed out, an even larger bubble has been blown, not only in housing but in asset prices and markets worldwide.
Good luck!
I am just a data parrot. And yes, bad data can steer a market student like me to make early or outright bad calls.
But, the data are the data and until I see something that counters my base case thesis about this “stimulus induced housing market in which unorthodox demand with unorthodox capital has blown a bubble larger than 2006”, I have the data to support me and allow me to sleep comfortably at night.
Moreover, I went through the EXACT same harrassment in 2005 and 2006, by my wife for one, especially when I panicked between Q3 2005 and Q2 2006 and sold every one of our investment properties we bought from 2000 to 2003.
House prices kept going up for TWO YEARS after we sold and it was a real point of contention with my family and friends. I doubted myself every night and couldn’t sleep. In the end, I won that battle and saved our asses. Yes, I was early but better than being late in an illiquid housing market.
In my mind and in the data I study daily, this is an exact replay of the bubble years simply with slightly different players. But, this time around, because the Fed is so over its skis, unable to cut rates or expand its balance sheet much over $4.5 trillion through more money printing, it’s much worse. If the housing market pukes again, there will be little that can be done about it unlike last time when the tools were many.
Mark,
I appreciate you stopping by and providing your view of the situation. It takes a lot of courage.
I too endured the jeers of my peers when I continued to rent from 2004 to 2007 when everyone else was gripped by the mania. My wife wanted to buy too, but she placed her faith in me, and we came out better for it. I imagine your wife became a true believer when the bust materialized.
I invite you to look at the differences this time as compared to last because our basic disagreement is about the stability of the props and manipulations put in place since 2008. I have yet to see a coherent scenario where must-sell inventory comes to market to push prices lower. The only two plausible scenarios I see are the possibility of a Chinese capital exodus, or an out-of-control rise in mortgage rates — and even if the latter occurred, I believe lenders would can-kick their way out of a jam. Sales would plummet, but prices would remain suspended in the clouds.
Vague fears about what might happen simply aren’t convincing. During the housing bubble, people like you who where ahead of the curve recognized the scenario of defaulting loans leading to foreclosures and must-sell REO inventory. There was an easily identifiable scenario that was a reasonable consequence of the foolish lending and loss mitigation practices of the time. Right now, I don’t see any such coherent scenario. If you can come up with one, I would be delighted to offer a critical review of it. The many astute observers here would also.
Thanks again for your comments, and I hope you continue to participate today and in the future.
Thank you Mark! +1
Hi Mark. We are all wrong at one time or another. Only those who don’t offer opinions are never wrong. It’s ok to fail. In fact, it’s the best way to learn. The most important part of the learning process is the post mortem. Constant reexamination is key.
I agree that values have risen back to near the prior peak. Also agree that these housing prices could be considered less affordable than those seen in 2006 because of the qualification requirements. But does this mean the current “bubble” is more or less stable?
The housing bubble popped back in 2006 because prices were based on unstable loan products. Houses appeared to be more affordable than today, but weren’t really over the life of the loan. When the Fed raised short-term rates from 1% to more than 5% over an 18 month span, and affordability products were phased out, it became readily apparent how unstable, and unaffordable housing had become.
“Rather, I have been overly bullish the macro economy and totally wrong about how long the Fed would step on rates and how many dollars it would print in order create a new bubble.”
The Fed didn’t create a new bubble by lowering rates, it made the debt more affordable from the last bubble by dropping debt service costs. New loans are fully-qualified, stable loan products, and therefore, by definition, affordable.
Bubbles can pop, or they can slowly deflate, or they can be maintained by matching ingress to egress. Fed policy has been to maintain the asset bubble to the detriment of the macro economy by reflating the bubble with printed money.
Since we have no inflation, there is no reason for the Fed to fight that fire. So the Fed won’t have to raise rates any time soon. When they do, they can do so gradually, unlike 2004-6.
What matters is not whether we are in a bubble, but whether the bubble will pop. It occurs to me that the downturn in 2008 would have been much less severe if the Fed had maintained low rates while Congress slowly rolled in tighter loan regulations instead of raising rates from 1-5% over an 18 month period.
Looking at the “bubble” today, we have a dovish instead of a hawkish Fed; loan qualification is relatively tightly controlled; and, prices have stabilized at this new reality. Even if we are in an affordability bubble, there is no reason to believe that is going change any time soon. The Fed will raise rates as a response to inflation. Inflation affects prices and wages, which means purchasing power. As long as the Fed maintains affordability, by lagging the macro indicators, then housing won’t deflate.
If the Fed is forced to raise rates, it will be due to a strengthening economy. The Fed raised rates abruptly in 2004-6 because of the mistaken belief that the economy was a powerhouse. This was an illusion based on the Ponzi housing economy. The economy was in bad shape based on leveraged borrowing. If the Fed learns from its past mistakes, then we won’t see the a severe downturn in housing prices.
I was going to write a more detailed response, but you hit all the high points in your comment.
IMO, it all boils down to the stability of the stimulus used to reflate the old bubble. All-cash is the pinnacle of stability, and conventionally amortizing fixed-rate mortgages are a close second. It’s the difference that makes all the difference.
“new reality”
sounds like a new plateau. the fed has everything under control.
LMAO.
The economy cannot strengthen until after rates have risen. You are stating an impossibility. Cheap money is our problem, not our salvation.
The Fed is not the cause of every ill in the economy. Pundits like to play “My Alternative Factual Scenario” and describe their Goldilocks’ policies that should have been executed and where the 10Y UST would be had this occurred. It’s helpful for evaluating the past and future, but when it devolves into Fed bashing, as it too often does, it ceases any value-add.
Hanson’s call on house prices will prove correct if/when mortgage rates soar from sub-4% to 6%+. You’ll be reminded here though, that the monthly cost to home buyers might not be much different, even though the price tag declines. Hanson’s call requires forced sellers, and that’s a difficult argument to make – that there will be a large group of forced sellers.
So Hanson’s housing forecast, is really just an interest rate prediction. Good luck predicting where rates will be one, five, ten years out…
7 years of ZIRP and now we are headed to NIRP – the FED is what ails the economy.
If you look at incomes compared to housing prices, it does seem affordability is worse now then before. Especially since wages are stagnant and actually going lower adjusted for inflation, I could see how people make the argument housing is not affordable, especially in light of the fact that everything else is getting more expensive. Regardless of what the fed is telling us about inflation rates, I do not think anyone here can deny things have gotten more and more expensive…
Foreign and domestic cash buyers, move up buyers, institutional buyers are all immune to this affordability issue because they are not buying with their incomes.
There will be a few high earners who also may not be affected by affordability issues because they make a ton of money or their incomes may have grown.
Therefore you can separate out groups of people who do not fall into this affordability trap. These are the people who are buying. They likely account for a small minority of the population, but in this era of low volume sales, they likely account for majority of the buyers.
Of those that do not fit into the above category and still buy, most people now have to spend a higher % of their income to get into a house. In essence they are simply shifting their spending from other areas to pay for a house. To me this is no different than those in the mid 2000’s that took out toxic mortgages or borrowed money they couldnt pay back to buy a house. Sure the lending standards say they can afford the house since they “qualified” for it, but does some “lending standard” dictate if people can truly afford it? Perhaps it dictates who is likely to not default, but is that the only factor in determining affordability? If I spent all my income on a house and nothing else, does that mean its affordable? Its arbitrary, just like the speed limit being 25 miles in a residential area. Who is to say that 25 mile/hr is safe and not 23 miles/hr? If people have to shift their spending from retirement, college saving, vacations, and other discretionary spending to buy a home, then to me they cant afford the house. I see people doing that to get into a house today. Just my 2 cents.
Fortunately, we’re returned to prudent reasonable lending standards in the mortgage industry. So borrowers aren’t allowed to make terrible decisions about allocating 40%+ of their real income to housing. The ATR rules (QM) limit back-end ratios to 43%, which is limiting housing ratios to an average of 25%. This is very healthy, and something Hanson fails to consider. FHA, VA, USDA and the GSEs allow slightly higher back-end DTIs, but their exemption from the ATR/QM rules expires in 2017.
30yrFRM loans averaged 6.41% in 2006. In the first six months of this year, the average was 3.77%. For buyers putting down 20%, and using a 30yr fixed, affordability is much greater than it was in 2006. Affordability is much worse for NegAm buyers, thankfully.
500k house, 20% down, 6.41% 30yrFRM
pymt: $2,505/mo.
income: $96,954/yr
500k house, 20% down, 3.77% 30yrFRM
pymt: $1,857/mo.
income: $71,884/yr
On napkin math affordability, which I don’t like to use, opting for the detail in my charts located at http://mhanson.com/archives/1930
If…house prices are higher then in 2006
and…monthly payments to the incremental buyer using the popular loan programs of each era up to 60% greater than in 2006
and…incomes have been mostly stagnent
and…that was a bubble
then…why isn’t this a larger bubble?
Anyway, hard data can be found at http://mhanson.com/archives/1930
Have you read much about the ATR rules effective in January 2014?
http://www.consumerfinance.gov/regulations/ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z/
You are saying that we are in a mega-bubble in 2015 because we aren’t using Pay-Option ARMs? Seriously?
Your “apples-to-apples” comparison of 2006 era incremental buyers using Pay-Option Arms at 1.25% with 2015 era incremental buyers using 4% 30yrFRMs leads me to that conclusion. If incremental buyers were using Pay-Option ARMs today, housing would be more affordable, but we would also be in a mega-mega-bubble. Your logic evades me…
Comparatively low volumes to 2004-8 results from fewer qualified buyers. Actually, fewer unqualified buyers given loans.
One big difference now is that back during the bubble, borrowers could use teaser rates to get their payments artificially low. Also, many became Ponzi borrowers who supplemented their income through mortgage equity withdrawal. Those factors make it very difficult to compare what was happening then to what is happening now. It’s also one of the reasons I selected the 1993-1999 period as a comparable in my analysis because during that period, fixed-rate mortgages based on verifiable incomes was the norm.
Great response and within it, you nailed the obvious, unnatural problem plaguing this market and forcing me to remain defensive with respect to prices.
You said… “but in this era of low volume sales, they likely account for majority of the buyers.”
The problem is you can’t have it both ways for a long period of time in housing economics, because volume always precedes price. On the upside and downside.
The past two years of anemic volume with house prices “drifting” higher is much like the froth created in the stock market over the past couple of years that was blown off in Aug and again in Sept over the period of a few days.
This housing market will right itself violently as well, but a few “days” to housing could be 6 to 12 months. Remember, back in 2008 the lions share of the crash happened in 18 months and as I have shown in my first post above the lion’s share of the past 4 years of gains happened in 20 months ending in June 2013.
In other words, a ton of retracement can happen over a short period of time and with housing be so illiquid relative to other asset classes, it often over corrects, leading to my call for a 50% to 61% giveback of the Nov 2011 to present gains when it happens.
Your comment also brings me back to my original client note from which Diana Olick’s blog post was based…
…”disconnect between Wall Street’s new found exuberance for everything housing-related and what’s really happening in the field, both on an absolute basis and relative to prior “recoveries” and strong housing markets, which were led by construction, not surging prices like this time around.
Put simply, house prices surging higher, leading a housing market plagued with pitiful demand is something totally unique to “this” housing market “recovery”. And based on my research and experience, this is not what a “durable recovery with escape velocity” is made of.”
Do you also predict rents will drop 25%?
With consumer confidence at relatively normal levels, the average American would not continue renting if it’s much more affordable to own.
“In other words, a ton of retracement can happen over a short period of time…”
Yes prices can fall quickly, but will they, and why?
“Put simply, house prices surging higher, leading a housing market plagued with pitiful demand is something totally unique to “this” housing market “recovery”.”
There are a lot of unique aspects to this recovery that don’t align with prior recoveries. Extrapolating from irrelevant data sets won’t yield good predictions. You have to go back to 1929 to get a similar downturn. But the Fed policy response in the 1930s was so different than today that the 1930s aren’t even a good example. Maybe this housing market recovery is unique for a reason.
It seems to me that the pitiful housing recovery more-or-less reflects the pitiful economic recovery. With such anemic gains in GDP, why would housing surge? In fact, a weak economy should result in weak demand. The fact that we have an uneven recovery, where sectors of the economy are recovering faster than others, and some areas of the economy experienced no recession at all (healthcare), helps explain why demand has been weak, and yet prices are high.
Prices rising in a vacuum, without being led by a surge in demand, is something we saw from 2003 to 2007.
Remember, in 2001 through 2005 we saw huge housing demand followed by a surge in prices. This was very fundamental and exactly what should have happened. Then, in 2006 demand slumped and in 2007 it fell to decade lows followed by 2008 when it fell to historical lows. Prices peaked in July 2007 but were only down 5% or so in the summer a year later. THEN, prices caught up with demand all at once and from there prices fell 15% in 2009 and another 20%+ through mid-2011.
In this “recovery”, volume surged in 2010 on the Homebuyer Tax Credit and continued healthy through 2013. But believe it or not, August Existing Home Sales last month of 505k monthly units, while much higher than Aug 2014 of 479k units, was DOWN from 515k units in 2013.
This matches the surge in prices going into 2013 and relative slump since then, just like from 2006 through 2008.
House prices may very well sit right here and not drop much. But, everything has to go right in the US and global economies, which after 7 years of an economic expansion and recessions that come very 6 to 8 years, is not my base case scenario.
“Prices rising in a vacuum, without being led by a surge in demand, is something we saw from 2003 to 2007.”
Prices didn’t rise in a vacuum. They rose as a result of surging demand. The homeownership rate rose from a historical average of 64% to 69% in a few short years. Combining this with unprecedented access to credit, and all the signs of a bubble were there. Bidding wars of 10 or more buyers were typical since sellers didn’t want to sell as prices rose – thinking that waiting would make them more money. Sellers have no reason now to expect that prices will rise. Buyers have no reason to fear that prices will plummet. More or less a balanced market for those who are ready to buy, or sell.
“THEN, prices caught up with demand all at once and from there prices fell 15% in 2009 and another 20%+ through mid-2011.”
Then in early 2012 the banking cartel got together and limited supply. Normally when demand falls and prices fall, supply also falls. Sellers don’t usually race to the bottom.
After the Lehman bros and Bear Sterns bankruptcies in 2008, banks unloaded their non-performing assets to remain solvent. Then the mark-to-market rules were suspended and the can-kicking began. The tax credits pulled demand forward and prices continued their descent through 2011. This all changed in 2012. In early 2013, the distressed inventory disappeared and bidding wars erupted over the few homes available. There were more homes pending than active in March 2013. When the Fed started talking about tapering in May 2013 rates shot up and active buyers rushed to close before their lock period ran out. This culminated in peaking sales in July and August 2013. With this historical context, it isn’t surprising that sales were higher 2 years ago.
There has been no economic recovery. ZIRP has done quite the opposite. The numbers show recovery, but that is the magic of monetarism – false signals – and the essence of distortion.
Today, we have relatively intelligent people on this blog making “logical” and “reasoned” arguments using false signals as their data set.
So, we have ZIRP – which has hollowed the economy of legitimate savings and capital – and under that big umbrella we have plain vanilla financing, a new plateau in house prices, rising rents, and a “tepid economic recovery”.
This time around, housing looks just fine; but, the bubble has taken a different form this time around and is much larger. I’m unsure how much it will effect housing, but it will be negative.
Lastly, I just rattled off 2000 words complete with data and analysis to back up my views in probably an hour or so this morning.
Obviously, I believe in my analysis and am not some crackpot spewing talking points without data, facts, or experience to back it up. (unlike the housing market perma-bulls always looking at age-old data sets completely irrelevant in this housing market).
As such, I think investors or those over their ski’s into “this” real estate recovery one question, “what if I am right?”, or “what if I am half right?”.
In either case, relative to the consensus and complacency in this sector, it would lead to some serious problems, especially with the global financial markets and central banks so much more levered and with so little tools relative to 2007.
Well, your analysis has a lot of Fed-bashing in it, which is very “crackpot-ish.”
I am sorry if our opinion of the Fed is different. I call Fed appologists crack pots. To each their own.
Fair enough, but I’m no apologist. I just accept what the Fed has done as the likely best course, and I refuse to create alternative factual scenarios using my Goldilocks’ Fed policy to fantasize about what direction rates would have taken.
Says all Fed panderers.
Greenspan, Bernanke, Yellen: “We got this”
Mark,
I appreciate the time you put in to your thoughtful response.
At some point, I would like to see you take up the task of constructing a reasonable scenario where must-sell inventory comes to market. Even if mortgage rates go up, I don’t see the must-sell inventory coming to market to facilitate a crash. Until I can see and understand how that would occur, I remain unconvinced. At this point, it’s merely fighting the tape to deny the efficacy of lender can-kicking.
My hard data, which Diana Olick didn’t include in her report is right here. Every time I look at it, the bear hair on my bank stands up.
http://mhanson.com/archives/1930
Renting has also obtained similar affordability problems over the decades. It doesn’t mean rents will crash.
The low period of 2003-2007 was because of unstable loan products, and actual cost of the loan over the entire term were not considered in the data. If anything, you can draw a good linear fit for the rest of the data going as far back as 1979. According to this linear fit, a correction of about 5% may occur.
Over the course of over 3 decades there have been plenty of structural and demographics shifts that effect supply, demand, and composition of properties. This explain the slope of the linear fit, why it is not flat.
Your scenario would be a recession causing high levels of unemployment. Unless owners as a group have built up a large amount of equity the newly unemployed will stop paying on their underwater homes and cause another banking crisis.
The banks have trained the public to stop paying their mortgage and live for free for years.
Can kicking will work until the problem becomes too large to monetize.
The coming recession/depression will look different than ’08. If all hell breaks loose in another sector, will it not affect housing?
Systemic problems can manifest in various ways.
Meanwhile, back in the delusional world of the financial media, we have this missive.
Home Prices Rise Nearly 7 Percent in August Amid Favorable Market Conditions
Employment gains, wage growth, and continued low mortgage rates are pushing home prices up both year-over-year and month-over-month.
In August, home prices recorded a 6.9 percent year-over-year gain for the single-family combined tier, including distressed sales, CoreLogic’s U.S. Home Price Insights Report found. This will mark the 42nd consecutive month of year-over-year increases. Meanwhile, on a month-over-month basis, home prices rose 1.2 percent.
National single-family home prices remain 6.3 percent below peak values recorded in April 2006, but prices are forecasted to reach a new peak level in April 2017.
CoreLogic forecasts that home prices in the single-family combined tier will remain flat in September and rise 4.3 percent from August 2015 to August 2016.
“Economic forecasts generally project higher mortgage rates and more single-family housing starts for 2016. These forces should dampen demand and augment supply, leading to a moderation in home price growth,” said Frank Nothaft, chief economist for CoreLogic.
“Home price appreciation in cities like New York, Los Angeles, Dallas, Atlanta, and San Francisco remain very strong reflecting higher demand and constrained supplies,” said Anand Nallathambi, president and CEO of CoreLogic.
He added, “Continued gains in employment, wage growth and historically low mortgage rates are bolstering home sales and home price gains. In addition, an increasing number of major metropolitan areas are experiencing ever-more severe shortfalls in affordable housing due to supply constraints and higher rental costs. These factors will likely support continued home price appreciation in 2016 and possibly beyond.”
One year ago ago mortgage rates were about .75% to 1% higher. As such, one could qualify for roughly 10% less house. If 70% use a mortgage to buy, then it makes sense house prices would be up 7% over last year. It’s all about the mortgage rates.
However, go back to 2013 and check then vs now…also up about 7% based on NAR. In fact, New Home builder prices in August (last month reported) down DOWN 1% year over year and builder houses are a leading indicator to resales and are the best guage the health of the real, end-user housing market.
It is definitely all about mortgage rates. In my post Bold California housing market predictions for 2015, I noted the following:
The only way were were going to get higher prices and higher sales volumes was through continued low rates, which is what we got. I will likely make the same prediction next year because very little has changed.
To some extent the Fed has painted itself into a corner with low rates. It has no choice but to wait for the paint to dry, or ruin their prior work. Then they can start painting their way out again.
Why do rates rise, and why do they fall?
Rates rise when capital is scarce and there is an increasing demand for borrowed money. Over the last 30 years rates have been falling. Why would rates suddenly reverse and start to rise again? With quantitative easing there is more capital available than the demand for it. So rates fall. Even without QE, rising investment capital was already driving down rates.
In order for rates to rise back up again either demand has to surge, or investment capital has to fall. Or both. I’m not even sure the Fed can drive rates up just by increasing the short-term rate. This will decrease demand for borrowing, and increase the capital chasing these higher rates. The Fed may need to sell MBS/UST back into the market (oversupply to drive down the price and the yield up).
The problem of not enough liquidity may turn into a problem of too much. As baby boomers start spending their nest eggs, investment capital may become scarcer in the next few years, so rates will begin to rise again.
“In order for rates to rise back up again either demand has to surge, or investment capital has to fall. Or both. I’m not even sure the Fed can drive rates up just by increasing the short-term rate. This will decrease demand for borrowing, and increase the capital chasing these higher rates. The Fed may need to sell MBS/UST back into the market (oversupply to drive down the price and the yield up).”
If this was true why has the fed continued to roll over their balance sheet (thereby maintaining QE) instead of just letting them mature and retire it? Why didn’t they marginally increase their overnight rate a fraction of a percent when everyone believed they would?
They fed has passed on two meetings where a .25% rate increase was completely expected and would not have cause a massive sell off or functionally changed their easing (since the rate floats all the way up to .25%).
I have a strong feeling if the fed suggested they were going to unwind their massive balance sheet within the next 12 months rates would skyrocket on investor panic alone.
“If this was true why has the fed continued to roll over their balance sheet (thereby maintaining QE) instead of just letting them mature and retire it? Why didn’t they marginally increase their overnight rate a fraction of a percent when everyone believed they would?”
The Fed doesn’t believe that inflation is strong enough to remove the stimulus. When they do start to tighten, raising the overnight rate will affect the short-term end of the yield curve. The long-term end is being held down by the repurchases of maturing securities. In 2004-6, as the Fed raised the short-term rate from 1-5%, the long-term rate barely budged.
“I have a strong feeling if the fed suggested they were going to unwind their massive balance sheet within the next 12 months rates would skyrocket on investor panic alone.”
You are probably right. We went through a rate scare in 2013 when the Fed started talking about buying less MBS/UST, and rates shot up. The temper tantrum drove rates from 3.35% up to 4.75%, but now the rates are back down again. This just demonstrates the ability of the Fed to move the curve through sales of MBS/UST.
In other words, interest rate adjusted resale house prices have no gone up at all since mid-2013. In builder houses, builder prices are down 1% year over year.
This is stagnation in prices followed by stagnation in demand at just about the perfect time lag.
What happens next is the real bet.
Does the economy suddenly expand again, rates drop during an expansion, which never should happen but in the world of Fed funny money often does, and we are off to the races with borad based inflation that has never come to pass?
Or, is the stock market telling us something (S&P 500 earnings forecasted to be $137 per share a year ago and it will end up being $109, which is a massive haircut) and we go into an economic retraction or recession?
My case is that a recession, to this housing market, up so much on so little fundamental growth, would be magnified.
Thanks for bringing some balance to this blog.
The housing and economic recovery chest beating will wane and the pseudo recovery continues to prove so.
Mortgage Insurer Projects 6% Chance of Home Price Declines
The average risk of home price declines over the next two years rests at the low level of 6 percent, except for states that are highly dependent on oil production, the Arch Mortgage Insurance (MI) Risk Index showed.
“Home prices in much of the country should continue to rise faster than inflation in the medium term, due to a shortage of homes for sale or rent, good affordability, and continued job growth of 2 to 3 million net new jobs a year,” the report noted. “Most Oil Patch states will experience slower home price growth, but any price declines should be fairly limited in scope. No states received Risk Index scores above 50, the point where home prices are more likely to decline than rise.”
According to Arch MI, many oil-producing states have been experiencing slow home price growth, Texas home prices increase 7.5 percent in the last year, must quicker than the national average of 5.1 percent.
“We expect the slowing trend to continue since there will be more energy-related layoffs to come (both directly and indirectly in manufacturing, transportation, etc.), due to long and uncertain lags and the recent continued declines in energy prices,” the report stated.
“Since the trend in employment has turned negative recently in several states, it is reasonable to expect a slowdown in home price growth in the oil region overall in the coming year,” the report said. “We do not foresee a repeat of the “Oil Patch” deep regional recession from the 1980s, thanks to a more diversified employment base, a well-capitalized financial sector, and the benefit of solid employment growth for the United States overall.”
In 2005 through 2007, they had a 10% chance of declines.
Politicians scramble to justify the 2008 bailouts
How Successful Has TARP Been After Seven Years?
Saturday, October 3, 2015, marked the seven-year anniversary of then-President George W. Bush signing the government’s Troubled Asset Relief Program (TARP) into law in order to help stabilize financial markets and restore Americans’ confidence in the economy.
TARP became law in 2008 at the depth of the financial crisis, at a time when many Americans feared that the country was on the precipice of another Great Depression. Less than a month before TARP became law, Fannie Mae and Freddie Mac had been seized by the government and required a bailout of $187.5 billion to continue operations.
In conjunction with the seven-year anniversary of TARP, Rob Runyan and Maya Newman from the public affairs office of the U.S. Department of Treasury wrote a commentary on Treasury’s blog examining the success of the program and what it has done to achieve its main goal of stabilizing the economy.
“Beyond the taxpayers return on their investments, TARP helped to stabilize our banks, keep credit flowing to businesses and individuals, save our auto industry, and keep millions of Americans in their homes,” the authors wrote.
The economy has experienced 67 straight months of private sector job growth and the unemployment rate is at its lowest level since 2008 (5.1 percent), serving as ” proof that the broad-based federal response to the financial crisis was effective in stabilizing our economy and setting the table for sustainable growth,” the authors said.
TARP was always meant to be temporary, which is why the government began moving to exit its investments and replacing government support with private capital after putting out the immediate financial fire. And while achieving return on taxpayer investment was not the primary goal of TARP, the program did just that because prudent execution helped TARP achieve its first goal, which was stabilizing the economy, according to Runyan and Newman.
In the past seven years since TARP was signed into law, the program has:
* Recovered $442 billion for taxpayers (including Treasury’s additional proceeds from the sale of non-TARP shares of AIG) while disbursing $429.7 billion for a positive return of $12.3 billion
* Recovered $275 million through TARP bank programs through repayments and other income, which is $29.9 billion more than its original investment
* Provided capital for 707 financial institutions through TARP’s Capital Purchase Program, 688 of which have exited the program
* Helped more than 1.5 million families avoid foreclosure through the Making Home Affordable (MHA) program
* Saved homeowners a cumulative total of more than $36 billion on monthly mortgage payments
This is important because like the Fed is sitting around with no tools to battle the next down turn, the Gov’t doesn’t have the tools they used back then either. If we get another macro and/or housing market downturn, these markets are on their own this time around.
Note, if they would have left the markets alone back then the drop might have lasted another year and prices may have fallen another 10% but right now I would probably be uber bullish because the slate was wiped clean.
We still have serious problems left over from back then for instance, millions of legacy HELOCS are are hard recasting after 10-years of interest only periods, turning fully amortized and rising 1% per year. I know of loans that went up in payment 300% over a single month leaving homeowners scrambling to try and refi it when they don’t qaulify under the new guidelines.
“if they would have left the markets alone back then the drop might have lasted another year and prices may have fallen another 10% but right now I would probably be uber bullish because the slate was wiped clean.”
This is the essence of hard money, Austrian school. The debt must be purged. Just as any price that corrects will overshoot the trend, so must interest rates overshoot the historic average (think double digit) before the economy can rebalance and experience sustainable recovery. At that point I will be Uber Bullish.
Trying, as we have, to wipe the slate clean via monetization merely exacerbates problems, while creating the appearance of a solution/recovery.
This is the Austrian Crack Pot Anti Fed stance. We do not allow misguided bootlicking fed pandering.
Orange County Woman Goes To Jail
California woman preyed on distressed homeowners, defied CFPB
A California woman will spend the next 70 months in federal prison after being convicted of concocting and perpetrating a scheme that defrauded struggling homeowners by offering them a fabricated opportunity to save their homes.
According to the Special Inspector General for the Troubled Asset Relief Program, Najia Jalan received a sentence of 70 months in federal prison for her role in a scheme that involved Jalan falsely presenting herself as a member of the Department of the Treasury, pretending she was an attorney, defying a restraining order placed on her business by the Consumer Financial Protection Bureau, and eventually being caught as she tried to flee the country after her scheme was discovered.
Beginning in December 2012, and continuing through October. 2014, in Orange County, California and elsewhere, Jalan devised, participated in, and executed a scheme to defraud and obtain money from distressed homeowners across the country.
“Najia Jalan masqueraded that she was part of Treasury, that she was an attorney, and that she was a consumer advocate, convincing homeowners to pay her as the first step in getting their mortgage modified under HAMP, when the reality is that this was one in a long list of crimes of dishonesty for this convicted felon,” said Christy Goldsmith Romero, Special Inspector General for the Troubled Asset Relief Program.
According to Romero, Jalan made up fake corporations, stole people’s names, and even set up a fake “Homeowners HOPE Hotline” to lure in desperate homeowners into participating in the scheme.
As part of the scheme, Jalan induced homeowners facing foreclosure to pay an illegal advance fee to one of her entities for purported mortgage relief services, and/or legal services that could save their homes from foreclosure.
According SIGTARP, to obtain the homeowner’s money, defendant made material omissions and false promises and statements, including: falsely promising consumers mortgage loan modifications that would substantially reduce their mortgage payments or interest rates or help consumers avoid foreclosure; falsely claiming her services were subject to a money back guarantee; falsely claiming to be a law firm; impersonating the identities of licensed attorneys; and omitting the material fact that she had been prohibited by a temporary restraining order and preliminary injunction to offer such services.
In executing the scheme, Jalan provided false statements to distressed homeowners, claiming that she was a licensed attorney of another name, that her companies were working directly with the Department of Treasury, that her fake company USLF was a law firm, and that homeowners needed to open a “mortgage fraud investigation” against their servicer as a required first-step in applying for the TARP Home Affordable Modification Program – all of which were untrue.
“(Jalan) stole their money and provided no service at all, and as a result people lost their homes,” Romero said. “She continued the scheme after the Government shut down her operations, and she tried to flee the country after SIGTARP unraveled her fraud scheme. SIGTARP caught her as she attempted to flee and worked to bring her to justice with our law enforcement partners.”
As part of her sentence, Jalan was ordered pay $236,785 in restitution and will have a three-year supervised release period after her 70-month sentence is complete.
“Najia Jalan preyed on families and individuals that were already facing tremendous financial strain,” said U.S. Attorney Eileen Decker of the Central District of California. “Jalan’s persistent and devastating fraud warranted this significant sentence.”
IT’S THE BLACK SWAN YOU DON’T SEE THAT TAKES YOU OUT
Risks to this housing market…
1) Rates rising to 6% (too obvious, not too worried about this because I don’t think they can rise that high or it blows huge holes into the US budget with $20 trillion in debt).
2) China, Brazil and Russia demand, which has driven demand and prices in top tier cities, not only stopped but going into reverse, causing higher end liquidations. In fact, in Miami Beach it’s already happening. The housing data there are horrid complete with y/y house price declines.
3) High yield market puking over the past month is a perfect replay of the subprime mortgage market puking in late 2006. But, this market is 50x larger. Whether or not this flu in high yield spreads to higher grade paper is yet to be seen, but even if it doesn’t it will reek havoc across corporate America when business that are earnings far less money (think frackers) have to refi their 5% high yield debt at 8% or 9%.
4) House prices falling nominally (5% to 10%) forcing millions who bought using virtually ZERO down FHA money over the past two to three years to be in a negative equity position. Of course, these people also have levered up with Subprime auto loans, capital one credit cards and many are saddled with student debt. A new round of negative equity defaults is easy to envision with a meager 10% drop in prices.
5) Massive second/vacation home fraud as high as in 2006 (retail buyers chasing institutions and foreigners into rental houses using fraudulent loans in order to get prime financing) turning around leaving a void in demand and causing increased supply and liquidations.
6) Institutions and smaller private speculators who bought millions of single fam properties since 2009 and are renting them decide to take profits and go into higher yielding assets. Remember, Blackstone and others said they are long term investors, 3 to 5 years, and its been 5 years since they started buying.
7) Another problem with institutions is they are all convinced they can offload risk with securitizing the rents with new Rental Backed Securities. But, with the high-yield bond market puking, these bonds won’t be as easily rated as they were earlier in the year and last year. Unless they can offload risk though RB Securities, they will liquidate when they decide to. And unlike you and me who wait, watch and take multiple offers before signing the sale contract, when a large insti wants to get out of an investment they press “SELL”. I could see a large insti trying to sell 50k houses in 3 months for instance.
8) Global equities market rout: I can easily see the SPX retesting 1850 and taking out 1830 before blowing through 1750 and settling somewhere in the 1650 to 1600 range, perhaps this month. If there is evidence of a recession coming soon, take that 200 points lower at least. This could easily cause 10% to 15% to come off house prices triggering a selling effect as described in items 4, 5, 6 and 7 above.
Bottom line, the risks to housing up here at nosebleed levels relative to 2003 to 2007 and incomes have not been this numerous since 2007. Anything to upset the apple cart could lead to a little pullback, which when dealing with illiquid housing, can turn large overnight.
You need to trim your bear hair. It’s waaaaay too long.
Some people are attracted to bears,and their lack of grooming!
Peter Schiff will never admit he is wrong about gold because his whole premise is the US dollar is in a massive bubble. He adamantly believes sometimes in the near future foreign governments will abandon the dollar and the US government will have no market for their debt.
His prediction relies on the United states essentially experiencing a massive government default which result in unprecedented money printing which will unseat the dollar as a reserve currency.
He admits he is extremely early, and also admits he underestimated the foolishness of our creditors.
He will be right, but it will take time.
Given enough time most predictions would prove correct. This fact does not make somebody a good analyst.
When should pundits admit their mistakes?
Ideally, they should catch their own mistakes, admit to them, and correct them. Since no one can catch every mistake, once the mistake is pointed out to them they should freely admit it, and then correct it, and hopefully learn from it. There is no point in defending the indefensible. People aren’t born knowing everything, so knowledge has to be shared or gained through effort. Peer review can be arduous, but ultimately advantageous for everyone involved.
Then you have pundits like el O that won’t admit it even after links are painstakingly provided to the quotes in question.
One of the things I greatly appreciate about this forum is the interplay in the comments. It’s pretty tough to stake out a foolish position contrary to the facts when you are fact-checked daily by very bright people.
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