Sep292014
What will the next housing bust be like?
Based on the moral hazard from lessons learned from the last housing bust, future housing declines will experience very, very low sales volumes.
What lesson did lenders learn from the painful losses from the housing bust?
Did they learn they shouldn’t peddle toxic mortgages? Nope.
Did they learn they shouldn’t give loans to unqualified borrowers? Nope.
What they learned is that no matter how foolishly irresponsible their lending gets, they will get bailed out by government cash and federal reserve interest-rate policy, and they can avoid mortgage default losses by loan modification can-kicking until prices rebound. As long as they don’t foreclose and resell for a loss, they can amend-extend-pretend their way out of any lending disaster.
That’s really what lenders learned.
Do you see the potential moral hazard? Since they refused to learn the lessons they should have, and since they learned they can take on unlimited risk with little or no consequence for the future, wouldn’t it be logical to assume that if given the chance, they will return to irresponsible lending to generate short-term gains through fee income?
As long as this moral hazard exists, only vigilant enforcement of regulations will prevent another housing bubble, but how long will that last? How long before regulators are captured by banking interests and a new Ponzi loan virus is released to the market? Five years? Ten years?
If we do have another housing bust, what will it be like?
Low volume followed by even lower volume
The 2014 housing market shows what happens when prudent lending standards are applied to an overheated housing market: sales volumes drop. In 2012 and 2013, the housing market rose about 20% in a 15-month stretch until an interest-rate spike in June 2013 brought down the affordaibility ceiling and stopped the rally dead. Over the last 15 months, the market has flatlined because buyers can’t raise their bids any further with their stagnant incomes, and slow employment gains creates few potential new buyers to keep volumes up. In the past, flat pricing and low sales volumes would have been overcome with affordability products, but with most of these toxic loans banned today, the market goes nowhere.
In a typical housing bust (California has endured three such busts, so we know what typical is), once sales volumes drop, sellers come to realize buyers can’t raise their bids because affordability products abruptly disappeared in a credit crunch. Since much of the inventory used to be must-sell, sellers were forced to lower their price to meet the market bid; thus house prices fell. Depending on the terms of the toxic loans, prices at the peak may be only a little elevated, or they may be extremely elevated.
For example, in the late 1980s and early 90s, that housing bubble was characterized by many conventional mortgages with excessive DTIs, and a moderate sprinkling of interest-only loans, so when lending collapsed back to prudent standards, the aggregate loan balances didn’t drop very much, so the market didn’t have as far to fall to reach stability.
However, the Great Housing Bubble witnessed the proliferation of Option ARMs, which elevated house prices 30% or more above stable price levels. When Option ARMs disappeared, aggregate mortgage balances plummeted, and even the added boost of cutting mortgage rates in half couldn’t make up the difference (see below).
When mortgage balances contracted in the credit crunch of the Great Housing Bubble, lenders also followed their standard loss mitigation procedures, which were to foreclose and resell the REO as quickly as possible. Since there were so many REO, this caused house prices to drop quickly and significantly back to stable levels determined by income and mortgage rates. This quick decline caused by REO sales is also what kept sales volumes up. Imagine what would have happened if lenders kicked the can from the beginning.
The next housing bust will likely see the same credit crunch induced collapse of aggregate mortgage balances, particularly if lenders are emboldened by moral hazard to develop and proliferate another Ponzi loan like the Option ARM. If that happens again, and if lenders use their “new and improved” loss mitigation procedures, when sales volumes decline due to the credit crunch, rather than signal an upcoming decline in prices, it will signal even further declines in sales volumes. In fact, if we do see another housing bust, I predict we will see sales volumes fall to lows never before measured, even lower than the worst sales years of the most recent housing bust.
Why will sales volumes fall so low? If sellers are trapped in cloud inventory, unwilling and unable to lower price, and if buyers are abruptly limited by lower borrowing power, financed buyers simply won’t be able to transact, no matter how much they substitute down in quality. If financed buyers can’t buy, sales volumes will crater — prices won’t go down much, which is what lenders are after — but sales volumes will necessarily suffer. That’s how I believe the next housing bust will turn out.
Curb supply to avert dangers of a burst property bubble
From Anil Kumar Bhatia, Published: 4:02 AM, September 23, 2014, Updated: 4:03 AM, September 23, 2014
Mr Ku Swee Yong’s commentary, “Tidal wave of property supply hits S’pore” (Sept 19), was excellent in detailing the softening market for residential properties. He analysed and outlined how excess supply will hit Singapore from next year to 2017.
But the real fear is that those who have booked properties and are unable to take up or pay loans start to dump the assets below the prices they paid, just to clear their debts.
This would affect financial institutions with heavy property loans. Such a property bubble would cause a general collapse of property prices and affect the business climate and economy.
This happened in the United States when mortgage lending became rampant and caused prices to slump in certain states. Once the damage is done, it would take a few years for the markets to return to normalcy.
Mr Ku’s suggestion to sell property investments would exacerbate the problem.
The authorities must look strictly at how to curb supply before things get out of hand. This would prevent panic selling and its fallout.
The article above is from Singapore, but it might as well be here in the United States. Look at what people are proposing: they want to make can-kicking public policy! What better example could we have of the impact of moral hazard on the behavior of market participants? A large number of speculators — enable by bankers — bid up real estate prices to where both the speculators and their enablers are worried about the fallout of a bust, and they want to make sure everyone kicks the can to prevent a bust.
Are we witnessing a housing bust now?
Most housing analysts didn’t foresee the decline in sales volumes in 2014. Most blithely assumed increasing employment would somehow create enough new owner-occupant buyers to make up for the loss of investors. Obviously, that didn’t happen. But’s let’s assume for a moment that 2014 was actually the peak of the housing cycle and we are now in a bust mode. If that were the case, the low sales volumes of 2014 are the first stage in the bust, and 2015 will see even lower sales volumes as higher mortgage interest rates causes aggregate loan balances to contract further.
Future housing busts may or may not see lower house prices because on low volume, prices can go anywhere. In future busts, house prices will likely drift slowly lower as the few discretionary sellers transact with the few cash buyers at lower and lower price points until prices get low enough that financed buyers can participate again. What will mark these busts won’t be declining prices, it will be declining sales volumes; for the people that matter, politicians, bankers, loanowners, a bust characterized by low sales is far superior to busts characterized by low prices. For potential future homeowners, people who obviously don’t matter, they just have to deal with it.
[listing mls=”OC14204489″]
Any effort to keep a lid on home price appreciation is now criticized. Shouldn’t some appraisals come in lower than the contracted value, particularly in a frenzy when buyers are overpaying?
Guess What’s Holding Back Housing
During the U.S. housing boom, real-estate appraisers acted like deal-enablers rather than valuation experts. Indeed, inflated appraisals were a key ingredient in the erosion of mortgage-lending standards that led to the housing bust. Now we are seeing the opposite — low appraisals — with unwelcome consequences for the housing market.
A low appraisal doesn’t necessarily equate to low quality but it could be a concern.
[Yes, a concern that the value doesn’t match the contract price, which is why appraisals are done in the first place. Duh.]
The highest percentage of low appraisals occurred around May 2009. This was not only the peak of the housing-market collapse, but also when the agreement first went into effect, easing the pressure on appraisers by mortgage brokers and banks to “hit the number.”
Although the study indicates that inflated appraisals are less common today, the impact of low appraisals may be problematic in its own right — higher levels of loan rejections that put a damper on the housing market. With the recent rise in housing prices, we are again seeing more low appraisals. This may mean that the rules have left appraisers slower to respond to sudden changes in housing-price trends.
It seems as if appraisers just can’t get out of the way.
There is another viewpoint.
Report: Low Appraisals Not at Fault for Slow Housing Recovery
Despite complaints from Realtors that low appraisals are disrupting home sales, a new analysis from FNC Inc. argues that valuations have had little impact in the delayed housing recovery.
As home values have made a rapid ascent in the past few years, those on the sales side point to lagging appraisal models as a major hurdle to finalizing transactions. In a 2012 study, the National Association of Realtors found a combined 35 percent of members surveyed reported delayed, renegotiated, or even canceled sales contracts as a result of lower than expected valuations.
In a newly released report, however, FNC maintains that despite anecdotal reports, “there is no strong evidence that low appraisal valuations contributed to mortgages falling through.”
Examining a sample of appraisals done this year, the company reported that nearly nine in 10 purchase loan appraisals “provide a value opinion that supports the transaction price,” with an estimated 27.6 percent valuing at contract price and 61.4 percent coming in above contract.
Out of those homes appraised at values below contract price, only 10.2 percent have short by 1 percent or more year-to-date—well within the typical 10–12 percent range, the company says.
At the same time, the share of above-contract appraisals valued at more than 1 percent of the home’s contract price year-to-date is 40.4 percent—a statistic FNC calls “puzzling.”
The appraisal industry will experience some change in 2015. The Dodd-Frank integrated mortgage disclosures (RESPA & TILA) do not allow the appraisal fee to change after the price is disclosed in the loan estimate received at application. Speculation is we’ll move to flat-priced appraisals, increasing the cost for everyone slightly.
This makes sense. Given that nobody can pick their appraiser any more, it becomes a uniform commodity. Since a widget is a widget is a widget, pricing should also be uniform.
This is the best measure of the effectiveness of lender can-kicking.
Dollar Volume of Negative Equity Falls $38 Billion in Q2 2014
According to the latest CoreLogic Equity Report, released today, the negative equity share nationwide fell from 12.7 percent in Q1 2014 to 10.7 percent in Q2 2014, and the number of underwater borrowers decreased from 6.3 million to 5.3 million. The total dollar amount of negative equity was down $38 billion from Q1 2014, falling to $345 billion in Q2 2014.
Quarter over quarter, all states exhibited a decrease in negative equity share through Q2 2014, in large part due to growth in home prices across the country.
Negative equity shares show stark differences when broken out by price tiers. Homes valued at less than $100,000, for example, accounted for 13.7 percent of the total negative equity dollars nationally in Q2 2014. Negative equity share for this category was the highest at 22.3 percent, more than twice the national share of 10.7 percent. Homes valued between $100,000 and $200,000 made up almost a third of the total negative equity dollar amount with a negative equity share of 13.6 percent. On the other end of the scale, homes valued at more than $200,000 made up 56.2 percent of the negative equity dollars nationwide and had a negative equity share of 3.5 percent. This trend suggests that there is a high concentration of negative equity mortgages in the low end of the housing market.
Quarter over quarter, the number of properties that were owner-occupied and had less than 20-percent equity, thus considered under-equitied, decreased by 8 percent, or 709,000 homes, to the current level of 8.1 million properties in Q2 2014. Under-equitied non owner-occupied properties, similarly, fell by 7.3 percent, or 99,000 homes, quarter over quarter to the current level of 1.3 million homes.
Bearish housing bets mortgage rate concerns
NEW YORK — Traders are accumulating options to protect against losses in an exchange-traded fund (ETF) that tracks housing stocks, speculating the homebuilding recovery may be threatened by an increase in interest rates.
The cost of puts conveying the right to sell the SPDR S&P 500 Homebuilders exchange-traded fund reached the highest level in 14 months relative to bullish contracts, according to three- month data compiled by Bloomberg.
Investors are growing concerned that the housing recovery may be derailed when the Federal Reserve increases its benchmark rate following a six-year stretch near zero percent, according to Ryan Detrick at See It Market.
Shares of the ETF have tumbled 9.1 percent this year after almost doubling in 2012 and 2013.
“There’s that bet against the housing recovery and the data we’ve seen confirms that to a degree,” Detrick, a Cincinnati-based market strategist at the investment research firm, said.
“If the stocks can’t do well in a rate-friendly environment, how well can they do when rates eventually go higher?”
The ETF — whose largest holdings include Home Depot Inc., Lennar Corp. and Whirlpool Corp. — has tumbled for four straight weeks. The fund is down 12 percent from an almost seven-year high in February.
Housing starts slumped 14 percent to an annual pace of 956,000 in August after reaching the highest level in almost seven years, Commerce Department data showed Sept. 18.
“If you were to take away the leg of support, ultra-low interest rates, how will the homebuilders fare? There’s rationale in being potentially bearish.”
You may end up paying the bill for the BofA mortgage settlement
If you invest in a retirement account or rely on a public pension, you may find yourself footing the bill for the U.S. Government’s recent spate of headline mortgage settlements with the nation’s largest banks. While the settlements promise billions in consumer relief, average consumers – and not the banks – are picking up a significant share of the tab.
For evidence of the trend, look no further than Bank of America‘s (BofA) recent $17 billion settlement with the U.S. Department of Justice (DoJ). BofA promised to pay off more than 41 percent of the fine by providing consumer relief, which includes lowering mortgage payments for certain borrowers. The catch is that BofA doesn’t have to actually own the mortgages it intends to write down.
The question at hand is, if BofA doesn’t own these mortgages, who does? And the most likely answer is, you.
Institutions like BofA churned out trillions in such mortgages and packaged them into mortgage-backed securities. The mortgage bonds were then purchased by fund managers in charge of retirement accounts as part of a diversified strategy. You earn money each month based on the amount of principal and interest paid by the borrowers whose mortgages back these investments. When the servicers in charge of these mortgages lower the principal balances and interest rates for a predetermined subset of borrowers – your monthly return is diminished.
As such, the DoJ is allowing BofA to settle crisis-era mortgage charges at the expense of savers, public workers and others.
What it all boils down to: everything was worth less without QE. Everything is supposedly worth more with QE (LOL, good one).
Reality is, this so-called market is giving up everything it got from QE just like Japan did every time. The reversion is going to be painful.
The federal reserve exists to create moral hazard for lenders. If lenders lose their minds and provide debt to inflate an asset bubble of any kind, the federal reserve will lower rates in order to make the previously inflated value justified by alternative investments, or they will juice the economy until fundamentals catch up to the previously inflated values — or some combination of both. The federal reserve ostensibly wants to avoid deflation and the pain that entails, but they end up creating the moral hazard which emboldens lenders to inflate asset values so much that deflation is inevitable. The federal reserve’s policies make credit booms larger and even more dangerous.
I could have sworn you commented several days ago the Federal Reserve tames the boom bust cycle. No?
They do tame the boom bust cycle, and as a consequence of this, they create a moral hazard problem with the potential to create an even larger disaster.
If you look back at the booms and busts of the 19th century, they were generally very extreme — good for long-term growth perhaps, but very painful. Since the federal reserve was created, we’ve had two extreme cycles, the Great Depression and the Great Recession, but the other recessions have been much less painful, mostly due to Federal Reserve meddling.
What the federal reserve does is my smoothing out the minor recessions and fostering moral hazard, these minor recessions aren’t as cleansing, and eventually be build up to a big blowout.
Is it better to have a series of more painful and cleansing recessions or a series of small ones leading to a big crash?
“What it all boils down to: everything was worth less without QE. Everything is supposedly worth more with QE (LOL, good one).”
This strikes me as an incredibly naive point of view. The value of QE is the stability it provided, i.e. backstopping the financial system and providing liquidity. This liquidity increased transaction volumes and allowed financial systems to function. MBS purchases provided mortgage capital that wouldn’t otherwise have been available. This allowed home sales to take place, helping to clear the market of distressed homes, and reduced rates.
Removing QE now doesn’t have the opposite effect; i.e. causing liquidity to dry up, rates to rise, and asset values to plummet. The extra QE liquidity isn’t as necessary now. It’s like filling a bucket with water. Depending on the amount coming out of the bottom, a certain amount of make-up flow needs to be added to the top, thereby maintaining the same level. Once private capital started to also fill the bucket up, the FED had to crank down on the valve before the bucket overflowed. If the amount draining from the bottom is less than the amount of private capital coming in, the FED will need to start pulling liquidity out.
In fact, selling QE purchased MBS may become necessary to keep rates from falling too low as private lenders compete over declining transaction volumes. In other words, some liquidity will need to be pulled out of the system to prevent a collapse in rates. The FED has amassed a large counterweight in the form of a 4-5T balance sheet.
Saying that “supposedly everything is worth more with QE” misses the point entirely. LOL.
Evidently, ‘credit’ does not concur….
There are many factors influencing the spread right now. Looks like a good time to buy high-yield and capture the spike in rates.
http://news.morningstar.com/articlenet/article.aspx?id=666771
“It was hard to put a finger on any one factor that caused the weakness in the capital markets last week, but the “risk off” mentality certainly predominated. Some pointed to weakness in German industrial metrics, which resurfaced concerns that Europe is on the precipice of entering another recession, and others pointed to Chinese economic indicators, which indicated that economic growth in China and other emerging-market economies is dwindling. In the corporate bond market, a few traders reported that many mutual fund managers indicated that their cash levels have sunk to very low levels as cash has been used over the past six weeks to absorb the near-record-breaking amount of new issues. In addition to the low levels of cash at the fixed-income funds, one source in the equity market said the volume of initial public offerings in the equity market, including the record-breaking Alibaba (not rated, wide moat), had sopped up all of the cash in the equity funds as well and led to selling pressure in the equity markets. On top of the low levels of cash, the credit spreads of new issue bonds have been priced with very little or no concession to outstanding debt and have not performed very well in the secondary market, curbing investor enthusiasm.
While all of these factors played a part in last week’s weakness, it was the surprise departure of Bill Gross from PIMCO that exacerbated the sell-off in the bond market Friday. Traders looked to quickly sell down positions, as his departure is thought to potentially cause significant dislocations in the fixed-income markets. If a considerable amount of investors decide to pull their funds from PIMCO, those funds will need to sell bonds to cover redemptions. With low levels of cash and dealers keeping their inventory levels to a bare minimum, even if investors reallocate into fixed-income funds with other mutual fund companies, it will take some time for that amount of cash to be put back to work.”
your short term faith in the FED completely ignores they have brought us to systemic levels long term.
I like the bucket analogy.
And this is something I never considered:
The decline and stabilization of low mortgage rates after the beginning of the taper caught most people by surprise. I hadn’t stopped to ponder the link between low sales volumes, low rates, and federal reserve policy.
It makes sense to me that as long as interest rates are low, the federal reserve would continue the taper. There is no negative consequence to doing so as long as rates remain low.
To take this one step further, rather than raise short term rates next year, it may make more sense to start liquidating some of their balance sheet holdings of longer term debt. They can hold short rates down while liquidating longer-term debt to steepen the yield curve and slowly bring up the long-term rates without harming overall liquidity by raising short-term rates.
“To take this one step further, rather than raise short term rates next year, it may make more sense to start liquidating some of their balance sheet holdings of longer term debt. They can hold short rates down while liquidating longer-term debt to steepen the yield curve and slowly bring up the long-term rates without harming overall liquidity by raising short-term rates.”
Yep. That’s what I would do. That way they create a market for their MBS/UST by driving up the spread (more supply = lower price = higher yield, with alternate investments held low vis-a-vis short term rates). With defaults falling via mortgage mods, there is already less risk than when the FED bought the MBS so there should be less risk premium and higher price. Time to start selling off to the private market.
In a way, the taper is already doing this. The reduction of purchases has set a glide path and there in a definite relationship between current rates and the drop in purchases. If the FED were to continue this trend by selling corresponding amounts of MBS, and increasing at similar intervals, rates may remain relatively unchanged, or may tick up slightly over the coming year.
If the FED were to stop purchases, but not start selling MBS, what happens to rates? A year ago, the FED was purchasing 85B/month. Shortly, they will be purchasing zero. Rates are just about level over the last 12 months.
To maintain momentum, the FED might consider announcing a sale plan starting at a low level (10B/mo.) at the same time they announce the end to the taper. This does two things: 1) it sets a direction, and 2) it creates the impression that markets are healing and the economy is recovering. Just ending the taper, with no further plan, or guidance, will allow the market to set the direction, which means it will go in every direction, with predictable volatility. A steady hand on the tiller is needed.
Keeping short term rates low will continue the economic expansion, and hopefully drive down unemployment and drive up wages. Higher wages will help absorb the rising mortgage rates. And rising mortgage rates will help to blunt inflation. Short term rates can be feathered to adjust for rising inflation. With rising mortgage rates keeping a lid on home prices, HELOCs and HELs shouldn’t result in much inflation either, so short term rates won’t need to be raised as soon.
In other words, the taper appears to be working, why not extend it through the zero bound, go negative and see what happens?
I don’t want to be an echo chamber, but I like your thinking on this. If you think about it, divesting themselves of the long-term bonds on their balance sheets is merely a continuation of the taper. Instead of reducing their buying by $10B per month, they can start actively selling then increase their selling by $10B per month until rates start to go up. Based on the stability we’ve seen in the face of the taper, the federal reserve still appears to have some control of long-term rates. If they can start selling off their balance sheet without causing long-term rates to spike, I’d be surprised if they didn’t do this. Winding down their bloated balance sheet would do a great deal to improve investor confidence and also boost the dollar.
One other thing to consider is that low volumes can create rising equity by reducing transaction losses. With a commodity like housing, where transaction costs are so high relative to the value of the property, a longer time between sales, i.e. lower turnover, reduces the parasitic drain from the inherent value of the housing market as a whole.
For example, if houses turnover every five years, with a 6% commission and 2-3% buyer closing costs, and seller prep costs averaging 2-3%, 10-12% of the house’s value is lost in the sale, or 1-1.2%/yr. If sales fall, then turnover falls as well.
Selling every 10 years cuts the transaction loss to 0.5-0.6%/yr. This may not seem like much until you multiply it by $25 Trillion, or $125B/yr.
As I was writing the post, I kept thinking that realtors should be the most worried about the long-term impact of all the market manipulations. They are the people most negatively impacted by declining sales volumes, yet they lobby for the policies that lead to their own destruction.
The main reason I didn’t mention this idea in the post (other than the post was already long) is that most readers here would embrace that as a positive impact of a future housing bust.
During the boom, realtors made out like bandits. Many homes were turning over every year or two. Some were being flipped even more often. It doesn’t take many years of this before all the equity has been consumed. The “affordability products” kept this phenomenon from being exposed. But, once the tide went out… we found out how many homes had their equity eaten. You can’t have your cake and eat it too.
For every action there is an equal and opposite reaction (Kepler’s third law). Realtor’s are now learning that a period of surging transactions can only be followed by a period of flagging transaction volume.
Russ says: For every action there is an equal and opposite reaction (Kepler’s third law).
Russ says: Removing QE now doesn’t have the opposite effect
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Oh I see, in your world, Kepler’s 3rd law applies to realtors, but not QE.
Got it.
give him a break, central banks around the world have created so much distortion money will, short term, flow to the dollar and push down interest rates. It’s an anomaly with a limited shelf life
Correct. Newton’s (not Kepler’s, my bad) third law assumes instantaneous, perfect transfer of energy and momentum. This happens when realtors get their commission check. This doesn’t happen when QE is performed, since the FED keeps a balance sheet. Thus, QE is stuck to the financial markets to be decoupled at a later date. Perfect in-elasticity vs perfect elasticity.
When transaction fees take equity out of a property, it never gets added back in again. Since the equity is what provides the commissions, once it has been consumed, realtors must wait for the equity to accrue again. If they eat the equity up more quickly than is being created during the boom, then they will have an extended wait after the bust plays out.
Also, the realtor commissions are different than QE in one important aspect: there is no balance sheet. This money is gone and cannot be put back into home equity. The FEDs balance sheet exists and must be dealt with at some point.
Credit markets have changed substantially over the last 6 years. So much so that liquidity is no longer constrained (note the fall in rates over the last year as the FED has reduced purchases). Removing excess credit has no effect on liquidity level if private capital compensates. So the reason removing QE won’t have the opposite effect is the strength of private capital intervention. The stronger that private capital returns, the quicker the QE can be unwound.
Also, the rate at which QE was added isn’t necessarily the rate at which QE has to be removed. So even if removing QE from the credit markets does cause rates to rise they won’t necessarily rise as quickly as they fell, because the QE doesn’t have to be removed as quickly as it was added. If four years of purchases are sold over 40 years, then the effect on rising rates and falling prices may be imperceptible (i.e. not the opposite effect).
Your overindebted and irresponsible neighbors get payment relief while you pay full price
More than 91 percent of borrowers nationwide who received mortgage loan modifications in the second quarter of 2014 had their monthly principal and interest payments reduced, while 56.1 percent of borrowers lowered their monthly payments by 20 percent or more, according to a report released earlier this week by the Office of the Comptroller of the Currency (OCC) regarding first-lien mortgages at large national and federal savings banks.
The OCC Mortgage Metrics Report, Second Quarter 2014 found that borrowers had their monthly mortgage payments reduced by an average of $252. The average payment reduction was slightly more ($269) for borrowers who received modifications made under the Home Affordable Modification Program (HAMP).
From January 1, 2008, to March 31, 2014, servicers implemented more than 3.5 million loan modifications, OCC reported. About 59 percent of those loan modifications, or 2.1 million, were active at the end of Q2 2014, according to OCC. The remaining 41 percent were no longer in the portfolios of their respective lenders due to having paid their mortgage in full, having been involuntarily liquidated (through lender actions such as foreclosure), or having transferred their loans to non-reporting institutions. OCC reported that about 69 percent of the nearly 2.1 million loan modifications that were active at the end of Q2 were performing, while 25 percent were delinquent and 6 percent were in the process of foreclosure.
In all, servicers implemented about three times more home retention actions during Q2 than home forfeiture actions. Home retention actions, including loan modifications, shorter-term payment plans, and trial period plans, totaled 208,150 for the quarter, which represented a 12.5 decline from Q1 and a 34.1 percent decrease from the same quarter in 2013. Home forfeiture actions, which include foreclosures, short sales, and deeds-in-lieu-of-foreclosures, totaled 64,790, according to OCC.
This is how financial reporters measure the success of their efforts to spin every data point with mindless optimism.
September Consumer Confidence Rises to Highest Post-Recession Level
Consumer confidence reached its highest level since the Great Recession in September, according to the Thomson Reuters and University of Michigan Surveys of Consumers. The index rose 2.5 percent over the month to 77.5. However, “confidence has repeatedly failed to move above this level,” according to the survey.
September’s increase in consumer confidence is the result of optimistic outlooks on the overall economy and personal incomes. In fact, of the two components that make up the overall consumer sentiment index—consumer expectations and current conditions—a rise in the former is solely responsible for the positive movement in consumer confidence for September.
The consumer expectations index rose 5.8 percent over the month of September, while the current conditions index fell 0.9 percent.
September’s optimism for consumer confidence is a little past due, according to the survey’s chief economist, Richard Curtin.
“The defining aspect of the current recovery has been that optimism about future prospects has not improved in advance of actual economic gains,” Curtin said. “Surprisingly, an improved economy has not sparked renewed optimism, at least until recently.”
Consumers expressed expectations of “modest” job growth over the next year, but they do not expect much change in the unemployment rate, according to the survey.
Additionally, a growing number of consumers expect their incomes to increase over the next year, albeit modestly. The median income growth expectation reported in September was 1.1 percent, which is the highest expectation since late 2008. At the same time, more households anticipate income growth now than at any time since September 2008.
“The renewal of income growth is particularly important for sparking increased consumer spending in the year ahead,” Curtin said, adding that likely pending changes to monetary policy make income gains all the more necessary to elevate consumer spending.
Was this the first sign in the US? A drop in land sales?
China Housing Bubble Bursts: Q3 Land Sales Crater 50%
China may be doing everything in its power to divert attention from the simple fact that its housing bubble, the largest in the world in terms of both assets comprising it as well as divergence from fair value, has burst. But while there is no clear threshold of what constitutes a bursting bubble when it comes to housing, the latest data out of Soufun, China’s largest real-estate website, which said that land sales have dropped a massive 22% to 1.7 trillion Yuan in 2014 so far, is likely as clear an indication as any that Beijing is about to panic.
And if that was not enough Bloomberg adds that land sales in 300 cites followed by Soufun fell almost 50% Y/Y to 415.9 billion yuan in 3Q, while residential land sales declined more than 50% to 265.3b yuan in 3Q.
So why, aside from the obvious, is this relevant? Because recall as we reported two weeks ago when looking at US household net worth, in the US it is all about (record) financial assets. So much so, in fact, that financial assets as a percentage of total household assets have never been higher at 70.3%, which also means that real estate as a percentage of total is as low as it has ever been.
Meanwhile, in China few households care as much about financial assets (the ones that do are largely a part of the Politburo or the ultra-rich oligrachy). Instead, the largest Chinese household asset is Real Estate, which at 74.7% of total household assets, is by far the most valuable asset that China’s population has.
Americans watched 30% to 50% of its household wealth evaporate during the housing bust. In China it will be worse. Also, it will be much harder for China to reflate the bubble because valuations are so extreme, they would be kicking the can forever before fundamental values caught up.
The value of assets in a communist country is equal to whatever they say it is. Your real estate could be 100% owned one day and belong to the state the next. No appeal.
I am surprised that the ratio would be this high in favor of non-movable assets. I would think that financial assets and fungible stores of value (gold) would be preferable stores of wealth. I suspect the ratio is thrown off by growth of the Chinese housing bubble. Paper gain, and paper loss – as long as they didn’t HELOC themselves.
Hi Irvine Renter, I looove your blog, so useful (although sometime I feel like it’s too realistic that I don’t want to own yet!! haha)
I’m from San Diego and want to use that scoring / rating algo for the properties here, but whenever I search one house I found on Redfin it doesn’t find it because your listings are 50 days (!) outdated.. anyway to get it updated everyday? Thanks!
The listings currently on the site in San Diego are from SoCal MLS. I just recently got approval from Sandicor to display current real estate data in San Diego County. These listings should be up and running in the next few weeks. I’m looking forward to it too now that I live in San Diego County.
Thanks! That will be great.
If I look at OC houses it also shows: “Data is updated as of 54 days ago.”, so wasn’t sure if it was just for San Diego.
I’ve never noticed that. The listings are updated several times per day, so the data isn’t old. For example, today’s featured property is less than 7 days on the market, so the data can’t be that old.
It may be related to the breakup of the CARETS RETS system. SoCal MLS and a number of other MLSs used to be banded together in CARETS. They disbanded about two months ago, so that may be the 54 day old update.
[…] is the root of my disagreement with Mark. The next housing bust won’t be characterized by an increase in house supply; in fact, I expect the opposite. Banks […]