Feb282013
With a rate dependent housing market, risks still linger
Earlier this week I detailed why I believe future housing markets will be very interest rate sensitive. The current market environment is completely controlled by interest rate policy at the federal reserve and distressed loan processing policy at the major banks. The combination of demand stimulus and supply control caused the housing market to bottom in 2012. Of course, since these are market manipulations, the future direction of home prices is uncertain. The market has many more headwinds than tailwinds.
Shiller’s Bottom Line: Risk Lingers in Housing
February 26, 2013, 7:00 AM — By Nick Timiraos
It’s possible that home prices have hit a bottom, but heavy government involvement to stabilize the mortgage market and the broader economy has made it harder to gauge the durability of recent home-price gains, says Yale economist Robert Shiller, the co-creator of the S&P/Case-Shiller index that bears his name.
The Case-Shiller 20-city index was up by more than 8% in November from its February 2012 trough as falling supplies of homes for sale and stronger demand have boosted prices. Developments spoke with Mr. Shiller on Monday about his outlook for U.S. housing markets right now. What follows is an edited transcript:
WSJ: Did we finally hit a floor in home prices last year?
Mr. Shiller: The trend in home prices seems to be up now. It has been going up. That’s upward momentum, which by my general rule of forecasting has been good for the future. I’ve been tentative about that. It may well be the turning point.
But I’m not sure about that. I’m more worried than most people that it could be a short-lived turnaround. It could be like the 2009-10 upturn where we saw home prices rising right after President Obama took office and right after the home-buyer tax credit was instituted. In that upturn there were some cities that did quite spectacularly. And then that fizzled. I’m not too sure that this one will extrapolate either.
OCHN: The main similarity between the 2009-2010 bear rally and the rally today is the presence of artificial market stimulants. In 2009-2010 we had both federal and state tax credits that pulled demand forward. The folly of this became apparent when sales volumes plummeted and prices followed in the 18 months after the tax credits expired.
There are two main differences between then and now. First, the stimulus is different. Today there are no tax credits, but we have record low interest rates through an unprecedented policy by the federal reserve designed to drive down mortgage rates. I think there is tremendous risk that when this stimulus is removed, so will the major source of demand in the market. However, Bernanke has pledged to keep interest rates this low for several more years. He hopes his statements will provide confidence that interests rates won’t rise and pull the rug out from beneath the market. Unfortunately, there is dissension at the federal reserve’s policy-making board, and Bernanke is up for reappointment in 2014, and he won’t likely get the job. If he is replaced by someone with less compunction about stealing from seniors on fixed incomes, then interest rates may rise sooner than most expect. This uncertainty is the opposite of what the federal reserve wants.
The second difference between the first bear rally and this one is that lenders learned how to control of the flow of distressed properties. Back in 2009, lenders weren’t as adept as can-kicking as they are today. With the regulatory and financial pressures largely removed, lenders can allow delinquent mortgage squatters to take a free ride back to the peak where the banks will finally execute them.
WSJ: Why are you more worried than most people?
Mr. Shiller: Part of the reason the indexes have gone up is because the foreclosure boom has receded. Foreclosed homes sell at a lower price, and the share of those sales has been falling. People might be deceived by this by looking at the indexes. The question is whether the gains will be sustained.
OCHN: I am also worried about this because the slowdown in foreclosure processing is not because they ran out of delinquent borrowers to foreclose on. Contrary to media spin, mortgage delinquencies are trending higher. Squatters are enjoying a free ride, and the banks are endlessly can-kicking with hopes that rising prices will restore collateral value behind their bad loans.
There isn’t any sign of the real enthusiasm we saw during the last bubble. The question is whether this could be the very vague beginning of a new boom? I guess it could. I just don’t know. Then there are issues with what the government does to support housing. They’re doing everything they can. They say they’re going to stop some day. When will people start worrying about that?
OCHN: People will not worry until interest rates go up. Until then, they will falsely assume interest rates will remain low forever, and when they want to sell years from now, a buyer who makes more money will be able to borrow at the same low rates of today to allow them to sell with a hefty equity check. It’s much more likely that wages will continue to stagnate in the face of high unemployment, and interest rates will be higher meaning a future buyer will be less leveraged and unable to provide the large check at the closing table.
WSJ: There are some people who look at the double-digit annual price increases in Phoenix and elsewhere and wonder whether we’re seeing new “mini-bubbles.” Is that a concern you share?
Mr. Shiller: Home prices are back down to a reasonable level. Why should they go up a lot? It means you have to have a succession of eager buyers that would bid them up. Historically major bubbles tend to occur at widely separate intervals. Once it bursts, usually, historically, people are fed up for a long time.
OCHN: The Ponzis aren’t fed up. Ponzis want another chance at free mortgage money. For the rest of humanity, the lingering fears of another crash should keep expectations of appreciation to much more reasonable levels. People may become more positive about housing, but not irrationally so.
WSJ: Could it be possible that prices are rising by double digits in these places simply because they fell below their long-term relationship with incomes and rents, and are now bouncing back off of that?
Mr. Shiller: Phoenix overshot. Prices got too low. In real terms it was down well over 50%, maybe close to 60%. Now it’s bumped up. It doesn’t look out of line either way now.
OCHN: Prices clearly overshot to the downside in markets like Phoenix and Las Vegas. That was the main feature that attracted me to the Las Vegas market.
WSJ: What do you make of the investor activity in the market right now? A lot of these buyers are all cash buyers—no leverage—buying on rental return. Are you worried about any return of speculative purchases?
Mr. Shiller: In a housing debacle, I’m sure some houses are underpriced, and there is probably a profit opportunity for some people who are going to choose carefully. I’m not surprised that this is going on. There seems to be a shift in public tastes for the time being at least for rental. So this business doesn’t surprise me. It seems to be an appropriate response.
OCHN: It is an appropriate response. Cash returns are better than most alternatives, thanks to Bernanke’s lowering of interest rates to zero, and the potential for rebound appreciation is large. Further, REO-to-rental is superior to principal forgiveness.
The hidden, latent problem with is activity is its impact on the move-up market. The move-up market will suffer for another decade because the equity that ordinarily would have accrued to first-time homebuyers is instead being diverted to loanowners and hedge funds. Between those two sources, about 40% of future move-up market demand is eliminated.
WSJ: For somebody with a stable job, who plans to live somewhere for more than a few years, is this a good time to buy a house?
Mr. Shiller: I think it’s OK, especially because mortgage rates are so low. This isn’t a time to get a flexible-rate mortgage! Get a 30-year, fixed rate mortgage. Rates are so low. They have gone up a little, but they’re still very low. That’s a real opportunity. Prices are not particularly low, but they’re not particularly high.
For someone with a stable job and a long ownership horizon, this is an excellent time to buy — assuming they can find a property in this depleted market. The cost of ownership is much lower than historic norms, and despite rising prices, properties are still less expensive to own relative to rents than they’ve ever been.
WSJ: What’s your outlook for home prices?
Mr. Shiller: It’s especially hard to say. We could be looking at a 1-2% increase a year for the next five years. That’s a reasonable scenario—1-2% a year, and it might go up more than that. I don’t know. My main message is that it’s a market with risk in it. We don’t know the future. That’s the most important message to convey.
Some people perceive me as a bear because like Dr. Shiller, I am cautious and anchored in reality. Most industry shills are dismissing the obvious problems facing the market and claiming happy days are here again. If we had inventory available today, happy days would be here right now. Despite the high prices, interest rates make them affordable. People can buy a nice house, comparable to an affordable rental, without having to stretch their finances beyond the breaking point. These should be the best of times, but lenders are intent on withholding inventory to drive prices up to help recover their capital. Loanowners and homeowners alike are happy to go along for the ride. By the time the banks get their way, prices will be high and marginally affordable, and with the prospect of rising interest rates in the future, another generation might be trapped underwater in houses that refuse to appreciate. Risks still linger. Buyer beware.
“This isn’t a time to get a flexible-rate mortgage! Get a 30-year, fixed rate mortgage. Rates are so low.”
If you get a an adjustable rate mortgage you taking a gamble with your principal residence. You can gamble and maybe you are right. However, if you are wrong then might have pay much more interest on the home or default.
ARMs hae never made sense to me from a consumer perspective. Every fixed-rate mortgage can be adjusted downward as rates fall by refinancing. However, only a fixed-rate mortgage never adjusts upward. You get the best of both worlds for a very small premium.
People ignore the risks with ARMs, and many will get burned — assuming they don’t get bailed out.
One of the main attractions to owning/financing your home instead of renting it, is fixing your costs. There was nothing more annoying living in an Irvine Co. apt complex with many vacancies, than receiving 6-7% annual rent increase proposals. Why would you choose to allow your costs to float when buying? Even if you reasonably believe you might move in 7 years, you might not.
ARM’s still make sense for those that plan to be move up buyers in 5-7 years. As most readers know, the average holding time for a home is 7 years which would indicate that more people should be getting ARM’s instead of throwing away extra interest on a 30 year fixed that they don’t plan to keep.
Simple rule of thumb: If you plan to stay in a home longer than 10 years, get a fixed rate. If you plan to move in 10 years or less, get an adjustable rate and save on interest.
Larry the serial refinancing strategy would work but I think you discount the costs by too much. It’s not only the monetary cost, but the time, effort, and STRESS to go through underwriting with each new refinance. You’re also resetting the amortization each time which results in MORE INTEREST paid over the life of the loan. Sure, some will refi into shorter terms, but most people won’t.
People taking out ARMs today, and fortunately not many are, may find the 5-7 year rule of thumb doesn’t serve them well. What happens if interest rates go up to 5% or higher in the next 5 to 7 years? Any short-term savings will be wiped out by the higher interest rate in the future.
I have a strong feeling that the AVERAGE HOLDING TIME of a home is going to increase to 15 years when the next stats are generated.
Anyone that bought in 2003-2007… that kept the home.. won’t be selling until 2018-2022 at the earliest and even breaking even.
I completely agree. That’s one reason for the inventory shortgage right now. There are also the numerous cash-out refi and HELOC folks that are trapped.
Risk lingers not only from rate dependance, but constant intrusion (fed/banks) into the market misprices risk, which means massive amounts of risk continues to pile-up unnoticed.
Ultimately, when risk is repriced, it shows itself in interest rates. When bonds are perceived as more risky, prices fall, and interest rates rise.
Of course, but repriced risk under constant intrusion remains mis-priced risk, so it still piles-up unnoticed.
You and Elizabeth Warren are beginning to sound more and more alike.
Ha!
Pretty entertaining to observe a petite ‘lil woman like Warren make thebernank squirm.
NAr: 2013 Sales Expected Weaker Than 2012
“Over the near term, rising contract activity means higher home sales, but total sales for the year are expected to rise less than in 2012, while home prices are projected to rise more strongly because of inventory shortages,” Yun said.
Indeed, the inventory of homes for sale dropped sharply in January, according to the NAR’s home sales report released last week, falling to 1,740,000—the lowest level since December 1999, when the inventory was 1,714,000. The months’ supply of homes for sale (computed against the sales pace) dropped to 4.2 months in January, the lowest since April 2005, when it was also 4.3.
The month-over-month trend in sales correlates inversely with the movement in the median price—that is, when the median price rises, sales dip, as happened four times in 2012; in the four months in which the median price dropped, sales rose. In January, the median price of an existing single family home fell 3.7 percent—the steepest one month drop in a year—and sales rose, albeit modestly, by 0.4 percent. The median price is at its lowest level since last March.
I can’t believe NAr stated that future sales will be weaker than the previous year. That person had to be demoted to the mail room.
NAr has bought a lot of political influence; now #7 on the top spenders list….
lobbying expenditures: 1998-2012: $219million
Of that amount, what really puts ‘things’ into perspective… in 2011, they spent $22mil and in 2012, bumped it up to $41mil. LOL.
http://www.opensecrets.org/lobby/top.php?indexType=s
Survey: Price Gap for Damaged REOs, Non-Distressed Homes Widens
The price gap between non-distressed properties and damaged REOs is widening, according to results from the January Campbell/Inside Mortgage Finance HousingPulse Tracking survey.
According to the survey, while non-distressed property prices—based on a three-month moving average—have risen to their highest level in three years, damaged REOs, or bank-owned properties in need of repair, fell in January.
Prices for damaged REOs were down 17.1 percent from the average price recorded a year ago and average $88,100, the lowest level seen in the survey’s four-year history.
The survey also found that while the investor share of purchases for damaged REOs has increased, interest for properties in that category has waned among current and first-time homebuyers.
In January, investors accounted for 65.4 percent of damaged REO home purchases, up from 58.1 percent a year ago and the highest level the survey has recorded thus far.
At the same time, current homebuyers accounted for just 15 percent of damaged REO purchases, while the share for first-time homebuyers was 19.6 percent, a near-record, according to the survey.
The HousingPulse survey includes about 2,500 real estate agents nationwide each month.
Mortgage Applications Continue Steady Decline
Mortgage application volume continued to fall last week even as interest rates fell, according to the Mortgage Bankers Association’s Weekly Mortgage Applications Survey for the week ending February 22.
MBA’s Market Composite Index, a measure of application volume, dropped 3.8 percent on a seasonally adjusted basis from the previous week. On an unadjusted basis, the index fell 3 percent. MBA noted its results did not include an adjustment for the Presidents’ Day holiday.
Purchase demand showed a substantial decline last week, with the seasonally adjusted Purchase Index decreasing 5 percent and reaching its lowest level since the end of 2012. The unadjusted Purchase Index fell 2 percent, settling 14 percent higher than the same week last year.
Meanwhile, the Refinance Index decreased 3 percent week-over-week. The refinance share of mortgage activity stayed flat at 77 percent, remaining it its lowest level since early July 2012.
According to MBA’s measures, the average contract interest rate for a 30-year fixed-rate mortgage dropped slightly to 3.77 percent last week. However, with points increasing 8 basis points to 0.48 (including the origination fee), MBA noted the “effective rate” actually increased.
“MBA noted its results did not include an adjustment for the Presidents’ Day holiday.”
But doesn’t every month have some sort of holiday…except March, April, June, and August.
Yes, but the mortgage applications are reported on a weekly basis so a holiday tends impact applications dramatically because it shortens the week by one day. It’s fine to report the numbers, but nobody should assign too much meaning to the drop.
At least yesterday there were some tougher question for Bernanke. I hope this means that Congress is laying the ground for a new Fed Chairman that won’t be a Bernanke Clone. Bernanke is digging a asset expansion hole that will be painful to get out of.
Fed’s Fisher: Continued QE runs “risk of overkill”
By Christina Mlynski February 27, 2013 • 4:48pm
Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas, discussed his opposition to what he has dubbed the ‘Buzz Lightyear’ monetary policy of the Fed – pledging to hold the federal funds rate at zero seemingly to infinity and beyond.
Other than the Federal Reserve’s initial quantitative easing program to underpin the recovery in the housing market through an initial tranche of mortgage-backed securities purchases, Fisher has opposed all other large-scale asset purchases and QE programs.
“I fully understand its theoretical underpinnings. But I question its efficacy,” Fisher said.
While Fisher questions a continuation of the current program of QE and more QEs down the road, he believes with the program now in place it would shake up the markets to suddenly withdraw it.
“But now that we have them in place, and the fixed-income and stock markets are hooked on the monetary Ritalin that we have dispensed in ever-larger doses, it would, in my opinion, do great harm to force a sudden withdrawal,” Fisher said.
Thus, Fisher said the best way to wind down QE is to taper the program’s dosage so that markets can adjust gradually to the eventual removal of this treatment and return to pricing securities on the basis of fundamentals.
In regards to the housing market, Fisher says the Fed managed to meet its goal of reinvigorating the housing market.
“The fact that the housing-market gears have now begun to mesh is why I believe we are running the risk of overkill by continuing our mortgage-backed securities purchase program at the current pace and would suggest tapering off those purchases,” Fisher explained.
Overall, the Fed’s bond-buying programs are not working, benefiting the wrong people and may even be counterproductive, Fisher said.
On Tuesday and Wednesday, Fed chairman Ben Bernanke said he disagreed with opponents of QE and noted that the easy monetary policy is effectively working.
“Although accommodative monetary policies may increase certain types of risk-taking, in the present circumstances they also serve in some ways to reduce risk in the system, most importantly by strengthening the overall economy, but also by encouraging firms to rely more on longer-term funding, and by reducing debt service costs for households and businesses,” Bernanke said.
““I fully understand its theoretical underpinnings. But I question its efficacy,” Fisher said.”
Everyone who questions the federal reserve is denounced as someone who doesn’t understand the greater good they promote. The quote above sums up the truth of the feds critics nicely.
Richard Fisher must be positioning himself as Bernanke’s replacement.
“and return to pricing securities on the basis of fundamentals.”
Apparently, he recognizes that assets are currently valued based on federal reserve stimulus rather than underlying fundamentals.
Bad theory leads to bad models; ie.,
That’s a damning chart.
growing wealth disparity shown in 1 chart.
the rich hedge, the poor get kneecapped. how’s that for a social contract? morons. there’s no better word for it.
how anyone can look at this chart and still argue against sound money is beyond me.
I’m still trying to figure out how the great exit (from QE and other forms of intervention) will be engineered. Can anyone explain this?
The federal reserve believes they can wean the economy off the stimulants and growth will take care of itself. It’s like the banks now believe all their problems can be solved by rising house prices. Their fantasies ignore the impact of their own liquidations. The federal reserve also is choosing to ignore the impact of their bond liquidations.
Even if the federal reserve is successful, the withdrawal of stimulus will cause the economy to remain weak for many more years.
The Fed will continually test an exit strategy, realize the consequences will unravel all previous stimulus, and decide to keep printing money to subsidize interest rates and MBS/banks etc.
Eventually, private and foreign treasury investors will demand higher returns because inflation will become far more apparent. The Fed and US gov will be forced to raise interest rates or the Fed will have to monetize nearly the entire treasury market.
This will end in a sovereign debt crisis and a US dollar crisis, essentially repatriation of dollars abroad and runaway inflation. Judging from the political and monetary landscape, I see no other realistic alternative. They’ve held rates too low for too long and, like a pendulum, rates must swing to the polar opposite to correct the malinvestments caused by artificially low rates. This is the ONLY way the economy can rebalance. High rates will cause debt service to consume 100% of tax revenue.
The credit cycle of the 60s and 70s repeating itself.
Larry-
Just curious… How has the property management aspect of your Vegas rentals been? Has it gone smoother or rockier than you expected? I’m considering investing some money in the desert (not Vegas in particular) but I think the management will be more intensive than what I’m used to. How has the turnover been? What about the quality of the renter pool? Thanks for sharing.
The expenses have been what I expected, but I’ve had more vacancy. The property manager takes care of most of the small details and expenses, so it doesn’t consume a lot of time to manage remotely.
“…stealing from seniors on fixed incomes…”
That’s a bit misleading. Maybe it should read, “stealing from seniors with very large savings accounts,” no? Only seniors with significant savings (relatively speaking), are affected by possibly losing 200-400 bps of interest.
I’m not a fan of the “fixed income” meme. Aren’t we all on “fixed incomes”? The typical middle class household has received much smaller annual increases than seniors on SSI over the past three decades.
Maybe it should be called fixed principal? The interest return on your $300,000 CD will be variable over many years, but the principal should remain the same.
I think the problem is that once seniors dig through their savings they can’t get work to build it back up.
I have no idea what it is the longer term solution to social security.
Your example illustrates the issue. What percentage of households have $300k in savings? So, we’re concerned about what the Fed is doing to seniors in the 1% of wealth holders, but we’re perfectly fine taxing the income of households in the top 5% of earners at 30%? And we even want to tax that at higher rates!
I think the much older generation did, the boomers won’t have that savings, but older generation had much more savings than most people think. But basically I’m talking about retired households. The $300K could also be in a 401(K) or something. If you are retired and don’t have at least $500K in savings how do you pay your bills? I know a lot of people don’t, but I don’t want to be in that situation.
I’m not in the high tax bracket, but I can’t stand tax the rich talk. Everyone needs to pay some taxes, even the 47% percent. I think in the 80’s only 20% people didn’t pay federal income tax, now it’s 47%.
But if we want to encourage savings then we need to slowly change the interest rates up and cut federal spending too.
Distressed Homes Still Drive Sales
By: Diana Olick CNBC Real Estate Reporter
The housing market appears to be surging ahead suddenly on all cylinders, but that does not mean it is free of the remnants of its recent downfall.
The number of distressed home sales, either bank-owned or short sales, may be shrinking, but it is still making up a significant share of the overall housing market.
Foreclosure-related sales made up 21 percent of all U.S. sales in 2012 and short sales, when the home is sold for less than the value of the mortgage, made up 22 percent, according to a new report from RealtyTrac. Add it up and 43 percent of all 2012 sales were of distressed properties.
Banks are making more of an effort to do short sales instead of taking a home to foreclosure, and new federal guidelines are streamlining the process. That led to a 15 percent drop in sales of bank-owned homes and a 6 percent increase in short sales. This has helped home prices because short sales on average sell for a higher price than do bank-owned homes, because they are usually neither abandoned nor vandalized.
“Although foreclosure-related sales represent a shrinking share of total sales, primarily because of fewer bank-owned purchases, distressed sales are still a disproportionately high portion of the overall housing market,” said Daren Blomquist, vice president of RealtyTrac. “And while distressed properties — whether bank-owned, pre-foreclosure or short sales not in foreclosure — are still selling at a significant discount compared to non-distressed properties, average distressed property prices are increasing in many markets thanks to strong demand and limited inventory.”
Limited inventory continues to be the key in today’s housing market, driving prices higher than most analysts expected. This is surprising, as distress in the market has not simply vanished. There are currently 1.7 homes in the foreclosure process and 1.5 million more seriously delinquent loans (90 days without a payment), according to a new report from Lender Processing Services. Banks are being more aggressive with loan modifications and principal forgiveness, but many of these homes will inevitably end up going back to the banks.
“Inventories continue to be low because non-distressed sellers are largely absent from the market, apparently waiting for prices to increase even more before they decide to sell,” noted Blomquist. “I think we are seeing signs of the shadow [foreclosure] supply hitting, but more on a market-by-market basis and often in the form of short sales as opposed to REO [bank-owned] sales — although REO sales are starting to show signs of life in judicial foreclosure markets with bigger backlogs.”
Strong investor demand for these properties is pushing prices higher, even creating bubbles in some of the formerly hardest hit markets, like Phoenix and Las Vegas. If prices get too high, however, and investors can’t reap the returns they need, then supplies could grow. So far that has not happened, but home prices are rising far faster than anyone predicted.