May232016
Entry-level housing market in California is hopelessly overpriced
Entry-level housing in California carries a very high cost, and there is little hope this will improve any time soon. In fact, the problem will likely get worse before people get fed up and do something about it.
When house prices move up rapidly and significantly as they have in California on numerous occasions, even the highest wage earners can’t afford a significant portion of the housing stock with what they can borrow and what they save from their large incomes. Prices get so elevated because previous owners sell their homes and use the equity that accumulated through the appreciation windfall to bid up prices on more desirable properties. As a consequence even the highest wage earners can’t start out in a property as nice as they would like: they must climb the property ladder.
How the property ladder works
In the real world, most first-time homebuyers use an FHA loan and buy a low-cost property. The reason for this is simple: it takes too long to save 20% for a down payment on a conventional loan. First-time homebuyers use FHA loans because the 3.5% down payment is within reach. Further, once these buyers are in a property, they simply wait five or ten years for loan amortization and wage-based appreciation to magically give them 20% to 30% equity in a property to use on their move-up purchase.
Once the owner has enough equity to get a closing check large enough to fund a 20% down payment on a move-up property, they go shopping. Since this is usually quite some time after buying their FHA financed property, it’s likely the household’s wage earners are making more money. They take their larger family income and their 20% down payment and buy a more expensive move-up property.
The broken property ladder
For the property ladder to work, home prices and wages must rise steadily and borrowing costs must remain stable, or better yet, mortgage rates should fall gently. If any one of these features is missing, the property ladder becomes unstable.
During the housing bubble, prices rose very rapidly, but rather than enrich an entire generation of homeowners, lenders allowed them to borrow and spend their equity, so while house prices doubled during the bubble, aggregate home equity actually declined. This left an entire generation of homeowners over-indebted and trapped in their starter homes. This lack of move-up equity and lingering problems with underwater borrowers explains the unusually low levels of for-sale housing inventory.
Today’s entry-level homebuyers in Coastal California must pay upwards of $600,000 in nicer areas. With as large as that number is, the number is financeable by many entry-level buyers with high family incomes. If the previous generation would have only paid $450,000, those owners would have $150,000 in equity they could use to move up to a $750,000 home, and the property ladder would function.
However, that’s not how much the previous generation paid. Many entry-level buyers from 10 years ago paid $650,000 to $750,000 with their option ARM loans with teaser rates. Any while many of those buyers lost their homes to foreclosure, many more obtained loan modifications, so rather than $450,000 or less in debt on their starter home, they still have $650,000 or more in debt, and they can’t sell.
Since the owners stuck in entry level homes carry too much debt, they aren’t listing and selling their homes, and they can’t make a move-up trade. Housing analysts concoct many plausible reasons for the lack of for-sale inventory, but the real reason is the excessive debt still carried by the previous generation of homebuyers.
The problem with a lack of inventory is most acute at the entry level because an entire generation of entry-level buyers is stuck. And since they can’t sell until they get enough to cover their debt, and since most won’t sell until they have enough left over to make a move-up trade, entry-level housing is scarce and hopelessly overpriced, particularly in California.
California starter home crisis tops national charts
Amy Thomas, May 18, 2016
First-time homebuyers in the Bay Area need to pay between 69% and 110% of their total household income to support a 30-year fixed rate mortgage (FRM) for a starter home, according to a new report by Trulia. Conventional wisdom concerning a balanced economy holds this allocation for shelter ought to be closer to 30% for both tenants and buyers.
It isn’t just that it “ought to be,” most lenders won’t extend loans to borrowers with debt-to-income ratios exceeding 31%, so whenever the amount required is greater than that, many people are priced out — and no affordability products toxic loans are available to help.
Not surprisingly, the report on starter home affordability across the U.S. indicates nine out of the ten worst metropolitan areas for first-time homebuyers are here in California. The report reveals the sharp rise in income needed to purchase a starter home from Q1 2012 to Q1 2016.
The nine California cities with the steepest increases are:
- Oakland, which requires 29% more income today than in 2012;
- Los Angeles, which requires 28.2% more income;
- San Jose, which requires 26.6% more income;
- San Francisco, which requires 24.7 more income;
- Sacramento, which requires 23.3% more income;
- Orange County, which requires 22.6% more income;
- Ventura County, which requires 19.8% more income;
- San Diego, which requires 18.1% more income; and
- Riverside, which requires 16.8% more income.
The only non-California city to weasel into the top ten worst spikes is Miami, Florida with a 19.2% increase in income needed over 2012. …
The problem in California is a chronic lack of supply. When supply is not sufficient to meet demand, the highest wage earners compete with each other, and the lower levels of income get priced out. Affordable housing subsidies don’t help because they merely merely provide housing to one family at the expense of another family that has a higher income and more savings, an unjust outcome.
Why starter homes matter
Though the concept of “affordability” is inherently flawed as it is muddied by its reliance on the abstraction of median pricing, these broader conclusions are indicative of a growing problem. Starter homes have a critical role in the transition into homeownership. First-time buyers purchase starter homes with the intention of building up equity and later trading up to an ideal family home they will occupy for a prolonged period of time. Without an initial toehold to leverage themselves into the future ownership of an ideal property, the ownership catalyst for the future of housing is missing from the equation.
The increase in price and decrease in inventory — which according to Trulia is down to a scant 158 starter homes for sale in San Francisco — is partially the result of mid-tier homeowners trading down. The average mid-tier home price across California increased 8% from January 2015. This increase pushed mid-tier homeowners down to purchase low-tier homes, those commonly defined as starter homes. In turn, low-tier prices increased 11% from January 2015. Homeowners who elsewhere are among the high-earning set are settling for these simpler homes, leaving mere scraps (at best) for first-time buyers scavenging the market.
That is a good description of the problem. It also illustrates why adding supply is the only solution.
Top five methods of housing market sabotage
Sometimes to find the best solution to a problem, examining how the problem could be made worse reveals options and perils that might otherwise go unnoticed. Unfortunately, upon close examination of the housing market, the path to destruction may disguise itself as the path to recovery.
To sabotage the housing market, remove homeowner equity and raise borrowing costs. The result is a disappearance of entry-level housing, a collapse of the move-up market, and very low sales.
To stop the orderly progression up the property ladder, it’s imperative to decrease equity and reduce mortgage balances. If potential homebuyers don’t have sufficient home equity, or if they can’t borrow enough money to complete a move-up trade, the entire chain of move-ups grinds to a halt, and home sales will plummet. So what are the best ways to accomplish this?
- Inflate a bubble that bursts, and trap an entire generation in their starter homes with no equity.
- Turn off subsequent generations on the entire idea of owning because of the high cost of bailing out the previous generation.
- Remove most equity from the system with unlimited mortgage equity withdrawal.
- Remove supply from the MLS to limit the options of those buyers willing to pay the high prices required to bail out previous buyers and the banks.
- Raise mortgage rates to lower aggregate loan balances to prevent wage growth from causing home price appreciation.
Generation X has little or no equity thanks to the housing bust and rampant mortgage equity withdrawal, so they can’t make a move-up. Millennials don’t want to play the game, so they are choosing to rent instead leaving the entry-level market in shambles. Between the two, we have home ownership rates at 48-year lows, a dearth of housing supply, inflated house prices, and little hope of improvement in the short term due to an impending rise in mortgage rates.
In other words, to sabotage the housing market, we simply need to stay the course.
[listing mls=”NP16106129″]
Communities that are safe and have decent schools do not have a negative equity problem. These communities have all time high prices. Even 2007 buyers are smiling since very few want to sell.
On the other hand, communities that are flooded with a crime wave from the illegal problem have prices well below 2007 levels. These prices are lower than 2007 since the illegal problem is worse than it was in 2007.
The Democrats have endorsed the flood of illegals into the country by looking the other. Worse, they are expect to gain voters from this inaction.
I know people who are stuck with negative equity because of the illegal crime wave. They are hoping Trump digs them out. No amount of job growth or negative interest rates will restore their home value as long as illegals flood their area.
You can think of the issue like this. The flood of illegals has changed the housing market. People with money are in bidding wars to give their wife and kids a safe area to live in. As the illegal flood grows, there are fewer safe areas left, which pushes prices higher and higher in better locations.
And, that is what is wrong in this country. No one is willing to face the fact that California communities overrun with illegals have seen a crime spike, and as a result, have not seen their prices return to 2007 levels. That is a fact.
I see everyone ignored this very true fact. Why? Because it is not politically correct.
You see, all the starter homes in areas overrun by illegals are not wanted by anyone. And, starter homes in safe areas have had a near historic price run-up. Underwater homes in California can be explained by the illegal problem.
Facts are inconvenient, so avoid them, like Trump.
After 30+ years of perpetual cheaper interest rates, EVERY ASSET CLASS IS OVERPRICED IN THE ENTIRE COUNTRY.
On a final note, I just heard something on the news and I completely agree. “The Federal Reserve has financed the entire Obama economic experiment”. They added 4.5 trillion to the Fed balance sheet, and the provided 0 percent interest rates so that the gov’t could double the national debt.
What a joke ….
I agree that all assets are overpriced, so where do you invest?
The point is to complain about the Fed. That’s all.
Alan Greenspan funded the entire Bush recovery as well, so Bernanke and Yellen are merely carrying on a Central Banker’s tradition.
How long does it take for lower rates to be baked into prices? Long-term rates have been in the threes since late 2011. Short-term rates have been zero since 2009. Sure, prices are affected by financing costs, but when the cost of financing stops falling their affect on prices also stops.
If interest rates took thirty years to bottom, then there is an equally strong case that asset prices were underpriced 30 years ago (because rates were astronomically high).
It doesn’t really matter either way. What matters is where rates go from here, and what effect, if any, that rising rates have on asset prices. If rates rise quickly, they will have a more pronounced effect than if they rise slowly.
Recent history, artificial or not, indicates that rates will continue to rise slowly. When rates have risen quickly in the past, asset prices also rose. Until it becomes clear that A) rates are rising, and B) that rising rates are adversely impacting asset values, then straddling the fence despite the occasional splinter (i.e. diversifying) is a sound strategy.
Based on what I’ve been observing in my monthly reports, I surmise that low rates are already baked in to prices. For more than a year now, rents have been rising faster than prices. That tells me that prices can’t be pushed up any higher or rising rents would have compelled more renters to become buyers and push up prices in the process. Further, based on historical rent-cost ratios, prices are at the limit of affordability, and only lower rates or higher wages can push prices any higher, assuming toxic mortgages don’t return in some form.
Problem is, the #’s are all bogus to begin with; ie.,
1)There is NO price discovery mechanism behind ANY asset.
2)Price action is NOT market-driven, but bureaucratic interventionism-driven via direct bond/debt market suppression = NOT real.
Price risk? Ha! Evidently, there is none. Calculate RoI? Pointless, not real. Cap rates? Puhleeeeze. OC home prices are aligned with actual OC incomes? Laughable! Rental parity? Forget about it, not real.
Since the Fed is printing like crazy, the best move is to open your pillowcase like a kid on Halloween, and accept the free money.
Tip: getting something for free a huge red flag; ie., it typically signifies the item (in this case, money/debt) is defective in some way, shape or form.
Good one. Actually, the free money is more of a loss-leader. You see this with printers and ink cartridges. A company sells a printer at a loss, figuring they can sell their proprietary ink cartridges at a ridiculous profit margin, to a captive buyer base.
Since real property is hard to relocate, nigh on impossible to move the land, a real estate buyer is locked into paying property and income taxes in their location. There are also relocation barriers (commissions, fees, moving expenses, etc.). The free money/debt is subsidized via higher taxes by the very people who benefit from the teaser debt deal.
Oh well, there are worse things than being locked into a 30yrFRM at 3.5%. Prop 13 limits property taxes, and the MID takes the sting out of the high purchase price, but income taxes have no upper limit in CA, so there is no free lunch. At least you got a free printer!
Sadly, el O has a point. The myriad of distortions caused by central bank policies makes any attempt at valuation tenuous. Using a zero percent discount rates makes all asset values rise to infinity.
I wonder if there isn’t a law of diminishing returns in regards to the zero bound. As borrowing rates approach zero, the supply of money approaches infinity outpacing the demand.
Soon, no one can use the money at even zero percent to turn a profit. The market is saturated. All the good investments are taken, and all the marginal investments are funded too.
Even the really speculative/stupid investments have all the money they can show profitable returns for. The only investments left are really bad ones that even banks won’t fund. To increase borrowing by decent borrowers, rates have to go negative.
Since rates in the US can’t go negative (or at least haven’t) asset price growth is limited by economic growth, not the growth in speculation.
I think there is a point of diminishing returns. I also believe this is why securitization ultimately fails.
When the securitization mania was in full swing, every available stream of cashflow was securitized and converted to cash. Unfortunately, once converted to cash, the former owner of that income stream needs a new place to invest, so the bid on another asset, drive up prices, and ultimately drive down yields. When you think about it, the ultimate end of securtization would be a zero rate of return on infinite asset values.
It’s the same problem central banks have with lowering interest rates. As they lower rates, they also lower the discount rate on every alternative investment. If this goes on long enough, you see investors chasing returns farther and farther out on the yield curve, and short-term rates hit zero — which is where we are now.
Right. So the solution is to raise rates – as the economy allows.
They end up chasing yield further out on the risk curve to get a return and end up destabilizing the entire economy. It’s the same story all over again. We are on the edge of the next crisis.
It’s all fake. Thanks.
California home sales off to slowest start since 2008
California January through April’s home sales were down 4.5% annually to 117,235, the lowest level for that time frame since 2008, according to PropertyRadar, a software, data and analysis products provider for real estate professionals.
In April alone, single-family home and condominium sales totaled 35,978, an increase of 5.8% from March, but down 8.3% from last year’s 39,219. This represents the lowest sales volume for April since 2011.
“We are well into the spring selling season and sales volumes are still near their lowest levels since 2008,” said Madeline Schnapp, PropertyRadar director of economic research. “The lack of inventory means the tug-of-war between inventory and price will likely continue for the foreseeable future.”
“While authorized building permits in California are approaching the highest levels since 2007, new inventory of any volume won’t arrive until 2017 or 2018,” Schnapp said.
Of course, home prices continue to rise with prices from March to April rising 5.5% from median home sales of $410,000 to $432,500. Prices rose still more from a year ago at 6.8% from April 2015’s median home price of $405,000.
Previous HousingWire coverage shows that what was presumed to be the hottest buying season of the year isn’t shaping up to that due to a flurry of factors that are growing into the “perfect storm” to hinder housing, explained Kevin Golden, director of analytics with a la mode, at the Mortgage Bankers Association’s Secondary conference in New York City.
“Prices jumped this past month as seasonal pent-up demand slammed head-on into an inventory constrained market,” Schnapp said. “Although California is still finding buyers, there’s no question that at some point, and perhaps happening now, buyers are going to put their hands up and sit tight or even consider out-of-state options.”
Northern California saw the largest annual price appreciation.
Out of the 26 largest counties in the state, here are the ones with the highest yearly increase:
Santa Clara at 16.3%
Merced at 13.9%
Sonoma at 13.7%
Monterey at 13.4%
Alameda at 11.6%
Marin at 11.1%
Next logical step in the recovery. As prices rise to unaffordable levels, and hit the financing ceiling, businesses will find it increasingly difficult to staff positions at current wages. Businesses with ability to raise prices, i.e. good businesses, will do so. Others will be forced to relocate, fold, or perhaps automate.
Housing prices will continue to rise as record corporate profits are sucked back into the real economy.
At the same time, a loss of city services will result in NIMBYs allowing more housing construction to lessen tax burdens and lack of services. It won’t be pretty, but inevitable, nonetheless.
I hope you’re right. When I read your comment, I actually feel hopeful about the future of housing availability and pricing in California.
San Jose housing prices: County’s median hits $1 million for first time
With high demand and a tight market, Bay Area housing prices continue to soar, setting record highs in April in Santa Clara and Alameda counties.
The median price of a single-family home in Santa Clara County hit seven figures for the first time last month: $1 million on the button. Prices grew even dizzier in San Mateo County, where the $1.2 million average matched the previous record, set in May 2015.
The East Bay also saw a run-up in prices, with the median Alameda County home reaching $750,000, up more than 10 percent from the previous month. Tugged upward by prices in Walnut Creek and other high-end areas, the median Contra Costa County price grew to $525,000, its steepest in seven years, according to new housing figures released Wednesday.
“We just don’t have a market under $700,000 in Walnut Creek,” said Alain Pinel agent Margaret Garber-Teeter. “And even at $700,000, you’re going to be in second-tier schools. So there’s still an affordability problem for young families, unless their parents help them, and a lot of young families get help.”
Overall, the Bay Area’s nine counties saw the median single-family home price rise to $725,000, just shy of the $738,500 peak of July 2007.
“It’s the same story: The housing supply isn’t keeping up with the demand,” said Andrew LePage, research analyst for real estate information service CoreLogic, which released the latest numbers. “Mortgage rates remain low. The region’s generating jobs. But you still have relatively low inventory, at least in the mid- and lower-priced markets, where most people are shopping.”
The Number of Million-Dollar Homes in the U.S. Has Doubled in Four Years
They have their own word for million dollar listings in San Francisco: Listings.
There were 190,000 homes worth at least $1 million in the San Francisco metropolitan area in May 2016, or 57 percent of the city’s housing stock. That’s three times the amount from May 2012, and the highest share among the 100 largest U.S. metros, according to a report published today by Trulia.
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/ilVixznSF1NQ/v1/-1x-1.png
Nationwide, the number of million-dollar homes doubled to 2.2 million over that time, driven by increasing values in a handful of big cities. As the chart below shows, 10 metropolitan areas make up two-thirds of the million-dollar homes captured by the data.
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/iOapWEl5CPxU/v1/-1x-1.png
In San Francisco, the median home price increased by 67 percent from March 2012 to March 2016, according to estimates from Zillow, rising to just over $806,000. (Zillow makes its historical home price data a little easier to surface than Trulia; both websites are owned by the same parent company.) Median home prices in Las Vegas, which has 6,600 million-dollar homes, increased 76 percent over the same period, landing at $203,000. There could also be artificial factors influencing home values within a narrow range. New York City’s mansion tax, a 1 percent surcharge that kicks in on homes sold for $1 million or more, gives buyers a reason to stop bidding at $999,999—even though that kind of money hardly buys a mansion in New York City anymore.
You can learn a little more when you drill down within metropolitan areas, said Ralph McLaughlin, chief economist at Trulia. For instance, there are parts of San Mateo, Calif., where the share of million-dollar homes has increased by eight or nine times—increases that reflect the appeal of neighborhoods that are accessible to high-paying jobs while offering housing stock that’s conducive to families.
The raw numbers still have some shock value. Los Angeles had the largest total of million-dollar homes, according to Trulia, with 291,000.
Bipartisan Senate coalition unveils bill to boost affordable housing
Legislation would expand Low Income Housing Tax Credit
As part of an effort to address what it calls America’s growing housing crisis, a bipartisan group in the Senate unveiled a bill this week that aims to boost affordable housing development by expanding the Low Income Housing Tax Credit.
The bill, called the “Affordable Housing Credit Improvement Act,” would increase the Low Income Housing Tax Credit by 50% over its current level.
The bill sponsored by Senate Finance Committee member Maria Cantwell, D-WA and Senate Finance Committee Chairman Orrin Hatch, R-UT, as well as Sen. Ron Wyden, D-OR, and Sen. Charles Schumer, D-NY.
According to Cantwell’s office, under the proposal, the expanded Low Income Housing Tax Credit would help create or preserve approximately 1,300,000 affordable homes over a 10-year period, which would be an increase of 400,000 more units than is possible under the current program.
Cantwell’s office also said that that beyond expanding the Low Income Housing Tax Credit, the legislation would also create a new income-averaging option to help developments maintain financial feasibility while providing a “deeper level of affordability.”
The bill also establishes a permanent 4% credit rate floor for acquisition and bond-financed projects, which Cantwell’s office said will provide more “predictability and flexibility” in financing these projects.
“Affordable housing is a crisis all across America,” Cantwell said.
“With skyrocketing rents and an increase in homelessness, more affordable housing units are a necessity, “Cantwell continued. “That is why today, Senator Hatch and I are introducing legislation to expand the Low Income Housing Tax Credit. By building more affordable housing units across the United States, more people can have a shot at the American Dream.”
According to Cantwell’s office, the Low Income Housing Tax Credit has helped finance approximately 2.9 million homes in the U.S. since its inception in 1986.
Between 1986 and 2013, more than 13.3 million people lived in homes that were financed by the Low Income Housing Tax Credit, Cantwell’s office stated.
This is wrong on so many levels. It all sounds plausible, but every supposition put forward in this article is wrong.
Will Gov’t Regulation Kill The Housing Market — Again?
Housing: Seemingly everyone applauds the recent surge in home prices as a positive sign for the economy. But, in fact, it isn’t. If anything, it’s a sign the federal government still hasn’t learned its lesson about excessive regulation.
While prices for homes have surged in recent years, they’ve done so thanks mainly to federal regulations put in place after the financial crisis. Low interest rates engineered by the Fed to stimulate the economy have fueled a surge in demand, driving prices up sharply. And federal regulations continue to require mortgage lenders to make risky home loans based on race and ethnicity, not creditworthiness — just as they did in the Fannie Mae and Freddie Mac market bubble of 2006.
On the surface, it seems puzzling: The homeownership rate plunged to just above 63% in the first quarter of this year, down from a peak of 69% in the third quarter of 2006. And yet, over just the last four years prices have surged 30% or more across much of the country. How can long-term demand be falling and prices rising at the same time?
For one thing, homebuilders, wary of the growing layers of regulation and the possibility of another market crash, just aren’t building homes as they once did. As we noted in a recent editorial, the 2010 Dodd-Frank law, perhaps the biggest regulatory mistake of our generation, has acted as a wet blanket not just on the housing market but on the entire economy.
In that editorial, we quoted American Enterprise Institute housing expert Peter Wallison, who served as a member of the federal government’s official investigation into the financial crisis: “Dodd-Frank was enacted by Congress without any significant effort to understand what actually caused the financial crisis.” Exactly. It was regulation for regulation’s sake.
Wallison wants Dodd Frank to be repealed, arguing that the housing market meltdown and subsequent financial crisis in 2007-2008 “was principally the result of the U.S. government’s housing policies,” not a lack of regulation.
Utah Sen. Mike Lee, in a recent commentary, maintains that home prices are soaring not because of healthy housing demand, but because of “government regulations (that) artificially inflate the cost of building new units.”
He’s got a point. A recent study by the National Association of Home Builders estimated that regulatory costs have surged 30% in just the last five years, thanks to the Obama administration’s heavy-handed regulatory response to the financial crisis.
And it’s about to get worse. A whole new raft of regulations are in the works, distorting the housing market further with growing risks to our economy.
The Consumer Financial Protection Bureau last October implemented a new Dodd-Frank rule that requires extensive new “compliance” forms and waiting periods for each mortgage deal. As the Heritage Foundation’s John Ligon wrote earlier this year, “The 2010 Dodd-Frank Act confuses endless red tape for effective reform of housing finance.”
Meanwhile, the Department of Housing and Urban Development has issued a new rule with the innocuous title, “Affirmatively Furthering Fair Housing.” In fact, says Sen. Lee, this innocent sounding rule is nothing less than an attempt by the Obama administration to put in place a national zoning board with control over local neighborhoods.
“If they don’t believe your neighborhood is ‘diverse’ enough, they will seize control of local zoning decisions — choosing what should be built, where, and who should pay for it — in order to make your neighborhood look more like they want it to,” Lee wrote.
Enough. Dodd-Frank is a bad law that has had awful consequences. So let us repeat: It’s time to end this nation’s failed experiment with top-down government control of housing, and let markets once again do the job that they do best. If not, we may soon face a housing-related financial crisis worse than the last one.
Below is some spin and bullshit spouted by investors who bought up the worthless shares of the GSEs and want to profit from the bailout. The article comments from some conspiracy theory crackpots are amusing.
New York Times: Fannie Mae and Freddie Mac being ‘held captive’
In light of the market crash in 2008, the government took over mortgage companies Fannie Mae and Freddie Mac, promising to return the companies to the shareholders when they were able to stand on their own again, according to an article by Gretchen Morgenson for The New York Times.
As part of a lawsuit filed against the government, sealed documents were revealed that contains the truth about the White House’s involvement in the U.S. Treasury’s profit sweep of the companies in 2012, according to the article.
From the article:
The newly released documents go beyond previous disclosures in the case and make clear that the Obama administration never had any intention of restoring Fannie and Freddie, which enjoyed implicit backing from the government before the takeover, to their status as stand-alone entities.
An email from Jim Parrott, then a top White House official on housing finance, was sent the day the so-called profit sweep was announced. It said the change was structured to ensure that the companies couldn’t “repay their debt and escape as it were.”
The documents also show the Treasury moving to modify the terms of the mortgage finance giants’ $187.5 billion bailout shortly after a July 2012 meeting when the Federal Housing Finance Agency, Fannie’s and Freddie’s regulator, learned that they were about to enter “the golden years” of profitability.
Actually, in the years since the federal government modified its conservatorship agreement with Fannie Mae and Freddie Mac to sweep all the profits from the government-sponsored enterprises into the government’s coffers, many observers, including those with a serious financial interest, have questioned whether the so-called “Third Amendment sweep” was even necessary.
Calculated Risk’s Bill McBride gets on TV
$1 million will buy you an entire West Virginia ‘town.’
SUGAR GROVE, W.Va. — If the District’s pricey real estate market has you down, the General Services Administration has a deal for you.
Just three hours away, for $1 million — the price of a single-family home in some quadrants of the city — you can buy 80 homes on 122 acres, together with a gym, full-size basketball court, bowling alley, soccer field, and police and fire stations. Did we mention the 12 guest cabins on the opposite end of the property?
Sugar Grove Station, nestled between the Allegheny Mountains and the south fork of the Potomac River, is the ultimate get-away-from-it-all destination. Seven miles from George Washington National Forest, it sits in the midst of a 13,000-square-mile area of the United States known as the National Radio Quiet Zone. All radio communications in the area are restricted. Translated: No pesky cellphone calls from pollsters asking about Donald Trump.
And traffic? Practically nonexistent.
“Free from noise and smog, this area of West Virginia presents an ever-changing picture that delights the eye and rests the nerves,” reads a description in the glossy GSA sales brochure. “You would be hard pressed to find such fresh air and church-like stillness anywhere else.”
In its own way, the former naval base brings together two Washington traditions: earmarks and espionage.
For years it served as the Navy’s ear, gathering communications from planes, ships and stations throughout the world.
Documents leaked by Edward Snowden in 2013 revealed its other role — as one of 10 “signals-intelligence activity designators” used by the National Security Agency to collect international cellphone location information and other data. An array of giant parabolic dishes obscured by thick forest cover are housed on a mountain ridge just over a mile southeast of the main property. These, however, are not part of the sale. The NSA, through a spokeswoman, had no comment on the matter.
The deterioration of Wall Street Journal real estate reporting since being purchased by move.com is remarkable. They fill their newspaper will Pollyanna stories that read like NAr press releases. The credibility they once had is deteriorating to near zero.
Why the Housing Market Is Getting Stronger
Spring has sprung for the housing market. Even the Federal Reserve isn’t likely to spoil the fun.
Steady job growth, rising wages and low interest rates have helped prop up housing demand. Friday’s positive report on U.S. existing-home sales underscored this. And even with the specter of another Fed rate increase looming, perhaps as soon as next month, housing’s foundation isn’t likely to be shaken.
There are a few worries after three consecutive months of declines in new-home sales, but government data and quarterly results from luxury home builder Toll Brothers Inc., out Tuesday, should ease concerns. Economists polled by The Wall Street Journal estimate sales of newly built homes rose 2.3% in April from a month earlier.
Meanwhile, home builders are feeling pretty optimistic about current conditions, which should bode well for Toll. A gauge of home-builder sentiment, released last week, held firmly in positive territory, according to the National Association of Home Builders. Perhaps more important, expectations for sales in the next six months jumped to the highest level of the year.
Rates also remain favorable. The average 30-year fixed-rate mortgage was 3.61% in April, the lowest monthly average since May 2013, according to Freddie Mac. Of course, rates didn’t stay low for long back then as the taper tantrum roiled the market. This time, an actual Fed rate increase likely wouldn’t provide as much shock value to markets as the mere hint of tapering bond purchases did then.
And a factor that has held housing back—affordability—might give buyers a breather. On the surface, rising home values have made it more difficult to buy a home, particularly for first-time home buyers. But a measure of housing affordability, compiled by the National Association of Realtors, tells a different story.
The Realtors’ group, assuming a 20% down payment, measures a typical mortgage payment for the median priced home and compares it with median household incomes. By this measure, housing has actually been getting more affordable since the summer, a reflection of rising wages and low interest rates.
It isn’t last call yet for this house party.
Perhaps this is one of the variables that has fueled the rise:
https://anthonybsanders.wordpress.com/2016/05/23/mortgage-denial-rate-at-only-5-and-declining-lower-than-beforeduring-the-housing-bubble/
So much for the idea that the credit box is too tight.
A lot of marginal buyers are not applying for mortgages these days because they are not being actively marketed to by subprime and alt-A lenders like they were in 2004. The vast majority of those lenders went out of business by 2008, so not only has the average borrower profile changed, but the average lender profile has as well.
So the low turn-down rate is because unqualified borrowers simply aren’t trying? I suppose some of that is true. Perhaps loan officers are weeding out people earlier in the process as well, before they fill out an application. With fewer programs available and less judgment on the margins, it’s easier to tell if a borrower is going to get a loan or not early on.
Only problem is, that the author can’t even read a graph.
The denial rate is 13%.
Ghost of ‘The Big Short’ Haunts Wall Street
It only takes about 15 seconds to scan an on-screen warning at the close of “The Big Short,” Adam McKay’s Oscar-winning film that recalls the insanity behind the housing market crash of 2008. It’s almost an asterisk – but then again, you can’t spell asterisk without “risk.”
It describes an investment vehicle called a “bespoke tranche opportunity,” which surely qualifies as an uber-exotic chunk of jargon in best (or worst) Wall Street tradition. Behind the mysterious moniker – and the so-called “opportunity” – lies an investment potion that conjures the ghost of the housing crisis.
The formula goes like this: BTOs equal CDOs (or collateralized debt obligations). And CDOs, in case your wiped-out portfolio didn’t remind you, helped kill America’s housing market. Put another way, this is the same investor maze with a shiny new “For Sale” sign, experts say.
[See: 10 Ways You Can Throw Retail Stocks in Your Chart.]
“As the late, great, baseball philosopher Yogi Berra once said, ‘It’s like deja-vu, all over again,'” says Robert R. Johnson, president and CEO of the American College of Financial Services in the Philadelphia area.
First, here’s the translation of the B-word: “The ‘bespoke’ title refers to the fact that the investor essentially designs the instrument – much like a bespoke suit is tailored to the customer’s wishes,” Johnson says.
And now, the second: “Tranche” is a portion of something. Of course, it’s not as though you’re going to say, “Pass me a tranche of spuds” at the dinner table. But the hot potato that is a piece of the private securities market could be enough to lure hungry investors weary of the low-yield interest rate market.
Yes, all this could be built on the same kind of shifting sand that caused CDOs and mortgage-backed securities to sink – in large part the result of new homeowners, approved for mortgages they couldn’t afford, falling short on even their first payment.
So has anything changed? Perhaps. For starters, any finagling to inflate investment ratings looks to be a distant memory – for now, anyway.
“The difference between now and prior to the financial crisis, in my opinion, is that there is a much higher level of awareness of the risk level involved in these kinds of securities,” Johnson says. “The problem then was that these securities were marketed, and rated by the rating agencies, as AAA quality. Then they were purchased by unsophisticated investors who didn’t know what they were buying.”
And in that sense, some investors will undoubtedly get sucked into a scenario where they’re in way over their heads, as well as their minds.
“No one is putting a gun to anyone’s head and making them invest in these kinds of securities,” Johnson says. “If investors learned anything from the financial crisis of 2007-’08, it should’ve been to invest only in financial instruments you understand.”
Go into You Tube and search for Bird And Fortune – Subprime Crisis and you will see a hilarious skit which pretends to be an “interview” with an investment banker. It’s hilarious. One of the points they make was the exotic and fantastic names the high yield funds thought up for themselves – especially Bear Stearns. One guy says, “One fund was named the Special Opportunity Enhanced Leverage Fund” and the other guy says, “I don’t know what it is, but I want one right now!!!”
https://www.youtube.com/watch?v=mzJmTCYmo9g
What would it take for the Fed to raise rates in June?
In the latest Fed minutes, released last week, the Fed outlined what it would be looking at when it decides whether or not to raise rates at its June meeting:
1. A continuing improvement to the economy.
2. A strengthening jobs market.
3. Inflation moving towards its 2% goal in the medium term.
But how close is the Fed to raising rates?
The 1st Qtr 2016 GDP growth advance estimate was only 0.5%. So, it won’t take much to show improvement here. The average revision from the advance to the second revision is +/- .5%; and from the advance to the third estimate is +/- .6%. A couple of thoughts: the second estimate is much more important than the third (so the case for raising won’t change be waiting); and the second estimate may be either 1.0% or 0.0% (If the latter, then the Fed holds off in June, if the former then the light turns yellow from red). Second estimate is due May 27th.
The last jobs report showed 160k jobs created. While this number is a little lower than the last few years average, and would tend to indicate that job growth was slowing, next months revision to this number may be more important than the absolute number. If 160k becomes 175k, and the June number tops 200k, or even 250k, then Fed will be able to check the second box. Next jobs report is released on June 3rd.
March Core-PCE was 0.82%. If this gets revised above 1%, and the April number is between 1.5-2.0%, then the Fed will have a green light to raise. This data is released on May 31st.
If the numbers fall like: 2nd Est Q1 ’16 GDP = 1.1%; ESS jobs created = 250k+; and, Core PCE = 1.2% (March), 2.0% (April), then the Fed will think twice about NOT raising rates.
The next two weeks should be interesting.
Trump now leads Hillary in the Real Clear Politics average.
http://www.realclearpolitics.com/epolls/2016/president/us/general_election_trump_vs_clinton-5491.html
That didn’t take long. A few more polls like that, and people will start taking his candidacy seriously.
No Perspective today.. He must have jumped off a bridge upon reading this news.
In Maui this week.
Haha… Ok, well that’s a little better. Enjoy!