The Housing Bubble

A weekend topic starting with Reuters. “A decade on from the financial crisis, global monetary policy is finally tightening, with the Federal Reserve raising U.S. interest rates and other central banks gradually turning off the stimulus taps. But despite the ‘normalisation’ underway, there’s a glaring abnormality that should be flashing red to the Fed and central bankers everywhere: financial conditions are easier now than at any point in over 40 years. The Chicago Fed’s national financial conditions index was last at -0.94, its lowest since April 1976. The Goldman Sachs U.S. financial conditions index is now at its lowest level since January 1990, when it was first compiled. This is the mirror image of soaring markets like equities that a growing number of observers say are now starting to look like bubbles.”

From Lew Sichelman.”The great minds of the mortgage market continue to work overtime, coming up with fresh ideas in an effort to reach more would-be homebuyers. Pilot programs like these don’t always prove worthwhile; in fact, some never make it beyond the testing stage. But they show the lengths to which lenders are willing to go for new buyers. Below are some of the latest offerings from the mortgage world.”

“Citadel Servicing Co. in California has come up with a loan for which buyers qualify with just a verification-of-employment document. Applicants need two years of continuous employment, plus a voice verification of employment on the day the loan closes. They must also confirm they have enough money on hand for at least a 25 percent down payment, though no other proof of income is necessary. The program is open to borrowers with a minimum 650 credit score and is good for loan amounts between $250,000 and $3 million.”

From Marketplace. “Tim Mayopoulos started working at Fannie Mae not long after following a career on Wall Street. He became CEO in 2012. He talked to host Kai Ryssdal. Mayopoulos: ‘Private capital ought to be the primary source of funding for the housing markets in the United States. And in fact, the innovations that we’ve been a big part of since conservatorship was imposed nine years ago have contributed to that. So if you think historically, Fannie Mae has this enormous balance sheet, we’re making all these loans, we have 18 million mortgage loans on our balance sheet. Historically, we would have held all of that credit risk for the life of those assets. Today we don’t do that. We now transfer a very significant part of that credit risk to private capital. In other words, we’re essentially getting reinsurance on what we have. So people have the impression that Fannie and Freddie are continuing to take all this risk. We still take some risk, but we are transferring a very very big part of that risk to private capital.’”

From the University of Pennsylvania. “Wharton’s Tim Landvoigt discusses how underpriced government mortgage guarantees contributed to the housing crisis. Tim Landvoigt: ‘One of the areas that I do research in is housing and mortgage finance. I have several papers that are concerned with the question: What were the main drivers of the housing boom in the early 2000s? The candidate explanations that people have come up with are cheap credit, easy access to credit and high house price expectations — expectations about large future gains in house prices.’”

“Knowledge@Wharton:’ One of the questions that has come out of that housing crisis has been what to do next with Fannie Mae and Freddie Mac, and you have a paper that looks at that. Can you talk about your key takeaways?’”

“Landvoigt: ‘That paper is called ‘Phasing Out the GSEs,’ which is a somewhat provocative title. [GSE stands for government-sponsored enterprise.] But what we’re really looking at in that paper is whether we should increase the guarantee fee that these government sponsored enterprises charge banks when they sell the loans in the secondary market. Our conclusion is that the guarantee fee has been much too low historically. It’s basically a very large subsidy to mortgages originated by banks that then sold to Fannie Mae and Freddie Mac. We show theoretically that that would provide incentives for banks to take on more risk in other areas of that balance sheet. Because we’re removing a lot of risk from the mortgage part.’”

From Richmond Magazine. “Maybe it was the hours spent playing house in the lofted treehouse bunk bed my dad made for me. Or maybe it was my early infatuation with TLC’s ‘Trading Spaces’ and then HGTV. It didn’t feel extraordinary to dream of buying a house at age 24. To turn that dream into a reality, however, I needed more than a gut feeling. Here’s what I learned over the course of the home-buying experience that helped make my dream come true.”

“First, you don’t need a 20 percent down payment to mortgage a house. That’s the biggest misconception for first-time home buyers, according to Ingrid Sell, a senior loan officer at Village Bank. ‘In fact, if you’re a first-time home buyer, the down payment is less of an issue,’ says Sell, who has worked in mortgages for 24 years and was, full disclosure, my mortgage broker.”

“The other misconception, she says, is that you need a perfect credit score. A loan officer’s job is to confirm that you can afford the loan you are applying for and have a history of paying your bills on time. ‘We’re not looking for perfect credit for seven years,’ Sell says. ‘Everyone should shoot for that of course, but life happens.’”

“Being a newly minted homeowner doesn’t mean I’m swan-diving into a sea of cash, Scrooge McDuck-style. But, I hope to build equity that my future self will thank me for. My house is not the worst on the block, but it has required major work to make it home. I invite you to follow along as I rip out the carpets, learn how to install light fixtures (and how not to), mow my first lawn and play nice with the neighbors.”

The Daily Voice. “Foreclosure auctions in the U.S. are at an 11-year low — but not in New York. It’s quite the opposite, as foreclosure auctions are at an 11-year high, according to a new report by ATTOM Data Solutions. The District of Columbia and seven states posted a year-over-year increase in scheduled foreclosure auctions in 2017, including New York (up 9 percent to the highest level since 2006); Oklahoma (up 4 percent); Connecticut (up 7 percent); and Maine (up 2 percent).”

“‘The data for the Seattle market tells a very big story, and that is we are not seeing a housing bubble forming,’ said Matthew Gardner, chief economist at Windermere Real Estate. ‘With foreclosure rates at less than 0.4 percent of total housing units, the market is remarkably stable. That said, we are certainly suffering from serious affordability issues, but this is not translating into defaults on loans.’”

From KOMO News. “New numbers just released Thursday morning show the stunning jump in home values in the Seattle area since the bottom of the housing crisis. Zillow says home values are now 23 percent above the highest they were during the pre-recession housing bubble. Zillow says when the housing market crashed around 2009, homes in the Seattle area lost more than 31 percent of their value - on average dropping by around $119,000.”

“But since the local real estate market hit its bottom in November 2011, Seattle home values have gained almost 79 percent, or $206,400. And Seattle isn’t alone. The report says the typical U.S. home has gained 36 percent in value, and is now 5 percent more valuable than at the height of the housing bubble. West Coast markets have seen the strongest gains in home value - with San Jose, Calif., leading the pack with a $615,000 gain since 2011.”

From the Associated Press. “Like many Texans whose homes were flooded during Harvey, Jacob Lerma faces mounting expenses and hasn’t paid his mortgage in months. His insurance payment wasn’t enough to rebuild his home and he was only offered a small loan after applying with the Federal Emergency Management Agency. His last hope is a possible buyout from the city of Friendswood. In the meantime, he, his wife and two daughters will continue living with his parents.”

“‘If the buyout doesn’t work and more money doesn’t come from insurance, walking away from it might be our only option,’ said Lerma. ‘It’s just crazy to see this all taken away.’”

From the Wall Street Journal. “After looking at several houses along Alabama’s Gulf Coast, we decided the sunny cottage on Audubon Drive in Foley was the one — so long as the seller came down a little on the price. A week before Thanksgiving in 2005, we signed the papers to buy the house for $137,500. Twelve years later, little about my life remained the same. I’d left Alabama to take a job at The Wall Street Journal. But I was still sending mortgage payments each month to a bank in Alabama.”

“I would have sold the house long ago, and in fact I tried. But when the U.S. housing market collapsed in 2007, the property’s value fell far below the amount I borrowed to buy it. When I bought the house, I was a newlywed three years out of college, believing I had achieved a signature goal of most young Americans. Instead, I set myself up to pursue an inverted version of the American dream. Most young people aspire to buy their first home. I spent a decade trying to get rid of mine.”

“Toward the end of 2011, the Journal moved me to New York to write about Wall Street financiers. In that role I spoke in late 2013 with Stephen Schwarzman, CEO of Blackstone Group LP, about his firm’s huge bet on rental houses. At a private dinner, I joked with Mr. Schwarzman about being a tiny competitor of his. He made the bull case for owning rental homes. Then he leaned over, pointed at the ceiling and said, ‘Don’t sell your house.’ ‘Steve,’ I thought, ‘that won’t be a problem.’”

“I pulled up to the house in the early morning hours of April 1, 2017, for the first time since 2010. I was spent from the 20-hour drive from New York, but pleasantly surprised by what I saw. The house was in better shape than I had expected, though it had changed enough that it no longer felt entirely mine. Within a week, a retired couple from Minnesota agreed to pay $112,000. They waived an inspection and my Realtor volunteered to cut his commission to help make the deal happen.”

“The appraisal hit the mark, no termites turned up and the deal closed in May. From the original purchase in 2005 to last year’s sale, I lost $25,500. My losses as a landlord? At least $35,000. Whatever the sum, it no longer mattered. I was free.”