Bits Bucket And Craigslist Finds For April 22, 2007
Please post off-topic ideas, links and Craigslist finds here.
The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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The end of too good to be true loans
The 10-year T-note improved this week, back down from the spooky-healthy job-market surprise two weeks ago, mortgages about 6.25 percent. However, the 10-year is now smack in the middle of a three-week trading range with no reason to move until the economy declares itself in new data.
We’ll get housing news next week, and then nothing until the first week of May. I think the data suggests a steadily weakening economy, but that general perception is built into today’s rates. New claims for unemployment insurance are suspiciously high; March retail sales were stronger than expected, up .7 percent, but robbing from April; and industrial production rose, but going nowhere. New housing starts and permits were up a hair, but this is a false signal: the only way for builders to unload excess land is to build houses and give them away, further depressing local markets.
The key items: corporate capital spending is sinking, down to 1.5 percent growth from forecast 6-7 percent, and “free cash flow” has dipped to deep negative — by 5 percent of GDP, as stock-buyback tail-chasing nears its endgame. Core CPI was under control in March, up .1 percent, but overall up .6 percent, freezing the Fed no matter what weakness lies ahead.
The media have for the moment worn themselves out on the subprime meltdown but continue to miss the subtle changes affecting millions of buyers and owners.
Markets in trouble are distinguished by illiquidity and widening spreads.
Normally, the flow of mortgage paper is greased all the way from retail to the derivative mill. As that great machine throws gear teeth and intermittently gnashes to a halt, intermediaries up-stream are worried about getting stuck with paper — they would become “lenders,” which everyone knows is insanely dangerous.
Two bulletins to us in the last weeks: an excellent wholesaler/securitizer of Alt-A loans (junk, not trash), suddenly announced that the maximum lock-length would be 15 days, and only for loans fully approved. The second: a major warehouse bank (these provide credit to mortgage banks to fund loans at closing, the credit line paid down when the downstream securitizer buys/pays for the loan) announced that it would no longer warehouse second mortgages. At all. Then a week later reversed, but only for seconds underwritten by the downstream buyer.
These policy changes are on or over the edge of panic, in fear that the system will lock up altogether, in terminal absence of liquidity.
The system is already in terminal illiquidity, but progressive, from poorest product headed up to some yet-unknown middle zone, pricing spreads moving from daylight to tomb. Citibank, the definitive piggyback wholesaler, changed its whole underwriting matrix by 5 percent of loan-to-value; whatever it would do at 100 percent it will now approve only at 95 percent and so on down the scale.
Alt-A is completely misunderstood outside the trade. At its weak end, it is trash, but at its better end, quality is as good as any Fannie ever patted. Alt-A just means “not Fannie.” Example: We have a client moving to the area without a job, but with a half-million dollars in savings, a first-time buyer, a $450,000 condo with 25 percent down. Fine career in IT, will have a job as soon as he wants one; FICO score in the 800s.
This loan four months ago would have been priced perhaps a half-percent above today’s 6.25 percent Fannies. Today, the talking starts at 8 percent. This guy may decide to get a job rather quicker, but there are many other no-risk, “no-doc” candidates who won’t be buying soon — not until the true risk of default is understood. We’re years away from that resolution, and in the meantime, underwriting and pricing of marginal product is going to be herky-jerky, here-today, gone-tomorrow, back-again, but not the same.
Never ever again will it be as it was from 2001 to 2006.
A couple other economic points to consider is the growth of M-2 over the February-March period which exploded to $105 billion (also pretty high in fourth quarter) and a second blowout of spreads (about 25 bps) in the Commercial Mortgage Backed Securities Index (CMBXI). There was a slight recovery in the last couple days but the overall situation looks pretty ugly with a tendency to get uglier. Recall that the subprime meltdown was proceeded by the bottom falling out in the ABX index.
Fed Data
http://www.federalreserve.gov/releases/h6/Current/
Subtract March unadjusted from February unadjusted to get growth
CMBX Index Data
http://www.markit.com/information/affiliations/cmbx
Click on index to get graph of spread
My take is the Fed is providing massive liquidity at the same time financial insitutions are dramatically tightening up. Where does the money go?
“Where does the money go?”
A few places I can think of off the top of my head:
- higher gold prices
- higher gasoline prices
- higher stock prices with little fundamental justification
- foreign currency deposit accounts (just set one of those up myself last week)
just set one of those up myself last week
Do tell!
If the recent rally is any indication, into stocks.
(Never ever again will it be as it was from 2001 to 2006.)
Nor should it be. I’m not sure, based on your description, that we are even back to reasonable yet. Obviously the non-doc, high loan value to income should be gone.
The question is, what about the downpayment in a country where no one saves? People who aren’t already homeonwers can go back to saving, but it would still take them three years to amass enough money to buy, even at reasonable prices. A 5% downpayment sounds like a reasonable compromise for a real homeowner with real income and good credit. But if home values stop dropping, downpayment requirements or income will go up. For the lower tranches, you end with an unsecured loan otherwise.
A return to reasonable price to income ratios will allow the market to return to normal prices. A return to reasonable downpayments could lock it altogether.
WT,
I think there has been a lot of noise about down payments going back to 20% that are coming from an eagerness to see prices drop quickly. By taking away potential borrowers who do not have 20% I guess the logic is that prices will need to drop until they reach a level where buyers do have 20% of the new price to put down.
I also saw a comment some time back about how 5% down was not really an option because when you take into account the costs associated with the purchase the 5% is gone as far as equity is concerned. But I am not sure that is a show stopper IF the borrower can afford the loan payments and it is a fixed rate loan. I guess it would only be an issue or problem if the borrower needed to sell the property before accruing any equity via payments. I was going to add appreciation, but then a voice in my head went “Bwhahahahaha!”
So I agree with your idea because it would enable some of the folks who have been waiting this out to get in a wee bit earlier if they choose. They risk buying in early and possible loss of value though and I guess that may set them up for some adjustment if their LTV goes through whatever threshold the lender may use. Not knowing much about that I would like to see other’s comments so I could learn something. But if you feel the price has come down far enough and you find a place you really want AND can afford using a fixed rate loan with a 5% down, why not? Some folks want to own, know it is not time yet, but would like to buy sooner rather than later for a whole host of reasons. While patience will be paid off in spades right now what is the downside to retaining a 5% full doc fixed rate loan product?
“By taking away potential borrowers who do not have 20% I guess the logic is that prices will need to drop until they reach a level where buyers do have 20% of the new price to put down.”
There is a succinct metaphorical way to express this scenario: crash landing with few survivors.
“I was going to add appreciation, …”
Don’t make the same mistake Gary Watts did last year and leave off the negative sign.
LOL! But of course GS! I keep that “In The Bag”
“The question is, what about the downpayment in a country where no one saves?”
Why would anyone in their right mind save when a War on Savers is underway?
Apparently some of the “too-good-to-be-true” loans are still out there. I just got a “great” offer from Countrywide for a wildly flexible “Payment Advantage 5/1 ARM” loan. Here’s some of the fine print:
“2. The initial minimum payment on a Payment Advantage 5/1 ARM is designed to be a remarkably low monthly payment that minimizes your monthly mortgage payment obligation. However, making the minimum payment on a Payment Advantage 5/1 ARM will result in deferred interest that will be added to the principal balance on the loan. The loan will recast if negative amortization limits are reached during the first 10 years, resulting in a significantly higher required payment amount. An interest-only payment will not reduce the principal balance on the loan. After the completion of the first 10 years, borrowers will be required to pay principal (which includes any deferred interest) + interest, which will result in a significantly higher monthly payment. ARM rates subject to increase after the 5-year fixed period. Payment options are based upon the then-current interest rate and the unpaid principal balance and are subject to change monthly. ”
I can hear it now:
“I don’t understand what that means. Why did my payment go up?”
Yeah, the disclaimer basically says:
If you sign this note your payment will go up, If you own this home your payment will go up, If you are a woman your payment will go up, if you are a minority your payment will go up, if you are a man your payment will go up, if the sun shines your payment will go up, if it rains your payment will go up, if you work your payment will go up, if you are jobless your payment will go up, if you like cake your payment will go up, if you are allergic to cats your payment will go up, if you don’t eat your vegetables your payment will go up, if you are a vegetarian your payment will go up, if you are reading this your payment will go up, if you didn’t get the memo your payment will go up, etc. your payment will go up. In short, your payment will go up.
Then cue the whine: “I don’t understand what that means. Why did my payment go up?”
Paul
I agree: too good to be true:
Ditech TV ad tonight for 125% LTV HELOC that is illegal in my state (Texas has an 80% LTV cap, AFAIK)
What is the timetable for a bottom?
If you had a chance to buy in NYC at 20% under current market as a primary residence, would you take it or rent? (rent =2200, buy = 550k)
$550K @ 6% = $33K, after 30% tax write-off, assuming you don’t hit any AMT limits you’re still looking at $23.1K or $1925/month in interest alone you’re loosing. How about insurance? How about maintainance & repairs? If you must throw money away do it, but I $2200 rent sounds like a pretty good deal.
Looking at when most subprime ARMs will reset, the motherlode seems to be due starting in summer 07 into late 08 at a rate of 35-50 billion per month. Figure in a 3-6 month lag in forclosures and I see a bottom in early 09. Then there’s still a bunch of Alt-A & Option ARMs that will reset from 2009 - 2011, so I don’t see any quick and miraculous after 09. Real estate will likely fall out of favor with “investors” for a while.
I am renting in overpriced Miami, I’ll wait till early 09 before I make a move. I think patience will be rewarded.
Mike,
I am renting in overpriced Miami, I’ll wait till early 09 before I make a move. I think patience will be rewarded.
If you can hold out until 2009 in what is one of the hardest hit markets, you’ll do very well. (Assuming you have a good down payment. I believe 25% down payments are coming back for anything more than starter, a la 1970’s.)
2009… will be a good buying window. Its certainly not 2007.
Got popcorn?
Neil
I’m not sure 20% would be enough where I live. However, you could get a 20% nominal decline plus an additional real decline due to flat prices over many years, as in the early 1990s. If that were the case, one could buy and just eat the higher payments until inflation and incomes caught up.
With my $200K rowhouse (1994) selling for $1 million (based on recent sales of identical homes), you are still talking about $800K. Even at 4X income, assuming people were willing to sacrifice to live here, that’s $200K in income.
So your market, for a traditionally middle class neighborhood in a city with iffy schools, is limited to married two-income professionals willing to live in a 100-year-old 1,500-square-foot rowhouse with parking on the street. Or perhaps the usual cops,teachers,fireman — but at the end of their careers not at the beginning, with second jobs, moving up from an apartment just as their kids are ready to move out.
But it’s not generalized inflation, or even wages that you need to compare to price; it is rents. Wages certainly influence rents, and the rental market is more responsive to wages and less responsive to interest rates than the purchase market. The question is, to what extant has the current level of rehabbing and condo construction raised the housing supply enough to to, in the medium-long term lower rents? Certainly much less in NYC than in, say Las Vegas, NV or Naples, FL.
rent factor in 1900’s till the 60’s
100
then after 80’s 110 to 120
with low current interest rates MAYBE 140-160x rent
so Im getting 350 k max at $2200 a month rent
20% not nearly enough. Real estate has gone up 200% - 300% in the last 5 years in NYC. A return to the mean and historic afford ability would require a 40% to 60% decline in prices.
I truly believe that is eventually will happen.
A house that sold for $250,000 in 1998 and is now priced at $650,000 (these are real numbers here in Queens) would be fairly valued at $350,000 at normal appreciation.
can’t speak for homes, but in my part of queens buying is still the same price as renting when you factor in the tax benefits. my 1 bedroom apartment is worth almost $10,000 a year in tax write offs. $0 if i had been renting. if you buy today it’s going to be higher based on a $250,000 price.
i think this is the top though since if you look at the price of 2 bedrooms and add the maintenance it’s almost the same payment as a SFH. very close.
i wouldn’t expect a crash since something like 90% of coops have at least 80% equity because most of the boards won’t let you borrow anything past this point. and a lot of banks won’t either.
“my 1 bedroom apartment is worth almost $10,000 a year in tax write offs.”
This was discussed last weekend. AMT could easily wipe that deduction off the books.
Prices are going at $1,200 per square foot. To buy the apartment that I live in would be about 250 times monthly rent. There is plenty of room for a crash.
Calculated Risk has this very post up right now!
http://calculatedrisk.blogspot.com/
CR’s blog is the honors version of the HBB.
HBB is more for every(wo)man.
“Historically, during housing busts, existing home prices fall slowly for 5 to 7 years - so I’d expect to start looking for the bottom in the bubble areas in 2011 or so. (I’ll return to existing home bottoms in a future post - we have time).”
2011 may prove too early to hit a bottom, given that the Alt-A and prime reset time bomb wave will not crest until that time. In fact, I am guessing 2011 may be about the time that many are starting to say that “real estate is the worst possible investment,” but it may still take a couple of years after that for the collateral damage of loan resets in the higher credit quality tranches to take full effect on prices.
BTW, does anyone have quick access to that loan reset chart that was posted here a couple of days back? It clearly makes the point I raise here — that resets in the better grade mortgage debt will not have maximum force until 2011 or so.
http://www.autodogmatic.com/forum/viewtopic.php?p=1226#1226
Agree with you on this, GS. This cycle was extended for 5-7 years beyond the normal peak, IMHO. This will likely take much longer to reach the bottom and to begin rising again. Just MHO.
Today’s NYT:
Mortgages’ Mystery: The Losses
By GRETCHEN MORGENSON
Published: April 22, 2007
“The losses on subprime loans are there, but are unrecorded.”
To continue reading this article, you must be a subscriber to TimesSelect.
Anybody a TimesSelect subscriber?
Is it Ok, if you subscribe, to copy and paste the contents here? Copyright law anyone?
a posting here the other day had a reo/foreclosure and the guy didn’t get a 1099 !!!
wow , it will have to be recorded eventually
it was a Wamu deal if a remember right
this is big flolks !
Posting the entire article does violate copyright law. But here is the last section which is the crux of the article.
[i]But as these people pay off their existing loans, two problems arise for investors. The prepayment of the loan means expected income from it disappears, and it also leaves mortgage pool investors with a greater proportion of troubled borrowers.
“To the extent that the availability of these programs makes it possible for better subprime borrowers to refinance away from current lenders and into a better mortgage product,” Mr. Lawler said, “it’s hard to see how that will be beneficial to the existing holders of subordinated subprime loans.”
Fannie and Freddie, in other words, are not putting out the welcome mat for mortgage loans that should never have been made. Those remain squarely in the hands of investors. We may not know who they are. But they do. [/i]
Gretchen did a nice writeup on the NFI debacle a couple of weeks ago- she’s all over this subprime thing
Long Island is crashing!!!!!
With a glut of homes on the market, she added, prices are declining, particularly for homes listed for more than $500,000. And lenders have tightened requirements for borrowers, fewer of whom can thus qualify for mortgages.
She said she believed all neighborhoods on Long Island would be affected, not only the less affluent ones. When real estate was booming, less affluent buyers “got into these more expensive homes with subprime mortgages,” Ms. Kamer said, often to move to a better school district.
http://tinyurl.com/28dm7o
.
Ms. Amico bought a house in 1989 as a single mother. Her son is now 24, he must have been born in 1983, and was 6, when she bought the house.
Since then she was working 70 hours per week to pay for the house. Who was taking care of the son?
Why a 24-year old son cannot get a normal job to help his mother paying for the house?
If I were to guess, Ms. Amico took loans to help her son’s failing business, and that is why she has problems with her loan.
Ms Amico must have pulled a chunk of ‘equity’ out of that house, for if she did not her payments would be very manageable for a blue collar worker in todays dollars.
This is another case of the press not doing there job, and providing a complete picture of the circumstances surrounding the foreclosure. Guess I should not be surprised, after all it is the NY Times.
And why can’t she get her adult son off his butt?
“Why a 24-year old son cannot get a normal job to help his mother paying for the house?
“
I know a bright, educated and hard-working single mom who has a dead-beat son with serious social personality problems. He won’t even mow the lawn, and when she tries to nudge him the response is “fits of rage” for days; he’d rather spend 24-hrs/day online while slumped in a chair. If he ventures outside it is to resupply his junk food needs, and he is of course cloaked in his matrix style trench coat. We are talking late thirties here.
He wouldn’t survive in the wild.
Well, she’s not too bright or she would have been a better mother and kicked him in the ass a long time ago.
Hard to do without a Dad around. Dad’s are usually the ones who administer the ass-kicking (he says as he massages Ben Gay into his in-step)….
Question to all renters:
Is the quality of your rental about the same as what you would buy, higher or lower?
My apartment is worse. If I were buying I would go for a much better place. But for now I am saving money.
But it also seems that others live in beautiful apartments they would not be able to afford to buy.
It won’t change anything, but I am just curious…
The place we are renting now is about the same level of niceness as we would buy in. If we stay in this city we will probably move somewhere a little less expensive though, just to save more every month.
(My apartment is worse. If I were buying I would go for a much better place. But for now I am saving money.)
That is the norm. People will live in a cheaper place for a few years than they would for (if they are thinking correctly about buying) the rest of their life.
I recently found out that apartments and condos aren’t the same housing units with different ownership arrangements. For those buying new, a for sale unit will be completely different — with higher cost higher quality materials and finish on both sides of the walls. That’s why builders who built condos and had to go rental are dying.
Of course, with a conversion you get ownership quality where you can see it, but what is behind the wall (soundproofing for example) is still a rental
Part of it is the whole deffered gratification thing. Traditionaly, people try to live cheaply for a few years before buying to save up for a downpayment. Nowadays, instead of saving, people think that if they buy with a subprime loan, somehow they’ll be able to “improve their credit” and refinance to a cheaper loan down the road. IMHO they have confused cause and effect. In the old days, homeowners didn’t have better credit BECAUSE they bought a house, but only those with better credit were ABLE to buy a house. Now, homeownership, rather than being a sensible economic move for those with stable jobs and lives, has become an afectation of affluence.
I never thought of it that way before, but I believe you’re onto something with that explanation. Thanks….
It’s smaller than what we would buy and not as well constructed. We pay $3000/mo which is enough to get us a brand new luxury two bedroom in a professionally managed rental building. We could get considerably more for our money if we rented from a single unit landlord, but the headaches are not worth it.
I want to believe that our apartment is not nearly as nice as what we’ll buy, however I can say with a great deal of certainty that we won’t be living in an area as nice as we live today. Specifically, for those that know OC, we’re living in a rental on Lido Island. I can’t believe that even after the bubble bursts the neighbor who is aksing approx. $5MM for their house will drop it into our range
Rent cost today for 2bd/1.5ba - $1,800.00. Woohoo!
Same here.
I am renting in most likely a nicer neighborhood but substandard house in downtown HB.
When we buy we might downgrade neighborhood for upgraded house, then again maybe not.
Once the Los Angeles resident commits to renting, it’s the location of the apartment that is more important than quality of unit. The rentor mindset says “I can afford $$ and then starts looking in the highest priced areas of the city to see if they can find the “needle in the haystack”. Rentors are willing to sacrifice sq. ft. and quality just to be in the right neighborhood. Don’t think it’s just an LA thing.
my rental is big but creepy. great view but the contruction trucks make my place rumble. lots of white noise and blog reading get me thru till my lease is up. my LL is a snake.
check out the latest pics on my site. san diego- a good place to overbuild.
http://buildingfrenzy.smugmug.com/gallery/2729167#144844916
Hi Ann,
You have some great shots on your site. I am wondering if you could figure out a way to get some labels up to identify locations? I am assuming you followed through on my suggestion to check out 92127, as many of those homes and freshly graded building sites look very familiar to me. Did you find any evidence of a shortage of housing or land to build on?
GS
GS: i did visit those areas but had no idea where i was headed. i managed to find carmel rd and the 5. thank god.
it was exilarating to be the “class snoop” and i’ll
try to slow down those uploads to make it easier to figure out.
i feel like we are all on a deadline and running out of time. big breath. exhale. slowdown annie.
“i feel like we are all on a deadline and running out of time.”
Funny you feel that way! By contrast, I feel like I am watching paint dry. But I know that it gets drier every day.
My rental is certainly not as nice as what I would buy, but that was purely intentional to save money. Lots of figuring has to go into this equation. My apartment has a nice fitness center that’s included. I’m not buying or maintaining any lawncare equipment (or cutting the grass). Same goes for the washer and dryer and all the other appliances, not to mention heat pumps, a/c units etc.
Now that my saving is largely accomplished, it’s time for me to move up to a waterfront rental for 40% of what it would cost me to own it, and none of the hurricane risk…
I rent in a newly renovated building in Manhattan. Previously I owned a McMansion built by one of the biggest builders out there. I can say the worksmanship (use that term loosely) on both of these places is crap. I spilled a glass of water yesterday and some got on the paint. The paint immediately peeled from the sheetrock.
Our mcmansion was no different. They are slapped up as quickly as possible to look good when you go through the door and then, “you are on your own”. Getting them to do the 1-year work is a pain in the neck. Don’t kid yourselves people. All they are building now is junk, whether it is for renters or “owners”.
Current rental is nice, but definitely not what we’d buy. I need room for a pool table!!!
I am hoping to be able to buy something at least as nice as what I rent. It is a 1400 sq/ft 3 bd/1.5 bth ranch house on 6000 sq/ft lot w/2 car garage on the Eastside of Costa Mesa. I started paying $1600/mo in 1999 and pay $2100/mo now. It is on a somewhat busy street, but after this long I am used to it.
I was considering buying on the Westside, but the middle school over there is rumored to be tough for non latino kids. On the flip side, the high school on this side is rumored to have a lot of spoiled rich kids so I am really on the fence about where is best. I’ll have to visit the schools and talk to parents to know the truth.
The bottom line is really going to be finding something I like a lot and can afford when the time comes. I would like a wee bit more property and a kitchen with more room. I am kind of glad this train wreck is so slow as it is giving me time to both save and research.
I love the house I’m renting in Santa Barbara. It’s a sweet little mid-century Atomic Ranch, one block from the beach, perfect for two people and a dog. If it’s ever for sale at a reasonable price, I will buy it. Unfortunately, most of the modest, vintage houses that come up for sale in this neighborhood get bought by flippers and “renovated” (lot line to lot line) until they are unrecognizable. Not because they have structural problems–because they are not grand enough. I hope you all are right and this market is going to crash, crash, crash. Only then will the architectural integrity of this neighborhood be preserved.
What’s Really Happening?
http://wallstreetexaminer.com/blogs/winter/?p=693
Burn bay burn
http://bp1.blogger.com/_a7jkcMVp5Vg/RitI49SVbwI/AAAAAAAAAkM/m2_ybPoXr38/s1600-h/burn.jpg
check out this weeks offering over at post secret. A sign of thing to come.
bay = baby
What’s bad for San Diego home equity gains is bad for car sales.
———————————————————————————-
Consumer concerns drive down auto sales
Two percent decline expected this year in San Diego County
By Dean Calbreath
STAFF WRITER
April 22, 2007
“What’s good for the country is good for General Motors – and vice versa,” a former head of GM once famously told a congressional committee.
LAURA EMBRY / Union-Tribune
Robert Browne of San Diego (left) talked to Michael Hamel, a sales associate at Bob Baker Ford, after test-driving an F-150 pickup.
But a growing number of Americans have apparently decided that what’s good for them is not necessarily what’s good for General Motors. Or Ford. Or Chrysler, for that matter.
Over the past year, auto sales declined 2.6 percent nationwide, including a 5.1 percent drop in California, sparked by tighter consumer credit, a cyclical industry downtrend, rising fuel costs and growing distaste for gas-guzzling vehicles.
And when Americans buy cars, they’re increasingly opting for foreign brands – led by Toyota and Honda – instead of the once-impregnable Big Three from Detroit.
In few places has the decline in auto sales – foreign or domestic – been more pronounced than in San Diego County.
http://www.signonsandiego.com/uniontrib/20070422/news_1b22carsales.html
This is part of the spreading contagion.
Its not done yet. People are still doing MEW to get that big truck, SUV, Lexus…
Its a patience game. We have a long laundry list of milestones to go through before we hit the bottom.
Got popcorn?
Neil
I have to put in my two bits here about vehicles. My neighbor always upgrades to a new ford F150 p/u every six years or so. He offered to sell me his 2000 model (immaculate and well cared for) for low blue book of $6500 (90,000 miles). I have a Toyota T100 (1995) with twice the mileage that’s worth about the same - five years older and 2x the mileage and drives much better and has had lots of 4×4 roads on that mileage. Ford makes crap anymore (they used to make fine fine trucks) - I could barely get in and out of the thing (and I’m 5′8″) and the tailgate practically falls on top of you when you try to open it, the ergonomics are all wrong. That’s why people buy Toyota anymore. American car makers have only themselves to blame.
Global
Rosy Goes Global
April 13, 2007
By Stephen S. Roach | Seoul
…
‘In my view, the odds of a spillover from the housing recession to consumer spending are high and rising. I concede it hasn’t happened yet but remain convinced that it’s only a matter of time in a post-housing-bubble climate before the asset-dependent, income-short, overly-indebted, saving-short US consumer pulls back. The scenario I have in mind envisions US consumption growth, which is currently running at a 3.2% clip year over year, slowing to around 2% over the next year — enough of a deceleration to push US GDP growth from its current 2% clip down toward 1% over the same period. Should the US economy follow this type of trajectory, I have little doubt that the rest of the world will be quick to follow. As I have long noted, I am not a buyer of the so-called global decoupling story (see my latest missive on this, “Spillovers versus Linkages,” 9 April).’
http://www.morganstanley.com/views/gef/archive/2007/20070413-Fri.html
Mortgage fraud is suddenly the concern du juor in the SD Union Tribune Sunday Homes section. The article linked below discusses how “the potential for mortgage fraud is on the rise,” as though to suggest that not much fraud has taken place thus far, which seems highly questionable. In fact, given that 50+ subprime lenders recently went out of business, and that lawmakers and regulators have suddenly discovered that lending standards may have recently become a bit too loose, I would suggest that fraud should be a decreasing concern over the next few years than it was over the past decade. The byline (”Lender Beware”) could also have been much better stated as (”Buyer Beware”), as lenders tend to profit handsomely through commissions on fraudulent loans, while the buyer is left holding the bag of an overpriced, overvalued home whose value is likely to become a household financial albatross over the next several years.
I also find the statistics cited in this article highly suspect (e.g., SD ranks 302nd out of 379 markets monitored by BasePoint Analytics on their fraud concern scale). Maybe they forgot to account for all the folks who overstated their incomes on liar loan applications?
The bit at the end of my quote below is also bogus. High appreciation rates may “carry people through,” by letting them sell at a higher price when they get into trouble. But they also help to mask fraud, thereby encouraging it. When the tide is going out (as it is presently), fraudulent activities are suddenly much harder to perpetrate, as lenders start to take risk aversion measures to protect themselves from the financial consequences of foreclosing on properties whose values were overstated due to fraud.
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Lender beware
Potential for mortgage fraud is on the rise in county
By Emmet Pierce
STAFF WRITER
April 22, 2007
JACIE LANDEROS / Union-Tribune
After monitoring San Diego County’s falling home prices, sluggish sales and a surge in foreclosures, real estate analysts are warning that the potential for mortgage fraud is on the rise.
The doubling of home prices here between 2000 and 2005 created ideal conditions for masking mortgage fraud, said Mark Fleming, chief economist for CoreLogic Systems, a Sacramento-based firm that specializes in measuring lending risks.
Although no one knows the full depth of mortgage fraud, the recent spike in loan default notices is a strong indicator of deception in the marketplace, Fleming stressed. Even so, San Diego County appears to be in better shape than most communities around the country.
“The good news is, you are at much lower risk of fraud than the nation,” said Fleming. “The bad news is, that low risk is rising. It is moving in the wrong direction. It is something to watch. The fact that you have rising foreclosures and declining prices, these are factors that may change the equation and make it more risky.”
Frank McKenna, a mortgage fraud consultant at BasePoint Analytics in Carlsbad, agrees.
“San Diego has the potential to see rates of fraud increase, absolutely,” McKenna said.
The surge in home values likely has hidden fraud by delaying defaults, he added. In a rising market, borrowers in danger of default can more easily refinance or sell. “The fact that San Diego has such a high appreciation rate, it carries people through.”
http://www.signonsandiego.com/uniontrib/20070422/news_lz1h22lender.html
The new DataQuick numbers for SD cast serious doubt “that San Diego has such a high appreciation rate” any more these days.
The current median of $490,000 is off by $27,500 from the all-time high set just over a year ago (in late 2005).
And as for LA’s & SoCals increased YOY medians, I have to wonder to what degree that might be due to the sudden dearth of subprime borrowers able to buy homes they cannot afford at the low end of the quality distribution, rather than an increase in home prices at constant quality?
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County prices sag, Southern California hits record
By Roger Showley
STAFF WRITER
April 22, 2007
While San Diego County home prices remain below their all-time peak of $517,500 set in late-2005, Southern California as a whole surpassed the $500,000 mark last month for the first time on the strength of the previously lagging Los Angeles County area, according to DataQuick Information Systems.
Southern California’s overall median was $505,000, up 4.6 percent from a year ago.
Meanwhile, Northern California had a median of $639,000, down from the $648,000 record set last June, but up from $601,000 registered in January.
As previously reported, San Diego’s March median stood at $490,000, up for the second month in a row but still below year-ago levels of $515,000.
Los Angeles’ median was $540,000, up 6.3 percent from March 2006 and the highest rise of any Southern California county. The biggest year-over-year drop was felt in Ventura County, down 6.9 percent to $566,750.
http://www.signonsandiego.com/uniontrib/20070422/news_1h22prices.html
http://www.dqnews.com/ZIPSDUT.shtm
Disciples of Casey, take note:
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Creativity, collaboration pay for criminals
Two types of fraud: for profit or housing
By Emmet Pierce
STAFF WRITER
April 22, 2007
Investigators and lending risk analysts say there’s almost no end to the ways mortgage fraud can be perpetrated.
“Southern California is fertile ground for people who want to commit fraud because there is such value in real estate,” said David Cabot, president of the San Diego Association of Realtors. “You have to be always vigilant. If you are a creative criminal you could do this 18 different ways and get away it.”
http://www.signonsandiego.com/uniontrib/20070422/news_1h22prevent.html
I am moving to CA in August. Can anyone let me know about good areas where the rents are still resonable?
Thanks in advance
Ca. is a pretty big state….
Susanville
Bridgeport
Trona.
OK…I guess I will chim in;….Tule Lake…
Here is a story on rents in the LA and OC areas from a few days ago:
http://www.latimes.com/business/la-fi-rents19apr19,1,5832655.story
Stay away from the coast or you will be in for a real shock rent wise. And rents are cheap compared to buying! It’s insane out here. The problem is if you are away from the coast IMHO the only other livable places are the mountains. (and my apologies to anyone who loves these non beach/mountain places) Inland gets hot real hot in SoCal and Sacramento. I do not know about the Central Valley or North of SF.
I rarely remember my dreams, and this one was pretty interesting…
I have a friend who’s made lots of money (he has an engineering firm) in the Aspen RE market, and he’s invested it in SFH in W. Colorado (nicer rentals). I was dreaming I told him to sell it all, then I spelled out the website for this blog so he could confirm this sage advice.
Hmmmm, maybe I should call him…
Anti-bailout voices are starting to be heard in the MSM.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/04/22/BUGU9PB34E1.DTL
Also mentioned here: http://www.washingtonpost.com/wp-dyn/content/article/2007/04/21/AR2007042100131.html
And in the OC Register today,
http://tinyurl.com/2vsxpm
When the OC Register is printing articles like this, you know that Armageddon has arrived.
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Sunday, April 22, 2007
Mortgage bailout a bad idea
Rescuing borrowers, lenders from their mistakes would send the wrong message
By Esmael Adibi
Director of Chapman University’s Anderson Center for Economic Research
Congressional Democrats are proposing to allocate hundreds of millions of dollars of taxpayers’ money to help homeowners who have trouble making their mortgage payments and are in danger of losing their homes through foreclosures. The underlying premise of this rescue plan is that rapid increases in foreclosures will hurt the economy and may cause a broad-based recession. In addition, supporters of this plan argue that many of these homeowners were granted risky mortgages without fully understanding the terms of the loans.
Although I agree that the possibility of a recession has increased, and some borrowers did not know what they were getting into, this proposal could have unintended consequences that send a wrong message to the market.
More importantly, I believe this plan is intended to rescue banks and nonbank financial institutions, including hedge funds that are holding some of these risky mortgages. These same institutions pocketed huge profits during the housing boom of the past six years. In fact, relaxed lending practices, creative and exotic mortgage financing schemes coupled with the growth of the subprime mortgage industry and speculation activity boosted housing demand, leading to rapidly rising home prices.
It is important to remember that home prices increased not just in Southern California, but also in many other regions of the country and the world. Home prices have increased for several years even in some regions where poor economic conditions did not justify that trend.
Many economists, particularly those in academia, argued vigorously that the pace of home price appreciation was not sustainable. Their voices, however, were slowly silenced by the popular media that succumbed to housing euphoria.
Our model at the Anderson Center, which is driven by fundamental economic factors such as rate of job creation, new housing supply and housing affordability, called for single-digit annual home price appreciation over the 2002-05 period and showed declining home prices over the 2006-07 period. In fact, the low housing-affordability measure in our model was the most influential factor suggesting low to moderate home price appreciation. Homebuyers and lenders, however, were not focusing on affordability. Lenders were offering loans with very low teaser interest rates that produced extremely low monthly payments for the first couple of years of the loan. Borrowers counted on future refinancing options based on their expectation of higher home prices. The lenders were not requiring borrowers to document their incomes, and some borrowers were not completely honest about how much money they made. This process masked the affordability problem, and the “irrational exuberance” continued.
tired to post this earlier…
http://tinyurl.com/2d8dkk