The New Housing Market
It’s Friday desk clearing time for this blogger. “The number of people who bought previously occupied homes fell in July for the third time in four months. This year is on pace to be the worst in 14 years for home sales. Since the housing boom went bust in 2006, sales have fallen in four of the past five years. Declining home prices and super-low mortgage rates haven’t been enough to boost sales this year. The weak data show ‘the housing market will not save the U.S. economy,’ said Paul Dales, senior U.S. economist at Capital Economics.”
“During a campaign stop Wednesday in Illinois on his Midwestern tour, President Barack Obama said a housing rebound will require ‘consumers and banks and the private sector working alongside government.’ ‘It will probably take this year and next year for us to see a slow appreciation again in the housing market,’ he said.”
“LuAnn Lavine, a real estate broker in western Illinois’ Henry County, told Obama, ‘Every week I sit around the kitchen table of families that are here today and I listen to the stories of a lost job, upside down in their house.’ She saw a turnaround in May and June. ‘My phone was ringing. I was busier than all get-out.’ However, ’since the debt ceiling fiasco in Washington, the phones have stopped,’ even through interest rates are at a record low.”
“Obama in reply said his administration was pushing banks to do loan modifications; Lavine disagreed. ‘The loan modification system has been a nightmare. Short sales are a nightmare. And the lenders are so tight and you have to be so perfect, and it’s not a perfect world,’ she said.”
“Deborah Stockhammer was four months late on her mortgage when she applied in April for federal foreclosure prevention money through the Hardest Hit program. The Jupiter River Estates resident soon was approved for the assistance. But Stockhammer said her loan servicer has refused to accept the federal money to make her loan payments. She was served with foreclosure papers last month. ‘The money is there, it’s been allocated,’ said Stockhammer, who refinanced in 2007 and now has a loan serviced by Ocwen Financial Corp. ‘Why not use it instead of throwing people out?’”
“Most rejections were because the homeowner had racked up too many late payments - the program requires owners to be no more than six months delinquent - and because there was not an eligible hardship.”
“‘Had they started this two to three years ago it might have been helpful, but at this point, a lot of the water is already under the bridge,’ said Lynn Drysdale, a Jacksonville attorney and co-chair of the National Association of Consumer Advocates, who nonetheless is supportive of Hardest Hit. ‘A program is going to be good as long as at heart it’s there to help the borrowers.’”
“Not everyone supports mortgage principal reduction and the issue has divided Washington. University of Maryland economist Peter Morici said cutting principal is ;grossly unfair to everyone else who pays their debts.; That is seconded by Kim Luu, a principal in a financial management firm, who wrote in a blog posting that cutting principal ‘benefits few people and only for the short term. It does not fix the problem.’”
“Freddie Mac spokesman Brad German said if Freddie cuts principal, it will raise the cost of home financing. ‘We’re financing a mortgage with the expectation that principal is going to be repaid. If there is a new scenario where it may not be repaid, that increases the cost to us and that will be factored into the way we price credit,’ German said. ‘We’re pricing risk. If the risk goes up, the price goes up.’”
“Confidential documents obtained by the Free Press show Fannie Mae has told banks to foreclose on some delinquent homeowners. Local governments are trying to keep people in their homes and keep property values up, and here you have a government bureaucracy ripping (those efforts) to shreds,’ said Wayne County Executive Robert Ficano.”
“‘Fannie would rather foreclose all the bad and marginal mortgages now, even at very high loss rates, while losses are on the taxpayer, so that when it is once again a private company, these risky mortgages will be gone, and will not result in losses for its shareholders,’ said Alan White, a law professor at Valparaiso University and a leading national expert on the foreclosure crisis. ‘Treasury and Congress have given Fannie a blank check, but Fannie knows the checkbook will be taken away sooner or later.’”
“‘I think you’ve got a dam that’s ready to break. Delinquencies are piling up,’ said John Gianola, managing attorney at the Iowa Legal Aid Foreclosure Defense Project. ‘Our August numbers have really picked up.’
“Roger Goldsberry, the director of the HUD-approved Family Management Credit Counselors in Waterloo, helps delinquent homeowners restructure their loans. Like Giaonola, he’s concerned the nation’s foreclosure crisis is not on the wane. ‘It’s going to come back with a vengeance,’ Goldsberry said.”
“The flow of foreclosures in New Jersey is expected to speed up soon, forcing more distressed homeowners out of their homes and weighing down property values. ‘It definitely doesn’t help the market, I’ll tell you that,’ said Scott Zotollo of Zots Appraisal Services Inc. in Rochelle Park. ‘All things being equal, a person’s going to buy the lowest-price property.’”
“‘It’s going to decrease the value of properties because foreclosures are going to go for considerably less,’ said John Susani of Coldwell Banker Susani Realty in Paterson. In the cities, he said, banks will sometimes sell foreclosed properties for 50 percent off market prices, so they can unload them quickly, before they are vandalized. ‘They want to get in and out,’ he said.”
“Dane County’s Distressed Property Index in July was a record-high 36.8 percent. Keller Williams agent Dan Miller noted the index has been climbing because last year was a record year for foreclosures, and many of those foreclosures are hitting the market now. ‘Many of the units that are selling in this market are foreclosures — because they can compete aggressively on price,’ Miller said.”
“More Americans joined the unemployment line last week than a week earlier. And consumers were under even more pressure at the cash register last month than economists thought. When inflation is rising at the same time the job market is weak, the Federal Reserve has a more difficult time stimulating the economy, said Jack Ablin, chief investment officer at Harris Private Bank.”
“‘Every time the economy got the sniffles, we had the Federal Reserve standing by with tissues,’ Ablin said. ‘This time around, I think the box is empty, and we’re going to have to go through this alone. I think we can do it. It’s just not something we’re accustomed to.’”
“So the world has some debt problems. Is it any wonder? In our modern financial world, one person’s debt is another’s asset. The whole global economy is built on debt. Debt is fine as long as it is productive. That is, as long as the debt capital generates a return that is greater than its cost. However, when the return drops below its cost, it’s a signal that the debt has become unproductive.”
“The law of economics has caught up with this system and it is now in its death throes. Governments are struggling to understand what they have created. They blindly throw more debt at a problem created by too much debt in the first place.”
“Dear Action Line: Why are home equity loans so hard to get? We’ve put a lot of income into retiring the principal on our mortgage, planning to use the house as our bank later on. Now we can’t get a home equity line of credit. - S.R., Jenks.”
“Housing prices in Tucson should hit their lowest point by September, after plunging more than 30 percent since 2008, analysts for Fiserv Case-Shiller Indexes now predict. ‘The increased foreclosure sales are a positive indicator, as it will be necessary to get through the foreclosures before the new housing market begins,’ said John L. Strobeck of Bright Future Business Consultants. ‘I say ‘new housing market’ because I believe we will never again see the typical housing market that we became used to in the 1990s through 2005.’”
The Detroit Free Press series is well done, IMO, even though I don’t agree with much of what’s said there. They actually took the time to dig into what’s going on with the Fannie Mae shadow inventory and how it’s being doled out.
On this:
‘All things being equal, a person’s going to buy the lowest-price property.’”
‘It’s going to decrease the value of properties because foreclosures are going to go for considerably less’..banks will sometimes sell foreclosed properties for 50 percent off market prices, so they can unload them quickly’
‘Many of the units that are selling in this market are foreclosures — because they can compete aggressively on price’
If you accept that housing prices are too high, then distressed sales are the only mechanism for lowering that. Think about it; owners won’t voluntarily drop prices. They have to be forced, through distressed circumstances. It simply how things are done. They don’t get together and say, ‘this house costs too much, let’s give the buyers a break!’
And that includes lenders when they’re the owner.
This is going to take time to work itself out. One camp cries out for all of the shadow inventory to be released to the market at once, but I think this is a naive position. Think about it: if you are a portfolio manager with a portfolio of distressed assets then you have a fiduciary responsibility to the asset owner to maximize the realized value of these assets.
To get the best value you don’t flood the market all at once- you release an amount that you believe the market can absorb. Like I said at the outset, this is going to take time to work out.
“One camp cries out for all of the shadow inventory to be released to the market at once, but I think this is a naive position.”
I don’t cry out for this. Just enforce the antitrust laws against price fixing, and the shadow inventory will release itself in due time…
in due time.
‘if you are a portfolio manager with a portfolio of distressed assets then you have a fiduciary responsibility to the asset owner to maximize the realized value of these assets’
That’s not hard to understand, but here’s the kicker;
The GSEs are financing their own REOs! They are basically buying them from themselves, with incentives, of course. And because DC has set them and HUD up as 90% plus of the lending market, they are buying private market REOs too!
“The GSEs are financing their own REOs! They are basically buying them from themselves, with incentives, of course. And because DC has set them and HUD up as 90% plus of the lending market, they are buying private market REOs too!”
GSP = Government Sponsored Price-fixing
“They don’t get together and say, ‘this house costs too much, let’s give the buyers a break!’”
It’s more like, ‘this house is costing me too much to own, compared to the price for which I could sell it.’ So long as owners can hold out hope for a reflation to bubble prices, they will have incentive to hold on a little longer. If someone explained to them that we are turning into Japan, and that Japan’s housing prices are still in the basement two decades after their real estate and stock market bubbles popped, perhaps sellers would see the light.
Some Hope, many de$pair:
Tis more like diz:
I want my house to sell for this price: $xxxxxx
I need my house to sell for this price: $xxxxxx
Their wants are inclusive to themselves, their needs involve many, many other$
Tug rope isn’t an individual sport,… beware the FatMen$ on the end of the opposite line, all theys needs to do is stand there with a firm grip.
Cue Paul Simon:
We work our jobs
collect our pay
Believe we’re gliding down the highway
when in fact we’re slip slidin’ away
She said a bad day’s when I lie in bed
And think of things that might have been
Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
the more you’re slip slidin’ away
“So long as owners can hold out hope for a reflation to bubble prices, they will have incentive to hold on a little longer.”
Ergo all the accidental landlords, including a neighbor around the corner from me. Bought at the peak, growing family, house too small, will rent it for 5-6 years to hold as an “investment” until the market “recovers.” In the meantime they’ve bought a larger house.
Hope springs eternal, I guess. But the bubble years still hold sway as what’s normal.
Le Japonisme
The Financial Times
August 19, 2011 7:38 pm
West shows worrying signs of ‘Japanisation’
By Richard Milne
The big question for many investors these days is one that could scarcely have been thought about a few years ago: is the west turning into Japan?
The response to that will determine the future direction of western economies as well as of shares and bonds. To date, the tentative answer has been that the developed world is heading Japan’s way as government bonds have far outperformed equities.
“This is looking like a Japan-style scenario. I am more nervous than I have ever been before about it,” says Sushil Wadhwani, founder of the eponymous hedge fund and a former member of the Bank of England’s rate-setting monetary policy committee.
The most striking example of the “Japanisation” of countries such as the US, UK and Germany is in their benchmark borrowing costs. If you take 15 years off 10-year Treasury, gilt and Bund yields there is a remarkable similarity with Japan’s performance from 1988 to 1996.
What happens next will be crucial. Since Japanese yields breached the 2 per cent barrier in 1996, they have never risen above it for any sustained period.
In the most striking move of another brutal week for markets, US Treasury yields on Thursday fell below 2 per cent for the first time since 1950. But they have since recovered slightly to stand on Friday afternoon at 2.08 per cent. Many investors, however, believe they could fall further, with some targeting yields of 1.75 per cent.
…
More
On this story
No magic medicine to fix global finances
Fears mount of cuts in EU bank lending
Tokyo struggles to keep pace with gold rush
Funding fears hit European bank stocks
Greece growth to be worse than thought
People who can afford their house payment, but list their house for sale at a delusional price for 5 years are not sellers, they’re dreamers. They don’t really mean to sell, they’re just looking for a sucker.
Think about it; owners won’t voluntarily drop prices. They have to be forced, through distressed circumstances ??
Spot on Ben….So many owners, particularly long term owners just can’t accept that their property is worth less than what they thought…They look at their house as if it is a CD in a bank…Point being, the CD’s never go down, they always go up…At worst they stay even…You can shove as much comparable sales as you want in front of them and they just reject it outright which then gets to the point of your statement;
“They have to be forced, through distressed circumstances”…
In the next few years, I’ll probably get the job of selling the family home back east. I’m of the mind that the place should just go on the market and be sold for a realistic price, not a dream price.
Although the interior’s a bit worn and could use an update here and there (the kitchen and bathrooms come to mind), I’ll let the next owner handle those things.
I think the most important thing you can do (cheaply) to get a house sold is take out the old “stuff” and make sure it doesn’t smell bad. I once looked at an interesting apartment in Jersey City. It was sort of quirky. But it smelled like animal urine and feces and not just a cat’s litterbox. As far as I could tell that smell was coming from the floor boards. I pretty much ran away.
I agree Ben, it’s a good article. But there really is no good position to take in this mess. If you favor cram-downs, then you’re rewarding bad behavior, being unfair to everybody else, and hurting banks. If you don’t favor cram-downs, then you’re throwing babies into the street.
HBB posters had a good idea — FB declares BK, house goes back to the bank, but the bank rents the house back to the FB — and is forced to stay there. The banks can take the loss slowly (as they receive rent). Of course, banks want be landlords even less than they want to be realtors, but hey, they made the loan, it’s either that or eat the loss all at once. The FB loses the house but saves face. It may work, but it’s a lot easier to wait for inflation to wipe it away.
‘It will probably take this year and next year for us to see a slow appreciation again in the housing market,’
The term ‘appreciation’ in the context of asset markets usually means rising prices. So is the policy goal to make real estate start going up again soon, in order to draw in speculators and investors and reflate the housing bubble?
I think the goal is to maintain the asset values as real estate historically has been the largest component of net worth for the middle class.
A cursory look at the data will show (1) a strong positive correlation between home ownership and wealth and (2) similar strong positive correlation between wealth and the value of owned homes, within the Ownership Society.
Are the Democrats are trying to reward wealthy homeowners and punish poor renters? Because I fail to see how higher home values would help renters or young families who are trying to buy homes.
Bear, I think this a case where the great minds are thinking alike. Here’s an interesting essay for all of the great minds on this blog:
De-commodifying Housing
Key points:
Investing vs. speculating: “Housing is such a ubiquitous form of investment – the most common form of wealth in America – that we don’t really think about some of the basic problems with the way that we treat housing as a speculative commodity. As Dean Baker points out, real housing prices haven’t done more than just grow at the rate of inflation for the past century and then suddenly diverged from this trend a decade or so ago.”
Affordability problems abound: “Bubbles are only one aspect of the market failure in housing – another major problem is a failure of supply and demand to respond smoothly, especially to the lower end of the market. According to Habitat For Humanity, 16.5% of American households spend more than 50% of their income on housing, and another 2.4% are either homeless or living in severely substandard conditions. Despite this enormous pent-up demand for affordable housing, the U.S actually lost 1.2 million affordable rental housing units between 2001-2007. It’s not surprising therefore, that there is not a single county in the U.S where a full-time minimum wage worker can afford a one-bedroom apartment at fair market rates and that one has to earn more than two-and-a-half times the minimum wage to afford a two-bedroom apartment (and that it’s getting worse):”
“(1) a strong positive correlation between home ownership and wealth ”
Yeah, and there’s also a strong correlation between the demise of piracy and global warming. Home ownership is a symptom that you have a job, not a cause of wealth.
Dems are trying to reward middle-class voters, who were never wealthy even if they thought they were.
“Home ownership is a symptom that you have a job, not a cause of wealth.”
I said correlation; did not mean to argue causality.
That said, any form of wealth, whether inherited or earned, seems to be a key causal factor in home ownership. Perhaps a better way to say this is that a lack of earned or inherited wealth will cause you to NOT be a home owner. Wealthy folks have discretion; poor folks do not, unless there is a subprime lending mania underway.
I think I would be much poorer had I bought a house in 2001 and stayed put in Tucson than by being a renter and consultant. I would be divorced by now and paying alimony.
I never agreed with any correlation between home ownership and wealth, or marriage and wealth for that matter. Those are social conservative bromides to cajole people into getting married and having kids - the conservative goal in life.
“Are the Democrats are trying to reward wealthy homeowners and punish poor renters? Because I fail to see how higher home values would help renters or young families who are trying to buy homes.”
PB- you’re looking at this from the perspective of the “renters or young families” rather than taking a look at the bigger picture. This is one area where it becomes a political analysis, and it boils down to numbers.
Here’s the primary number: how many voters are in the homeownership camp and how many voters are in the renter or looking to buy camp?
maintain ??
To late for that but they are trying to help put a floor/backstop in place so millions more do not fall into the negative equity range…At least that’s how I see it…
I think the (impossible) goal is to stop the bleeding of the banks. The corpse is getting pretty smelly though.
‘It will probably take this year and next year for us to see a slow appreciation again in the housing market,’
mortgage rates at 4%, 20% underemployment, and no significant wage increases and this idiot sees housing “turning around”…two dollar gas is more likely.
‘This time around, I think the box is empty, and we’re going to have to go through this alone. I think we can do it. It’s just not something we’re accustomed to.’
The box was always empty. In fact, there is no box. Rather they have an electronic printing press technology and a license to use it to support whatever asset class or group of corporations they choose.
Last week, during one of the down days for the stock market, the Fed announced low rates until 2013, or something. It didn’t help stocks, and I heard this “analyst” on NPR say “the markets realized the Fed wasn’t magical.”
That’s really what they’ve hung their hat on all these years? That Bernanke is going to bust out on the street in a tutu and spread pixie dust on everybody?
Wait, I’ve got the answer! Let’s do what Keynes said - dig ditches and fill them back in.
Or we could stimulate the economy by breaking windows and employing glaziers to replace them. I think they are already trying this over in London.
Let’s be fair; Keynes would say the government should borrow the money to dig/fill the ditches and break/replace the windows.
Does anyone have a link to a picture of Bernanke in leotards and a tutu, holding a magic wand and spreading glitter and pixie dust he rides his unicorn?
Man, that’d be a great photo.
Or how about some t-shirts printed with, “My Fed Chairman went to Jackson Hole and all I got was a glittery unicorn.”
Helicopter Ben Bernanke
Here ya go:
http://newspiritualpath.com/wp-content/uploads/2010/12/helicopter-ben-bernanke.jpg
OK — did you bother to click on the link above before posting?
I’m getting a Bandwidth Limit Exceeded message when I click on the link.
“Not everyone supports mortgage principal reduction and the issue has divided Washington. University of Maryland economist Peter Morici said cutting principal is ‘grossly unfair to everyone else who pays their debts.’”
I’m pretty sure my stance on this issue agrees with the Republican platform. The household-level moral hazard created by forcing group A to pay down group B’s debts would be extremely destabilizing to the financial system. And the group which was forced to make payments could go into paroxysms of rebellion against the unfairness of this policy.
What I find amazing is that DC policymakers are still floating the idea of principle writedowns at this point. For five years since the housing bubble popped, this discussion has surfaced and resurfaced again, but never gained political traction. With increasing Republican control of the Congress, I doubt it will gain traction now, as forcing one group of individuals to repay others’ debts is not exactly in line with Republican thinking.
With increasing Republican control of the Congress, I doubt it will gain traction now, as forcing one group of individuals to repay others’ debts is not exactly in line with Republican thinking.
It isn’t. But next year is an election year. And, since a lot of the Republicans in Congress are career politicians, they want to keep their jobs.
Expect to see more than a few “Nixon Goes to China” moments in the next year.
And they won’t just be coming from the Republican side. I think that Obama and the Democrats will also be providing some interesting surprises of their own. Personally, I hope that a single-payer health care system will be one of them, but hey, that’s just me.
Personally, I hope that a single-payer health care system will be one of them ??
I second that…..
I’m thinking that much of the push toward single payer will come from companies wishing to:
1. Be more competitive in world markets. The health insurance cost burden on U.S. companies is a major drag on competitiveness.
2. Cut their costs. Health insurance costs, in addition to being uncontrollable, seem to only be headed one way: Up. And, despite what they say about health care costs, I think the real reason is insurance company profits. Gotta keep those up in the stratosphere.
Heh. Nixon was always going to china, that policy was actually his! His opposition to it was politics, since Kennedy supported it, Nixon had to oppose it. But Nixon was the author of the “go to China” policy.
” I doubt it will gain traction now, as forcing one group of individuals to repay others’ debts is not exactly in line with Republican thinking.”
Unless the person stuck with the debts hasn’t been born yet.
So the president still talking that jive about the market snapping back in a year or two? He and so many others just don’t get it that housing VALUE never really went up at all, only the PRICES did because of the speculative frenzy. In most markets prices still have far to fall before getting back to late nineties levels where they belong. I think the analysis Charles Hugh Smith posted on his blog about 5 years ago is absolutely brilliant as a predictive instrument and events have so far unfolded as he said they would. According to those charts we have a long way to go before hitting bottom. Sadly, so many people already sold at the peak through Helocs and cash out rifis and don’t actually own their houses; they’re just waiting for the margin call….
Thanks for mentioning Charles Hugh Smith. I think this is the blog post you’re referring to:
Phase Transitions, Symmetry and Post-Bubble Declines
“Debt is fine as long as it is productive. That is, as long as the debt capital generates a return that is greater than its cost. However, when the return drops below its cost, it’s a signal that the debt has become unproductive. When that happens, the debt load begins to eat away at a country’s wealth.”
The return on debt used for past consumption is zero. It is nothing more that a promise to be poorer in the future in exchange for being richer today.
That is a key change — what the debt is being used for. Buy outs and executive bonuses rather than building companies. Luxury amenities and cash-out refis used for cruises and Escalades rather than college education or fixing the roof.
But debt allows trade imbalances, and results in MONEY!
No debt increase, no new money.
Lots of debt decrease, less money.
If debt goes poof and you were on the wrong end of this debt that went poof then your money went poof.
Money that goes poof creates a scarcity of the stuff. If you have money and everyone else’s money went poof then you sit where normally kings sit.
It’s good to be the king. Kings get to call the shots. Those with cash in a cashless world also get to call the shots.
“This year is on pace to be the worst in 14 years for home sales. Since the housing boom went bust in 2006, sales have fallen in four of the past five years.”
2011 - 14 = 1997. We are at pre-bubble levels of demand now; when will we return to pre-bubble price levels?
‘Fannie would rather foreclose all the bad and marginal mortgages now, even at very high loss rates, while losses are on the taxpayer, so that when it is once again a private company, these risky mortgages will be gone, and will not result in losses for its shareholders,’
How does that plan mesh with the other plan to wind down Fannie and Freddie once and for all?
Op-Ed Contributors
White Picket Fence? Not So Fast
Kim DeMarco
By VIRAL V. ACHARYA, MATTHEW P. RICHARDSON, STIJN VAN NIEUWERBURGH and LAWRENCE J. WHITE
Published: August 16, 2011
…homeownership policies and mortgage subsidies in the United States benefit the rich a lot more than the poor. For example, the economists James Poterba and Todd Sinai recently estimated that the benefits from the mortgage interest deduction for the average homeowning household that earns between $40,000 and $75,000 were about 10 times smaller than the benefits that accrue to the average household earning more than $250,000. These policies increase income inequality instead of reducing it.
A better policy would be to gradually wind down Freddie Mac and Fannie Mae and to scale back homeownership subsidies. We favor a long-term focus on rental assistance programs for the poor that are on budget and housed in the Federal Housing Administration, and whose costs are transparent to taxpayers.
…