The Link Between House Prices And Earnings
Readers suggested a topic on interest rates. “Mortgage rates will be going up soon, and as everybody knows, when rates increase home prices increase too, so smart home buyers should buy now to lock in a low interest rate at an affordable purchase price before rates and prices go up.”
A reply, “Mortgage rates normally rise as the inflation rate rises. Inflation leads to a rise in wages and house prices will rise as wage inflation occurs. In this case we have a disconnect with the Mortgage rate artificially low and little sign of wage inflation, so I rather doubt house prices will rise, unless wages do. If wage inflation fails to occur house prices will drop, as people will be unable to support the higher cost of home ownership.”
One said, “Wages are going nowhere. The only thing that can drive prices higher at this point is artificially constrained supply and lower interest rates. The millenials had their future completely sold out from under them, and are awash in debt at graduation, with no job prospects that will allow them to pay it back. They were the foundation of the housing food chain, and this will become more apparent as the oldsters die off.”
Mortgage Solutions. “Leading economist Roger Bootle of Capital Economics, speaking at the Tenet Group conference in London, said that despite a prolonged period of low interest rates the current earnings to mortgage payments ratio was only slightly below historical averages. He warned rising interest rates would cause a spike in the number of borrowers unable to cope. ‘If you look at affordability, the percentage of a person’s income that they pay out on a mortgage has been comfortable at the long-term average and is currently just below. But it should be below given the base rate is at 0.5%, what do you think it will be like when there are normal rates of 5% or 6%? Mortgage rates will be 7% , 8% or 9% and it will look rather different, a lot of people would find themselves incapable of servicing their mortgages at that sort of level of interest rates.’”
“Bootle said the link between house prices and earnings had drifted but higher interest rates would see this return to normal levels. ‘This has important implications,’ he warned. ‘Somewhere in the future, not this year or even next year, but between four and five years’ time, we will have of two events. We are either going to have a housing market crash with big falls in house prices sustained over a long time to get this ratio back to normal.’”
“‘Or the government is going to preside over a period of higher inflation, including higher wage inflation, accompanied by a weaker exchange rate in order to bail the market out and restore this relationship without house prices falling. I think we will see one of those two things.’”
The Des Moines Register. “Iowa Bankers Mortgage Corp. President Dan Vessely and Fannie Mae Chief Economist Douglas Duncan both fear that one of the most under-appreciated consequences of the new qualified mortgage rules will be higher mortgage rates, especially for loans that almost meet the threshold. That’s because the rules also cap the combined points that mortgage originators and repurchasers may charge at 3 percent. Points are a kind of fee for them — often accepted from borrowers in exchange for a lower interest rate.”
“‘Banks are in the business of making money and if this regulatory change decreases the profitability on mortgages they have to recapture that someplace else,’ Duncan said. ‘It would not surprise me to see that result in higher interest rates.’”
“One way to make a borderline mortgage loan both compliant under the new rules an viable for the lender is to raise the interest rate, according to Vessely. ‘A definite result of this new rule will be higher interest rates in order to have certain loans meet the new qualified mortgage rule,’ he said. ‘Whether it’s an intended consequence or an unintended consequence, the rates are going higher.’”
From Miami Today. “‘Forgive me if I do not raise a toast to the start of a new phase of robust growth in the US economy that is here to stay: to a long-awaited period of actual recovery that will lift all boats with its rising tide of prosperity,’ University of Central Florida economist Sean Snaith wrote recently in his annual economic forecast.”
“‘I’ve seen this movie before and that is not what follows this current scene of economic data reports,’ he added. ‘I know the villain awaits us in 2014 and the uncertainty of the Affordable Care Act, Dodd-Frank regulatory reform, and what path the Fed will follow as it unexpectedly took its first step in its taper off of bond purchases in December are a cabal conspiring to suck out the wind that currently is providing the economy with its lift.’”
“Data shows that prices have risen significantly. It has sent a signal to builders that more inventory is needed as housing construction activity has increased. In the Miami-Fort Lauderdale-Pompano Beach metro area, housing starts are expected to rise in 2014 for the fifth consecutive year after bottoming out in 2009.”
“‘All these are indicators of a high grade housing market,’ Mr. Snaith wrote, ‘yet housing in Florida enters 2014 in a delicate condition as new regulations are set to kick in, interest rates are set to rise as the Fed has taken its first steps to tighten monetary policy, and the diminishing role of cash investors raises questions about the sturdiness of Florida’s housing recovery.’”
“He noted the role of investors is starting to wane, as evidenced by a declining level of cash transactions from a year ago. ‘These investors, unlike the flippers of the bubble era, are driven by portfolio concerns,’ he added. ‘Real estate prices have been rising in Florida over the past several years and this ironically makes housing in Florida a less attractive investment by reducing the expected return of housing. Higher sales prices reduce the return both by decreasing the rental yields and by reducing the size of capital gains when investors seek to sell the home.’”
“Meanwhile, the availability of mortgage financing is just a fraction of what it was prior to the housing collapse. The Mortgage Bankers Association’s Credit Availability Index dropped in November to 110.2. The index is benchmarked at 100 in March 2012. To get a sense of how much housing finance has dried up, if the index had been tracked in 2007, the association estimates that it would have stood at 800.”
“‘While [mortgage] standards in 2007 were clearly too lax,’ Mr. Snaith wrote, ‘current availability of mortgage financing is just 14% of what it was back then and is likely too tight to allow for a smooth transition from an investor-driven to a traditional buyer-driven housing recovery.’”
Heres where we’re at for mortgage (housing) demand…. right around 1997 levels.
http://finance.yahoo.com/news/mortgage-applications-hit-13-low-212727183.html
Why?
It has nothing to do with anything except PRICE. Prices are 225%-300% above long term trend. Resale housing prices are 40% above new construction costs. Something is very wrong.
The biggest wrong in your post is you calling yourself a “Housing Analyst”. HA, what a laugh. If used housing is selling for 3 times reproduction cost, builders would be racing to build and sell new houses at huge profits. That is not happening.
You just don’t know what you’re talking about. Pick up the pieces and move on.
Just keep renting…that’s what your good at…..
I have plenty of houses and tenants. Carry on Debtor.
HA. Living in your mother’s basement playing Monopoly doesn’t count!
Could we all play nicely in the sandbox, please? No more throwing sand in your playmates’ eyes.
P.S. It looks like Sacramento home prices have achieved a permanently-high plateau.
Sacramento County’s median home price remains steady
By Hudson Sangree
Published: Wednesday, Jan. 15, 2014 - 7:36 pm
Last Modified: Thursday, Jan. 16, 2014 - 8:16 am
Sacramento County’s median home price held steady in December at about $240,000, where it’s been stuck since midsummer after a big run-up in prices last spring, according to DataQuick.
But the number of homes sold in the county last month was the lowest for any December in six years, the San Diego-based real estate information said Wednesday.
There were 1,696 houses and condominiums sold countywide in December, including new and resale homes. That was the lowest figure since the days of the housing collapse when only 1,372 houses sold in December 2007.
Last month’s sales were about 20 percent below Sacramento’s historical average for December, DataQuick reported.
The reasons for the steady prices but low sales are a constrained supply of homes for sale, investors leaving the market, and higher prices and interest rates undermining affordability, said DataQuick analyst Andrew LePage.
“Investors are still out there but in smaller numbers,” LePage said. “Prices are up 20 percent in a lot of markets. Rates are up a percentage point since the spring. But mainly there aren’t enough homes to meet demand.”
It was a similar story in Southern California and the Bay Area, where sales figures were also the lowest for any December since 2007, LePage said.
“It’s the same statewide,” he said. “There’s a very thin inventory of homes on the market.”
…
I apologize. I just get tired of HA’s claims he can build housing anywhere for $50/sf, telling people they shouldn’t buy housing, and now claiming he owns multiple properties. It all seems very misleading to me.
We can? We do. In all 48 states.
‘It has sent a signal to builders that more inventory is needed as housing construction activity has increased.’
‘Homebuilders overcame inclement weather to begin work on more homes than projected…For all of 2013, builders began work on 923,400 homes, up 18.3 percent from the prior year and the most since 2007’s 1.36 million.’
‘Housing will make a significant contribution to growth this year,’ said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts, who forecast a decrease to 997,000. ‘Higher prices are bringing more building.’
Building houses is one of the few occupations that:
1. Employs lots of people (directly and indirectly)
AND
2. It is an occupation that cannot be exported.
Very few jobs have both these traits. If I were a member of the PTB then housing would be what I would be pushing for the reasons stated above.
1. We do our best to leverage efficiencies to reduce manpower budgets.
2. We’ll import them.
‘an occupation that cannot be exported’
You should visit a job site in Phoenix sometime.
Anyway, building anything is fine as long as it is actually needed. An artificially high price sends a signal to producers that will eventually result in over-supply. This is just one reason prices should never be manipulated.
If building houses supports an economy in and of itself, Las Vegas would never have crashed.
“If building houses supports and economy in and of itself, Las Vegas would never have crashed.”
Vegas didn’t crash DURING the building, it crashed AFTER the building.
Money flowed into Vegas during the building. After the building stopped the money flow also stopped.
‘Vegas didn’t crash DURING the building’
Last time I was there I saw lots of unfinished construction.
‘Abandoned projects leave lasting reminder of economic crash’
http://www.vegasinc.com/business/tourism/2011/jun/24/abandoned-projects/
I was in North Las Vegas not that long ago. I wandered around a commercial project. It was like a strip mall, but was almost a square block in size. It was completely finished; landscaping, paint was perfect, parking areas cleanly blacktopped. It was for rent; all of it. Not a single occupied space. A big sign on the corner said it was lender owned.
This has been explored here many times:
‘Home-building activity picked up in Central Indiana in December to give the local industry its best year since the recession.’
“This is a true indicator of a strong economy in Central Indiana,” said Steve Lains, chief executive officer of the Builders Association of Greater Indianapolis, in a prepared statement. “We have continued to see permit numbers steadily increase and forecasters are predicting numbers to hold strong in 2014 — proving that a growing housing market is critical to a stable economy.”
Why do these guys push this line so hard?
“proving that a growing housing market is critical to a stable economy”
Can there be a more loaded sentence? He left out, “vital to our national defense and a stalwart against terrorism”.
Me thinks he’s getting excited for a reason. Could it be there are some government goodies to be had by equating house building to community enrichment? Developers wouldn’t try to milk local/state/federal governments for their own benefit, would they?
“Why do these guys push this line so hard.”
Because it’s all they’ve got. House building keeps money flowing at home. Building a factory will also keep money flowing at home but building a factory means competing against factories built someplace else that has lower production costs, hence factories do not get built at home but houses do.
Again, building houses is one of the few occupations that cannot be exported. It may not make long-term economic sense to do this but if just may make short-term political sense to do this.
‘Gov. Jack Markell and his 2008 gubernatorial campaign helped donors break campaign contribution laws, suggesting to one developer that he make donations in the name of others and ignoring business details that showed one donor exceeded limits, according to businessmen interviewed during a more than two-year investigation into state campaign practices.’
‘In one case, Dover real estate developer Michael Zimmerman told investigators a Markell campaign staff member recommended he reimburse donors for their contributions. And in another, Markell and his campaign received information from real estate developer Keith Stoltz that showed his business entities were improperly contributing, even after Stoltz sought guidance from the campaign on how to contribute legally.’
‘A 101-page report outlining the investigation by special prosecutor E. Norman Veasey also provides evidence that Delaware candidates often failed to police contributions from limited liability corporations and other entities, in some cases supporting a “pay-to-play” culture that exists in state politics.’
‘But none of the public officials will face charges, Veasey said in his report. And no charges will be filed against campaign workers or donors, he said. Veasey spends much of the report explaining why he chose not to prosecute when presented with information about potential wrongdoing, including his inability to corroborate allegations, the inability of witnesses to provide more evidence and the fact that the statute of limitations expired in some cases.’
The actual home building happens here but how much of the labor is citizens? How much of the pay is sent to mex or central amer as remittances? How much of the building materials are from abroad? How much is prefab stuff that replaces labor at the site with work done by machines/robots/chinese labor?
“Mr. Banker”, I mean, “Combotechie”, seems a bit confused sometimes.
It was for rent; all of it. Not a single occupied space. A big sign on the corner said it was lender owned.
Sounds a bit like that lender-owner might need to drop the rents, no?
Which begs the question: what is it that is giving the bankers a disincentive to drop the rents and fill the space? Empty space sounds very economically inefficient.
“Empty space sounds very economically inefficient.”
Unless they plan to sell soon and cash in on the QE3 housing market stimulus chips before the QE3 taper fully reverses them. You wouldn’t want to have to deal with occupants if you planned to sell soon.
You wouldn’t want to have to deal with occupants if you planned to sell soon.
I thought such properties sold better if they were fully leased.
After all, then the buyer doesn’t have to wonder whether the rent analysis reflects reality, or fantasy.
‘an occupation that cannot be exported’
The labor to fill U.S. construction jobs certainly can be imported, though. You should have seen the large crews of itinerant Mexican construction workers standing around every morning to get a lift to job sites back in the heyday of the San Diego housing boom! (BTW, these folks are nowhere to be seen these days…)
Where do these workers eat? Where do they stay? Do they eat in the country they came from? Do they go to sleep every night in the country they came from?
Much of the money that is earned stays in the place that it is earned and it circulates in the place it is earned. And much of the money that is earned arrived at the place that it is earned AFTER being sent from some other place.
Vegas, for example, was built largely by money that came from someplace else; Vegas was largely built by money that was injected into it. As long as money was injected into Vegas the city boomed, when the money stopped being injected then the boom morphed into a bust.
“Where do these workers eat? Where do they stay? Do they eat in the country they came from? Do they go to sleep every night in the country they came from?”
My impression was that lots of them lived in shantytowns located down in the canyons of western San Diego County during the boom, and most moved back to Mexico after the bust. But this is largely conjecture…I have no data to back my hunches.
Maybe my conjecture isn’t wildly off the mark, though:
In a County of Canyons, Counting Challenges
By: Kelly BennettConnect | January 18, 2013
File photo by Sam Hodgson
Switzer Canyon, in North Park, photographed in 2011. Canyons pose a challenge to volunteers trying to tally the county’s unsheltered homeless population.
Preparing for their 4 a.m. wake-up call next Friday, a roomful of volunteers met downtown last night to learn the basics about the region’s upcoming tally of unsheltered homeless people. Similar trainings are happening throughout the county this week for more than 700 volunteers.
Count organizer Dania Brett said her group, the Regional Task Force on the Homeless, will deploy counters to more than 500 of the county’s 605 U.S. Census tracts to count individuals, cars with people sleeping in them and hand-built structures like cardboard boxes, shopping carts with tarps draped over them and tents.
Partner groups will do special searches in the county’s canyons and places where unsheltered youth are known to sleep, Brett said. “But we can’t cover every canyon, and we can’t cover every inch of the river beds,” she said.
Turns out, planning the count is also a remarkable lesson in San Diego geography.
“Because we have so many canyons, because we have over 4,000 square miles to cover, because over half of that is rural, there are a lot of challenges,” she said. “But it’s worth the effort.”
Every community in the country that receives any federal funding to combat homelessness must do this count every other year. San Diego chooses to do the count annually. We looked in more detail at the count and its inherent difficulty in this post. The group isn’t taking any more volunteers for this year’s count.
…
Here is a bit more anecdotal evidence:
US home construction is rebounding, but builders say they can’t find enough qualified workers
Published May 09, 2013
Associated Press
In this April 24, 2013 photo, Richard Vap, owner of South Valley Drywall, poses for a photo at a home construction site with one of his crews working in the background in Lakewood, Colo. The resurgent U.S. housing market has sent builders calling again for Vap, but Vap says he is having trouble hiring enough qualified people. (AP Photo/Ed Andrieski) (The Associated Press)
The resurgent U.S. housing market has sent builders calling again for Richard Vap, who owns a drywall installation company. Vap would love to help. And he would — if he could hire enough qualified people.
“There is a shortage of manpower,” says Vap, owner of South Valley Drywall in Littleton, Colo. “We’re probably only hiring about 75 or 80 percent of what we actually need.”
More than six years after the housing bust stalled construction and led many companies like South Valley Drywall to slash payrolls, the reverse is occurring: As demand for new homes has risen, builders and the subcontractors they depend on can’t hire as fast as they’d like.
Builders would be starting work on more homes — and contributing more to the economy — if they could fill more job openings. In the meantime, workers in the right locations with the right skills are commanding higher pay.
The shortage of labor ranges across occupations — from construction superintendents and purchasing agents to painters, cabinet makers and drywall installers. The National Association of Home Builders says its members have complained of too few framers, roofers, plumbers and carpenters. The problem is most acute in areas where demand for new homes has recovered fastest, notably in Arizona, California, Texas, Colorado and Florida.
The problem results largely from an exodus of workers from the industry after the housing bubble burst. Some experienced construction workers found other jobs — in commercial building or in booming and sometimes higher-paying industries like mining and natural gas drilling and aren’t eager to come back.
Hispanic immigrants, largely from Mexico, who had filled jobs during the boom were among those who left the industry and, in some cases, the United States.
Dave Erickson, president of Greyhawk Homes in Columbus, Ga., lost an employee who took a job this year in Texas. The former employee is now installing fiber-optic cable and earning 30 percent more than he did as a construction supervisor.
“I think he’s frustrated with the cycle we went through in recent years,” Erickson says.
A shortage of labor in a well-paying industry might seem incongruous in an economy stuck with a still-high 7.5 percent unemployment rate. But it reflects just how many former skilled construction workers have moved on to other fields.
In 2006, when the boom peaked, 3.4 million people worked in home building. By 2011, the figure had bottomed at about 2 million. As of last month, about 2.1 million people were employed in residential construction.
…
“The resurgent U.S. housing market has sent builders calling again for Vap, but Vap says he is having trouble hiring enough
qualifiedpeople who will work for a pittance rather than the historical average wage for the profession.“…reflects just how many former skilled construction workers have moved on to other fields.”
Just imagine the quality of workmanship of the houses being built now.
As usual, the highly skilled always find a way to survive, if they want to.
The quality might be better than you think.
There are two hypotheses:
1. Highly skilled people were also the most driven, and they went to other industries to keep food on the table;
or
2. Construction didn’t fall to 0, but fell a huge amount. The survivors were only the best, because users of the workers could be much more selective.
Said another way, the building boom required so much labor that any idiot with a hammer and saw became a carpenter…and quality of construction fell to VERY low levels.
Couldn’t the opposite be true? That there were so many workers for so few jobs that only the best in construction kept those jobs?
Good point. But how do you explain the current shortfall.
A shortage of labor in a well-paying industry might seem incongruous in an economy stuck with a still-high 7.5 percent unemployment rate.
The answer lies in the volume of people hired and fired each an every month. In November, the BLS estimates that there were about 4.1MM people hired for new jobs, and about 3.8MM separations (people leaving jobs)…these numbers are NOT seasonally adjusted.
Lots of people get jobs each month, lots of people lose jobs.
A lot of those in the construction industry DID find another job. In some cases, the new job paid more. In many cases, the new job was steadier than construction (which is notoriously boom/bust).
If you were one of the construction workers who found a job that was OK, and not subject to boom/bust cycles, and your old construction boss called you up asking you to come back…would you?
Now, for the long-term unemployed, it is more difficult to see why these folks wouldn’t start to learn a trade and try their hand at construction. Lack of resources to learn a trade? Inability to move to where the jobs are? Hope that they can find a job in the industry in which they are most accustomed? Too old for the work? Too well educated to accept a construction job as their first step as a employed college graduate?
“If I were a member of the PTB then housing would be what I would be pushing for the reasons stated above.”
If it works in China, I guess it can work in America, too.
True. But:
1) To pay for that employment and associated economic activity, a house purchaser goes into massive debt to fund it. It’s not cost-free. There is a massive deleveraging event that occurs with many if not most house purchases, which suppresses economic activity over decades.
2) Keynes said that in a pinch, burying bottles of currency and giving and then having the citizenry dig them up would increase the employment and wealth of the society. He said houses and such were better. Of course, he ignored the “deleveraging event” that occurs with houses. Perhaps the Keynesians should implement a bottle-burying scenario.
3) Congress is derelict in its duty to create policies to create a resilent, heterogeneous job base here. They’ve acquiesced to business desires to export jobs overseas. Every policy has costs and benefits. Economic theory says free trade is best. But it also says that a free trader trading with a protectionist gets the worst possible deal. Also - free trade is good if our economy can benefit from it but not get raped by it. There are those who view it as an almost magical panacea. It has benefits but we can’t ignore the costs either.
“Perhaps the Keynesians should implement a bottle-burying scenario.”
1. Buy lots of bottles of Bacardi 151.
2. Repeatedly spike punchbowl.
3. Wait.
“1) To pay for that employment and associated economic activity, a house purchaser goes into massive debt to fund it. It’s not cost-free. There is a massive deleveraging event that occurs with many if not most house purchases, which suppresses economic activity over decades.”
We had long fruitful discussions about that months ago. Thanks for revisiting it.
Another way to put it is that today’s housing market stimulus sows the seeds for tomorrow’s not-so-great recession.
Still another way to put it is today’s housing market stimulus injects money into a money-starved economy today and this stimulus is something that will be paid for tomorrow.
Borrowing from tomorrow to finance today will always work out as long as tomorrow never comes.
If tomorrow ever does come then the job of the borrower includes making sure that he, himself, is not the one that has to pay back what was borrowed.
Never underestimate the power of incentives, says Charlie Munger, and the incentive now is for the PTB to spend now and worry about paying back later - and the later the better.
Tomorrow is here.
Let me get this story straight:
The PTB in multiple countries across the developed world have decided that housing market stimulus is the way to economic prosperity.
Did it occur to any of these central planners that so many countries pursuing the very same plan might end in tears? Or is this one of those cases where the ‘no atheists in foxholes’ logic prevails?
“‘Or the government is going to preside over a period of higher inflation, including higher wage inflation, accompanied by a weaker exchange rate in order to bail the market out and restore this relationship without house prices falling.’”
“… including higher wage inflation …”
And this “higher wage inflation” will be accomlished by … well, just how will this higher wage inflation going to be accomlished? By maybe bringing back the jobs that have been exported over the years to places that are in The Land of Someplace Else?
Or maybe (door number two) by spending lots of R&D money here to create new jobs here so that these new jobs that are created here can also be exported to The Land of Someplace Else.
And isn’t this is what is now happening? Places such as Silicon Valley boom because the inovation that drives places such as Silicon Valley booms. But most of he country - most of the world - isn’t driven by today’s innovations, it’s driven by yesterday’s innovations. And it’s yesterday’s innovations that gets exported.
Today’s innovations spring up in our Think-Tank cities (and the wages in these Think-Tank cities reflect this) but the production of these innovations end up being shipped out to The Land of Someplace Else. And the workers in The Land of Someplace are willing (and able) to do the production at wages that are a lot cheaper than the production wages here in this country.
So just how is this “higher wage inflation” that is supposed to magically materialize in this country supposed to come about, by maybe bringing production back to this country? Lol, good luck with that.
As you pointed out there is no wage inflation. I would add that there is some “inflation” (one might call it comparative market wage) in those areas where there is a monopoly - such as government contracting.
Even in mature industries there is a wage gap between the knowledgeable experienced and newbies (translated as <5 years). This is because the company needs to retain these pools of knowledge, otherwise it will effect the business in the long run. One could further argue that the newbies are funding the “knowledge” pool’s wages which increase at a much higher net rate. Even an uniform wage increase for the workforce translates into higher wages for the high earners.
One other thing, along with the export of jobs, wage inflation is also exported as one can see, albeit slowly, in China and rapidly in software workers in India. I hear that Indian companies find it very hard to retain good engineers (in various fields). So these engineers are seeing the wage inflation, until it becomes unsustainable.
‘Chinese developers issued about US$22 billion of bonds on the offshore markets in 2013, almost double the previous year, according to S&P, as land prices increased. New-home prices in December had the biggest year-on-year gain in 2013, according to SouFun Holdings Ltd., the nation’s biggest real estate website owner, while sales tracked by the government in the first 11 months of 2013 were just shy of $1 trillion.’
“Many developers exceeded their sales target last year, but we also saw them issue bonds as they realized that their land acquisitions went beyond budget,” Fu said. “The offshore bond market this year may not be as strong as in 2013 because of quantitative easing tapering in the U.S.”
“Banks embracing a housing-bubble favorite: interest-only loans”
http://www.latimes.com/business/realestate/la-fi-interest-only-loans-20140118,0,2906726.story
When organic demand evaporates due to grossly inflated prices, go back to what you know best…… smoke and mirrors.
At least we know California will join Denver as the epicenter of the coming cascading defaults.
“Banks Keep Their Mortgage Litigation Reserves a Secret”
http://dealbook.nytimes.com/2014/01/16/banks-keep-their-mortgage-litigation-reserves-a-secret/?_php=true&_type=blogs&_r=0
Don’t alarm the public by disclosing the truth about the housing debacle and collapsing housing demand.
Normally you’d think a high level of reserves is a good thing they’d want to report. If the losses aren’t gear, some of the reserves will eventually become income on their p&l statement, adding to corporate profits. So either they don’t have enough reserves our they have a lot but don’t want people to read into why they’re holding so much aside for lawyer bills.
If i had to guess, I’d bet on not enough reserves.
“The Mortgage Market Just Cratered And The Fed Should Be Worried”
http://www.huffingtonpost.com/2014/01/14/mortgage-rates-housing_n_4596218.html
You think this might have something to do with cratering housing prices?
“Citigroup Cuts 950 Mortgage-Servicing Jobs”
http://www.bloomberg.com/news/2014-01-17/citigroup-cuts-950-mortgage-servicing-jobs.html
Another 600 Maryland mortgage pimps to be wacked later this year says the article.
NJ Bank Exits Residential Mortgage Business
http://www.capemaycountyherald.com/article/news/cape+may/97851-local+bank+exits+residential+mortgages+finds+new+jobs+affected+employees
This is all part of the bigger picture. Demand for mortgages and housing is going back to long term levels. Prices to follow.
“‘While [mortgage] standards in 2007 were clearly too lax,’ Mr. Snaith wrote, ‘current availability of mortgage financing is just 14% of what it was back then and is likely too tight to allow for a smooth transition from an investor-driven to a traditional buyer-driven housing recovery.’”
Another sign of a resurgent Housing Bubble: Sean Snaith quotes once again appearing in the MSM.
“…a smooth transition from an investor-driven to a traditional buyer-driven housing recovery.’”
Yes, what we’ve had is anything but traditional, but the MSM can’t or won’t connect the dots…artificially low rates, statewide foreclosure moratoriums, propped-up FHA loan levels and silly 3% down payments, constant drum beat around recovery…good luck thinking organic demand could possibly fill the gap as investors look elsewhere for ROI.
All they’ve done is set up the next wave of FB’s.
Good Luck with the “smooth transition” also. Never seems to happen.
The inevitable race to the exits on investors realizing the boom has turned to bust tends to get in the way of smooth transitions.
Sean Snaith was an idiot in 2007 and he is an idiot still.
He makes $185k per year at UCF.
Actually $187,681.31
http://tbo.com/fact-finder/government-salaries1/
Anyone who makes that much coin is well aware that the taller they stand the harder they fall. Hence when I had an annual total compensation like that I bought up precious metals in physical form, and loaded up on Series I savings bonds.
Now that I’m about 2/3 that income I don’t buy as much metals and savings bonds. My job is probably more secure these days anyway.
“Anyone who makes that much coin is well aware that the taller they stand the harder they fall.”
I doubt that pertains to tenured professors in the Florida state university system. I’m guessing they can make the most ludicrous comments imaginable to the press, knowing their positions are perfectly secure.
It is nearly impossible to fire a tenured professor. And the historic reason for that is so that they feel free to speak their mind to the press and in their research papers, not tow the line that the college want’s them to spew onto the world.
I’m fine with academic freedom, so long as professors draw the line at pandering to constituencies which fund their research programs, such real estate professors making deliberately misleading statements which play into the interests of the Real Estate Industrial Complex.
such real estate professors making deliberately misleading statements which play into the interests of the Real Estate Industrial Complex.
The problem is that you can’t really easily define a standard that separates the whoring from the true exercise of academic freedom. Try to constrain the one, and you end up with something that could well be misused to constraint the other. We’re better off having a few professors whoring themselves out in the press, rather than risk constraining important thinking that truly should be shared widely.
Mr. Snaith was quite famous here on the first go around
‘Somewhere in the future, not this year or even next year, but between four and five years’ time, we will have one of two events. We are either going to have a housing market crash with big falls in house prices sustained over a long time to get this ratio back to normal.’
‘Or the government is going to preside over a period of higher inflation, including higher wage inflation, accompanied by a weaker exchange rate in order to bail the market out and restore this relationship without house prices falling. I think we will see one of those two things.’
Can anyone offer comment or references on which of these approaches the Fed plans to pursue?
Is it possible that planning is already underway behind the scenes for a massive relaxation of U.S. lending standards in order to help investors offload their appreciated properties on unsuspecting, marginally qualified U.S. household buyers?
Today’s marginally-qualified homeowner household = tomorrow’s bailout-worthy foreclosure victim.
Is it possible to both ease credit and reduce foreclosures? I’m missing it.
The Economist writers are cheerleading for this potential development!
Fannie Mae and Freddie Mac
Reopening the taps
A new regulator may make America’s mortgage giants more forgiving
Jan 18th 2014 | WASHINGTON, DC | From the print edition
DURING the early 2000s Fannie Mae and Freddie Mac, two government-linked agencies that guarantee the majority of America’s residential mortgages, helped to inflate America’s housing bubble with a gusher of easy credit. The pair have spent the past five years trying to make amends, by jacking up fees and tightening standards until only pristine borrowers qualified for their backing. But that may now be changing.
The mortgage giants’ exacting standards have been a sore point with the administration of Barack Obama, which wants more done to ease the supply of credit and to prevent foreclosures. With that goal in mind, Mr Obama nominated Mel Watt, a Democratic congressman and longtime advocate of more federally backed mortgage lending, to head the outfit that regulates the pair, the Federal Housing Finance Agency. He took office on January 6th, having been confirmed by the Senate last month. One of his first acts was to suspend an increase in the fees the companies charge to guarantee the mortgages that they buy from banks, bundle into securities and resell. Mr Watt wants the FHFA to assess the impact of the increase on “mortgage credit availability”.
This could mark a sea change. In 2008 the tottering companies were bailed out by the Treasury and placed in “conservatorship”, a sort of receivership that puts their regulator in control of their affairs. For Ed DeMarco, a civil servant appointed to run the FHFA in 2009, the priority was restoring the companies’ solvency, recovering the billions spent on their bail-out and shrinking their overall footprint. He refused to let Fannie and Freddie write down defaulting borrowers’ principal, arguing that this would encourage those who were still making their payments to default.
Mr DeMarco also raised the fee the companies charge to guarantee a mortgage, from 0.25% of the amount borrowed in 2008 to over 0.5%. (It was to rise by another 0.1 percentage points under the now-suspended proposal.) This boosted the companies’ profits while raising mortgage rates. Mr Obama’s officials seethed, but Mr DeMarco’s actions endeared him to Republicans, who used Senate rules to block Mr Obama’s first nominee to replace him.
Republicans also opposed Mr Watt, claiming he was unqualified. In fact, Mr Watt had served on the committee that oversees Fannie and Freddie. Republican consternation was really over his left-leaning record, his perceived sympathy for the companies’ staff (he opposed cutting their executives’ salaries after they were bailed out) and his advocacy of the reductions in principal Mr DeMarco opposed.
In the end, Mr Watt was confirmed only after the Democratic majority changed the Senate’s rules to overcome Republican obduracy over presidential appointments. Should he wish, he has many ways to bolster the housing market.
…
Is it possible to both ease credit and reduce foreclosures? I’m missing it.
Easing credit certainly reduces them in the short-term—just not in the long-term. Integrated over time, I’m sure that it significantly increases them.
“I’m sure that it significantly increases them.”
Are you assuming that Democrat politicians won’t concoct ‘Save Our Homes’ bailouts in the future targeted at FBs who drank the easy money lending purple drank?
I think the unloading mechanism is already starting up, but in a different form. The big investors know that they can’t sell to individuals who can’t get mortgages or afford inflated prices, so they are targeting yield-starved small-time investors who want to join the RE game late in the day.
New Lenders For Real Estate Investors: http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-429053/
And it looks like it will blow up a lot quicker than subprime -
“Most of these mortgages have short repayment periods that can trip up borrowers. The monthly required payments are low because they are often based on a 30-year repayment plan, though borrowers actually have just five to 10 years to pay back the loan. At the end of this period, they have a balloon payment for the total remaining balance.”
Yikes.
“…so they are targeting yield-starved small-time investors who want to join the RE game late in the day.”
Transferring losses to greater fools who are happy for the opportunity to join tomorrow’s generation of bagholders is a time-tested strategy for cashing in bubble price gains.
At the end of this period, they have a balloon payment for the total remaining balance.
Reminds me of one the best Simpsons’ quotes ever:
Yup. Oh, then after your final monthly payment there’s the routine CBP or Crippling Balloon Payment.” – Stan
“But that’s not for a while, right?” – Homer Simpson
I thought all these hedgie smart investors had already flipped for great profits. Guess not. Yeah, a few got in and out quick, driving up prices on the way. What about the rest?
Somebody has to get left holding the bag on historically large real estate investment gains since March 2009.
“He noted the role of investors is starting to wane, as evidenced by a declining level of cash transactions from a year ago. ‘These investors, unlike the flippers of the bubble era, are driven by portfolio concerns,’ he added. ‘Real estate prices have been rising in Florida over the past several years and this ironically makes housing in Florida a less attractive investment by reducing the expected return of housing. Higher sales prices reduce the return both by decreasing the rental yields and by reducing the size of capital gains when investors seek to sell the home.’”
Got slow motion train wreck?
Well, and how many of these investors actually have most or all of their portfolio successfully rented out, let alone their carrying costs covered for those units that are occupied?
There’s nothing ironic about Florida’s declining investment levels…when the math doesn’t work, the investor class moves on to something else.
“Well, and how many of these investors actually have most or all of their portfolio successfully rented out, let alone their carrying costs covered for those units that are occupied?”
Based on high rents and low inventories of homes for sale or for rent, I have to assume that more than a few investors are keeping their properties off the market for now, on the presumption that they might do better by just waiting for prices to go up a bit more then selling, rather than dealing with the hassles that naturally arise once tenants take possession.
But how many investors planned on that? Paying cash and sitting on a property for several years with no rental income?
Given several IPO’s got taken off the table, this may have been where these investment pools netted out, but it sounds like buying thousands of houses with 50%+ of the portfolio sitting empty wasn’t the original plan.
It seems like hordes of investors in U.S. residential real estate are following the same time-tested real estate investing game plan:
1) Buy residential property.
2) Wait a few years.
3) Sell to cash out your profits.
What just crossed my mind as I posted that comment: How can so many people possibly make money on such a lame investing strategy?
How can so many people possibly make money on such a lame investing strategy?
The Fed seems to be doing their darnedest to ensure that they all do, though…
Count on no salary increases for a generation to feed the illusion that RE is a way to get wealthy. There are ways to get wealthy. Rob the biggest jewelry store (crime), build a successful business, or build wealth slowly but more likely through a diversified global stock fund. That way you don’t count on one economy or one nation’s demographics. I see this mistake over and over by HBB folks who only see the American economy.
“People are beguiled by low interest rates into borrowing a sum of money they can never imagine earning,” said Danny Dorling, a professor at the University of Oxford. “The whole market has reached this position because of people believing that something that isn’t cheap is actually cheap. We have got ourselves into an almighty mess and we don’t have any plan to get out of it.”
“Dan Wilson Craw, a spokesman for campaign group Priced Out, said that poor quality, insecure private rented housing was pushing people into home ownership despite the financial pressures.”
“If there was less speculation in property and a better alternative to home ownership, then ownership might start competing as a tenure, rather than being the least worst option,” he said. “The vast majority of people want to buy their home. A big part of it is the assumption that house prices are going to keep rising.”
“People are beguiled by low interest rates into borrowing a sum of money they can never imagine earning,”
So long as the money never has to be repaid, where is the problem?
‘Loans to businesses have risen to a record high and bank executives say they are increasingly optimistic about the U.S. economy. “The sun and moon and stars are lined up for a very successful year” in the U.S., JPMorgan Chase & Co Chief Executive Jamie Dimon said.”
“I don’t see any weak spots in America,” Dimon said, noting that corporations, small business, the stock market and the U.S. housing market are all showing signs of improving.’
‘Outstanding loans to companies reached an all-time high of $1.61 trillion at the end of last year, topping a record set in late 2008, according to Federal Reserve data released on Friday.’
Bonds rally, but caution remains
Adam Shell, USA TODAY
11:14 a.m. EST January 17, 2014
(Photo: Stan Honda, AFP/Getty Images)
Story Highlights
- 2014 is supposed to be the year prices on long-term U.S. bonds start to crumble
- But bond sell-off has yet to materialize
NEW YORK — 2014 is supposed to be the year prices on long-term U.S. bonds finally start to crumble under the weight of a better economy and fewer asset purchases from the Federal Reserve.
But the bond sell-off has yet to materialize. The price of the 10-year Treasury note has been rising in 2014. And the yield, which moves in the opposite direction and ended 2013 at 3.03%, has moved down, not up.
The 10-year note yield stands at 2.84% as of Friday morning trading.
What gives? Are long-term bonds worth investing in again, despite Wall Street forecasts of declining bond prices this year?
The trigger for the renewed appetite for long-term U.S. bonds was the weak December jobs report. Last Friday, the government reported that the economy generated a paltry 74,000 jobs in the final month of 2013, far below the 200,000 expected by Wall Street. That day, the yield on the 10-year note suffered a big drop, falling to 2.86% from 2.96%. The reason for investors’ renewed fondness for bonds: a fear that the jobs report is signaling the economy might be weaker than folks think.
…
” bank executives say they are increasingly optimistic about the U.S. economy”
Danger Will Robinson, Danger!
There seems to be no shortage of porcine beauticians eager to explain recently weak U.S. jobs numbers on the weather.
The great jobs puzzle
Working hard or hardly working?
One month’s slip does not a slump make
Jan 18th 2014 | WASHINGTON, DC | From the print edition
Not an easy season to seek work
ON JANUARY 10th the Bureau of Labour Statistics (BLS) reported some miserable jobs numbers: a net increase of only 74,000 in December. Wall Street had expected almost triple that number; it was the biggest such miss since 2008. In the previous four months America had created more than 200,000 net new jobs a month, convincing investors that a strong expansion was finally under way. Such optimism now seems premature.
Some economists dismiss the report as an anomaly. Many people couldn’t work in December because of the horrible weather. Moreover, the BLS revised up the pace of job creation in November, so the average of those two months, at 158,000, is probably closer to the trend for the last months of the year. The jobless rate actually fell, to a five-year low of 6.7% from 7% in November. Mark Zandi of Moody’s Analytics, whose proprietary payroll survey had projected a gain of 238,000 jobs, predicted that data revisions in the coming months would wipe away the dip.
The numbers are confusing. America publishes two jobs reports each month: one based on a survey of employer payrolls; another based on a sample of households, which yields the unemployment rate. For some time, the household survey has been gloomier than the payroll survey.
Unemployment peaked at 10% in October 2009. Much of its subsequent decline has been driven not by job creation but by people dropping out of the labour force. (Those who have given up looking for work are not counted as unemployed.) The labour force participation rate has fallen from 65% then to 62.8%, its lowest point since 1978. Some of this is because the economy is weak and jobs are scarce: in December, the number of people who said they wanted a job but weren’t looking for one jumped by 332,000. Many will presumably start looking again once job prospects improve. But much of the drop is structural, as ageing baby-boomers retire and the long-term unemployed end up subsisting on disability benefits.
The household survey is also showing far less job growth than the payroll report: 1.3m in the past 12 months, compared with 2.2m (see chart). If the household data are adjusted to match the payroll survey’s definition of a job (for example, by not counting the self-employed) the gain drops further, to 1.1m.
…
The economic outlook in the U.S. is so bright, it naturally raises doubts among circumspect observers.
Jan. 19, 2014, 12:03 p.m. EST
U.S. seen on track for best growth since 2005
Economists say road clear for 3% GDP in 2014, but we’ve heard that before
By Jeffry Bartash, MarketWatch
WASHINGTON (MarketWatch) — Think the disappointing U.S. jobs report for December has dampened the optimism of economists about the new year? Think again.
Most economists think the dismal 74,000 increase in net hiring last month was a fluke caused by poor weather and seasonal-adjustment problems that will soon be revised away or prove to be an aberration.
The way those with a sunnier view see it, the road is clear for the U.S. to produce its fastest spurt of growth since the Great Recession. There’s no big crisis in Washington brewing, U.S. households are better off financially and businesses are raking in the profits. Nor are there any major global threats to the economy on the horizon.
Consider the new forecast by top economists at the nation’s leading bank firms. They predicting the U.S. economy will hit 3% growth in 2014 for the first time in nine years.
The forecast by the advisory panel of the American Bankers Association is no outlier, either. A rising number of economists predict the U.S. will meet or beat the 3% threshold.
“We see 2014 as somewhat of a breakout year,” said Christopher Low, chairman of the ABA’s 13-member panel and chief economist of FTN Financial.
President Barack Obama, faced with sagging poll numbers, hopes economists are right and he’s telling the public the same thing.
“I say this can be a breakthrough year for America,” Barack Obama said in a speech late last week. “The pieces are all there to start bringing back more of the jobs that we’ve lost over the past decade.”
…
Maybe the horrible retail sales numbers and declining mortgage apps will convince people that all is not well?
The presumption in the San Diego press is that rising mortgage rates will hurt potential buyers who get priced out. Nobody just yet is mentioning that sellers might also face difficulty in trying to cash out of their 38% in unrealized home equity gains since February 2012.
Fed taper could hit housing market
Soaring mortgage costs already discouraging local buyers
By Dan McSwain
5 p.m. Jan. 18, 2014
Prospective homebuyer Michael Lin tours one of the model homes in the Maricel at Torrey Highlands development. Prospective homebuyer Michael Lin tours one of the model homes in the Maricel at Torrey Highlands development. — Howard Lipin / U-T San Diego
The stakes are high for San Diego’s housing market as the Federal Reserve tapers the national economy off super-low interest rates.
Some experts think interest rates have been held back more by sluggish global growth than by Fed stimulus, so the “taper” that began this month won’t matter much. Then again, nobody can reliably forecast short-term rate movements.
And there’s little question that higher rates would hurt potential homebuyers. Already, skyrocketing mortgage payments may have chased away enough demand to halt price growth.
Further increases would pile a new problem onto the region’s housing market, which is distorted by a chronic supply shortage and soaring costs caused by local and federal government polices.
Waiting has certainly punished potential buyers lately. A typical new mortgage in San Diego County hit a modern low of $1,150 a month in February 2012, but by last month it had jumped nearly 47 percent to $1,695.
Most of the increase came from home prices, which surged 38 percent in less than two years.
…
‘Local experts discussed the local and national outlook for 2014 at the 30th annual San Diego County Economic Roundtable on Friday. Housing permits bottomed out at about 3,000 and this year they are expected to reach about 8,500 — but about 12,000 permits are needed to accommodate demand, said Marney Cox, chief economist for the San Diego Association of Governments.’
‘Labor force growth is problematic, Cox said, because it has declined in unexpected areas — about 5 million 25 to 54 year-olds left the labor force due to frustration. There has also been more people in that age group moving out of San Diego than moving in.’
“People have voted with their feet,” Cox said.’
“…about 5 million 25 to 54 year-olds left the labor force due to frustration.”
Ouch! How many labor force members were there in that age range to begin with, before they started dropping out in droves?
Wow — the numbers are hidden in plain sight!
The fields in the table are as follows (by column number):
(1) Age range
(2) Total civilian noninstitutional population
(3) Total civilian labor force
(4) Labor force as a percent of total population
(5) Total employed
(6) Employed percent of population
(7) Number unemployed
(8) Unemployed percent of labor force
(9) Not in labor force
(1) / (2) / (3) / (4) / (5) / (6) / (7) / (8) / (9)
25 to 54 years / 124,314 / 101,253 / 81.4 / 94,150 / 75.7 / 7,103 / 7.0 / 23,061
So there are 23 million Americans of prime working age who are “Not in the labor force”? Let’s assume for the sake of argument that these people are unemployed, whether or not they are currently looking for a job. Wouldn’t an accurate read on the unemployment rate then be
100%*(7,103+23,061)/(101,253+23,061) = 24.3%?
What am I missing here?
That’s pretty close to the number reported by ShadowStats, which means it’s probably right on the money.
There admittedly are biases in counting all 25-54-year-olds as “in the labor force” by virtue of their age range:
1) Some young people in this age range are truly out of the work force to start or raise families (primarily female).
2) Independently-wealthy individuals or those whose partner or spouse provides enough income to support the household may choose not to work.
3) A significant portion of people in this age range who are on disability may be legitimately unable to work, though the ADA presumably has reduced the size of this group by making workplaces far more accessible than they used to be.
4) People who either return to school or stay in school after their early-20s to complete advanced degree programs are reasonably counted as temporarily out of the work force.
No doubt a significant portion of the 24 million in the prime working age range of 25-54 fit one of the above or similar categories. However, the notion that someone who is unemployed, by any definition that agrees with common sense, but just fed up with looking for work should no longer be counted as unemployed seems quite ludicrous. Excluding this group from the count of unemployed workers creates a huge systematic downward bias in the headline unemployment rate statistic.
Excluding this group from the count of unemployed workers creates a huge systematic downward bias in the headline unemployment rate statistic.
Quite intentionally, I might add.
‘Seattle Condo Inventory & Prices Way Up In December’
‘The Mark Company…Condominium Pricing Index shows Seattle condo prices rose 15% in December 2013 over the previous year. They put new condo pricing at $687/square foot in December, down 3% from November. That price drops to $531/square foot for resales.’
‘New construction inventory was up over 400% from a year ago, with 321 units available thanks to newer projects.’
‘Not one given to hyperbole, I have no problem telling you that a tsunami of change is coming to the home lending industry. The result will be higher rates, tighter guidelines, and fewer lending options for the people the changes are designed to protect. It will affect everyone who plans to refinance, purchase or sell a home.’
‘…Finally, there’s one more wave of changes that would plunge what would normally be a QM loan into the non-QM pool. Remember that government agency, the CFPB?’
‘It’s come up with a new index called the Annual Percentage Offered Rate (APOR). The Annual Percentage Rate (APR) will no longer be able to exceed the new index, APOR, plus 1.5 percent, or it becomes a non-QM.’
‘The average borrower who just wants to buy a home may have no idea what these acronyms mean, let alone that they exist. But they will feel the effects and soon, and here’s why:
‘First, rates are going up, as most lenders are nervous to make a loan that will exceed the 43 percent DTI and therefore will pad their margin to cover potential losses.’
‘Second, small loans, for example, less than $150,000 dollars, and FHA, VA and USDA loans will exceed the APOR limits in many cases, which will hasten many lenders to vacate that marketplace.’
‘Third, many lenders will not be as aggressive on underwriting as they fear going over the 43 percentage DTI guideline.’
High rates, tougher loan qualifications - that’s racis
It’s also financially prudent. I frankly don’t see how these changes can be allowed to stand.
The Census will be releasing their data on vacancy rates in the next couple of weeks. This includes vacancy in the largest 75 metros, and each state.
IMHO, this is one of the best indicators of whether new homes SHOULD be built–if the current housing stock is full, there is greater potential need for more…
…and cue HA with his “25MM excess housing unit” dribble…
Careful of your misspelled lexicon. It exposes you. Too late.
Careful of your misspelled lexicon. It exposes you. Too late.
Ok, so he meant drivel, not dribble.
That goes for you too.
That goes for you too.
At least you aren’t accusing us of being the same person today, like you commonly do…
LOL.
A fraud is a fraud.