The Repetition Of Past Behaviour
Readers suggested a topic on the current markets. “How will the (already started) decline play out this time? Jingle believes in some ungraphable pattern like a parabolic plateau, but things aren’t quite the same as last time. This crash seems more like squeezing out the investors and flippers and starting back with the decline on the regular owners that should have proceeded further 2 yrs ago. Not as many foreclosures, not the increasing unemployment?”
“I’d be happy to see 2011 prices in my area again, but this time with houses you could actually buy rather than ones being held in reserve for some real estate investor group. Oxide thinks if this happens then the investors will come back.”
One said, “More interest rate cuts ? Oh wait they can’t go any lower..”
A reply, “Have you ever tried to suspend any one or more of the Thermodynamic Laws? It can be done but the energy required to do so cannot be sustained indefinitely.”
To which was said, “Actually no you’re never suspending the laws of thermodynamics. The law says you need extra energy, you put in the energy, law is followed. Now, if you are equating ‘energy’ with ‘Yellenbux,’ yeah, I agree. It can’t be sustained indefinitely. But for me it doesn’t have to be sustained indefinitely. It only has to be sustained long enough where buying beats renting for the same duration.”
The Dallas Morning News in Texas. “More than one in 10 houses that are put on the market in the Dallas area have a buyer within three days of the sign going up, according to Redfin. And almost 40 percent of Dallas-area houses sell within two weeks, the Internet real estate marketing company reports. In Austin, more than 20 percent of houses are under contract to sell within the first three days of listing. The fastest selling market is Denver, where more than 27 percent of houses sell with 72 hours of hitting the market.”
“This spring’s Dallas home market is even more frantic that last year, agents say. ‘It’s insane,’ said Scott Schueler with Keller Williams Realty. ‘Sellers price it at the top end of the comparable sales and still get multiple offers, beyond anyone’s expectations.’”
KTAR in Arizona. “A real estate expert says it’s costing less to buy a home here. ‘The median single family sales price is $195,000. This is the lowest since August of last year,’ said Dean Wegner. ‘In fact, home prices have slowly been going down every month this year.’ But that’s not a bad thing. ‘Last year we saw double digit appreciation, and that’s unsustainable,’ Wegner said.”
“Wegner says if the real estate market stays where it is now for the next two to seven years, everyone would be quite happy with the real estate market in Phoenix. Wegner said he believes that if prices are ‘anything more than this, you’re going to see appreciation. Anything going further down from here, you’re going to see upside down, you’re going to see short sales again, and you’re going to see foreclosures.’”
The Register Guard in Oregon. “Foreclosure filings climbed 78 percent, to 139, in Lane County in the first quarter of this year compared to the same time in 2013, according to RealtyTrac. John Helmick, CEO of Eugene-based Gorilla Capital, is not surprised by the jump. He predicted in January that Oregon would be one of the few states with more foreclosure starts in 2014 than in 2013. The reason: A change in state law that went into effect last summer requires lenders and homeowners to go through mediation before a home can be foreclosed on.’
“That change didn’t avoid foreclosure for many distressed homeowners, Helmick said. Those people were so far behind on payments, on houses worth less than they paid, that foreclosure was inevitable, he said. What it did was create a backlog of homes inevitably headed for foreclosure, he said, many of them ‘zombie’ homes that were in bad shape, abandoned and left to deteriorate further. A few years ago, about half of the houses his company bought were abandoned, vacant homes, he said; today, about 82 percent are.”
“These houses can compete for buyers, he said, but he doesn’t think the number of homes his company will put up for sale at any one time will have a major effect on the market. Home sales are affected by a number of factors — ‘how well the economy is doing, employment, mortgage rates,’ he said. Gorilla’s homes may have a small effect on the market, Helmick said, ‘but a change in interest rates would have more.’”
The Irish Times. “A couple of weeks ago, I wrote a column about the fact that nothing has changed in Ireland politically. Because I’ve been thinking about where we’re at, right now, 2014, more and more. The issue now is not only the opportunity to change things for the better actually gone, but that the government is relentless in erasing the past, walking around like the lads from Men In Black waving their memory wand neuralyzers in our faces.”
“I occasionally throw an eye on what houses are going for in Dublin. One interesting property struck me the other day, which could act as a parable for the property market right now in the capital. A two-bedroom cottage in Stoneybatter that sold for just under €110k last summer went sale agreed after the asking price was set at €250k recently. There you have it folks, it’s those memory wands again.”
“Now it’s not like our property bubble burst generations ago, thus excusing the repetition of past behaviour. In terms of the wider context of history, our monumental property screw ups didn’t happen ‘just yesterday,’ they happened five minutes ago. Of course there is a supply problem in Dublin. But one of the reasons for that issue of supply is the countless people who are in negative equity. There’s little movement in the market because people are stuck. Stuck in places they don’t want to live in. Stuck with houses and apartments they don’t want.”
“A property bubble is not just being created, it’s already there. And now people want to buy again. Despite the property mistakes made five minutes ago, those who kept their heads down and didn’t fork over money during the first property boom are out looking for properties, and day in day out, the asking prices are creeping up, ten, twenty, thirty, forty, fifty, sixty grand. I’d say estate agents are in a tizzy. They probably don’t even know what to price most properties at in the city. Can we not see that this is THE EXACT SAME THING that happened previously? It’s a micro version of it, but it’s the exact same.”
With mortgage applications in the crapper, I guess it is time to start loosening up lending standards again, to suck in tomorrow’s foreclosure victims?
Sounds good to me.
So long as the principle is federally guaranteed, what’s not to like?
There it is. The wonder of using other people’s money.
I get to keep the profits, the losses I get to share with strangers.
“You can’t lose with the stuff I use.” - Rev Ike
Rev Ike:
http://www.youtube.com/watch?v=ZQaS7ZB8i7I
I used to watch him. He worked out of a neighborhood south of us. I think my brother still has his prayer cloth.
HELOCs happening again based on the new comps? Mr. Banker are you offering easy HELOCs again?
I’m offering anything that will bring me money.
The big lie in this article is the suggestion that there was ever a “credit freeze.” What happened was a mania, followed by artificial measures by the Federal Reserve to artificially support home prices at levels above historic norms relative to rents and incomes. Since prices remain inflated far out of reach from most American household incomes, which happen to currently be lower than they were at the peak of the bubble in 2007, either prices need to fall in order for sales activity to pick up again, or banks need to revert to subprime lending to bridge the gap between incomes and prices.
It looks like the Powers that Be have decided a return to subprime lending is the best path to real estate recovery. Of course this is being packaged as a “return to normalcy,” rather than a reversion to the lending practices that led to financial panic in 2007-08.
Markets
Mortgage Lenders Ease Rules for Home Buyers in Hunt for Business
Banks Ease Standards Enacted After the Housing Boom Turned to Bust in Sign of Rising Confidence
By Nick Timiraos and AnnaMaria Andriotis
Updated April 18, 2014 7:35 p.m. ET
The credit freeze is starting to thaw.
Mortgage lenders are beginning to ease the restrictive lending standards enacted after the housing boom turned to bust, a sign of their rising confidence in the housing market.
While standards remain tight by historical measures, lenders have started to accept lower credit scores and to reduce down-payment requirements.
One such lender is TD Bank, Toronto-Dominion Bank’s (TD.T +0.25%) U.S. unit, which on Friday began accepting down payments as low as 3% through an initiative called “Right Step,” geared toward first-time buyers and low- and moderate-income buyers. TD initially launched the program last year with a 5% down payment. It keeps the product on its books and doesn’t charge for insurance. Borrowers also don’t need to put down any of their own cash if a family, state or nonprofit group provides a down-payment gift.
The changes also are a recognition by lenders that the business of refinancing old mortgages, which had been a huge profit center for banks, is nearly tapped out. To generate future profits, banks will have to compete for borrowers who may not have perfect credit or large down payments.
With refinances down sharply, “everybody is fighting for a smaller portion of the originations pie,” said Mike Copley, executive vice president of lending at TD Bank. He said the bank believes the loans will perform well.
Mortgage originations, which reached $1.8 trillion last year and $2 trillion in 2012, are forecast to hit $1.1 trillion this year by the Mortgage Bankers Association. The expected 36% decline this year is due to less refinancing. “With volume dropping as much as it has, many lenders are looking to expand their credit box,” said Michael Fratantoni, the MBA’s chief economist.
The credit thaw has been led by community banks, credit unions and other lenders that largely shied away from the U.S. subprime market during the past decade.
Valley National Bank, a community bank based in Wayne, N.J., lowered down-payment requirements to 5% from 25% this month on mortgages for certain buyers in New York, New Jersey and Pennsylvania. Next month, Arlington Community Federal Credit Union, based in Arlington, Va., will begin accepting 3% down payments on mortgages up to $417,000, down from 5%.
Low-down-payment mortgages never went away after the housing bust. Instead, they shifted from private lenders to the Federal Housing Administration, which insures loans with down payments of just 3.5%.
Over the past year, however, more than one in six loans made outside of the FHA included down payments of less than 10%, the highest share since 2008, according to figures from data firm Black Knight Financial Services. That still is lower than the nearly 44% of the market they accounted for at the peak of the housing bubble in early 2007.
Fannie Mae and Freddie Mac, the government-supported housing giants, will buy loans with down payments as low as 5% if they carry mortgage insurance. The uptick reflects insurers’ increasing confidence in the housing market and the fact that the FHA is charging higher fees, which makes private insurance more attractive for borrowers with strong credit, said Rob Schaefer, a credit executive at Fannie Mae.
Wells Fargo (WFC -0.33% & Co.), the nation’s largest mortgage originator, this year began allowing certain borrowers who make down payments of 5% on a primary residence to have up to 2% of the down payment come as a gift from relatives. Borrowers must have strong credit and purchase mortgage insurance.
Another sign that banks could get less picky: Credit scores for borrowers seeking conventional mortgages also are easing. Scores on purchase mortgages stood at 755 in March, down from 761 a year earlier, according to data from Ellie Mae, a mortgage-software provider. Those on purchase loans backed by the FHA dropped to 684, compared with 696 one year earlier. (Under a system devised by Fair Isaac Corp., credit scores run on a scale from 300 to 850.)
Smaller lenders are accepting even lower scores. Average credit scores on purchase loans closed through a consortium called LendingTree fell to 679 in March, down from the year-earlier 715.
Brent Kersanske purchased a two-bedroom condo in Somerville, Mass., for $465,000 last month with a 5% down payment, the largest he could afford. The 27-year-old software engineer said he applied for an FHA-backed mortgage, but his building wasn’t approved for the FHA program. Instead, Leader Bank, a community bank in Arlington, Mass., gave him one mortgage for 80% of the purchase price and arranged a second mortgage with another small bank for the remaining 15%.
“I wouldn’t have been able to get the place I wanted without this,” he said.
…
Subprime car loans are also back again, along with all the reasons that this time is different and these will hence create no problems.
ft dot com
April 10, 2014 4:55 pm
American subprime lending is back on the road
By Gillian Tett
Many new loans are going to consumers who previously had little chance of getting funding
Toyota Motor Corp. vehicles sit lined up waiting dealer delivery at the company’s logistics services inside the Port of Long Beach in Long Beach, California, U.S., on Tuesday, April 3, 2012. Job gains and buyers who put off car purchases during the recession are driving the fastest three-month auto-sales pace in four years, even as average U.S. unleaded gasoline prices rose 20 percent this year through the end of March. Photographer: Tim Rue/Bloomberg©Bloomberg
A few short years ago, “subprime” was almost an expletive. During the financial crisis, mortgages linked to subprime borrowers – or those with poor credit history – caused devastating losses; so much so that many asset managers declared they would never touch subprime again.
But the financial world has a short memory, particularly when easy money and innovation collide. In recent months subprime lending has quietly staged a surprisingly powerful return, not in relation to real estate, but another American passion – cars. Some wonder how long it will be before this new boom causes another wave of casualties, not just among naive consumers, but investors too.
The historical echoes are uncanny. During most of the past decade the amount of car-related debt grew only modestly. Yet outstanding car loans, which totalled $700bn in 2010, have jumped by a quarter in the past three years. This has led to a sharp increase in car sales, benefiting groups such as General Motors.
This upswing is striking, given that many other forms of consumer credit have remained weak since the 2007 financial crisis. Outstanding loans on credit cards, for example, have recently hovered near a 10-year low, and data this week showed they fell unexpectedly sharply, by $2.42bn in February.
But car finance – along with student loans – jumped in that same month. Even more notable is that this has occurred amid a sharp deterioration in loan quality. Five years ago, subprime loans represented barely a 10th of the total; today they account for a third. A particularly high proportion of GM cars sales are financed by subprime loans. Meanwhile, a 10th of new loans are now going to so-called “deep subprime”, or consumers who would previously have had little chance of getting funding – particularly given that incomes for poorer households have stayed flat or declined, even as car prices jumped.
There are several reasons for this boom. One is the fact that asset managers are currently so desperate to find something – anything – that produces a return in an ultra-low interest rate world that they are gobbling up all manner of bonds. And investors are particularly keen to buy bonds backed by car loans because these performed better than mortgages during the last credit crisis. This has spawned a widespread (and potentially dangerous) assumption that American consumers are so attached to their cars they will do anything to retain them.
However another reason for the boom is that savvy private equity firms and hedge funds have jumped into the fray, backing a plethora of new car finance companies in the past three years.
These have pushed loans to consumers in creative ways, and it has been a highly lucrative game: consumers can pay almost 20 per cent interest for subprime loans, but finance companies’ funding costs can be a mere 2 per cent, due to voracious investor demand.
Thus far there is little sign that this boom is causing tears. Default rates on car loans remain low by historical standards, at about 1 per cent. Still, if interest rates rise, defaults will almost certainly jump, particularly if incomes remain flat.
Credit rating agencies are starting to get uneasy. Some of the smartest Wall Street players are quietly cashing out. Some financiers are now so convinced that a crunch looms that they are furtively shorting automotive stocks such as GM, on fears that a loan crunch will hit car sales. That may explain why shares in the car company have slid so sharply this year, even beyond what could be explained by the recent embarrassing scandals over faulty ignition keys.
…
“Thus far there is little sign that this boom is causing tears.”
Not to worry, lot of tears are well on their way to being shed.
Another thought: Was this Fed manipulated market run-up designed to rid the banks of foreclosures as they went up in price and could be sold at a profit, or at least minimal loss? Now that the banks have reduced their exposure, the Fed is at liberty to remove their supports?
Yes, I’d say that was the plan all along, in addition to helping their insider friends get some nice foreclosures at significantly reduced prices in those back-room bulk deals.
“American subprime lending is back on the road”
+1 This isn’t your grandpa’s depression.
A Maserati dealership just moved into our area…In the past they were located in only the most affluent locations…San Francisco & Carmel…I guess Rolls Royce & Bentleys are next….
Right up there with Lowes and Home Depot.
Don’t forget the USDA loans, which were greatly expanded by DC and are a subprime as it gets.
‘The United States Department of Agriculture has announced that funding is available for residents of Western New York who wish to purchase or repair single-family homes, through two Rural Development housing programs: the home repair program and the guaranteed and direct loan program.’
‘The guaranteed loan program assists lenders in extending mortgages with affordable terms to low and moderate income home buyers. Rural development guarantees the loan, thereby reducing the lender’s risk. Guaranteed loans can be made on either a new or existing home, for up to 100 percent of the appraised value.’
And these:
‘Announced in 2013, the FHA Back To Work Program allows a buyer to repurchase a primary home just 12 months after a foreclosure, short sale or a deed in lieu of foreclosure. Extended through Sept. 30, 2016, the program aims to fulfill a lofty goal – offering families a second chance at homeownership.’
‘The buyer needs to show a 20 percent loss of income or more for at least six consecutive months. For example, if the previous foreclosure, short sale or deed in lieu happened because of loss of income, this threshold is met so long as pre-event income meets the 20-percent rule. Let’s say pre-event income of $100,000 per year dropped to $80,000 or lower for six consecutive months, this passes.’
‘FHA wants you to demonstrate you’re back on both feet. You’ll need to show that since the previous financial calamity, you have re-established your income and have satisfactory paid your other obligations. How to support claim: You’ll need a credit score of at least 640 and have gone through a HUD-approved counseling agency related to homeownership and residential mortgage loans. A 12-month favorable credit rating on your other obligations would support a 640 credit score.’
‘If the short sale, foreclosure or deed in lieu of foreclosure took place 36 months ago or longer, then the lending requirements are as follows: conventional loan with 20 percent down (to avoid PMI) seven years or three years with documentable extenuating circumstances and a lender exception, on a VA loan 36 months out from last date of event, on a USDA loan 36 months out from date of last event, on a Jumbo mortgage that is a loan amount bigger than the maximum conforming high balance loan limit (Sonoma County’s is $520,950), most lenders require seven years from a foreclosure or a deed in lieu of a short sale with 30 percent down 36 months out or longer.’
‘In most cases, a consumer purchasing a primary residence again would wait for 36 months to get an FHA fixed-rate mortgage unless supporting documentation delineates the loss of income time frame and buyer has met the other re-establishment conditions required by the FHA.’
There always seems to be a backdoor avenue in DC to increase subprime lending, even as high-profile subprime collapse cases are endlessly reviled.
The problem is that politicians use the bodies of the cannon fodder to lubricate the bankers’ profit machine. Meaning, they are putting people through the wringer with foreclosures, while using them as proxies to funnel money to Wall Street. As Geithner famously noted, it’s about foaming the runway for the banks.
Those people are going to lose those houses at a time that is mutually convenient to both politicians and Wall Street executives.
I mean in the latest Freddie Mac Investors presentation, only 68% of loans modified in 2011 are still current and performing (p.20).
In that presentation, you can see that the GSEs have controlled the entire mortgage market since 2008 (p.10). That is sending false signals to a lot of people getting sucked in, to lubricate the bankers’ profit machine. Add to that the Fed’s mortgage buying binge, and that yet more sends distorted signals to the market.
Can they keep it up while inflation eats away the value of the dollar? Well, inflation plus ZIRP plus declining wages is not the best way for politicians to keep the populace happy.
My conclusion is that the Fed leaders have a very large, powerful hammer. They can make any particular market behave as they wish. But they have little concept and minimal control of the side effects of their policies.
“The problem is that politicians use the bodies of the cannon fodder to lubricate the bankers’ profit machine.”
A problem I struggle to cope with each and every day.
(snort)
“Those people are going to lose those houses at a time that is mutually convenient to both politicians and Wall Street executives.”
It’s quite beautiful, isn’t it? Truly, a work of art.
Convince the multitude of unwashed masses that people are smart at the exact same time you are convincing them that they should sell their souls.
Mr. Banker, it’s diabolically brilliant. Salud!
Doh - forgot the presentation link: http://www.freddiemac.com/investors/pdffiles/investor-presentation.pdf
Small detail:
“In that presentation, you can see that the GSEs have controlled the entire mortgage market since 2008 (p.10).”
This is misreading the slide, IMHO. They note “MBS Issuance”, not mortgages made. In other words, this does not include balance sheet lenders (ie. lenders who don’t package up their loans and resell).
I’m not saying the GSEs don’t dominate the market, but they aren’t at 99%. The last metric I saw was that government was about 83% of mortgages issued, down from 91% in ‘09.
Mortgage applications are at an 18 year low. Equal to the same level as in 1996. This is a typical trend to be expected.
1996 was the year when housing recovered from the 1990 bust. Housing values recovered and the market was less distressed. Prices were fairly stable thru 2000, maybe 2001. Where the bubble started was 2002-2006.
I believe you can correlate our current time in the cycle to 1996. Mortgage applications will slowly increase over time. Values will hold steady. Home builders are adding units to the market and this will help meet demand and contribute to the growing economy.
Not much to get excited about anymore. The big appreciation jump of 2013 is over. Carry on.
‘Carry on.’
You forgot, place fingers in ears, say “la-la-la-la”, and carry on.
Yep. There were plenty of differences between the market in 1996 versus now.
To name two:
1. Interest rates rose quite a bit in 1994, and by 1996 were much higher and closer to historic norms than they are currently. It seems pretty hard to suggest that interest rates can go anywhere but up from their current rock-bottom levels over the last half century.
2. Inventories are creeping up at the moment at the point when investors are drastically cutting back on their purchases. Who will be willing and able to step up and buy at prices approaching those paid by investors in recent years who merrily outbid anyone in sight?
Jingle, not sure which market you were looking at, but prices went up by at least 100% where I was looking (San Diego and L.A.) between ~1997 and 2001. We were at a natural peak in the housing cycle by 2001, and the bursting of the stock market bubble should have made that decline even steeper than normal. Instead, prices *rose* in the middle of a recession.
Right now, prices in our neighborhood are at or above peak bubble levels. Sorry, but there is nothing “normal” about it.
‘We were at a natural peak in the housing cycle by 2001′
I went over the price changes for Orange County with a broker who was out there in the entire nineties and through this time. We got to 2001 and he pointed out that they’d had a “pretty good run” by that year. Then up some more. Come 2003, we saw subprime explode, along with prices and then up for a few more years. The cycle should have ended and retraced years before the bubble supposedly started.
What’s funny is that friends and neighbors were admitting that there could be a bubble in 2001. By 2003/2004, they were absolutely sure that there was no bubble, and that prices would rise forever from that point on. It was an odd psychological change that I will never forget.
Again, today, nobody will acknowledge that there is a bubble.
“Jingle, not sure which market you were looking at, but prices went up by at least 100% where I was looking (San Diego and L.A.) between ~1997 and 2001. We were at a natural peak in the housing cycle by 2001, and the bursting of the stock market bubble should have made that decline even steeper than normal. Instead, prices *rose* in the middle of a recession.”
A fellow I work in SD started his position circa 2001. His dad, a Realtor®, advised him to rent, not buy, since homes in SD were ‘overvalued.’
Next thing he knew, prices doubled again by 2007…
Instead, prices *rose* in the middle of a recession ??
Next thing he knew, prices doubled again by 2007 ??
Thank You Greenspan and the ownership society CIRCA 2002 via George Bush….
Not until prices are allowed to adjust.
Muggy gifted me with this yesterday:
“Comment by Muggy
2014-04-18 15:20:46
Oxide got married!
http://i.dailymail.co.uk/i/pix/2008/10/08/article-1073629-02F076B300000578-985_468×333.jpg ”
Question is, which one am I?
Oxide, you are a good sport.
Have you ever seen Shakespeare’s A Midsummer Night’s Dream performed? If so, then I assume you recall the character Bottom (”Bottom is an ass”).
“Mortgage applications are at an 18 year low. Equal to the same level as in 1996. This is a typical trend to be expected.
1996 was the year when housing recovered from the 1990 bust.”
I’m not sure what part of the planet you were on at the time, but that was when you could buy a California condo for way cheaper than renting a comparable place. And anyone who did so was considered crazy by the neighbors who had just witnessed seven years of price collapse which they presumed would continue.
Back then, the Fed had more of a ‘hands off’ policy towards real estate price adjustment, and made no effort to prop up prices as it did in the recent period. Hence your attempted comparison is irrelevant.
Could not agree more, GS. I bought a house for 3X my income (as a single person, not married!). That was a good market. What we have today is NOT a good market.
I hope you are still comfortably and happily housed, anyway!
Thanks, GS, we’re enjoying things, but the market is crazy, and I fear the fallout…not just for ourselves, but for society, in general. The house I bought as a single person was sold in 2004, at which point we began our 8-year journey as bubble-sitters. We got in at a good point in 2011, but not because I thought it was the bottom of the housing crash. I still think we have a long way to go, but we were earning nothing on our cash, and rents in the neighborhood had been going up significantly which made us nervous that the LL would start jacking up the rents. They haven’t done that as some friends of ours are in our old rental, and they are still paying the same rent that we were (our beloved landlords!). Still, the possibility made me nervous, and the rent spent while waiting for the rest of the bubble to deflate would probably be the same or more than any future capital losses on the house.
I just want the RE market to normalize — and for specuvestors to get the hell out of the market — so that regular families can go back to buying regular houses at affordable prices without having to stretch too much or use gimmicky mortgages.
Too many commas!
“I just want the RE market to normalize — and for specuvestors to get the hell out of the market — so that regular families can go back to buying regular houses at affordable prices without having to stretch too much or use gimmicky mortgages.”
Hear hear! That said, I believe you guys are fine…
“I believe you can correlate our current time in the cycle to 1996. Mortgage applications will slowly increase over time. Values will hold steady. Home builders are adding units to the market and this will help meet demand and contribute to the growing economy.”
Pardon the French, but I just have to share what my HS tennis coach would have said about that:
One can look at the graph and perhaps see similarities:
• The house price chart from The Economist looks nothing like 1996 to me, at least.
• The Case Shiller 10 and 20 city indices look nothing like the current time. Again, to me at least.
Regardless, one needs to look under the hood, in my opinion, to understand what’s going on. Under the hood, there is massive Fed and government intervention. As the “Confessions of a Quantitative Easier” article I linked to earlier noted, the Fed never bought a mortgage before in its 100 year history. Now it has about 2 trillion dollars worth of them on its balance sheet. The GSEs buy nearly every mortgage out there, and have for the past 6 years. Those actions are done. So what does this mean going forward?
We now know that the central bank and the government can in fact manipulate an entire market. But as I noted in another post, was this just an exercise in foaming the runways for the banks, by raising house prices so banks and other financial entities could offload foreclosures to improve their balance sheets?
Maybe just looking at a chart can yield useful information, like the stock market “technical analysts” believe. But I think looking under the hood is necessary for a more accurate understanding of the situation.
The Dead Cat Bounce in the price chart from The Economist is pretty hard to miss, no?
You need to look at the prices in real terms, against incomes, and rents (all graphs available from the “Economist” link).
In that regard, you cannot say that we are back to the bubble levels of 2005-2007. No where close.
However, I think the most important graph to consider is the graph associated with Shiller’s long-term data:
http://www.econ.yale.edu/~shiller/data/Fig2-1.xls
This is a link to Shiller’s 1890-present INFLATION ADJUSTED home price data.
From this graph, it looks like we have approximately reached a “normal” cyclical peak in home prices, and THAT peak was achieved much faster than the peaks in the late 70’s early 80’s and in the early 90’s (due in large part to low interest rates).
The question is “where do we go from here”?
I DON’T think we’ll continue to spike up in prices (if you are thinking about “panic buying”, don’t).
I DON’T think we are going to crash from here, there has been too little new construction to create the conditions for this.
I DO think that we are going to bop around in a “trading range” for a while, until new development gets going. At that point, once the next shock comes along (recession, etc.), housing will suffer.
Considering current asking prices are 300% higher than long term trend, prices have a long way to fall to reach the long time metric of 2x annual income.
Have you prepared?
“I believe you can correlate our current time in the cycle to 1996.”
What a grand fantasy this guy has spun inside his own head. Must have taken on decades of debt in the not too distant past, i.e., at exactly the wrong time.
Confirmation bias at its worst…
“I believe you can correlate our current time in the cycle to 1996.”
I have to disagree….I bought in 1996 (SF Bay Area / Marin County) and sold in 2004.
In 1996, traditional mortgage standards were still in place - down payments of at least 10%, no other debt allowed, 6 months cash in the bank required, plus 3 years of tax returns and strict parameters around debt to income levels. Rates were indeed higher (about 7.5% for a fixed loan) but prices hadn’t disconnected from local incomes yet.
I guess it is time to start loosening up lending standards again, to suck in tomorrow’s foreclosure victims?
And there are fools born every day. And more fools entering the “home buying years” to get sucked into the Fannie Mae meme lie of “The American Dream.”
Funny though, Fannie Mae and NAR have a lot of willing accomplices in the victim category - other people who got sucked into the meme “The American Dream.”
At my office you are nothing if you don’t have a house. This is Orange County.
In L.A. it was - you are nothing if you don’t drive an upscale car. I think it makes more sense to drive a car you enjoy than to be a prisoner to a neighborhood.
Fannie Mae: maker, and destroyer, of “The American Dream.”
‘North Jerseys commercial real estate market is rebounding, but lenders should remember the hard lessons of the 2006 housing-bubble bust and remain wary about whom they finance, since white-hot sectors such as multifamily residential are likely to cool off, a panel of lenders said.’
‘The outlook was rosy in many aspects, but the panelists talked about issues looming on the horizon, including potentially less demand for apartment construction. An audience of about 90 people attended the breakfast event at the Hilton Hasbrouck Heights, where Stephen Novak, senior vice president at Lakeland Bank and head of its commercial real estate group; Paul Heilmann, senior vice president of commercial real estate at Columbia Bank; and mortgage broker Gretchen Wilcox, president of G.S. Wilcox & Co., all agreed that after a dry spell, capital is flowing into the region’s commercial real estate market this year. The investors back in the market include life insurance companies, Wilcox and Heilmann said.’
“There’s just so much more money out there,” said Wilcox, whose firm is based in Morristown. “There’s financing for any deal.”
The landscape has grown more competitive for banks and other lenders offering financing, leading some of those players to be less restrictive in terms of whom they lend to, several panelists said. That could lead to some loans going bad in the future, saddling lenders.’
“There’s a lot of pent-up demand,” said Novak, who is based in Wyckoff. “So we are all probably doing things a little less restrictive, but we can’t have the past disappear from our memory. That’s where we all get into trouble.”
“The multifamily market has been very hot, to a point where sometimes you have to say to yourself is it too good to be true. … Down the road there could be potential risks,” he said. “We just need to make sure that we remember what we’ve been through.”
“You say that we should be remembering, but I don’t think we’re remembering,” said Wilcox, prompting laughter from the audience. “Banks are now lending non-recourse [a loan secured by collateral, often property],” she said. “They weren’t doing that, really, a year ago. … There is some noise out there that things are getting back to a level where there might be some warning signals in the near future.”
I remember when I lived in NNJ in 2002-2003. I drove a few times to the south part of the state through Princeton. It was odd to see once farmland turned into small house subdivisions - all McMansion 2 story beheamoths. And they were all in a middle of nowhere. It was as though it was a bunch of stagecoaches in a circle to fight off outsiders.
It always amazed me how people want to move out to where it’s quieter and then they go into a housing tract of cookie cutter houses close to each other where you can hear next door neighbors.
Same deal here in greater Seattle area: drive an hour out of the city into the middle of the forest, where you can lean out your side window to reach the borrowed cup of sugar from your neighbor . . .
When the worst credit risk borrowers are the ones the lenders reach out to extra far to finance, you know the mania hasn’t ended yet.
“There’s just so much more money out there,” said Wilcox, whose firm is based in Morristown. “There’s financing for any deal.” ??
“Banks are now lending non-recourse [a loan secured by collateral, often property],” she said. ??
Yep….The big Institutions and Corporations are awash in cash…Its coming in the door twice as fast as they can find somewhere to place it…They are all seeking yield and competing with each-other for it…There are Trillions in play….
Just look at this one institution for Stanford University;
“fiscal year 2013 (FY2013), which ended Aug. 31, 2013. Consolidated net assets increased $3 billion, or 11 percent, to end the year at $29.7 billion”…
So the PHX area is a little ahead of Dallas and the rest. Here the media can no longer deny and have to admit prices been declining all this year. Why weren’t that saying this in Jan or Feb?
What happens when prices start declining? Where is there evidence of a previous 2-7 year plateau that this guy thinks is possible? This is on topic to this thread, how will it play out? I think once the declines start, they keep going
(And don’t give me some Case Shiller chart discussing 6 month old data).
‘What happens when prices start declining?’
If you have a bunch of speculators, and I mean the broader definition of speculators, you would expect inventory to surge.
Texas has some interesting markets. It has long been out of sync with most other metros. It was in deep trouble in spring 2005, when Florida Arizona, Nevada, Utah, Idaho and California, among others, were in a silly zone. And the energy boom adds another dimension you don’t find in most other markets. That said, let’s consider that most markets which took off in late 2011 or early 2012 are beginning to struggle after big run-ups; San Diego, Phoenix, Las Vegas and Denver, for example. You can add some Florida cities to that as well.
As it closes, the secondary parabolic rise looks pretty anemic compared to the first. Will we have another, yet weaker. sucker’s rally in 7 or 8 years?
It’s a flight of stairs all the way down IMO, unless a bull enters the china shop, so to speak.
“And the energy boom adds another dimension you don’t find in most other markets.”
+1 I know a family that grew a RE equity nest-egg for twenty plus years as they moved-around and moved-up the career ladder, and they left it all behind in Casper, WY. Poof!
Here’s one enduring truth that you have to keep in mind with all this;
Current asking prices of resale housing are 200% higher than reproduction costs (lot, labor, materials and profit).
CA Housing Demand Craters 9% YoY; Collapses To 6 Year Lows
http://www.zillow.com/local-info/CA-home-value/r_9/#metric=mt%3D30%26dt%3D1%26tp%3D6%26rt%3D14%26r%3D9%26el%3D0
Paso Robles, CA Housing Prices Collapse 24% YoY; Inventory Explodes 156%
http://www.movoto.com/paso-robles-ca/market-trends/
My parents live nearby in Cambria…this part of the state is also on severe water rationing due to the drought.
I’ve been thinking about possible scenarios a bit. I can imagine fewer job losses than years past, but there’s this:
‘New research tracking people who have been out of work for six months or longer found that 23 percent of them landed a job within a few months of the study. But a year later, more than a third of that group was unemployed again or out of the labor force altogether.’
The economy is weaker than it was in 2006. There are high numbers of underwater mortgage borrowers, which wasn’t the case in 2005-06. The guy in Phoenix is right; price declines mean more foreclosures. How many more is unknown. Of course, foreclosures bring even greater price declines and more foreclosures.
Here’s something else; back in 2005 IIRC, Danielle De Martino, a writer for the Dallas Morning News, reported that her sources inside the Federal Reserve were talking about raising rates so they would have “ammunition” should the bubble burst. (She now works for the Fed). And they did that, so they could lower them later to soften the decline. Bernanke and Yellen’s Fed have made no such moves.
“Bernanke and Yellen’s Fed have made no such moves.”
They ran out of bullets, which led to the ‘(re)invention’ of QE.
They ran out of bullets, which led to the ‘(re)invention’ of QE ??
And I think they will reverse course on QE if things falter…I also think any increase in rates, if it occurs will occur in 2015…No way the FED will become controversial in the 2016 election year…
If I were bracing for significant change, it will be in 2017-2018…The 2016 election IMO, will be framed around historical change in everything from entitlements to Tax Code…
Brace for the change that comes like a thief in the night, hitting you over the back of the head.
The system is much more fragile than it was 8 or 10 years ago. Minor accidents tend to result in grave injuries when one is fragile.
You know…if they raised the rates after 2008 I would have bought up Series I bonds. The fixed rates of return would go up on those. Haven’t bought much Series I bonds the last 6 years or so.
I looked over my dad’s investment portfolio recently. Some smart adviser (maybe me!?) got him to park a couple of hundred grand in TIPS in the early-2000s, before interest rates tanked. I told him to hold onto those for life.
The economy is weaker than it was in 2006.
Amen to that, it’s terrible. And the tech bubble is now crashing and the easing has already occurred and the balance sheet is out of control.
It’s like that point in the movie Meatballs where Bill Murray (as the coach of the bball team) declares the zone isn’t working and they’re too good to cover man to man, so they just decide to pants the other team and run for the bus.
Antioch, CA Housing Demand Plunges Through 2008 Floor; Now At 10-Year Low
http://www.zillow.com/local-info/CA-Antioch-home-value/r_16780/
Rancho Cordova, CA Housing Demand Collapses 27% YoY As Buyers Disappear
http://www.zillow.com/local-info/CA-Rancho-Cordova-home-value/r_26679/
“…rather than ones being held in reserve for some real estate investor group.”
I never did get the legality of that market allocation scheme.
Can anyone who understands why that was legal kindly share their insight?
I don’t know about the legality, but I definitely encountered the illegal variety when shopping around in 2011.
It was a condo that had been owned by the bank for a long time, incredibly low price for the building. I tried to make an offer and was told by the realtor the bank could not accept the offer for consideration, because the “7 day offer window was closed” (this was exactly 2 days after it was listed). After days of threatening to call my lawyer, the police, the SEC and everyone else I could think of, one banker finally told me the realtor was “misinformed” and I could in fact submit my offer, but I had 3 hours to send it in before the “real” deadline.
I decided the whole thing was just too fishy and declined. Don’t know who was allowed to buy the condo at way-below market price while all the competition was stonewalled, but it was flipped for a 75% profit at the end of 2013.
I saw a number of properties that were never officially on the market, but were sold to some insiders and then flipped for significant gains. I tried to complain to various officials and agencies, but never got anything back other than the stock letter saying “thank you for your comments and concerns about the foreclosure crisis.”
This country is as crooked as they come.
I saw that happen over and over again and it’s still going on. BS like an address getting listed at 7am and in contract by 8am. Meanwhile on the same road, scores of other shacks sitting for months or years with for sales signs on them.
Not everyone who attempts real estate fraud in San Diego County gets away with it.
The Unauthorized Randy “Duke” Cunningham Page
Defense Contractor Mitchell Wade, in a sweetheart deal, secretly bought Duke and Nancy Cunningham’s Del Mar Heights house November 20, 2003 for $1,675,000. They hid the sale through a shell corporation of Wade’s, “1523 New Hampshire Avenue LLC.” A month later, Wade put it on the market, but it didn’t sell until the price was reduced to market value, eight months later. Wade sold Cunningham’s old home for $975,000. Since home values haven’t gone down recently in San Diego, it seems Wade gave Cunningham $700,000 (not a campaign contribution, but apparently an illegal gift). Wade never moved in there, as he and his company, MZM Inc. are in the Washington, D. C. area and don’t do business in San Diego. Cunningham bought his Rancho Santa Fe mansion for $2.55 million. Shortly later, Cunningham had Brent Wilkes pay his second mortgage on the Rancho Santa Fe Mansion and Wade pay the first mortgage. In exchange, it appears Cunningham helped Wade get contracts for his MZM Inc. ($41 million in fiscal 2003, $65 million in 2004) to triple MZM’s profits in 2004. Cunningham says the contracts are “very, very classified” stuff, so he can’t talk about it. Wilkes gained $6 million in defense contracts for unwanted hardware worth $1.5 million. In short, these were war profiteering bribes.
…
‘Get ready for a potentially slow buying season in the housing market. Pending home sales are down 11% from a year ago, mortgage rates are about 1% higher than a year ago and homebuilders are breaking ground at a slower pace than expected — at an annual rate of 946,000 units, more than 2% below forecasts.’
‘Robert Shiller, co-founder of the S&P/Case-Shiller Home Price index, tells The Daily Ticker that the momentum in housing may be changing. Investors who had become a growing part of the market are pulling back and the Fed, which has been supporting the housing market through its quantitative easing policies, continues to reduce those purchases, says Shiller.’
“It’s not at all clear that momentum is a safe bet anymore,” says Shiller, a Nobel prize-winning economics professor at Yale. But he expects home prices will continue to rise, though most likely at a slower rate.’
Gosh Robert, I hope all those people who bought houses competing against investors and counting on Fed support and low rates didn’t pay too much! Of course, you’ve been warning anyone who would listen.
Shiller gets the Captain Obvious Award once again.
“Investors who had become a growing part of the market are pulling back …”
Lol, in some markets investors were not only “a growing part of the market”, they WERE the market, and because they were the market their bidding up of prices CREATED the price rise of the market that they dominated.
Is this a great world or what? Take a position in something - in this case a neighborhood or two of houses - and then bid up the prices of the comps and - presto! - you automatically bid up the value of the position you took. And when your position swells in value your balance sheet also swells in value, and a swelling balance sheet can be a very enticing selling point to those insiders who are interested in selling “investment opportunities” to the great multitudes of the unwashed masses who are desperately in search of a decent return.
Suck ‘em in, shake ‘em out.
“And when your position swells in value your balance sheet also swells in value, and a swelling balance sheet can be a very enticing selling point to those insiders who are interested in selling “investment opportunities” to the great multitudes of the unwashed masses who are desperately in search of a decent return.”
I need to add to this: Not only is a swelling balance sheet enticing, so is the payment of dividends. Think of this: An investor not only get to participate in a sure-thing lock on a hefty capital gain somewhere down the road, he also gets to receive a dividend while he waits. Why it’s a miracle!
Let’s take a look at an example, a favorite of mine, called American Homes For Rent (AMH) and use AMH’s cash flow statement as a source:
Last year AMH lost $19,066,000 but was still able to pay out $12,989,000 in dividends. Is this a sign of some outstanding financial management or what?
But wait, let’s search a bit further:
Why lookie here, AMH raised $1,761,376,000 via the sale of stock and also it raised $356,603,000 via net borrowings, so this means the source of this nifty dividend investors were getting is either from borrowed money or is their own money being returned to them from company stock sales that they themselves participated in.
Why, isn’t that neat? Go to work, earn money, pay taxes on the money you earned, invest the money you have left over by buying stock in AMH and receive a dividend that you again get to pay taxes on, the dividend, in this case, in part financed by yourself when you bought the stock.
Sign me up!
Ponzi finance works great until the music stops playing, at which point collapse happens.
And if you look at the biggest lender to these companies it’s Deutsche Bank. The bank itself is highly leveraged and in poor financial shape. They are making an all in bet.
You didn’t account for the depreciation/amortization of $70,987,000 (non-cash expenses that reduce income).
The source of the dividends was FFO (funds from operations).
Take another REIT, Prologis (Industrial).
Last year, they had earnings of $0.64 per share, but distributed $1.12 in dividends. How did they do this?
Their funds from operations (FFO) was $1.65 per share.
The difference between the FFO and earnings includes depreciation as a significant non-cash charge.
How about another, DDR (Retail):
2013 earnings: ($0.14)
2013 dividends: $0.54
2013 FFO: $1.13
This is not uncommon.
May not be uncommon, but it is magical thinking.
The stock should soon be worthless.
“Gosh Robert, I hope all those people who bought houses competing against investors and counting on Fed support and low rates didn’t pay too much! Of course, you’ve been warning anyone who would listen.”
That’s our self-appointed duty around here…