May 18, 2014

The Key Lesson Hasn’t Been Learned

Readers suggested a topic on the FHFA. “I think there can be only one weekend topic this week, the nuclear bomb the PTB tried to set off: Will Mell Watt be able to keep the bubble going? I don’t think it will be enough. Last time we had an (apparently) robust economy, a much better jobs picture, and fraud out the yin yang in order to drive prices up. Now we have stocks at an obviously steroid driven high and echo bubble prices that are already starting to fall in leading edge areas like PHX. No, Mel ain’t gonna be able to do it. There isn’t the demand at these prices.”

A reply, “The problem is very clear: 1. House prices have to stay high to protect people who already bought. 2. House prices have to be low in order for more people to buy. 3. Prices are not going to go low enough for people to buy, because their PITI simply can’t compete with investor’s cash.”

“To solve this, you could prohibit investors from buying, which would drop prices low enough for people to buy. Or you could somehow give money to people but not to investors, so that people could compete. Or you could start creating well-paying jobs so people have money. Or you could sit around for a few years and debate it, and meanwhile inflation will slowly swallow the problem. This is what is happening by default.”

One said, “That only works if people’s incomes rise as well. That isn’t going to happen. If ground beef costs $20/lb, no one will have money to buy a house.”

And finally, “Do most voters realize that politicians have anything to do with house prices? It’s like the head of the FCC killing net neutrality. It’s got no political consequence, despite service which will get worse and more expensive. Regardless of the howls of those few who do understand the money, politics and technical issues.”

“There is the angle that voters vote for incumbents or challengers based on their overall sense of well-being or malaise. It’s not clear to me that releasing the housing market would be pinned on politicians.”

“The big issues is how it plays with the central bank, which creates a bank-safe/bank-friendly financial ecosystem. Central bankers wouldn’t like it. Also, the FIRE sector is one of the largest of all political contributors overall, for decades. And they wouldn’t like it. Those are the major factors in front of politicians it seems to me.”

The Credit Union Times. “Melvin Watt, the relatively new director of the Federal Housing Finance Agency, which oversees Fannie and Freddie, on Tuesday outlined a new three-part strategy designed to make more credit available to borrowers. Watt’s approach, offered during his first public appearance since taking office in January, reversed the agencies’ previous mandates to reduce their roles in the mortgage market.”

“FHFA’s first strategy, Watt said, is to maintain foreclosure prevention activities and credit availability for new and refinanced mortgages to ‘foster liquid, efficient, competitive and resilient national housing finance markets.’ Central to this strategy will be Fannie’s and Freddie’s actions to increase liquidity in the present single-family housing market, improve servicing standards and foreclosure prevention actions, and foster greater activity in the area of affordable multifamily properties. Watt said that would involve relaxing previous mortgage standards and payment history requirements.”

“In addition, the FHFA will not reduce loan limits as previously discussed, Watt said. The move comes in hopes of preventing further compromise of a housing market just beginning to emerge. Reform measures for the two enterprises seem to have stalled in Congress, while naysayers have said they worry looser standards could lead the $14.4 trillion mortgage market into another housing bubble-and-burst cycle.”

“Despite concerns, a stuttering housing market is holding back overall economic growth, according to Federal Reserve Chair Janet Yellen and Treasury Secretary Jacob Lew.”

The Arizona Republic. “How badly does the federal government have to screw up before the politicians reach the conclusion that there is no useful role for it in the housing market? Getting a mortgage used to require a down payment of 20 percent of the purchase price. The monthly mortgage payments couldn’t exceed about a third of the borrower’s income. Defaults by those meeting those criteria were extremely rare. Housing finance was very boring, but very safe.”

“There was a movement among some private lenders to ease up on or abandon these underwriting standards. So long as housing values were rising, went the thought, mortgage lending was virtually risk-free. Fannie Mae and Freddie Mac facilitated the transfer of the risk for these substandard loans to the secondary market and began gobbling up the most risky of them for their own investment purposes.”

“Then the bubble burst. And when housing values were not increasing, but falling precipitously, the folly of abandoning strong underwriting standards was exposed and the carnage was extensive. At the time, everyone said, this can’t be allowed to happen again. The federal government shouldn’t be privatizing profits and socializing losses. But the key lesson, the importance of the federal government not undermining market-driven underwriting standards, hasn’t been learned.”

“A housing market based upon sound underwriting standards doesn’t need a federal guarantee or a government-facilitated secondary market.”

The National Review. “Tim Geithner has a new book coming out. Geithner, who was president of the New York Federal Reserve Bank when the partial correction of the real estate market began in 2006 and became President Obama’s first Secretary of the Treasury in 2009, will hit bookstores with Stress Test: Reflections on Financial Crises.”

“Stress Test is festooned with blurbs about the author’s candor and insight, and about the great debt our nation owes him. For younger readers: They’re talking about the official narrative that the TARP, the Fed’s monetary expansion, bailouts like AIG’s etc., ‘rescued’ the economy from a hyperpocalyptic catastrogeddon that was always very vaguely described but, we were assured, sure to destroy us all unless the government spent trillions on bold, persistent experimentation.”

“But former Special Inspector General for the Troubled Asset Relief Program Neil Barofsky was notably if not uniquely honest in the Obama brain trust. He correctly pointed out in 2010 that the design of federal housing efforts was to re-inflate the housing bubble — not exactly a Newtonian discovery, but something few people in government were willing to say outright.”

“You’d think seven years of economic anemia would cause even the blindest believer to wonder: Was it really a good idea to put off a much steeper credit contraction and rapid arrival at the bottom of the market in exchange for nearly a decade (so far) of stagnation and the apparently permanent hobbling of the American economy?”




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91 Comments »

Comment by Whac-A-Bubble™
2014-05-17 08:11:31

The Arizona Republic. “How badly does the federal government have to screw up before the politicians reach the conclusion that there is no useful role for it in the housing market? Getting a mortgage used to require a down payment of 20 percent of the purchase price. The monthly mortgage payments couldn’t exceed about a third of the borrower’s income. Defaults by those meeting those criteria were extremely rare. Housing finance was very boring, but very safe.”

“A housing market based upon sound underwriting standards doesn’t need a federal guarantee or a government-facilitated secondary market.”

Sounds like The Arizona Republic gets it.

“Despite concerns, a stuttering housing market is holding back overall economic growth, according to Federal Reserve Chair Janet Yellen and Treasury Secretary Jacob Lew.”

But as long as the folks at the top of the Plunge Protection Team agree that more government intervention is needed in housing, common sense about sound housing policy can remain suspended forever.

Comment by MrsLolaSoros
2014-05-17 10:16:09

I’m shocked the Az Republic printed this. Phoenix is developer central. The entire economy there is dependent on real estate.

Comment by Guillotine Renovator
2014-05-17 11:57:04

The entire economy is not dependent upon it, or it would have ceased to exist during the meltdown. That being said, the attraction of Arizona was always cheap housing. You could afford a house on $15 per hour. When that’s gone, I’m not sure what AZ really has to offer, what with 115 degree temps for months on end. The weather is absolutely AWFUL.

Comment by MrsLolaSoros
2014-05-17 13:27:43

The weather is beautiful except for 3 months in summer, no worse than places with bad winters. That afford a house on 15 bucks an hour is certainly gone. If they didn’t put in the floor then begin the pump up it would have ceased to exist.

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Comment by azdude
2014-05-18 06:13:44

az is gods country.

most people have never got off i10 in az.

have any of you ever been to black butte lookout north of payson?

 
Comment by CharlieTango
2014-05-18 09:57:56

We fly all the way to Page Az from time to time just to fly around and look at the scenery. A little Utah is thrown in.

 
Comment by cactus
2014-05-18 10:33:24

The drive up Mt lemon spectacular !!

 
 
Comment by Blackhawk
2014-05-18 11:03:18

Right, sunshine, blue skies and warm winter temperatures really suck.

Believe it or not, once your acclimated, it’s easy to live with 105 degrees. For me, 110 is where it seems really hot.

BTW “115 for months” is an exaggeration but we can get over 100 degrees all summer. It’s very weird. A cloudy day makes everyone happy.

Other positives: cheap homes, cheap taxes and a state government that’s trying to balance it’s budget.

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Comment by Guillotine Renovator
2014-05-18 12:17:22

I lived in Phoenix for 2 years, so I don’t need a tutorial on the weather- or anything else for that matter. But nice try.

 
Comment by Blackhawk
2014-05-18 15:55:45

Dude. If you don’t want to be corrected, quit embellishing your posts. If you lived here two years you would know that we rarely get over 115.

 
Comment by AmazingRuss
2014-05-18 16:16:44

But the sky is yellow ALL all the time.

 
 
Comment by doom
2014-05-18 21:19:20

Awful??? lets see you drive with top down almost nonstop, natural disaster’s do they have any, otherwise sunshine 92% of the time is just plain jealously of a place that has climate not weather.

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Comment by Housing Analyst
2014-05-18 21:33:05

So hot you can fry an egg on the sidewalk 92% of the time?

Can’t wait!

 
Comment by Doom
2014-05-19 06:40:22

Total nonsense you are big on averages, Phoenix avg temp year round is 73.

Like your housing post, anybody who quotes Zillow or those sites really doesn’t do their homework and takes a lazy approach of what buying and selling is all about.

 
Comment by Housing Analyst
2014-05-19 06:55:01

Fry an egg on the sidewalk 92% of the the time. A literal hellhole.

 
 
 
 
 
Comment by Whac-A-Bubble™
2014-05-17 08:27:21

“But former Special Inspector General for the Troubled Asset Relief Program Neil Barofsky was notably if not uniquely honest in the Obama brain trust. He correctly pointed out in 2010 that the design of federal housing efforts was to re-inflate the housing bubble — not exactly a Newtonian discovery, but something few people in government were willing to say outright.”

There it is.

The men American people admire most extravagantly are the most daring liars; the men they detest most violently are those who try and tell them the truth.

– Henry Louis Mencken

Comment by MrsLolaSoros
2014-05-17 10:18:08

“In addition, the FHFA will not reduce loan limits as previously discussed, Watt said.

I think no one on either side wants to change anything before November. Keep the status quo so you can’t be blamed. That is also why I am dubious that any of this shamnesty talk makes any headway before the election. Why give the other side an issue when you are already behind?

Comment by Ben Jones
2014-05-17 11:52:15

‘no one on either side wants to change anything before November’

I hadn’t thought about the timing and the election.

It’s kinda like the Chinese; now they are relaxing a few buyer restrictions in some cities. Sure, people are going to line up to buy at nose-bleed prices because the government will again let you buy more than one house in a city where FB’s are trashing developers sales offices.

Comment by MrsLolaSoros
2014-05-17 21:20:27

I think November is all that matters, from now until then everything is done with eyes on November.

I can’t wait until the next round of bailout has to be justified. Who will be the next Lehman Bros offered as the sacrificial lamb?

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Comment by RJD
2014-05-17 08:54:10

“It’s like the head of the FCC killing net neutrality. It’s got no political consequence, despite service which will get worse and more expensive.”

See below link re. ‘Net Neutrality’ by Karl Denninger’

http://market-ticker.org/akcs-www?post=229021

As for the housing debacle, so called regulators and our illustrious politicians have never done their jobs.
Officials who occupied the highest levels at the SEC, FED, Congress - as part of various banking and finance ‘oversight’ committees, Presidential adminstration Treasury Secretaries and of course CEOs and senior officers (except those whose rightly blew the whistle and were fired or shouted down) of the largest banks/investment banks, thrifts and insurance companies such as CITI, Bank of America, IndyMac, AIG, Goldman, Lehman, Bear Stearns, Washington Mutual (to name a few) between about 1995 and 2008 should be in prison.

A truly great nation is one which abides by and upholds its highest and soundest laws (and doesn’t change them or create new and utterly impotent laws for convenience when the SHTF). A truly great country has a population, media and judicial system which hold to account those responsible for conducting fraud whether they be politicians of any rank and stature or those so called elite ‘masters of the universe’ in the highest echelons of the banking, mortgage origination and insurance world. Unfortunately the USA is no such nation. The phrase ‘IN GOD WE TRUST’ should be stricken from your money. In fact, I doubt very much “GOD” appreciates being associated with money. But hey it looks good doesn’t it -slap ‘GOD’ on something and it must have credibility. It is quite clear that the USA has no intention of trusting GOD or abiding by and instituting any sounds laws for the benefit and prosperity of the people. For a country who can count as one of their own the creator of ‘Star Trek’ where the phrase ‘the needs of the many outweigh the needs of the few’ you have fallen quite far. Did all the government bailouts over the past 40 yrs really benefit the needs of the many?

Comment by Neuromance
2014-05-18 12:08:14

Net neutrality has costs and benefits:

• Everyone pays for their connection, including Netflix. Netflix pumps a lot of data out, using much of the capacity of their connection. In order to optimize the Netflix data stream, it might reach a deal with say, Verizon, to prioritize its data, allowing a better experience for Netflix consumers.

• The downside is that once ISPs can prioritize data, and charge for prioritized transmission, that can be abused at will.

• Net neutrality wants to prevent prioritizing data. It wants all traffic to be treated equally, be it Netflix or some other organization.

ISPs could prioritize traffic and continue to use their existing infrastructure without upgrading and still manage to deliver good throughput. Or they could not prioritize and have to upgrade their equipment to deal with the increased network traffic.

From the anti-neutrality standpoint: ISPs would like to be able to prioritize traffic. In the best circumstance, it would allow them to continue to deliver high quality voice and video without upgrading their equipment, instead of having to increase network capacity.

From the pro-neutrality standpoint: There is a fear that ISPs will abuse that capability, charging even more for internet connections, or throttling connections with content they disagree with.

I’m in the latter camp. I think the ability to hold blogs hostage if they don’t stop posting so much anti-ISP commentary is real. I think ISPs will abuse the privilege, charging more for worse service. I think the Internet is the last bastion of free speech and it shouldn’t be held hostage in any way to an ISP’s whims. I think all data should be treated equally, and other remedies should be pursued if one particular content generator is stressing the network.

Here’s a good discussion on how Internet connectivity works, from one of the early Internet pioneers: http://spectrum.ieee.org/computing/networks/a-radical-new-router/0

Comment by Carl Morris
2014-05-18 13:40:19

My thought at this moment on it would be why can’t the private stuff including ISPs do what they want, but all the public infrastructure must be neutral? And when we say “but some people can only get Comcast” then perhaps that’s the real problem?

Comment by Neuromance
2014-05-18 18:27:10

There are “natural monopolies” in industries with very high barriers to entry. Things like electrical lines, telephone lines, oil and gas lines, railroads require massive infrastructure to even start to function, much less operate as going concerns. So it’s difficult for competitors to enter.

It seems to me that broadband is the same way. Hence the need to tightly regulate them in order to prevent monopoly behavior.

There’s a school of thought to define ISPs as “common carriers”. A former FCC commissioner is in favor of this approach.

Here’s an article and chart on internet download speed versus price of different countries around the world. The US is quite expensive relative to other countries, and relatively slow. The US is certainly bigger than other countries, but I suspect there are other, less flattering, factors at play as well.

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Comment by Carl Morris
2014-05-19 06:38:54

I think we have a different definition of ISP. I think of ISP as what’s at the other end of the wire…not the wire itself.

 
 
 
 
 
Comment by doom
2014-05-17 09:07:40

Fiasco of the boom days shows what power the people really have. Folks just walked away, I guess the powers to be thought that would never happen

Any business anywhere that has the public shut down to its products or business practices will fail, no matter what marketing campaign is devised.

Now confidence, better job creation, trust of the banks and mortgage firms and a hope and a prayer may bring the public back to reconsider, but like 1929 many people remembered and put money under their bed never to return to a bank.

People who don’t know that era, got burnt in 2008 just as bad, it can take longer then 6 or 7 years to forget?

Comment by cactus
2014-05-17 09:14:54

Folks just walked away, I guess the powers to be thought that would never happen”

No they didn’t how they could be so wrong is another question. They sure walked away in CA after the Aerospace downturn of the early 1990’s.

Walked away after buying across the street at the new discount.

 
Comment by Mr. Banker
2014-05-17 09:20:00

“People who don’t know that era, got burnt in 2008 just as bad, it can take longer then 6 or 7 years to forget?”

“People who do not learn from history are … ”

… are my bread and butter.

Bahahahahahahahahahahahahahaha

We bankers are endlessly grateful for our American educational system.

The gift that keeps on giving.

Bahahahahahahahahahahahahahahahaahahahahaha

 
Comment by scdave
2014-05-18 08:19:09

got burnt in 2008 just as bad, it can take longer then 6 or 7 years to forget ??

Yes it will as we are seeing playing out right now…Owner occupied housing as a percentage is heading down…Renters as a percentage is headed up….Delayed marriages….Delayed child birth….Apartment construction across the country is booming….Single family starts are way below peak and even below population growth….

Comment by Whac-A-Bubble™
2014-05-18 11:21:45

Everything that was attempted to rescue the housing market made things worse.

And what is being offered to remedy the situation? More of the same policies that caused the problems in the housing market to begin with.

 
 
 
Comment by Weather Helm
2014-05-17 09:21:53

What strikes me sometimes is the positive feedback loop housing policy represents:

1) We feel the “need” to make housing more “affordable”, so we
A) Lower interest rates
B) Lower credit standards
C) Increase the activity of gov sponsored/owned enterprises
2) Demand stoked, housing prices go up and become more unaffordable
3) Go back to step #1

Cycle repeats until “something” happens.

President Obama used to talk about the need to end this crazy credit cycle and stop encouraging so much debt. I guess 6 years later now he’s older and wiser. I guess it ain’t the first or last time he reneges.

Comment by Mr. Banker
2014-05-17 09:35:08

There are so many people FOR higher house price and so few people AGAINST higher house prices so natch higher house prices are what you are going to end up with.

Milton Friedman: “Did any you vote today?”

Friedman’s class: “Vote? No, there was no election held today.”

Milton Friedman: “Did any of you buy anything today?”

As long as there are millions of people willing to buy houses at higher and higher prices then higher prices are what you are going to get AS LONG AS these willing house buyers are able to get the money.

And so, here I sit, ready and willing to do my part in carrying out God’s plan.

 
Comment by Guillotine Renovator
2014-05-17 12:15:05

Obama talked a good game, then completely wilted. It did not take long, either. I’m not sure what exactly happened, but I know it involved a complete lack of cojones. He is a banker’s wet dream, selling out the American public in short order.

I am not sure we will ever find a politician with the intestinal fortitude to forge the path which is needed to get this country on the right track. It would literally involve risking one’s life, because I am convinced that the monied special interests in this country would not even bat an eye at plotting an assassination if their wealth and power were seriously threatened.

Comment by Mr. Banker
2014-05-17 12:48:42

“I am not sure we will ever find a politician …”

You are just not looking in the right places.

I find them all the time. Or, rather, they find me.

They seem to be always in need of money in order to keep on running for offices (aka keep their jobs) and guess who The Money Man is?

I’m The Money Man and I have the money clout to get things to go may way and the best part of all this is the money I use for these purposes belongs to somebody else.

Bahahahahahahahahahaha

You cannot lose with the stuff I use.

 
Comment by Carl Morris
2014-05-17 16:49:01

I am not sure we will ever find a politician with the intestinal fortitude to forge the path which is needed to get this country on the right track.

Or you find them all the time but are successfully convinced each time that they are unelectable or their weaknesses are unacceptable and we’re best off sticking to the officially approved candidates.

 
Comment by Housing Analyst
2014-05-17 20:04:00

“Obama talked a good game, then completely wilted. It did not take long, either. I’m not sure what exactly happened, but I know it involved a complete lack of cojones. He is a banker’s wet dream, selling out the American public in short order.

I am not sure we will ever find a politician with the intestinal fortitude to forge the path which is needed to get this country on the right track. It would literally involve risking one’s life, because I am convinced that the monied special interests in this country would not even bat an eye at plotting an assassination if their wealth and power were seriously threatened.”

There it is.

He reinforced the very entrenched power structures he promised to dismantle.

 
 
 
Comment by Neuromance
2014-05-17 09:36:41

We’ve been hearing reports recently about how mortgage loan quality is very high. To see if that’s true… how much private activity is there in the mortgage markets?

Comment by Rental Watch
2014-05-17 17:35:13

Lots of people buying Fannie/Freddie backed loans…a small but increasing number of non-GSE lenders entering the market. The last number I saw was non-GSE lenders at 17% in 2013, up from 9% in 2009, but all way less than the ~50% of the peak bubble years.

Comment by scdave
2014-05-18 08:23:40

The last number I saw was non-GSE lenders at 17% in 2013, up from 9% in 2009 ??

Yes and at rates that are double What FNMA charges….

 
Comment by Whac-A-Bubble™
2014-05-18 11:23:16

“Lots of people buying Fannie/Freddie backed loans…”

Especially the Fed, which takes tens of billions of dollars worth of GSE debt onto its balance sheet each month.

What could go wrong with that plan?

Comment by AmazingRuss
2014-05-18 18:07:03

Is there any limit on how much they can put there?

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Comment by Whac-A-Bubble™
2014-05-18 19:53:22

None to my knowledge. It is the financial equivalent of a black hole. Once Treasurys or GSE debt is on the Fed’s balance sheet, I don’t see any reason it ever needs to leave, do you?

 
 
 
 
 
Comment by MrsLolaSoros
2014-05-17 10:26:28

3. Prices are not going to go low enough for people to buy, because their PITI simply can’t compete with investor’s cash.”

I thought this argument was flawed when OZide made it earlier. The investors cash only comes out once prices drop super low again, and even then the “investment” was a flawed model based not on the claimed ability to rent out, but a hope for future appreciation. Investors are also BORROWING the cash, which is really OPM. When prices were low enough for investors to flock in before, there still wasn’t enough cash to suck up the shadow inventory. It’s all based on a manipulated market.

If the houses people are living in without paying or with massively underwater mortgages that aren’t being properly recorded as bank losses were added into the mix, prices would go back where they belong.

Comment by Mr. Banker
2014-05-17 10:36:13

“If the houses people are living in without paying or with massively underwater mortgages that aren’t being properly recorded as bank losses were added into the mix, prices would go back where they belong.”

“… bank losses…”

A definition is in order:

Bank loss: An old and rarely used term that was made obsolete by the actions of Central Bankers everywhere.

Comment by Mr. Banker
2014-05-17 11:15:37

Another definition of another term may clarify things a bit:

Taxpayer: A tool used by PTBs to further insure that the term “bank loss” remains obsolete.

 
 
Comment by Blue Skye
2014-05-17 13:17:53

Individuals in a mania “buy” a house because they believe rents will always go up. Investors buy houses in a mania because they believe rents will always go up.

People with money and people who borrow each get crushed and fall out of the mania one at a time.

 
 
Comment by Bill, Just south of Irvine
2014-05-17 13:23:57

Finally got cable internet installed. My mobile hotspot would not allow me to download software I need without killing my data for the month. Now to hook up internet TV!

Comment by Bill, Just south of Irvine
2014-05-17 13:57:06

oops - sorry Ben Jones - I forgot I was not on Bits bucket page!

 
 
Comment by Carl Morris
2014-05-17 16:50:26

“You’d think seven years of economic anemia would cause even the blindest believer to wonder: Was it really a good idea to put off a much steeper credit contraction and rapid arrival at the bottom of the market in exchange for nearly a decade (so far) of stagnation and the apparently permanent hobbling of the American economy?”

I think everyone who profited from it will agree it was the best decision.

 
Comment by NihilistZerO
2014-05-17 18:47:41

Please lower standard, FHA. I want the steepest decline in prices possible and that only happens if they lasso in the Muppets before the next crash. NINJA loans mean a better foreclosure deal 4 me. If the FED has taught me anything it’s that the game is dirty and you should play to win.

Comment by Whac-A-Bubble™
2014-05-17 22:28:58

“Please lower standard, FHA. I want the steepest decline in prices possible and that only happens if they lasso in the Muppets before the next crash.”

The world loves an optimist!

Comment by azdude
2014-05-18 06:16:27

angelo should open up shop again .

guy who did my windshield last week got three and lost three homes via angello.

Comment by rms
2014-05-18 10:43:56

“angelo should open up shop again .”

+1 Just imagine the “tan man” w/bible making a cameo appearance with Mel Watt (no photo) to kick-off “mo credik.”

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Comment by MrsLolaSoros
2014-05-18 11:01:03

See, this is what I’m talking about with it not working. I just don’t see Countrywide, New Century, First Financial and all those many many mortgage companies that were pumping it up for years and years coming back. Maybe, but I just can’t see it getting like it was (nutso crazy who cares fraud) in anywhere near enough time to save the already sinking ship.

 
 
 
 
 
Comment by Whac-A-Bubble™
2014-05-17 23:37:11

ft dot com
May 15, 2014 8:19 pm
Squeezed middle behind US housing slump
By Robin Harding in Washington

An unexpected slump in the US housing market has exposed the shaky fundamentals of recovery in the world’s largest economy, as a lack of incomes growth for middle-class Americans leaves them struggling to buy a home.

Last week, Janet Yellen, the chairwoman of the US Federal Reserve, warned a risk that had seemed vanquished was once again menacing the economy. “The recent flattening out in housing activity,” she said in testimony to Congress, “could prove more protracted than currently expected.”

Given the depth of the housing slump in the 2008-09 recession, and thus a huge amount of pent-up demand for homes, the recent bout of weakness in the sector is a surprise. It shows how the uneven distribution of incomes growth, with wealthy Americans doing best in the recovery, may be holding the economy back.

The weakness of housing activity so far this year is palpable. Existing home sales were down by 7.5 per cent on a year ago in March; new housing starts were down by 5.9 per cent in the same month. House prices, however – up by 12.9 per cent on a year ago, according to the Case-Shiller index – have kept rising.

There is a list of immediate reasons why housing has slowed. Most important is the rise in mortgage rates since the Fed began to talk about tapering last spring – up from around 3.5 per cent to 4.5 per cent in early 2014, before moderating to around 4.2 per cent today.

“Our research indicates that house sales activity is much more sensitive to rates than it was in the past, because borrowers have fewer products to fall back on,” says Sam Khater, deputy chief economist at Corelogic, a housing data provider. In times past, when 30-year rates rose, borrowers might turn to an adjustable rate, but few lenders are offering them in the wake of the crisis.

Michelle Meyer, a housing economist at Bank of America Merrill Lynch, adds three more short-term factors to the list: a tailing off in distressed sales, which generated a lot of activity; a lack of inventory in the market; and bad weather at the start of 2014.

Those factors are likely to abate, leading to a stronger recovery later this year, but none of them seem quite sufficient to explain why the housing sector is not more robust, five years into the recovery from such a deep slump.

“I think it’s the scars from this cycle,” says Ms Meyer. “We still have a bit of a credit crunch. A lot of people don’t have enough equity in their home to move. I also think that confidence hasn’t improved enough.”

Mr Khater said he believes “it’s structural”, pointing out that as long ago as the 1990s, there was growth in population and employment, “but during that entire time period we have not had median incomes growth”.

Comment by Whac-A-Bubble™
2014-05-18 06:50:05

“The weakness of housing activity so far this year is palpable. Existing home sales were down by 7.5 per cent on a year ago in March; new housing starts were down by 5.9 per cent in the same month. House prices, however – up by 12.9 per cent on a year ago, according to the Case-Shiller index – have kept rising.”

Rising prices on shrinking volume of sales somehow sounds familiar. It seems like I have seen this movie before.

Can anyone who has been reading and posting here for a while suggest what happens next in this movie?

Comment by rms
2014-05-18 10:56:08

“Can anyone who has been reading and posting here for a while suggest what happens next in this movie?”

Since you’re not down to selling homemade popsicles yet I’d say we have another sequel being written.

 
Comment by MrsLolaSoros
2014-05-18 11:03:54

Can anyone who has been reading and posting here for a while suggest what happens next in this movie?

Some new pump it up QE bailout injection scheme, but only after November?

 
 
 
Comment by frankie
2014-05-18 02:45:40

The governor of the Bank of England has given his strongest warning yet about the dangers to Britain’s economy posed by the booming housing market.

Mark Carney said the market represented the “biggest risk” to financial stability and the long-term recovery.

http://www.bbc.co.uk/news/business-27459663

 
Comment by senoir manchild
2014-05-18 05:36:57

that affording a house on 15/hr is not gone

frequently one of you is saying new construction is no more than 55 per square foot; I say even less the actual construction

who wants to pay more in Pheonix, Infierno…

desert

Comment by Housing Analyst
2014-05-18 06:56:45

Many of these truths need to be stated frequently considering how successful the housing crime syndicate has brainwashed the public.

 
Comment by scdave
2014-05-18 08:45:10

new construction is no more than 55 per square foot ??

Lets see it…Brake it down….Piece by Piece….Labor and materials for a 1500 square foot wood frame house….

Comment by Housing Analyst
2014-05-18 08:51:05

It’s been done over and over again here. You just don’t like it.

“Piece by piece” <—-LOLZ

 
Comment by CharlieTango
2014-05-18 10:30:47

Mammoth Lakes is seeing some slow modest growth in new construction. About half of the jobs we are working on are being built for $300-$500 / sq ft.

A decade ago my trade, insulation was costing locally $1-$2 / sq ft but now with new codes and more sophisticated design techniques the range on the top end is over $10 / sq ft.

Houses can be built for $55/ sq ft but some of us have to comply with plans and specs which can take the price per sq ft into higher ballparks as can 7 figure lot prices and insane permit costs.

It costs close to $1,000 / month to heat a small home around here with the current price of propane, people are switching back to electricity and forced air is getting un-affordable. People are electing to spend $20-$60k for insulation instead of $5k-15k in many cases. Architects are suddenly quite willing to design in these costs as well.

The largest new project has actual geo-thermal wells already installed while other houses are installing heat-pumps and using the geo-thermal term. I don’t think the heat-pumps work to well here.

Comment by Housing Analyst
2014-05-18 13:41:41

Everyone bids on plans and specs. And everyone complies with code.

Good job at cherry picking an exception though.

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Comment by cactus
2014-05-18 10:39:50

New construction is no more than 55 per square foot ??”

It probably doesn’t cost too much to manufacture pharmaceuticals either.

Someones making some money.

Comment by senior manchild
2014-05-18 12:25:07

you would probably be shocked at the savings just crossing the southern border; prescriptions probably on average 20% U.S.

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Comment by Whac-A-Bubble™
2014-05-18 06:19:40

Will the return of the “toxic twins” prove to be a game-changer for the Echo Bubble?

Comment by Whac-A-Bubble™
2014-05-18 06:22:02

Fannie Mae and Freddie Mac
Return of the toxic twins
Mel Watt wants easier credit for homebuyers. What could go wrong?
May 17th 2014 | WASHINGTON, DC | From the print edition

THEIR reckless investments helped inflate the housing bubble. Their collapse in 2008 triggered a government takeover and a costly bail-out. Many people would like to see Fannie Mae and Freddie Mac, America’s twin mortgage giants, abolished. But their new regulator wants the two firms, which guarantee 55% of new American mortgages, to promote easier credit—again.

Mel Watt, a Democratic ex-congressman, took over as boss of the Federal Housing Finance Agency (FHFA) this year. He replaced Ed DeMarco, who had focused on shrinking the twins and recovering the bail-out cash. On May 13th Mr Watt signalled a break with all that.

The maximum size of a Fannie or Freddie-backed loan, rather than shrink, will stay the same: $417,000 in most areas, and $625,250 where housing is pricey. The fees the twins charge to guarantee loans, rather than rise, will for now stay the same. Most important, Mr Watt clarified and narrowed the conditions under which banks which sold Fannie and Freddie dodgy mortgages would be forced to buy them back. Mr DeMarco had relentlessly pursued such “putbacks”, scaring banks into denying credit to all but the best qualified borrowers. “I don’t think it’s FHFA’s role to contract the footprint of Fannie and Freddie,” Mr Watt said. Together, these steps offer a modest fillip to home sales and construction.

While in Congress, Mr Watt pressed Fannie and Freddie to funnel more credit to relatively poor families, a well-meaning policy that did not end well for those families. He has now given the twins—and their mission of boosting home ownership—a new lease of life.

Comment by Whac-A-Bubble™
2014-05-18 06:52:11

While in Congress, Mr Watt pressed Fannie and Freddie to funnel more credit to relatively poor families, a well-meaning policy that did not end well for those families.

Have the Democrats yet owned up to their responsibility for sinking the financial stability of low-income families they actively encouraged to become homeowners?

Comment by MrsLolaSoros
2014-05-18 11:07:38

George Jefferson, a hard working drycleaner small business entrepreneur should be the model. Instead it’s Jay Z.

George Jefferson lived in a Deluxe Apartment In The Sky.

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Comment by Carl Morris
2014-05-18 13:43:00

George Jefferson lived in a Deluxe Apartment In The Sky.

And it was affordable on middle class income. Even in a desirable area.

 
 
 
Comment by Guillotine Renovator
2014-05-18 10:27:14

This guy has bubble fever. Somebody should check his meds.

Comment by rms
2014-05-18 11:29:34

“This guy has bubble fever. Somebody should check his meds.”

In reality Mel Watt is just another shill for the Mortgage Bankers Association, the Nation Association of Realtors and Wall street. They have him on a leash while they grind out the housing music. Colin Powell is familiar with the routine; just smile and parrot the lies on the teleprompter.

http://picpaste.com/monkey-and-organ-grinder.jpg

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Comment by Whac-A-Bubble™
2014-05-18 12:49:43

“Colin Powell is familiar with the routine…”

Funny that I was just thinking about him earlier today — particularly his ‘pottery barn rules.’

Here is to hoping that somebody correctly connects the next U.S. mortgage lending disaster to the current Democratic party initiative, and succeeds in making them own up to it.

 
 
 
 
Comment by Whac-A-Bubble™
2014-05-18 06:25:49

Is it pretty much only Democrats who are behind bringing back Fannie Mae and Freddie Mac to pre-bubble-collapse prominence, or do Republicans back a fully-governmentized mortgage market as well?

Comment by Bill, Just south of Irvine
2014-05-18 14:46:55

I wouldn’t count on the RINO wing, which is most of the R party for agreeing with the Demos on this.

Comment by Bill, Just south of Irvine
2014-05-18 14:49:01

oops - I wrote it wrong.

I WOULD count on the RINO wing, which is most of the R party, for agreeing with the Demos on this! The purpose of Congress is to distort capitalism with big government and then blame capitalism for the problems they caused.

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Comment by Bill, Just south of Irvine
2014-05-18 06:38:39

“Was it really a good idea to put off a much steeper credit contraction and rapid arrival at the bottom of the market in exchange for nearly a decade (so far) of stagnation and the apparently permanent hobbling of the American economy?”

I doubled my amount of treasuries, municipal bonds, and cash total from October 2009 to now. And without taking the socialists’ bait to buy a depreciating asset - instead I bought more stock. Doing well. This amount I saved in bonds and cash will take me 12 years to spend, and that will take me to retirement.

But lately I sold off a bunch of shares, especially the last 20 months. At one point I had 10,000 shares of my former company stock, but have been selling some at a time and have a little over 4,000.

Bet with the “progressive” Fed and treasury. Then walk to the exits before the mad rush to the exits.

Comment by Bill, Just south of Irvine
2014-05-18 06:54:03

If the government figured out a way to prevent the stock market from going up but only to have real estate prices go up the last five years, perhaps more gullible people would have bit the worm at the end of the hook. But by allowing stocks to go up far more than housing prices, a lot of people priced out of real estate were more than happy to ride the stock market for five years, make some sales, pocket the money, buy more T-bills for the next stock market cycle, maybe stack some precious metals and wait.

Because this whole thing is failing. And when it is too known to be a coverup - internet cannot be silenced, there will have to be big changes in policy to get the government completely out of the way of housing.

In addition, It is nonsense to expect a stucco box built by shoddy labor in a neighborhood full of deadbeats, cRAP noise listeners, and subsidized people will increase enough to pay for your retirement. It’s a depreciating asset as long as subsidies remain, for one thing.

Good agriculture land (where water is plentiful) is what is worth something. Not rotting wood. Besides, the agriculture land is not destroyed by the cRAP noise crowd. Maybe also apartments, which is why I am slightly into REITS. But SFHs are depreciating assets and by no means related to retirement.

Comment by Housing Analyst
2014-05-18 07:47:50

Good post.

There’s a problem with tillable land. There has to be demand and you have to have the tools to till it or offload it to someone who does. Given the efficiencies in ag these days, I just don’t see it. Science and engineering will continue to impose greater efficiencies on each unit of ______ (fill in the blank….. dirt, fuel, labor, etc).

 
 
 
Comment by Whac-A-Bubble™
2014-05-18 08:09:19

Al’s Emporium: Commentary
Mortgages for the Masses
Al Lewis Wonders if Student Debt-Laden Young People Can Afford to Buy a Home
By Al Lewis
May 18, 2014

Make a loan, any loan, to any home buyer for any amount.

Sell the loan to Fannie Mae (FNMA -1.29%) or Freddie Mac (FMCC -0.47%) so it’s the government’s problem if it’s never paid back.

This is what helped trigger the 2008 financial collapse. But last week, Melvin Watt, the new head of the Federal Housing Finance Agency, which oversees Fannie and Freddie, said he wouldn’t reduce limits on the size of mortgages that these government-owned mortgage giants guarantee. He also said he would loosen rules that obligated mortgage lenders to buy back any distressed loans they sell to Fannie and Freddie.

“Our overriding objective is to ensure that there is broad liquidity in the housing finance market,” he explained in a speech at the Brookings Institution in Washington. He said his decision “is motivated by concerns about…the health of the current housing-finance market.”

Democrats and Republicans are still fighting about what to do with Fannie and Freddie, but these agencies still stand behind two-thirds of all mortgages in the nation’s $10 trillion mortgage market.

Before the financial collapse, they were supposedly private enterprises. But the government took them over once it was clear they were headed for bankruptcy. Their bailout cost $190 billion. Since then, Fannie and Freddie have paid about $200 billion in dividends to the government—a profit for taxpayers.

Never mind that their turnarounds came from the same funny-money finance that reanimated all of America’s zombie banks: zero interest rates and tens of billions of dollars in monthly bond purchases from the Federal Reserve.

Now, Fannie and Freddie are feeling flush and want to stay in the game until Congress tells them otherwise. A bill to overhaul them passed a Senate committee on Thursday—but it’s unlikely to go much further in an election year.

You see, without Fannie and Freddie backing a lot of loans, the U.S. economy could slip back into a recession.

The so-called housing-market recovery has already hit a wall. Experts are content to blame this year’s dip in existing-home sales on the weather. But here’s the bigger picture: Home-ownership levels fell to 64.8% in the first quarter, the lowest in 19 years.

For the last half-decade, college graduates have left school with huge debts and bleak job prospects. Students and graduates owe more than $1.2 trillion. The last thing many young people need is mortgage debt on top of student debt.

What economists call “household formation” has nose-dived. The number of households established in the U.S. has dipped by about 800,000 a year since the 2007-09 recession, according to a paper by the Federal Reserve Bank of Atlanta, hitting some of the lowest levels since World War II.

Millions of Americans remain without jobs. Millions more have found new jobs that pay less. Millions more are retiring as the baby-boom generation enters its golden age.

Who needs a mortgage? RealtyTrac, a real-estate data provider, reports that 43% of all homes sold in the first three months of this year were all-cash deals.

Wealthy investors and giant buyout firms such as Blackstone BX +0.45% have been scooping up all the distressed homes—so there have been few deals for average home buyers to be had.

Fannie and Freddie can try to juice the market now, but there may not be much demand left for home loans.

The story of America’s mortgage crisis ends like this: The rich got richer and the poor will rent from them.

Comment by Neuromance
2014-05-18 10:38:28

The government and central bank love debt for different reasons. Politicians love it because it juices the economy today. It’s a currency injection like money printing. Central bankers love it because their wards, the banks, have debt at the core of their business models.

The problem is the debt hangover - the deleveraging event - which follows debt. Where people draw down their spending to pay back the debt.

So policy makers engage in all kinds of shenanigans to moot that debt. The central bank take that debt off the lenders hands and sequester it on its balance sheet. Or the government pays it off, and that debt too is sequestered on the central bank balance sheet. The lenders are made whole but the borrower is left struggling with the albatross. A classic trickle-up policy. All under the guise of helping the little guy. Brilliantly Machiavellian.

But the central bankers and politicians have to be careful. History is littered with examples of societies which became too enamored of the immediate jolt provided by currency injections, either by money printing or via debt.

Comment by Mr. Banker
2014-05-18 13:43:20

“All under the guise of helping the little guy.”

As in, perhaps, “The Homeowner Protection Act”?

There are several things wrong with this statement:

1. The term “homeowner” is incorrect if one believes that the home buyer is really the home owner.

2. The term “protection” is correct if it is applied to the homeowner but it is incorrect if one thinks it is being applied to the home buyer.

 
Comment by Carl Morris
2014-05-18 13:44:23

History is littered with examples of societies which became too enamored of the immediate jolt provided by currency injections, either by money printing or via debt.

And we’re about to add a new chapter to the history book.

 
 
 
Comment by Neuromance
2014-05-18 10:36:06

The key lesson hasn’t been learned.

“It is hard to get a man to understand something when his salary depends on his not understanding it.” — Upton Sinclair.

If the central bank and the government keep in place perverse incentives - i.e. 1) separating lenders from repayment risk and 2) government guarantees of private debt - they should expect perverse outcomes.

 
Comment by senior manchild
2014-05-18 10:45:31

that affording a house on 15/hr is not gone

frequently one of you is saying new construction is no more than 55 per square foot; I say even less the actual construction

who wants to pay more in Pheonix, Infierno…

desert

Comment by senior manchild
2014-05-18 10:48:01

this should have been above

 
 
Comment by clark
2014-05-18 22:24:09

Maybe this has been asked here before? (Pardon me, I Do try to keep up with you guys) How similar is the housing inventory to the that of the automotive inventory? I read about how autos are the ‘new’ sub-prime’, is there a shadow inventory of autos stacked up somewhere, scattered here and there? And if so, are they being absorbed in a rental/lease market the same as in housing? Is there a great big fleet of cars, parked on an abandoned airport, waiting to be rented? At wishing prices?

HA,… anyone?

 
 
Comment by clark
2014-05-18 22:55:13

Also, the title, “The Key Lesson Hasn’t Been Learned”

That is soo perfect!

However; it’s been learned by some.

Thanks to you all. Cicera: 2004.

In case you need to hear it: You Guys Are Da Bomb!

Oops, now I got flagged by the Stasi NSA.

Back in the 1980’s I Never Ever would’ve thought I’d write the words above. Back then I saw a house I liked and noted it was priced at $30,000 Dollars and thought I had all the time in the world to buy it.
Now I see I’ve been Priced Out of the market forever.
Me, and everyone else I know. …

Time.

 
Comment by clark
2014-05-18 23:02:13

If you will, a response I got on another blog:

Tor Libertarian
May 19, 2014 at 1:27 am

Fact:
“US auto inventory stockpiles have been growing, with the number of unsold vehicles rising to 3.7 million units at the end of March 2014 – the highest level since 2006.”
(that’s there reported and possibly manipulated total. The point of these photos is to cast doubt on Big Brother’s lies that “chocolate production is at an all time high”)

Thanks for pointing out the age of the photos. If you have a source for this assertion, it would be helpful. If only we could all move to a pursuit and then tackling of factual situations.

Let’s say for arguments sake you are 5x more knowledgeable than everyone here about the auto industry and its practices. It would remain the case that there are some amount of cars sitting outdoors at any given time. All that really matters, in this case, is what that number really is. And what the Crony Corporatists and Statists are saying it is. Right?

How many cars are built and just sitting somewhere, what is the number? Saying something is customary, is besides the point, and doesn’t assist in our quest for the truth of the matter.

I don’t have a dog in the fight either way. Perhaps this happened in 2009. I don’t see how that makes it somehow acceptable.
http://www.abovetopsecret.com/forum/thread1013231/pg5

I included this here because this is an automotive themed site. And zero hedge is generally reliable, though certainly not libertarian. It trades links with shtfplan and peak prosperity/chris martenson among other sites.

To my mind the photos are real. They provide damning evidence of the manipulated crony capitalism we live under, also known as corporatism.

Secondarily, you are also welcome to assert your expectation that whenever something gets posted on the internet it should be relatively new information. Again in this case, I don’t agree with that mindset, expecting everything posted on the internet to be breaking news does not seem reasonable to me.

Instead it seems like yet another cheap tactic, to avoid talking about brass tacks and objective truths. I would hope this forum wouldn’t be a place where academic sophistry gambits are considered legitimate discourse. (Not saying you engaged in them, just stating a general expectation we hold of each other)

Within the article, they acknowledge these photos need an update.

UPDATE: Currently May 16th, 2014, all of these cars at the Nissan Sunderland test track have disappeared? Now I don’t believe they have all suddenly been sold. I would guess they may have been taken away and recycled to make room for the next vast production run.

Peak Car
http://pricetags.wordpress.com/2014/05/17/peak-car-they-just-keep-piling-up/

US Auto Industry to see solid growth in 2014 (cough)
http://www.bidnessetc.com/business/auto-industry-analysis-general-motors-nyse-gm-us-auto-industry-poised-for-solid-growth-in-2014/

Nov 2013 inventory at 76 days of sales
http://www.bloomberg.com/news/2013-12-02/most-autos-on-u-s-lots-since-05-has-ford-leading-cuts.html
- this is the most autos on lots since 2005.

We have reached peak car in the US
http://usa.streetsblog.org/2014/01/21/the-american-cities-with-the-most-growth-in-car-free-households/
In 2007 there were 2.07 vehicles per US household
In 2012 there were 1.98 vehicles per US household

 
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