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Another Angle on the Housing Crisis

Russ Roberts made an interesting remark in a podcast I recently listened to, in which he was talking with Robert Shiller of Yale University and the well-known Case-Shiller Home-Price Index.

He stated that one of the often overlooked benefits received by the droves of consumers who over-bought houses and helped carry the economy into crisis, was the fact that they got to (and in many cases still do) enjoy being able to live in a bigger, nicer home than they otherwise would have.

It's worth thinking about. In the end, it may not work out so well for everyone. But what about all the time spent enjoying the lifestyle?

Where'd That Buyer's Market Go?

Didn't it just seem like there was a massive swing from a seller's market to a buyer's market? Leading up through about 2005 or 2006, it seemed buyers were constantly facing multiple-offer situations, and frequently watching homes sell above the asking price. Not all markets, but it was common in the Bay Area. Sometimes the seller priced deliberately low to try and incite a bidding frenzy.

Then, the bubble burst. Foreclosures and short sales hit the scene. And we had 20 listings for every buyer. Low-ball bids, high inventory were commonplace. It was a complete inversion of the seller's market, as the buyer now had all the levers.

And in recent months, we've heard some pretty wild stories about some segments of the market. What is interesting to me is the lower end homes, first-time buyer price range. This market is back to full on mania! Much of the inventory is controlled by banks, the prices are low/affordable. And investors with cash have come out of the woodwork to pick up these places. First time home buyers are racing to buy before the $8000 tax credit expires.

We are hearing of cases with 20 offers. 30 offers. 40 offers... listings stating that "all non-cash offers will be dismissed". Buyers are taking a shotgun approach, putting offers out on several homes, hoping one 'sticks'. Crazy stories about Realtors stealing keys so other agents cannot show listed homes, and the other agents breaking in to the home to show to their clients... !!! Madness.

It's amazing to me that we would see the market go from one extreme to the other so quickly. No time spent in the middle, no 'equilibrium'. But we'll straighten this out eventually. And it will last for a while before the next tilt happens.

35 Billion in Housing Aid - Coming to State Housing Finance Agencies

There's some interesting news about an expected 35 Billion lifeline about to be extended to the various state run Housing Finance Agencies, including CalHFA. These agencies offer below-market financing for housing to first-time buyer families and individuals, with some restrictions on income and property value.

I have a substantial amount of experience with the CalHFA program, and when this program is healthy, it is effective.

Late in 2008, CalHFA suspended it's lending programs due to a lack of funds. This 35 Billion infusion - which is ~2 times as much as the expected total expenditure for the 8k first time buyer tax credit - will likely help open that program back to a level where it can be effective. It's worth keeping an eye on.

Are Home Sales Up? Depends On Your Price Point

Real estate is all about micro markets. In the San Francisco Bay Area, homeowners might be celebrating the recent trend to higher sales volume in recent months. But that data comes from national sources. How much of the Bay Area falls into the brackets below, where we are seeing increases in volume? Thanks to Steve Harney for the info:

Below $100000 - sales up 38.8%

100k-250k - sales up 8.7%
250k - 500k - sales down 6.2%
500k - 750k - sales down 8.9%
750k - 1MM - sales down 10.6%
1MM - 2MM - sales down 23.3%
2MM+ - sales down 32.4

Not to be a wet blanket though... This data does not show the volume of sales in these brackets, and the bulk of housing likely falls into those lower price brackets. Activity at the lower end means future liquidity at the higher end. It's the "plankton theory" of housing: If a homeowner want's to buy a higher priced home, they need to sell their lower priced home to somebody. There's a food chain. First-time buyers, aka the "plankton" have to get into the market to support the ripple up the chain for move-up buyers. So I would expect that this activity will work its way up through higher price brackets in coming months.

Ayn Rand - Liberty vs Socialism

This is worth a spin...

Slideshow of 100 Abandoned Homes in Detroit

This is a view of disaster through an artistic lens. There are some downright gorgeous shots in here, every one of them representing a story of tragedy, loss, failure, and hurt. A sign of the times, Detroit has had as many headlines as any other city as a representation of the worst economic conditions in our nation in 'The Great Recession'.

Remember the mood only 6 months ago? While I think the recovery rally cries are a bit premature, it certainly does not feel as likely as it once did that we could see a full wide-scale meltdown or economic collapse.

We'll come back, and the beginning of that long process is underway. I'd love to see these same 100 photos updated in a few years.

Weekly Mortgage Interest Rate Survey on Mortgage-x

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: () () Over the next 30 days rates will decline slightly; over the next 90 days rates will decline slightly.

Comment by John C. Glynn: A second-guessing of the 'recovery' will put pressure downward on rates, but be careful about the implications of an unwinding Federal Reserve with their asset purchase programs designed to lower rates - they are coming to an end.

Find out what others are saying by clicking here. (hint, looks like I am running with the pack this week...).

Unemployed to US Economy: "Go on without me..."

I am concerned about the recent optimism in the financial markets. Sorry. Not cool to be a pessimist. But I am not - just trying to be a realistic optimist here.

We lost 245k jobs in the month of July. This made markets happy because it was less than expected (325k), and fewer than the prior month. Around January of this year, we were losing ~750k per month. So yeah, improving, but not exactly good.

Is this cause for optimism? How can we distinguish between optimism and an evaporation of pessimism? Are they the same thing?

(Source: Bureau of Labor Statistics)

What bothers me are the following details, below the headlines of the news release:

• the only growth in new jobs is among the 55 and up crowd - baby boomers who, under other circumstances, would no longer be in the job market.
• nearly 5MM people have been out of work for more than HALF OF A YEAR

The second point leads me to wonder, when does fatigue set in? The unemployment rate went down this period (9.4%) but this is expected to be anomalous in retrospect; unemployment is expected to break 10% within the year. Since the survey methodology only considers "unemployed" people to be those A) without work and B) actively looking for work, how many people have given up? How many are tired of sending resumes out multiple times a week, getting no replies, and simply focusing on other things until there are signs that jobs are available?

I love this analogy from Planet Money: The foot is on the pedal, and it's floored (Federal Funds rate @ 0% and other stimulus). The car (our economy) is rolling backward. But the speed at which we are rolling is slowing. And that's enough to get us where we're going? hmm...

I am not yet convinced. What say you?

Stevie Ray Vaughan Called; He Wants His Social Security Back

According to The Tax Foundation for 2007 (most recent data):

• the top 1% of tax filers paid 40.4% of all Federal taxes (up from 39.9%)
  
• the top 1% of tax filers made 22.8% of total reported adjusted gross income
• $410,100 income required to be considered top 1%
• top 5% paid 60.6% of all Federal taxes on 37.4% of adjusted gross income
• $160,000 income required to be considered top 5%
• top 10% paid 71.2% on 48% of all income
• $113,000 to be in the top 10%
• bottom 50% of all filers paid 2.9% of the total income tax bill

July Jobs Report to Mortgage Rates: "You can call me Susan if it makes you happy"

Today we saw release of the anxiously awaited July employment report, which turned out to have a few surprises, and a general portrayal of an economy that is continuing to struggle, but at a slower pace than before. The number of jobs (net nonfarm payrolls) lost over the month eased to 247,000, as against June’s loss of 443,000. Obviously, this is an improvement, and it is generally being read as indicative of a gradually healing jobs market.

It is important to recall, though, that this recession has seen the loss of 6.7 million jobs—and “less-worse” won’t make that number decline. And while the unemployment rate fell to 9.4% from 9.5%, there is a lot of indication that a primary reason reason was that people took themselves out of the jobs market, as they stopped actively look for a job. This is no improvement, and the unemployment rate is still expected to break 10%. When we see a greater number of people entering and re-entering the jobs market, it will signal an improvement to confidence in people’s ability to find a job. Improvements in the jobs market tend to follow improvements in other areas of the economy. It will be some time before we can say we’re in a recovery, not just moving toward one.

So how did mortgage rates respond to this news? Not so good. If you are on the fence about refinancing, or waiting for a better deal, it might feel like somebody's got a grip on your necktie right now, no clear sign of them letting go at the moment...

...For approved audiences, this clip is "Rated R". The butt-kicking in the bond market today reminded me of this...

Mortgage Meltdown: More Blame Game and Depressing Politician Behavior

In case you still want to watch the debate over 'who caused this Great Recession', check this clip out. You can't stick a bullseye on Barney Frank's back, let alone get a straight (or honest) answer out of him. But can you blame the guy? He's a vote-getter first and foremost! Ok, I'm in a particularly cynical mood today, politicians depress me rather than inspire me 9 times out of 10. Now you know.

Last we heard, it was the Clinton administration pushing Fannie Mae and Freddie Mac to lower lending standards to accommodate more low-income buyers. Who even cares at this point? I wish they'd stop the finger pointing and learn how to regulate before the crisis hits, not squeeze the life out of the market with righteous after-the-fact belt-tightening that is more about showboating to their constituencies (self-service) than about creating a healthy economic environment with stable legal guidance (public service).

For some more bad light on politicians, see this story about Senators Chris Dodd and Kent Conrad and their 'sweetheart' deals from Countrywide on their own personal mortgages, via a program called "Friends of Angelo" (Mizillo). How feasible is it that the Chairman of the Senate Banking Committee (Dodd) and the Chairman of the Senate Budget Committee remain unclouded in their judgment when receiving preferential treatment from a bank? In other words, "the last two people that should have dirty loans were at the front of the line".

Well apparently they now admit that they were aware of the preferential treatment, though they denied it a year ago when the story first broke. I can't find a credible link though that supports this supposed acknowledgement.

Weekly Mortgage Rate Survey on Mortgage-x

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: (V) (V) Over the next 30 days rates will decline slightly; over the next 90 days rates will decline slightly.

"Comment by John C. Glynn: Discord among analysts - and thus volatility - continues. There's enough reason to expect rates to remain low, but the sensitivity seems to be to the upside for rates, so bad timing can potentially hurt."

Find out what others are saying by clicking here. (hint, all over the map - still - which reinforces my belief about uncertainty above...).

090706 Less Worse Syndrome and other Brain Dumps

Are we in the midst of recovery? Has the Great Recession hit bottom? The market chatter has definitely shifted. Key changes include:

• "green shoots" instead of "next shoe to drop"
• "inflation" instead of "deflation"
• "recovery" instead of "bottoming"

So.....?

During the last Fed meeting, there were actually conversations that included speculation that the Fed would either raise rates, or begin looking in that direction. They said nothing of the sort. And even though the oddsmakers had the chances of rates changing at that meeting at less than 4%, there was still anticipation along these lines. Since that meeting, SF Fed President (evidently in the running to be the next Fed Chairperson) reiterated her belief that the Federal Funds rate would be at or near the current level of 0.000-0.250% into 2010 or longer. huh.

Paul McCulley says, discussing the eventual hiking of Fed Funds rate:

"And when is all this going to happen? Last week, the markets started to romance the notion of before the end of 2009. To me, this is simply silly. In the matter of cutting off, and then kikking, the fat tail risk of deflationary Armageddon, boldness in execution is no vice, while patience in declaring victory is indeed a virtue. The Fed has been bold and is committed to patience. Bravo! And the first Fed rate hike? Call it no sooner than 2011." -6/15/09

It's going to be tough to pull out of this with rising unemployment. At 70% of GDP, Consumer Spending is a critical factor in new environment. Consider this from Bridgewater, which I recevied from John Mauldin:

"... as long as credit remains frozen, spending will require income, and income comes from jobs. And debt service payments are made out of income. Therefore, in a deleveraging environment job growth becomes an important leading, causal indicator of demand and other economic conditions."

Less Worse syndrome is dominating the markets right now. For example, in May, the total number of jobs lost came in around 345k, but since April had losses of ~509k, the markets saw this as a positive sign. Job losses are not positive. The month to month changes may indicate a change in the trend, but not just on one report. The June losses were at 465k. So that's 509, then 345, then 465. During the mnth of June, before the June data was released, the markets were optimistic based on an appearance of "less worse". They appear to be reconsidering...

...

The California new home purchase tax credit - 10,000 to anybody buying new construction residential real estate in CA has expired. The program hit it's limit at 100,000 applicants.

There is a 1 page bill in congress to put the hated HVCC (Home Valuation Code of Conduct) policy on hiatus for 18 months. If you are engaged in a financing transaction, you've either encountered this acronym, or are about to. It is causing all kinds of problems, and creating quite a stir. Should be interesting to see where this goes. I'm not too encouraged by the 1-pager, but there's been overwhelming support from the industry...

Did She Just Say "Pundint"?

eh? I know Suze Orman is already a target for laughs, portrayed on Saturday Night Live by Kristin Wiig. So I'll try not to get petty here.

There are a few well known "pundits", or even actual financial services practicioners, who have taken opposition to some of Suze's advice. Particularly her hardcore blanketed advice to pay down all debt as a top priority. Critics say, sometimes it's just not that black and white.

In this video, Suze makes a key shift in favor of liquidity for safety purposes as a priority over eliminating credit card debt. It's interesting to note however, that this advice comes too late in the game for many to react. I think it really highlights the key issue some have with her advice - we need to be financially prepared for the unknowns in life before they hit us. It doesn't really help to start preparing for disaster after it strikes.

Her former advice to pay down credit card debt is basically a math lesson gift wrapped as financial planning advice. Too many of the variables in her equation are held constant, when true financial planning takes a subjective, individualized look at all variables in a particular scenario. Same goes for the new advice - that may be the right idea for some, but don't mistake what is going on here. Her extreme point of view, and universal conviction are what make her interesting enough to put on TV. That's not what makes individual advice pertinent or valuable.

For kicks, here's the SNL version.

Fed Watch: What Did Today's Policy Statement Really Say?

"Strikes and gutters, ups and downs..."

I have not seen this much anticipation ahead of a Federal Open Market Committee meeting in I don't know how long. This component of the Federal Reserve meets for a 2 day session every 6 weeks, and makes a formal policy statement at around 11:15 (pacific) on the 2nd day. Generally, there are a lot of eyes on the markets in this moment, as the Fed's statement will contain an update to or reassertion of the Federal Funds rate, a key short term rate with implications for the economy and longer term rate outlook. But there are also a few carefully constructed sentences released to justify their rate-setting decision, and the markets try to read between the lines for hints at what the Fed might be thinking.

When investors buy bonds, the values increase, and rates get lower.

We entered this week's meeting in a state of uncertainty. During the spring months, the bond market had been flat for several months, rates for mortgages remaining relatively calm. Then, a few weeks ago, after a few economic reports indicated a potential recovery beginning to take place in the economy. This caused bond investors to pull some money out of the market in favor of other vehicles - like the stock market. The momentum gained traction until the levee broke, and a lot of the 'safe haven' money that goes into bonds during bad economic times started to flood its way out, causing rates on mortgages to rise - and rise quickly.

Just as quickly, the 'confidence rally' came to a halt, and the markets seemed to be reconsidering the idea that we were about to come out of the woods of The Great Recession. And that's where we were today - caught in the middle, unsure of whether we are going to head into recovery, and bump right into hyper-inflation, or another wave of economic pessimism, causing bonds to regain their appeal.

All eyes were on Ben Bernanke and the Fed's policy statement. The markets wanted to be reassured that inflation was not an imminent threat. They wanted confirmation that the Fed has an 'exit strategy' in place to unwind some if the excess reserves that have been pumped into the economy to fight deflation. Funds which if left unchecked, should lead to inflation again at some point. But there are as many critics of the inflation treat theory as there are proponents. And this causes the market to be uncertain. They wanted something to chew on today...

Here is a link to the policy statement. It was all old news. Nothing new. Just a subtle reference to the idea that they expect inflation to remain low, and that they are committed to their campaign to keep participating in market stabilization efforts.

The bond market made an initial sell-off, but knee-jerk reactions are typical. By the end of the session, the market for Mortgage Bonds (underlying instrument affecting mortgage rates) were dead flat on the day. I'll give credit to Bernanke for playing it cool, and effectively managing the expectations of the market. By not responding directly to the wishes of the market, he reasserts the impression that he is in control. It may not be what the market was asking for, but the market abides.

Weekly Mortgage Rate Survey on mortgage-x

I participate in a weekly survey on mortgage-x. For the upcoming week, I said:

Vote: () () Over the next 30 days rates will decline significantly; over the next 90 days rates will decline slightly.

"Recent bond market deterioration represents a shift in sentiment, and the high volatility is representative of a lack of conviction. No markets like uncertainty. The shift toward optimism that we are coming out of the Great Recession may be premature."

Find out what others are saying by clicking here. (hint, all over the map, which reinforces my believe about uncertainty above...).

Affordability Index Update - Remember Real Estate is all about Micro Markets

Holy smokes!

Check out this article from the LA Times, talking about the real estate market in Lancaster, CA. House prices are down to levels not seen since the late 1980's! If we could get an affordability index for this town alone, I imagine it would look quite exaggerated compared to the one above. And if you're a homebuyer in Lancaster, that's a good thing!

Bummer for everyone who bought over the last 20 years, especially if they are looking to sell, but if you're out looking for a home, or an investment property, this is what we call a 'no brainer'.

Long Exhale... Brain Dump 06/09/2009

I've been plugging away some long hours over the last few months, but I'm back to shake some dust of the blog here. No cohesion promised here, just a spewing of some of the more evocative and interesting ideas, quotes, etc that I've seen since the last post:

- Jon La Grou introduces an awesome home construction enhancement, cheap, smart, simple. Updating 150 year old technology, bravo. 5 min video

- John Mauldin on the current crisis: "..This again illustrates the problem of using past performance to protect future results. You have to look at the underlying conditions in order to get a real comparison, and we have not seen a deleveraging recession in the US for 80 years. Using the past data in today's world is useful, and may be harmful to your portfolio." >> Word.

- Pimco's Paul McCulley on the current crisis: "There's nothing like a bull market to make geniuses out of levered dunces."

- There's a battle Royale taking place right now in the debate on the future of interest rates. We saw the low trend break down over the last two weeks, and what followed was one of the biggest downlegs in the bond market I've ever seen. Cheerleaders of the recovery think that long term interest rates need to be higher to attract investment capital. The Federal Reserve can't continue to make the market with mortgages at 4.5% if all of the 'safe haven' dollars are now getting cozy with alternative vehicles to the US Treasury markets. But are we even out of the woods yet? With credit contracting, and unemployment rising (10% here we come!) how are we supposed to spend our way back to positive GDP growth? It doesn't add up... I said it before, and I'll say it again, we've got a lot of bites left in this sandwich...

- US Housing affordability index (which began tracking data in 1971) was at an ALL TIME HIGH before rates popped. This has been bringing in bargain hunters to gobble up the excess housing inventory. But the momentum was just getting going. With rates up, it knocks the index back a ways. But financing a home today is still cheap by historical standards. 30 year average of the 30 year fixed mortgage rate is closer to 7.500%

- In much of the recent economic press, there is discourse along the lines of "the worst is behind us". The stock market has had one or two down weeks over the last three months. In other circles, we hear "commercial real estate is the next shoe to drop". Given that it would be less likely that the government would bailout strip mall developers, will the markets be able to shake off an era of see-through buildings and continue dancing like there's nothing to worry about?

The Case for Not Waiting

One of the more frustrating aspects of today's marketplace is all the wasted energy. Consumers are stuck on the fence, waiting for lower rates to refinance, waiting for lower prices to become a buyer in this buyer's market. Sometimes waiting pays off, and it certainly has if you hesitated to buy a home in 2006, and are now reconsidering. But you could be heating your house with the windows open...

Trying to squeeze blood from a turnip, waiting for 4.500% when you can get 4.625% today can lead to disappointing results. Rates are at or within spitting distance of all time historical low levels. With all the moving pieces of the puzzle, waiting often means a lot of false starts and missed opportunities.

Example 1 (purchase). Defining the cost of waiting. Maybe you've got a pretty good read on the supply/demand dynamics of your market, you know about the seller's circumstances, competition, etc. Visibility is ok, and you know this house is overpriced. So you try and pull down the price tag, but the seller isn't going for it. Do you have a good read on the global markets? Well, do ya? Some sort of inside track? What if that house you want does eventually come down 25k, but at that exact point in time, the markets are digesting a panic over inflation expectations, and rates have shot from 4.750% to 5.250%? What's a better deal? The answer is: Lower rate, higher price. I'll show my math if you don't believe me, shoot me an email to request it.

Example 2-4 (refinance). Job loss, Equity loss, Rate spike. If you owe $400k 6.250%, waiting for 4.500% when you could have 4.625% today, how much do you lose paying at 6.250% for 3, 6, 12 months of waiting? Again, it's helpful to do the math. 12 months at 6.250% costs $6500 more in interest than 4.625% over one year. The extra .125% in rate, if you can get to 4.500%, is worth $500 over a year.

Sure, over 30 years, that's a significant savings. But it is not worth the cost of missing the boat altogether, as we hear about consumers doing every day.

Unemployment is rising (currently 8.5%). Equity is falling (price declines of 30-50% off peak in some markets). And there is a debate going on in the markets about inflation coming from excess stimulus cash in the financial system, and whether it will cause rates to spike without warning.

Would you rather have a $6500 sure thing, or a shot at $7000 with a potential risk of zero? These are forces beyond your control, so eliminate them or avoid them if you can. Otherwise, if you're sitting on that fence, and you fall asleep, you might end up with a nasty burn...