Looking Ahead at Mortgage Rates

The NY Federal Reserve is, and has been, the biggest buyer of Mortgage-Backed Securities for all of 2009. This helps push mortgage rates lower, and that's why they allotted for a 1.25TN budget over a 15 month period. It is set to expire at the end of Q1 2010.

This week, their purchasing volume is down significantly. ~9BN this week. For the past few months, they had been closer to 16BN per week, and a few months earlier they were consistent at 25BN per week.

It makes sense that as they near the end of their budget, they will slow the volume. Otherwise, their departure from the market would create a demand vacuum.

Many speculate that mortgage rates will quickly return to the levels that predated the Fed buying campaign. But I don't think it will be that severe - that environment had a number of different dimensions that do not apply today. That said, it's helpful to note what has happened to rates this week (up) as the Fed's buying changed (down).

Strategic Default and the Fading Stigma of Foreclosure

It's important to pay attention to the sociological dimensions of the financial crisis (aka Great Recession) as it continues to evolve.

I think this article on SocketSite touches on a very interesting point. Social dynamics are at play as well as financial ones on the path to a mortgage loan default and foreclosure. But as the 'bug' spreads, and more and more of us know people who have faced foreclosure, it becomes less of a Scarlet Letter. And that implies that the social reasons to avoid foreclosure get weaker as it becomes more prevalent around us. It's a snowballing effect.

So before we are able to truly bottom, we need to combat this force as well as the purely economic ones.

Note - the study referenced here suggests that 1 in 3 California mortgage defaults in 2008 were strategic, which represents a 16x increase from the rate only 4 years earlier.

Price Discrimination and Landlording

You've got to wonder about the owner who rented out this home. There are a lot of 'accidental landlords' out there, and maybe this is an upside-down, about to be foreclosed upon investment. But no matter what, I hope this homeowner charged a premium for rent based on tenant selection.

Unemployment Over Time - Nice Visual

Here's a great visual representation of the unemployment trend over the past few years, laid out by county for the entire US. Takes about 15 seconds to get the point across.

Are You Getting Tired of Being Outbid?

The Currently Frustrating First Time Buyer Landscape It has been an amazing transformation in the housing market - multiple offers scenarios are back in a major way, primarily on lower-end price ranges. Just a few months ago, it seemed there were 20 listings for every willing home buyer.

Not any more.

Today, first time buyers are FRUSTRATED when they make an offer and lost in the piles of offers, which in some cases are 30, 40 even 70 other offers! And within those offers, many of the would-be buyers are investment groups, buying with cash. It's big money squeezing out the smaller money. Just like that. First time buyers are getting boxed out.

This is frustrating when you think of the psychology of the today's first time buyer. They're overcoming quite a lot of fear and uncertainty after watching the devastation that has hit the housing marketplace in the past few years. Is now the time? Think of the nerves this requires! And on top of that, there's a sense that these buyers deserve a shot, since they weren't a contributing factor in this whole messy episode in the first place. Right or wrong, I can understand that feeling.

Frustrating.

Get Ready For a New Resource

Fannie Mae's "First Look" program is about to come online. Fannie Mae has a large inventory of foreclosure homes, just what the investor groups are after. But that's also what a lot of first time buyers see as good price opportunities. Here's how First Look is going to help:

* reducing deposit requirements to as little as $500
* renegotiate offers after appraisals
* up to 45 days to complete transaction, up from usual 30 days

Fannie Mae's intent is to provide easier access to this inventory for owner occupants. This is not restricted to first time buyers, but it will absolutely affect that sector of the market if the program comes around as intended.

If you have any questions about this, feel free to email me.

Rewind: Retirement Overconfidence, April 2006

In April 2006, I was in Chicago preparing to give a best man toast at a wedding. I jotted down some notes on something I had with me for reading material. And this morning, cleaning out some stuff in my office, I came across the notes, turned them over to see what I had written on.

"Workers have Retirement 'Overconfidence'"

Wow. This was 3.5 years ago, and the study that the above article references indicated that 68% of workers surveyed reported that they were confident about their retirement savings. It also suggested that 53% of them had less than 25k saved for retirement.

That sounds like a horrible mis-match, but to me, that's only ~21% that are delusional for certain (assuming the 32% NOT confident are all in the group that has less than 25k saved so far.)

But 77% had less than 100k saved for retirement. When we retire at ~67, and live to 78 (78 is the US life expectancy as of 2007), that 100k isn't going to provide much of a Winnebago budget if it has to last for 11 years.

• SIDE NOTE- And at least one prominent US doctor believes the first person to live to age 150 is currently a man in his mid-50s. Read that again. Do you still want to plan to retire in your 60s?

So where are they now? I'd love to see what the current survey says. How many are confident about their retirement planning now that we've passed into this era of economic crisis. How much has it affected confidence? (How much has it affected savings?). And how will it shape our expectations, planning, and savings habits going forward?

Tax Credit Expansion and Extension - Best FAQ Resources

Take your pick:

• Straight from the horse's mouth: IRS
  
• User-friendly page from the National Association of Home Builders

The NAHB site was put up in a hurry. They want to sell you homes. Great motivation to put together a clear communication on the subject. Check it out.

Weekly 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 remain unchanged.

Comment by John C. Glynn: No signs of inflation anywhere, and wide profit margins from lending institutions; there's fat to be cut even if the inflation specter pops up. I see a lid on rates for a while."

See what others say.

Tax Credit Update - Move-Up and First Time Buyers (APPROVED)

Obama has just signed the tax credit expansion/extension into law. It affects first time buyers, and now some move-up buyers as well.

Last week while this was still making its way through Congress, I asked readers to comment on how such a change might affect them. I received a good number of responses. Here are some highlights:

• 68% of responses were generally positive in response to the credit
• 37% indicated specifically that this credit would have positive implications for our general economic health
• 16% indicated that this specifically urges them along in plans that were loosely taking shape as-is
• 0% of responses contained comments that this would dramatically change their plans
• 26% of the responses had comments suggesting the size of the credit cause the credit to be ineffective
• 11% of the responses had comments suggesting that the credit was reaching too far up the socioeconomic ladder; either the Move-Up Buyer was being wrongfully rewarded, or that the income limits were too high
  
• 16% indicated specifically that this credit would have negative implications for our general economic health

And as a side note:

• 37% of responses had something sarcastic to say
  

Thanks to all who took the time to read, and especially to respond.


Some key points of interest with the new revision:

• Income thresholds are raised
• Move-Up buyers can claim a tax credit of up to $6500
• Dates have been extended into mid-year 2010
  

If you're buying a home next spring, here are some key qualifying dates to remember.

• April 30, 2010 : You must be under contract for your new home
• June 30, 2010 : You must be closed on your new home

And if you are now trying to figure out how this credit might now apply to your specific situation, the IRS has a basic info page, and also a scenario page that has just about every possible angle.

Keep me posted - I'm really interested to see if this has an impact on our markets. If you're interested in reading my view, I explored it right here.

Why A Tax Credit For Move-Up Buyers Is Important

Today I posted a question on Facebook - asking for input from existing homeowners on the appeal of a tax credit that would not be restricted to first-time buyers. There is currently a proposal on the table that:

• Extends the deadline for the first-time $8000 buyer credit
• Increases the income caps on accessibility of the credit
• Adds a $6500 credit for move-up buyers

While I've seen many first-time buyers get excited about the $8000 credit, and especially in recent weeks as the deadline approaches, my gut sense was that the $6500 move-up credit would make far less impact in encouraging people to move than an $8000 credit encourages a renter to ditch their landlord.

Most of the responses I got were pointing at political aspects of this (which I don't care to get into here), but it did elicit a few private messages from people who said they would consider it. None of these people was previously insistent upon staying still, so it's hard to tell if the allure of a $6500 credit would make anybody budge who wasn't already oriented that way...

But then I recalled a very interesting article that I read a few weeks back from the Pragmatic Capitalist. In this post, they take data to the theory of market lock-up, and explore the level of equity most homeowners need to be in a position to sell and buy. They look at how many homeowners are 'trapped' and unable to become a move-up buyer even if they wanted to. It's not an optimistic outlook, so remove all sharp objects from the area before reading.

The move-up buyer credit goes straight at the problem raised by the Pragmatic Capitalist. Maybe $6500 isn't enough to grease every jammed-up gear in the system, but it's got to help some scenarios. I'd argue it could be the last nudge needed to spark a few transactions currently stuck. As with everything economic, it affects the margins.

Add to this conversation the Plankton Theory as it applies to Housing (discussed frequently by Bill Gross and Paul McCulley of PIMCO)- which stresses the importance of first time buyers (the plankton) to continuously bring new money to the market so that the bigger fish (move-up buyers) and whales (McMansions) can have something to feed upon.

If we have low inventory at the first-time buyer level (we do, as evidenced by reports of 20-40 offers per listing), and a move-up buyer creates lower-end inventory, than the enticements need to be hitting this move-up market. The first-time buyer needs inventory, not a tax credit.

So if it works, it encourages market activity in the middle and upper price brackets, essentially adding fluidity to the market. I like it.

Best Real Estate Commercial Ever

There are so many things to love about this ad.

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