12 Observations on Residential Housing

1) The rating agencies have been running like crazy. They do that when they are behind the curve. Whether it is Moody’s on subprime, or S&P on Alt-A lending, the downgrades are coming in packs. Then there are difficulties with the debts of real estate partnerships, like LandSource Communities Development, which is likely to file for insolvency, together with some residential developers.

2) Now, there have been a few summary pieces on how the rating agencies changed as the housing boom moved on. Here is one from the New York Times, and one from the Wall Street Journal. As I had commented long before in my writings at RealMoney, the rating agencies were co-dependent with those that paid them. That said, it would be hard to construct a system that would not be that way. Buyers don’t have a concentrated interest in ratings. Issuers do.

3) If I were Ambac (AKF), I would be doing all that I could to allege fraud on contracts where representations and warranties were not upheld. Ambac is fighting to survive.

4) Mortgage insurers — it is the best of times, if you survive, because you are the almost the only game in town for those wanting to do low down payments, and rates for mortgage insurance are way up. But, it is the worst of times, housing prices are falling, rating agencies are downgrading, and defaults on insured mortgages are rising.

5) Foreclosures:

• An excellent summary and map of foreclosure activity.
• Maryland makes them take a little longer. (The article overstates the lengthening.)
• California is suffering.
• Desperate in Denver.
• Foreclosures and crime are correlated.
• Which leads the FHA to act, and the states to act as well, because Federal efforts are slow.

6) Gotta love OFHEO, which is trying to rein in the GSEs during a lending crisis. Even though they may have traction, I don’t see how they tighten the regulations during a crisis.

7) For that matter, consider the lenders. Countrywide (CFC) seemed to purposely ignore the creditworthiness of borrowers as they jammed it out the door lent on mortgages. Even with all this, mortgage lenders are complaining that new regulations will make mortgages less affordable. What they mean is that they will issue fewer mortgages, and they will make less profit. Please, let’s stop making it easy for those that can’t afford a home to take the risk of buying one. Higher mortgage rates are bad in the short run, but good in the long run.

8 ) Dr. Jeff reluctantly asks what inning we are in on housing. I understand that it is an overused metric, but it is overused for a reason. Nine is an intuitive number — are we halfway through? Fifth inning. One-quarter? Third. Almost done? Eight or ninth. He also makes a simple request to those of us who opine on the housing slump, to be more definite in what we say, provide more data, and what will be signs that the troubles are turning.

I need to set up some housing recovery googlebots to scan for me, but my guess is that we are in the fifth inning of the troubles. When I get more definitive guesses/answers to the questions, I will post.

9) Delinquencies:

• Lenders, or better, servicers, are struggling with the load.
• That said, the growth in subprime delinquencies is slowing. Perhaps we are going through burnout, where most of those likely to default have done so, and a few incremental defaults remain.
• But home equity loan experience keeps getting worse. (My only surprise there is how slow this has been in arriving.)

10) Home prices continue to fall, and estimates to the nadir (cycle low) range between 0-50%, with 10-20% being the most common.

11) Falling home prices will lead to many more foreclosures in prime loans, and of course Alt-A and subprime. Foreclosures happen when a sale would result in a loss, and a negative life event hits — death, divorce, disaster, disability, and unemployment.

12) Second-order effects:

• Home remodeling expenditures fall
• (Commercial) Architecture Billings index falls. (Does not bode well for commercial real estate.)
• Low new housing sales.
• Tough total sales environment in the SF Bay Area. Sales fall before housing prices, and rise as housing bottoms. (Opinions on that last thought?)
• Allegations of fraud are thick among borrowers and lenders. A lotta smoke, but is there any fire?… Clearly, the servicing system was not designed for this level of failure, so I’m not surprised that things are moving slowly.
• Homeowner vacancy rates are at an all-time high. That should keep the pressure on prices, because there is a lot of competition if you want to sell, and there is a lot of dark supply waiting to emerge if prices get more favorable. Emergence from this set of troubles may be slow, much like a credit crisis in the corporate bond market often feels slow to unwind.

Comments

[Wez]

Nice work!

[jackh]

Home value declines.... home equity loans dry up...carpenters are laid off.....Home Depot lays off......furniture store fold or hold fire sales.

If the consumer is 70% of the economy we are indeed in trouble. High unemployment looms just as Medicaid and Social Security run out of cash.

I'd say we're only midway through the first inning.....

A perfect storm is brewing.....

[Negative carry]

Oh yeah, jackh. You'll be able to cut the irony with a dull penknife when those of us of working age are living on dog food because of all the taxes we pay to keep retirees from having to live on dog food.

[OptionTrader]

Check this out cgi.ebay.com/ws/eBayISAPI.dll?ViewItem&a...

[jackh]

Better get used to it. The time to make adjustment to retiree benefits has slipped past.

By the time the system reacts and changes it'll be NC and friends whose retirement benefit is slashed.

High taxes and reduce retirement benefit..... remember that in November!

[special1person]

"High taxes"?

Those are just words to frighten so-called "Conservatives".

What they mean to say is "higher" taxes for the "already" rich.

BOO HOO HOO!!! ALREADY RICH PEOPLE might have to pay HIGHER TAXES!!!

Republican's compassion for the Already Rich knows no boundaries!

[BioInvestor]

Thanks for this great resource. Perfect!

I have one question: about three weeks ago, I saw a very interesting graph on Good Morning America (if I recall correctly). It plotted the real average US house price over time for about the last seventy years are so. The chart was eye-popping in that it showed that the last five years were really an aberration. I have searched the GMA website and can't find the graph. Does anyone know where I can get that chart or the numbers? Thanks in advance!

[billddrummer]

Bio,

I saw the same chart, and it reminded me of an expression that Milton Friedman said: "All aberrations revert to the mean." That's not a direct quote, but a paraphrase. In short, the aberrant runup in housing prices over the past 4 years is now reverting to the mean: A stable growth rate about 1% higher than inflation. Since inflation was averaging less than 2% annually over the past 4 years, but housing prices were rising at 10-40%, depending on where you measured it, to correct to the mean would call for housing prices to fall anywhere from 4%-35%, also depending on where you measure it.

That's happening right now nationwide.

As prices revert to their mean, further dislocations in the housing markets should be expected. But once this takes place, the next step is working off the excess inventory piled up while more houses were getting built than could be purchased.

Look for housing's 'recovery' in 2012.

[H2O]

Okay boys and Girls lets down to brass-tact's

I know for a fact Countrywide used - A house on our appraisal - That they
said sold for 39,900 dollars - On Sept 14th 2007 - The day of the appraisal
However the said house sold for - 62,000 in July of 2007 - But listed as selling
for 39,900 on Sept 14th on the appraisal - Then through country records - after
I pointed out these facts - Land safe-countrywide - involved with said house - had
it sold on Sept 28th for 39,000.

Here's the kicker - they dropped the payment they wanted of 405 dollars - but April 29th
that's right April 29th this year - they ran it through our ATM - For payment - of said
fraudulent appraisal.

Kind of a HA-HA-HA on us was it not - well not really - WE stopped payment -and Here is where
the HA-HA-HA really is.

Doing fraudulent activities through ATM'S is a federal wire crime.

Now lets say the American people take the time to go through there appraisal at the county
office - and those same Millions Americans find landsafe-countrywide - have faked there appraisal
- and was paid by credit card or ATM.

Now wouldn't that amount to millions of wire fraud cases - just against countrywide and there
appraisers at landsafe?

You think Enron accounting was bad - wait till the American People demand justice - against
fake and false appraisals - that had them lose there homes.

[User 165905]

H20-Dude that kind of mortgage in NY $67 K gets a house, without any windows or doors in the south bronx if you are lucky. Where can we find these gems of properties???

[mortgagevet]

Excellent article. All the non FNMA and FHLMC business that hit wall street was enabled by the ratings agency's collusion with the big Wall St banks. As with anything else, there was a ready market to sell so many lenders large and small were happy to originate and sell these loans to Wall St. If you took the time to review credit policy at Bear, CSFB, Lehman, Nomurra and others you would see that the credit policy was set up to fail - every one of these loan purchasers allowed 100% financing with no income verified (sometimes no requirement to even list income amount on the application) no asset verification required with credit scores minimums as low as 620. Oh, and sprinkle in an allowance for seller paid costs based on an appraisal ordered by and directed by a mortgage broker. These were sold in Alt-an prime securities.

Lets face it. Mixing no verification of nothing with a subpar credit score and you may as well have just given the borrower some money and told them to forget the whole process - really, a joke.

Once a handful of lenders experienced the profit and share growth with limited risk of selling Wall St. product(AAA rating and instant liquidity) virtually all followed suit like lemming - no bank, investor, board, or borrower wanted to be left out of the profit train.

And why not - values were rising.

A separate issue is the document waiver programs underwritten and approved via FNMA's DU system and FHLMC's LP System. FNMA and FHLMC both authorized the use of an automated underwriting decision based on credit score, LTV, income listed and assets listed. Its still out there. Wells Fargo calls it "Straight to Close", Chase has "Zippy Stated", Wamu calls it "Doc Relief" and Countrywide calls it Fast and Easy. The intention was less paperwork thus increased productivity for lenders and less hassle for borrowers. The tradeoff was these systems required higher credit scores (700) as well as a number of other factors that, based on studies of loan performance, would be predictive of lower default rates.

There are two problems with this. First the studies that predicted lower delinquencies were performed while real estate values were increasing. Second, there was a belief that borrowers would tell the truth on their loan application.
Well, real estate values are not rising, and whether on their own or at the suggestion of their mortgage broker, borrowers didn't tell the truth. A recipe for disaster.

No real housing recovery until 2010 at best. Clean up the mortgage and housing industry. Eliminate the third party mortgage brokers who manipulated the system for a one time commission (brokers get paid when a loan closes and leave the lender and borrower with the mess) Look for either full income verification or a large, verified down payment (30%) and then we'll see stability in the housing market and liquidity and confidence return to the secondary market.

[ponchovilla]

Dave: The next time someone mentions which inning are we in just say it's the World Series and could go to 7 games.

[Negative carry]

Okay special person, I'll play your game: when Democrats say "tax relief for the middle class" it means "another refundable credit for people who don't pay any income tax anyway", i.e. a welfare payment.

Yeah I made $200k last year. But I live near NYC where I pay more for rent than most home"owners" pay for their houses and where taxation has reached its pinnacle as art form. But the federal government considers me "rich" so I get none of the rebates for my 3 kids, etc. etc.

Makes me want to move back out to the sticks and get a nice easy job with some county government and start sucking on the government teat myself.

[raylopez99]

Shouldn't rental prices be stable with so many people not buying homes?

[replicant]

There was a 26 inning game, and yesterday a 22.

By then everyone can hardly stand, even the fans and the hot dog guys.

[yourfilled]

socialism for the rich...capitalism for the middle class....the government will bail out those "too big to fail."
I attended the Fed meeting in Chicago where Bank of America has all there top guns promoting the take over of Countrywide...Of course, it will go thru....and you will pay for it.

[Archimedes]

The Fed, a non-government organization, through the help of corrupt political leaders are planning the collapse of the US and world economy.

In our country, their ultimate intent is to reposses the private property en masse and control Amercian citizens.

In the "Great Depression" the Federal Reserve and a coalition of bankers engineered a similar trasfer of wealth. This time the theft of American assets will be 100 fold that of the 1930s, in relative monetary terms.

To understand the driving force behind this, read up on the Talmud:

www.talmudblasphemy.com/truth-talmud.htm

Then you'll understand why our Lord drove the Federal Reserve of Jerusalem or the "money-changers" out of the Temple with a wip.

Bernanke and Greenspan should be arrested and held for Treason and the Fed should be taken over and their assets returned to American citizens.

[Tom Lindmark]

Three things:
1. A very good article
2. If you want to see the chart that several of you mentioned, I have a little video on my blog that includes it. Here is the link blog.metro-real-estate.com/?p=162 .
3. Having been on the financing end throughout the bubble, I can assure you that the level of fraud was astronomical. That's what makes it so hard to call the inning. It's impossible to look at numbers and draw conclusions since historical norms are probably meaningless.

[Bad_Writers]

Mr. Merkel, not everyone is familiar with these unreferenced acronyms.

[H2O]

WEll Coutrywide-Landsafe - went and do it - Fraud through wire fraud.

They sent throught the fraudulant apprasial, for pay.

Now the fraud will be sent to the justice apartment - and Senator Shum.

[johngonole]

Special1person your name says all we have to know about your political idealology. Pretty sure you want legislation that will benefit yourself and that is all you really care about.

[Tom Lindmark]

Wow! We're at the point of citing biblical references in order to assess blame. Guys and girls, there's enough blame to go around forever. From loan officers, to mortgage brokers, to mortgage companies, to banks, to investment banks, to asleep at the switch regulators, to politicians promoting homeownership, to corrupted insurers, to stupid, ought to know better investors they all were chasing an easy dollar. Let's quit trying to assess the blame and just let the markets work this one out. Yes, by that I mean shut down the fix it mentality in Congress and just let the chips fall. Then we can all get back to being productive.

[gone2pot]

What Tom L said.

[Herbert Wannamaker]

People who make $200K a year are not rich. People who make more like $1 million a year and up are rich. Remember in the 1980s when people said, "Oh, that job pays $60,000 a year?" Well the constant debasement of the dollar has rendered that a $200,000 job. Cops where I live start at $74,000 a year. That's a job that requires a high school diploma and nothing more.

Part of the reason that there's such a serious debate about tax policy in the United States is that people who aren't rich think they are and people who are poor think they are middle class. Debasement of the currency confuses everyone into thinking they belong to a different socioeconomic class then they actually do.

And it's not just income, it's wealth. There are a lot of people making $175K to $250K with huge student loans, and who bleed under zero down mortgages on $1 million condos that are two bedroom one bath. They have little wealth and their income goes mostly to interest payments. 35 years ago the idea that someone making a salary in the top 10% of income earners would, regardless of actual saved wealth, be able to afford something a little nicer than a two bedroom one bath condo. Debasing the currency causes this sort of confusion.

Debasing the currency causes people to see quite modest acquisitions like small condominiums as a luxury objects reserved to the truly wealthy. If Americans had better math skills, they'd realize that the tax rules should focus on those making $1 million a year and more. Aside from the 1920s and the 1980s and now, the highest earners used to pay close to 50% in income tax. Now it's low 30s.

Capital gains taxes at 15% and not subject to "payroll tax" the capital gains exclusion for real estate and so many other rules have been used to try to bribe people making $200K a year by taxing people who make $75K a year even more! (note the "payroll tax" ending at $100K and that huge 15% tax being spent mostly on general tax fund expenditures with now a $2.3 trillion hole in the trust fund from this regressive tax that essentially was a bribe to those making $150K to $250K a year because if their taxes were a bit higher (and they are the new middle class), then the truly rich would have had political problems maintaining existing tax rules.

The saddest part of all of this is that the average person has used finance and credit in a way that put off for 20 years really understanding what these rules have wrought. That consumer credit expansion and erosion of the savings appears to have reached the end of the road as it doesn't seem mathematically possible for the trend to continue.

Americans will figure out how much prices have risen when they have to pay for things with their income instead of HELOCs, 2nd mortgages, borrowing against rising asset prices, etc. When people try to get by using their incomes to buy thing instead of credit, they'll realize that perhaps 80% of Americans are really poorer than at any time since the 1970s.

[Game On]

Herbert Wannamaker great Epilogue to a great article. I'm one of those young persons, made good like my Parents wanted make about $145K together with my wife in an area of the Country were the average family income is 60K. We have no kids, but almost $180K in student loans between us. Can't legitimately purchase a house unless we want to live outside the city in a crapbox and saving the downpayment will take at least 2 years. (Both graduated with a professional degree 2 years ago)

Together we paid nearly $14,000 in student loan interest. We get to deduct a princely sum of $2500.

The Tax Code is the damn problem and HW explained the underlying cause... regular folks have been completely hoodwinked into thinking they are in a higher class than they are.

To fix this we need to CREATE NEW CLASS DISTINCTIONS. The truth is even those with least incomes are in many ways better off than there counterparts 50 years ago. They own LOTS of clothes (although mostly garbage) in comapirison

A a test go out and talk about the estate tax or the so-called "death tax" and you'll find a large majority of people are against it and would support getting rid of estate taxes... but guess what? only about 5% of estates actually get hit with estate taxes as the aggregate wealth must be in excess of many millions.

Income Tax needs to be revised such that Student Loans Interest is 100% deductible, Home Interest Payments are 100% deductible up to the average median home price, Capital Gains BECOME GRADUATED... think about this readers... because like the estate tax this would benefit to most of you; and Estate Taxes go to 50% Estates over $10,000,000 to 75% for estates over $100,000,000. All the estate tax revenues.

Capitalism is going to become reborn in my generation to be a game with fair refs. Who would play Monopoly if 3 players get $200 and 1 player gets $2000? Let number 1 play alone and see how much fun the game is and then we start over.

[Lynn]

Tom Lindmark for President!

[Tom Lindmark]

Lynn,

Thanks for the support but as someone once said, "If nominated I won't run and if elected I won't serve." I can't remember who I just quoted so if you or anyone else knows, let me know.

[urbanexus]

Very nice complilation of information!

[reff55]

Better stop buying ipods and HDTV's