Scott Sambucci

John Taylor Clears the Way for an Informed View of the Financial Crisis

Ira - Nice work on detailing Taylor's article. He's an important voice of reason when evaluating the current housing and mortgage situation. Hopefully policy-markers and market participants will understand that simply dropping interest rates will not be a panacea for the market.

His paper is one that I've referred to myself here on Seeking Alpha (seekingalpha.com/artic...) and your complete analysis of his paper is appreciated.

The Fed Struggles to Lower Mortgage Rates

Bill - Thank you for this post.

"Although mortgage rates have declined , they have not dropped to the extent necessary to give homeowners truly significant savings, especially after the recent run up in rates." - I think this is a key takeaway that policy-markers need to understand. Dropping mortgage payments $100-$200/month for homeowners is only going to have a marginal effect on the housing market, while spurring inflation with increased market liquidity.

I'm with you on this one - seekingalpha.com/artic...

The Mortgage Industry, Housing Market and Inflation

Author's note: Please note that the Money Supply graph is showing the "Year on year change %," not the nominal amount of money supply. The graphs indicates that the rate of growth in the M1 money supply was mostly unchanged from 2005 through 2008, but has increased dramatically recently. M2 and M3 showed an increase in the rate from 2005-2008, slowing in 2008, but still rising.

Most recently, the short term rise in Money Supply has coincided with a decrease in inflation, however it's noted that this is likely due to a decrease in overall economic activity. The long term affects on increased Money Supply will likely result in an inflationary environment, which as Mankiw pointed out, would be acceptable as long as it's a controlled rise.

With regard to Housing Starts and recessions, it was intended to indicate that housing starts and recessions also coincide, though I suspect that the wording that I chose was unclear.

As always, thank you to those that comment in a professional, constructive manner. The "mindsharing" that takes place in these public environments often helps to clarify the imperfect science of economics and finance.

Why the Housing Stats Are Lumpy

This is such an important concept that housing market participants need to understand. Many markets are bipolar - there's the distressed properties market at one end and the traditional properties on the other. Looking the trends in Naperville by price quartile (25% breakouts), it's pretty clear that the "top of the market" has held strong through the recent downturn:

tinyurl.com/8m736q

Compare that the Chicago MSA in aggregate, and there's a completely different story to tell:

tinyurl.com/7la9pw

It's particularly challenging for agents & brokers in these stronger areas to sell because uninformed buyers think they can walk in and off 80% of list and get it "because it's in Chicago." Fact is, micromarkets like Naperville are quite different. This happens nationally is stronger microareas like Santa Monica (Los Angeles) and Palo Alto (San Francisco).

Rates, Applications and Approvals

Nice work on this Kevin. Excess liquidity got us in the situation in the first place. Karl Case presented a paper at the recent American Economics Association that showed the 2003 was a period of inordinate loan modifications - the ration of mortgage refinancings-to-purcha... was nearly 3:1, with loan modifications reaching nearly $1 trillion in Q3 2003 alone. You can download the paper here:

www.aeaweb.org/annual_...

Housing: Not Cheap Enough?

Judy - Nice work on this synopsis of where we are. I attended Karl Case's presentation at the American Economic Association meeting last week - was a very revealing presentation of the data. Here's a link to the complete paper that he presented, with the presentation slides he used in the appendix of the paper:

www.aeaweb.org/annual_...

The Housing Market Will Improve with Lower Prices, not Lower Interest Rates

Hi John - Thank you for thoughtful feedback - always appreciated!


On Dec 26 11:22 AM John Lounsbury wrote:

> PS
>
> Scott - - -
>
> I have read both of your articles, and was not excited about the
> first one. This one is much better and adds to my insight into the
> housing market outlook. I particularly like the graph comparing
> price and inventory. In my opinion, an impaired demand facing an
> inventory overhang is the real problem for the next several years
> in residential housing. Interest rates are secondary.

The Housing Market Will Improve with Lower Prices, not Lower Interest Rates

It's important to mention that this article is an extension of an article published yesterday comparing the differences in monthly payments to the buyer with lower interest rates vs. lower home prices:

seekingalpha.com/artic...

Housing Gets Even Worse

Couldn't agree more with your statement: "I still think that trying to put an artificial floor under house prices by forcing down mortgage rates is a bad idea." The net effect of a mortgage rate decrease to the proposed 4.5% would have less of an impact the lower overall price levels. If you run the math, the effects of 20% drop in home prices will lower monthly payments to the buyers more than a 20% drop in mortgage rates (say from 5.5% to 4.5%) with an artificial price floor. I ran some numbers for comparison if you're interested in seeing the net effects - scottsambucci.blogspot...

More Macro Signs For Texas, California

Texas is definitely showing signs of weakening. It will be interesting to see what effects are seasonal with the holidays and how the TX markets respond in the Spring. Showing on-market home prices in the Austin, Dallas, & Houston,TX markets: tinyurl.com/73fo4b

Florida never took a breather in its slide through last Spring, so again - what will happen this Spring? Are Miami, Tampa, & Orlando, FL markets reaching a low point yet?: tinyurl.com/7zoyqk

In California, we're seeing slides in LA, San Diego, & Sacramento, with San Francisco holding: tinyurl.com/9fl8nk

Sacramento, Heart of Foreclosure Activity, Hits Holiday Slow Down

Looking at the overall Sacramento market, we're (meaning Altos Research - altosresearch.com) definitely seeing inventory levels drop along with prices: tinyurl.com/9x2fpd

This would certainly support Tim viewpoint that foreclosures are clearing the market.

Similar trends in Los Angeles - Inventory levels declining along with price:
tinyurl.com/77vxe5

California Housing Recovery? Not So Fast

I would agree Tim's comment that there are differences between the new and existing home markets. I only specialize in the existing home markets, but there are some interesting price trends that we're seeing. For example, check out this chart of existing home prices in Sacramento by 25% divisions - top, two middle, and bottom market segments:
tinyurl.com/7l3vbn

There is definitely a rate of decline in home prices at the lower ends of the market. The question is - are these reflective of a turnaround, or just that prices have fallen so far that there is an asymptotic effect at some perceived price floors? Either way, prices are starting to show signs of leveling in Sacramento. If California was first in the glut, it could be first out and maybe this is the beginning of the beginning....

Why Are Mortgage Rates So High?

With mortgage rates already at historical lows, is dropping rates less than 100 basis points really going to spur demand? Probably not. In talking with hundreds of agents through my work, most agents will tell you that buyers are telling them - "I'm waiting for the bottom" not "Mortgage rates are too high."

I think you statement - "Long term recovery will only get started when homes are priced at values supported by mortgage rates sustainable over the next 5 to 10 years.." certainly supports this.

The price of money isn't the issue - it's the price of goods (homes) that is keeping buyers out. I wrote a bit about this myself last week as related to John Taylor's assailing of the Fed regarding lower interest rates: scottsambucci.blogspot...

Will Lower Mortgage Rates Help Housing Recover?

"How many people can’t afford to borrow money at 5.5% to buy a home, but could do so with a 4.5% rate? Not many, I suspect."

This is exactly the point. Ask your local real estate agent - which of the two reasons do they hear more from their "buyer clients" still sitting out of the market:

1. "I wish mortgage rates were lower."
2. "I'm waiting for the market to bottom and stabilize."

Most would go with #2....

Glad I came across this article - I was thinking the same way this week... scottsambucci.blogspot...

Scary Foreclosure Numbers, Scarier Prospects

There's a pretty clear indication at a key market like Sacramento, active inventory levels are falling (it would seem due to foreclosures), and existing homes are continuing to drop their prices:

tinyurl.com/6xkbsu

In general, prices in the resale market are still correcting. Looking a Chicago over the past two years, the seasonal changes in inventory had almost no effect on the downward trend in prices, save for a break in price trend for a short time in the Spring.

tinyurl.com/5oalbo