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Archive for the ‘Housing Bubble’ Category

The housing market will remain crippled until we eliminate perverse incentives to  financialization and speculation, Fed/Federal intervention and all subsidies/giveaways.

If there is one goal that the financial cartels, their politico apparatchiks and the public might actually agree upon, it would be restoring the housing market to health. This is because the financial cartel, their politico lackeys and homeowners would all benefit from the stabilization of housing values at current levels:

1. SDI (systemically dangerous institutions) a.k.a. too big to fail banks,  would avoid insolvency by keeping all their mortgage assets marked to unicorns-and-pixies, i.e. artificial valuations.

2. The political class of toadies, lackeys and grifters would finally free itself of an unsolvable problem that keeps highlighting its incompetence and irrelevancy.

3. Homeowners’ most treasured fantasy–that valuations will rebound and thus restore their dreams of  “free” home equity– will be reanimated.

In other words, everyone exposed to losses in the corrupt, speculative apex of malinvestment  known as the U.S. housing market doesn’t want a truly healthy housing market, they just want  a return to the bubble era.

Sorry, folks, ain’t gonna happen. (And yes, I own property, too, but it is what it is.) Bubbles do not reinflate, even with the Fed chanting its Keynesian Cargo Cult mantras (“zero interest rates forever!”) and waving dead chickens over the embers. The conditions which inflated the bubble cannot be called up by incantations; faith in the system has been destroyed, and only the complete socialization of the mortgage market by the forces of Central Planning–the Fed and the Federal government’s Socialized Mortgage Makers, Fannie and Freddie– have staved off the complete collapse of prices which would have wiped out the banks and cleared the market via actual capitalism in practice, i.e. a transparent marketplace which is allowed to discover price.

Despite the fact that a truly healthy housing market is anathema to the Status Quo and current property owners sitting on huge mortgages, let’s lay out the necessary characteristics of such a housing market. A lot of this will strike many of you as counter-intuitive, but that only highlights the pervasiveness of the speculative propaganda that slowly hollowed out our culture’s previous understanding of housing and replaced it with a devilishly magnetic financialization model.

In the previous era (when income and prosperity were more evenly distributed), housing was in essence a  “patient investment” that offered low-cost shelter and a type of forced savings: by paying a mortgage for 30 years, the homeowner built a nestegg of savings that more or less kept up with inflation. With the mortgage paid off, the homeowner enabled a low-cost retirement  (no more mortgage payment, and no rent due, either) and the eventual transfer of a valuable asset to their children.

Contrast that to this era’s perception of housing: fundamentally, housing is a speculative vehicle which is available, thanks to low/no down payments, government giveaways and low interest rates, to Everyman and Everywoman. The idea of actually staying in one home long enough to pay off a 30-year mortgage–or even the idea of paying off a mortgage–are as antiquated as stone tools.

Paying off a mortgage? That’s Squaresville, man; the name of the game in financialized markets like housing is to buy and sell constantly, churn, baby, churn, with an eye on “flipping” for a quick speculative profit.

Housing isn’t a store of value, it’s a way to leverage zero savings and a bit of income into speculative wealth.

This financialization of housing was the inevitable consequence of the Federal Reserve’s money-printing and low interest rates, as explained in this brilliant essay on Zero Hedge:Winners And Losers: The New Economy:

You obviously cannot print wealth, but if you try that fiat money distorts the entire economy by directing investment to things which appear to appreciate but what is really happening is that the dollar is depreciating. As a result, fiat money and real capital are invested in  financial assets because they appear to have greater yields than returns from the production  of goods. Prices rise (price inflation) and it creates the inevitable boom which always busts. The fall out is that we are stuck with things people don’t want (in the present re/depression it is housing). And we fall for it every time.This has led to the phenomenon that Messrs. Frank and Gross describe: the financialization of  the economy.

If we think this through, then we are forced to conclude:

1. The first step toward restoring a healthy housing market is to eliminate the tools and forces of financialization: low/no down payments, low interest rates, securitized mortgages, government giveaways, Federal Reserve buying of mortgage-backed securities, and the Federal “Socialism Is Good When It’s the Mortgage Market” agencies, Fannie Mae and Freddie Mac.

Yes, that is step one: eliminate the Federal Reserve, Fannie and Freddie and all housing subsidy programs. In other words, restore a transparent, private-sector mortgage and housing market freed of Central Planning manipulation, cronyism and corruption.

The goal is her quite simple: restore “patient investing” by eliminating all the  perverse incentives for speculation and the resulting culture of rampant cheating, obfuscation, lies, deceit via omission and corruption–the inevitable consequences of financialization.

Requiring a 20% down payment is viewed, perversely, as an impossibly restrictive standard; yet requiring a substantial down payment is the only way to incentivize “patient capital” and squeeze out speculation and its destructive culture of deceit and churn.

2. Focus resources on neighborhoods that can be adequately supported by property taxes at a level 25% lower than current taxes; abandon the unsustainable exurbs and suburbs.

The one thing we can safely predict is that housing values and thus the owners’ ability to pay high property taxes are both eroding. Thus property taxes will decline, either via falling housing prices, voter revolt or wholesale abandonment of the properties. That is the basis for anticipating lower property taxes going forward.

The postwar suburban model of development is fundamentally a pyramid-Ponzi scheme based on eternal growth: more homes and more residents will generate higher tax revenues that will enable the future maintenance of the new roads, schools and other infrastructure that are added year after year.

This dynamic is explained in this excellent slide presentation:A Complete Guide To The Ponzi Scheme That Is Suburban America(via Adam T.).

So what happens when growth stops and taxes contract? The model falls apart, quite literally. There is no longer sufficient revenue to maintain the sprawling expanses of roads, schools, parks and the city staffing which also expanded every year along with growth and taxes.

What happens when the tax base contracts? Roads crumble, parks are left to become overgrown homeless encampments and those who can leave for more liveable environs do so. There is anecdotal evidence that the Pareto Principle comes into play: when 20% of homes are underwater, values dive, and when 20% of homes are abandoned, the neighborhood deteriorates.

I first addressed this dynamic about four years ago: The Great Fall: How Suburbs De-gentrify to Ghettos  (November 20, 2007)

There is nothing mysterious about the process:

A) There are upper limits on how much increasingly strapped homeowners can pay in property taxes

B) Maintenance costs are relatively fixed and can only be deferred

C) When revenues fall below minimum maintenance costs, the neighborhood deteriorates

D) When 20% of the homes are distressed, abandoned or foreclosed, then a positive feedback loop is triggered: those still able to move will do so, followed by those who give up trying to maintain their mortgages/property

Clearly, those neighborhoods that harbor dense congregations of homes and enterprises offer a compact footprint to be maintained, and a diverse network of households and enterprises to share the tax burden of that maintenance.

3. Require all lenders, banks, the Federal Reserve (a private bank) and all government agencies to mark their housing and mortgage assets to market. This will force two other essential actions: write off all bad, uncollectable mortgages and liquidate insolvent banks, lenders and agencies via open, transparent auctions of homes and other real estate assets.

There is nothing mysterious about this process; the government undertook a similar program in the early 1990s to clean up the savings and loan debacle spawned  by corruption and speculation run wild.

This will dramatically lower the value and thus the price of housing in most markets around the nation. There is no substitute for letting a transparent open market discover price. The alternative is a culture and economy constructed of lies, bogus accounting and eventually, a total loss of faith in financial and political institutions.

Another part of the “discovery” process should be the investigation of fraudulently originated mortgages and MBS (mortgage-backed securities), with the perpetrators of the frauds brought to justice and the fraudulent debt liquidated. Messy, yes, easy, no, essential, yes–if you want to restore faith in a hopelessly corrupted, fraud-based, opaque, manipulated market for mortgages.

Needless to say, the murky/non-existent title documentation for millions of mortgaged homes will also have to be addressed on a national level.

4. Owning a home as a patient investor should be cheaper than renting.  The down payment is capital invested, and the yield on that capital is lower shelter costs.

The benefit/yield on renting is that it doesn’t tie up scarce capital and it does not commit the renter to staying in one locale.  These benefits require a premium, i.e. renting is more costly than buying and owning a home as a patient investor.

In a market with too many homes and too few qualified buyers (especially if subsidies and giveaways were removed from the system), this rent/buy equilibrium would likely be established by home prices dropping significantly.

5. A truly liquid market for housing must be re-established, and there is only one way to do so: Only a transparent, private, free market of mortgages and houses will create a  truly liquid market that enables buyers to purchase a home and have some reasonable expectation of being able to sell it in a reasonable length of time to willing, unsubsidized private buyers.

Right now, the housing market is so constipated with bad debt, politically untouchable banks, Central State manipulation  and the corrupting grip of speculative financialization,  that no buyer can be assured that he/she will be able to sell their home in the future.

This leads to a very rational hesitation: in a weak, fractured and increasingly volatile labor market, it is risky to commit oneself to  buying a house that could rapidly decrease in value and cannot be sold.

Talk about a bad deal: not only is one’s capital trapped, you’re physically trapped in an asset which could fall dramatically in value if the constipated market ever clears. No wonder the housing market has been reduced to ill-informed foreign investors (“I can offer you this bridge in Brooklyn for very cheap, cash only”), people with a mere $100 skin in the game (Got A Hundred Bucks? Buy A Home (Or Virtually Anything Else) Using 2,000x Non Recourse LeverageZero Hedge) or those funded by other government giveaways and subsidies.

There is no other way to restore a healthy housing market than these actions:

1. Eliminate financialization by eliminating the Fed, the insolvent banks, the mortgage securitization racket and all the incentives for speculation, corruption and deception.

2. Clear the market by writing off all bad debt/mortgages and auctioning off all bank/lender assets in a transparent, free auction market.

3. Require 20% down payments and let interest rates rise to what private capital demands as fair compensation.

4. Encourage patient investing, not speculation.

5. Conserve resources to neighborhoods that are sustainable in eras of contracting tax revenues.

Unfortunately for future generations who might like to own a home whose price was set by the market rather than a Central State devoted to “saving” predatory banks and Wall Street’s financialization machine, Wall Street and the banks are terrified of a healthy housing market,  because an unfettered “price discovery” would doom their marked-to-Tinkerbell house of cards.

The nation, and its future homeowners, deserve better.

Charles Hugh Smith – Of Two Minds

The housing gamble: What if home prices remained stagnant until 2020? 6 charts laying out the argument for stagnant or declining home prices for another 10 years. Peak in dual income households, home prices still inflated relative to incomes, Federal Reserve unable to hold mortgage rates low forever.

What would happen if home prices remain stagnant for another decade?  It is hard to imagine that the cornerstone of the American dream would somehow become a bad investment for the next decade.  For decades every generation was conditioned into believing that housing was the best investment a family could make.  For many it provided a stable home for retirement once the mortgage was paid off.  One third of all homes in the United States that are owner occupied have no mortgage.  Yet this mindset of buying and paying off a mortgage has largely been lost.  No mortgage burning parties in the digital age.  It may be making a comeback not because people want this but because there is no other financial choice.  Given the current domestic and global trends, it is likely that housing will be suffering another troubled decade from 2011 to 2020 just like it experienced from 2001 to 2010.  I want to lay out six charts as to why I believe housing will have difficulty moving up in price in the next ten years.

Chart #1 – Dual income households peaking

One of the big reasons many families did not feel the deep pinch from 1970 to 2000 was because of the rise of the dual income household becoming the standard.  It should be obvious that with more incomes under one roof purchasing power would increase.  Yet this is really where we start seeing the loss of the middle class.  What used to be a path accomplished with one blue collar income now required two incomes.  Yet as the chart above highlights we may have hit a plateau in terms of dual income households as a percentage.  In the late 1960s 47 percent of households had both spouses working.  In the early 2000s it was up to 67 percent.

The biggest line item for a family is housing.  Household income growth has peaked and over the last decade it has gone stagnant.  It is hard to envision where the boost in income will come from.  Short of having your kids work and also live with you this does not seem like a likely option.  The market really shifted in 2000 and the only way the growth in housing prices continued was by the introduction of exotic mortgages that allowed incredible leverage and created the fertile ground for a bubble.  Now that incomes are being verified and the only game in town is government backed mortgages, the only way home prices on a national level will increase is simply if real income growth is generated.

Chart #2 – Case-Shiller 20 City Index

As measured by the Case-Shiller Index home prices are now back to levels last seen in 2003.  We are seeing a lost decade in many areas.  The bubble is rather clear in the chart above.  But with no household income growth why would home prices go up?  The Federal Reserve is trying to keep mortgage rates low via artificial means by buying up mortgage backed securities but how long can this go on?  At some point a market equilibrium is needed and the above chart shows that home prices are still inflated if we look at incomes.

Markets in Nevada and Arizona are seeing big sales jumps because prices have fallen 50, 60, and even 70 percent in some cities.  People will buy if the price moves low enough.  Can you imagine the above chart moving sideways for another 10 years?  In the short run, prices are still going lower.

Chart #3 – Case-Shiller last 12 months

Home prices over the last 12 months have fallen by 3 percent.  This may not sound like a lot to you but this is an asset that typically never moves lower even by a fraction of a percent.  The reason for this movement is the pressure of the large number of distressed properties out in the market.  You have to ask yourself why would a property become distressed?  It is likely, and the most common case, that many people simply cannot pay their mortgage with the household income that is coming in.  The middle class is shrinking and this is measurable by looking at household income and buying power.  As this power decreases, why would the biggest purchase of households keep moving up in price?  It simply cannot and that is why we still see home values moving lower.

Chart #4 – Federal Reserve holding prices high

Expensive home prices simply to have prices inflated is not a good strategy.  It seems counterintuitive but home prices should reflect actual buying power by American households, not an artificial floor set by the Federal Reserve.  The Federal Reserve has purchased trillions of dollars in mortgage backed securities simply to keep the 30 year fixed mortgage rate low.  The reason it does this is because a lower interest rate increases buying power since most households only focus on their monthly net payment for housing.  Yet this is the wrong side of the equation.  When we had more prosperous times in the nation home prices went up because household incomes went up, not the other way around.

This strategy isn’t new and was tried by Japan.  They lived through a real estate bubble and quantitative easing and what happened to the Japanese economy?

Chart #5 – Japanese real estate bubble lessons

Japan has had two lost decades in their economy because of the real estate bubble that burst but also the large banking bailouts that were conducted by their central bank. What this did is that it kept the market price of housing from being realized and served as an albatross for the rest of the nation.  With an aging population problems are creeping in their system even with low interest rates.  This real world example serves as a lesson for the United States if we wish to hear it.

So far we have gone down the path of ignoring reality.  Yet you can only pretend so long and ultimately home prices have to reflect what local area families can afford without massive subsidies.  This redirects investments from more productive sectors and that is why it is dragging our economy down just like it did to Japan.

Chart #6 – Housing starts

Finally those who actually build homes have not felt the need to add more housing units onto the market.  Why?  We probably have enough housing supply to last us a decade at the current pace.  Keep in mind you have many baby boomers that will want to sell and move into smaller homes.  This will add supply for younger families.  You also have many new homes that were built to over capacity and this too has added to supply.  Another factor is the large rental units on the market.  Ultimately there is a lot of housing to work through.  We have millions of homes that will be foreclosed on in the next few years.  More units of housing.  The above chart shows how devastating this bubble was.

Will home prices remain stagnant until 2020?  I would change my mind if we saw real household income growth for middle class families.  This I hope is the actual case here.  Yet there is little indication that this is happening.  Hard to imagine the American Dream icon being a drag for another 10 years but there you go.

My Budget360

Oh we’ve got a gem of an article this morning, in of all places, The New York Times. 

The commission’s report finds fault with two Fed chairmen: Alan Greenspan, right, a skeptic of regulation who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but then played a crucial role in the response to it.

The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

Well, that’s certainly a statement of the obvious….but it gets better.

The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence.

While I don’t necessarily disagree with the premise, the idea that this was merely a result of deregulation is ridiculous.  It was a failure to apply existing laws to blatant criminality…..you know, like FRAUD.  There have been laws on our books regarding fraud and criminal behavior (like stealing) since this country was founded, yet not a single law has been applied during this crisis but to one individual, Bernie Madoff.  Bet he’s wondering, ‘Why me?’ about now.

Like Mr. Bernanke, Mr. Bush’s Treasury secretary, Henry M. Paulson Jr., predicted in 2007 — wrongly, it turned out — that the subprime collapse would be contained, the report notes.

Democrats also come under fire. The decision in 2000 to shield the exotic financial instruments known as over-the-counter derivatives from regulation, made during the last year of President Bill Clinton’s term, is called “a key turning point in the march toward the financial crisis.”

Timothy F. Geithner, who was president of the Federal Reserve Bank of New York during the crisis and is now the Treasury secretary, was not unscathed; the report finds that the New York Fed missed signs of trouble at Citigroup and Lehman, though it did not have the main responsibility for overseeing them.

Former and current officials named in the report, as well as financial institutions, declined Tuesday to comment before the report was released.

The report could reignite debate over the influence of Wall Street; it says regulators “lacked the political will” to scrutinize and hold accountable the institutions they were supposed to oversee. The financial industry spent $2.7 billion on lobbying from 1999 to 2008, while individuals and committees affiliated with it made more than $1 billion in campaign contributions.

Color me surprised that they all declined to comment…..not.   I don’t think it is likely that Henry Paulson ‘got it wrong’ – not when he was at the helm of Goldman Sachs when these little ‘financial weapons of mass destruction’ were developed.  He was also there when Goldman Sachs (the only firm to do so), bet against the very clients they sold these ‘investments’ to!   No chance in hell he didn’t understand what was going on.   To argue he and Ben Bernanke were ‘mistaken’ would be to argue that they didn’t understand what the banks and lenders were doing.  Pull the other one.  No, this was a case of blatant and willful lying to the American people.   Matter of fact, I would argue it was absolutely essential that Henry Paulson be appointed Treasury Secretary in order for the massive cover-up to occur and to work the way it did.  The myriad of the lies told by Paulson, Bernanke, Geithner and others have been documented meticulously here on FedUpUSA and can still be found linked in the right-hand column.

In summation, the NYT article does convey one thing quite clearly:  Our government is comprised of those that run the banking industry and Wall Street, have spent years in the banking industry and/or those who are being directly paid by Wall Street and the banking industry.  Those that control the quantity of money have entirely captured our government.  We have no independent government.  None.  Zip.  Nada.  I believe there is a word for this:  fascism.

When will you wake up America?  Apparently not when you’ve lost your job.  Apparently  not when you’ve gone broke, and apparently not when you’ve lost your home (fraudulently, I might add).  Here it is in black and white:  You have been robbed in broad daylight and you continue to re-elect those directly responsible for doing so.   As long as Americans continue to elect Congressional Representatives with a ‘D’ or an ‘R’ behind their names; those that are ‘professional politicians,’  YOU are contributing to your own demise.  As long as you continue to elect people who are paid by Wall Street, you are not going to change anything.  Just try to find a Representative not owned by Wall Street banks OpenSecrets.  Yes, even now with the 112th Congress.

Are you going to leave this criminal, captured government to your children?  It’s past time to wake up America.  What will it take?

‘Americans can always be counted on to do the right thing, when all other possibilities have been exhausted.’ — Winston Churchill

Could we work on not making this man a liar?

STOP THE LOOTING & START PROSECUTING!

Home Builder Displays Vacuum In Brain

Posted by Karl Denninger

Hattip to the forum for the pointer to this one….  yes, I know the original post was written in 2008.  It’s still relevant, and should be required reading to understand exactly how screwed people’s opinions in the “homebuilding” space are.

As a Builder, I am extremely interested in the current debate about the home building and mortgage finance industry.  One comment I have heard repeatedly over the past several weeks is the need to return to “sound mortgage standards” based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment.  But just how realistic is this?

Ah, the old “let’s appeal to what people deserve” game.

According to the U. S. Department of Housing and Urban Development, the median household income in the U.S. in 2007 was $59,000. If we return to sound mortgage standards, median home values would have to be $147,500 (2.5x) to $177,000 (3x).

So under “sound mortgage standards,” a household earning the median income would have to save $29,500 (2.5x) to $35,400 (3x) – 50% to 58.5% of their annual household income – for their down payment before they could purchase a home. Is this realistic?

“Realistic” (as defined by “what someone deserves”) is irrelevant.  What matters is mathematics.  You know, that ugly science that says that some things you want are just not achievable?  Yes, that.

According to the U.S. Census Bureau, the median home price in the U.S. is $231,000, so median home prices would have to drop 37% to 48%. Is this realistic? Even those homeowners who purchased their homes using “sound mortgage standards” would owe more than their home is worth.

You helped create a massive bubble and support the mispricing of the homes in that bubble, and thus YOU are partly responsible for the above condition.

Now you wish to argue that it shouldn’t exist, because, well, people “deserve” something better.  Wish in one hand and wipe your butt with the other; it won’t change what’s in or on either.

As a Builder, I would love to be able to build and sell new homes for under $148,000.  But is that realistic?

According to the National Association of Home Builders Economics Department Construction Cost Survey, the average new home built in the U.S. in 2007 was 3,340 sq.ft, was built on an 11,968 sq.ft. lot, and had a total sales price of $454,906.

According to the NAHB the “average” new home built in 2007 was nearly three times the size of the one I grew up in and was built on a lot that was ten times the square footage of that same home.

Oh, and by the way, my family was decidedly middle-class.  My father was a CPA for a glass company.  Not exactly a “pedestrian” or “lower blue collar” income.  Both he and my mother have college degrees; his in accounting, hers in education.  She decided to stay home and raise a family, he went to work every day, driving 25 miles one way to do so.

We had three bedrooms for four of us (the adults obviously shared), one bathroom that had a toilet, a tub and two sinks, a living room and an eat-in kitchen.  One story with an unfinished basement (containing the laundry gear, furnace, hot water heater and electrical panels); that’s it.

No air conditioning, one telephone on the wall, one black-and-white TV (we couldn’t afford color) which sported rabbit ears and, later in my youth, I helped my father install on the chimney an external antenna with a rotator.

According to the Idaho Department of Labor 2007 Occupational Employment and Wage Report, the median hourly wage for construction trades workers in the Boise City – Nampa MSA $13.85 plus 21% for payroll taxes and insurance equals $16.75 per hour.

That’s funny.  I remember quite vividly that the glaziers in the shop my father worked at were union boys and earned about $31/hour gross – that is, before payroll and other taxes and such, and of course before overtime.  This, I will remind you by the way, was in the 1970s.  So if the actual cost of “labor” in Boise City is $16.75, I’d say you’re getting a hell of a deal, inflation considered and all.

In conclusion, how realistic would it be to return to “sound mortgage standards” based on home values of 2.5 to 3 times income, 30 year fixed rate mortgages at 80% loan-to-value and a 20% down payment? Not very. Doing so would certainly change the home building industry which historically accounts for 10% to 15% of the gross domestic product of the U.S.  We would build fewer new homes and the ones we do build would be much smaller homes on much smaller lots.  And home buyers would certainly have to adjust their expectations.

Maybe I should start building apartments

Maybe you should pull your head out of a place the sun does not shine and take responsibility for helping to bankrupt this nation.

You, and those like you, have led people to believe they can have something for nothing.  That they can violate the laws of mathematics with impunity and never pay for it. 

You are just like my father, who, after he retired, decided he would “get his” and thus supported (strongly) Medicare Part “D” – despite full and certain knowledge, since he’s a CPA and understands compound interest, that it would be impossible to sustain the program on an indefinite forward basis and HIS GRANDDAUGHTER would INEVITABLY get screwed as a consequence.

I don’t really give a good damn what you think you should be able to build and what people should be able to have.  It’s not relevant.

What’s relevant is the mathematics of leverage and compound interest.  These are mathematical laws, not suggestions.  Violating them with wild abandon and willful intent is why the nation is in the mess it finds itself in now.

May I remind you that of those who have completed “HAMP” modifications find themselves with DTIs – that is, mandatory debt service payments – over 60% of their pre-tax income.  If you then add into that things like automobile insurance, medical insurance and bills, fuel for said vehicle, utilities for the home, food and similar necessities both to live and continue to be able to earn an income, along with taxes (yes Matilda, everyone pays FICA and Medicare irrespective of income) you find that this so-called “beneficiary” of your profligate pumping of “home values” finds himself eating dogfood and being a literal leaking water heater away from family bankruptcy.

I simply don’t care if people are unrealistic about land values – that will change out of necessity, irrespective of what those people – or you – might want.

But to claim that the “average” family should be buying a 3,000 square foot house is simply outrageous.  It speaks directly to the idiocy of “pump it up” finance and ridiculous and outrageous statements from people like Chuck.  “We all are owed McMansions and by God, we’re gonna have ‘em – whether we can pay for them or not!”

Yes, that posting was from 2008.  But Chuck hasn’t stopped.  No, just a few months ago he’s played “buy now or be priced out forever!” once again, citing, of course, the earthquake in Chile:

Are you waiting for the price of that new home you’d like to build to drop further?  I wouldn’t.

That was copper, remember, along with oil (which goes into a lot of things, like, for example, asphalt shingles)

How’s that worked out the last few months?

It was “going to the mooooooon!” through 09 remember?  Now, not so much:

And oil?  Remember, Goldman (and others) told us it was going well over $100 soon (again.)  Yes, I noted that it might, on a technical basis.  Well, so much for that:

This looks more like “don’t be a sucker and buy into the hype” to me than “buy now or be priced out forever!”, when one looks at the issues analytically.

Make good choices folks, and kick to the curb the asshats who have, for the last two+ years, tried to goad you into doing something that will leave your bereft of your labor and accumulated wealth.

A “nice big house” isn’t yours unless it’s paid for – if you have a big fat mortgage on it the bank owns it and your future labor.  You in fact own nothing other than debt.

Don’t let Chuckie talk to you into doing something stupid – when homes are 2-3x average incomes and you have saved that 20% down payment, then and only then do they make a moderate amount of sense to buy – and then as a place to live, not as an “investment” that you expect to appreciate in value.

Remember, Chuckie’s certifications (self-claimed, I’m not making this up) include Certified New Homes SALES Professional and Certified New Home MARKETING Professional.

That is, he’s certified in the art of separating you from your money by selling you something. 

That, incidentally, just might be adverse to your interests.

Why We Need Fed Transparency

Posted by Karl Denninger

Buying a Home in America today is Expensive Thanks to the Banking Sector: Examining Income and Home Prices from 1950 to the Present. Can Home Prices Fall Another 38 Percent?

A question rarely asked regarding the housing market today is whether prices are affordable.  There seems to be this implicit belief that because prices have fallen so drastically that they somehow must reflect a bargain.  This is not necessarily true.  I think in our consumerist society people are conditioned to automatically assume that a lower price somehow means a good deal.  Go to any mall after the Christmas shopping season and you’ll see “amazing” bargains for 50, 60, or even 70 percent off.  But is it really a bargain?  This question is not often asked yet this is the central tenet to the housing bubble that got many Americans into trouble.

In order to understand the housing market, we need to look at the income of the average American.  Yet this is something that is usually removed from the equation when discussing housing policy.  How do Americans pay for their mortgage?  From an ever scarcer W-2 job yet Wall Street and policy makers have somehow consciously avoided focusing on this connection because headline unemployment is at 10 percent.  But let us look at the relation of income to home prices over the decades:

Source:  Visual Economics

Now this is a critically important chart.  At the height of the bubble it took 473 percent of the median household income to purchase a median priced home.  Compare this to 297 percent in 1975.  The current number is 331 percent.  But let us run our own numbers based on Census data.  The median U.S. household income is $52,029 according to the 2008 Census (this number is lower for 2009 but data won’t be released until September of 2010).  The current median home price is $172,600.

Median Household income:       $52,029

Median U.S. home price:             $172,600

But is this affordable?  Not necessarily.  First, let us look at the home ownership rate in the U.S.

67.6 percent of U.S. households own their home.  The housing situation is very much a majority issue for average Americans.  This is where most Americans store their wealth.  51 million households have a mortgage while 23 million live in homes with no mortgage at all (approximately 30 percent).  Let us run the numbers for someone looking to buy a home today with a FHA backed loan since this only requires a 3.5 percent down payment.  Here are the numbers:

We’ll go ahead and use Texas since there is no state income tax there and it will give a better overall net income to the median income household.  After taxes, the family is taking home roughly $3,570 per month.  How much money down is need for a FHA backed loan?  3.5 percent and let us use the $172,600 median home price:

Down payment:                               $6,041

Now if we run the numbers, things look okay here:

$982.60 / $3,570= 27.5% Debt to Income (DTI)

Many bankers will even go with gross income so you will have a better ratio.  However, taxes and insurance are other costs associated with owning a home.  In Texas, these run anywhere from 2.5 to 3 percent.  Let us add that in as well:

PI ($982.6) + TI ($431.5) = $1,414

Now, your housing payment is eating up nearly 40 percent of your income:

$1,414 / $3,570 = 39.6%

What about repairs?  Landscaping?  Garbage pickup?  These are all other items associated with owning a home.  Keep in mind we are using the median priced home in our example and not some extravagant home.  This is what the average American is facing.

Even going back to 1975, prices would still need to fall to meet that price to income percentage:

$50,029 x 2.97 = $148,586

The median home price would need to fall an additional 13.9 percent to go back to 1975 affordability levels.  I’ve seen a few articles mention home prices falling an additional 10 to 15 percent and this seems to fall in line with the above.  Keep in mind this is important because buying a home is now based on income and monthly fixed outlays.  The maximum leverage products like option ARMs are now a thing of the past.  You now have to demonstrate via reportable income that you can afford a home.  With unemployment so high this becomes a challenge.

I always find it fascinating that most charts looking at home prices seem only to go back to the 1970s.  This is when the U.S. Treasury and Federal Reserve disconnected the dollar from any connection to the gold standard.  But let us look at two other periods of relative good economic times, 1950 and 1960:

1950

Median household income:        $3,319

Median home price:                       $7,354

Home price / income = Percent of 221

1960

Median household income:        $5,620

Median home price:                       $11,900

Home price / income = 211 percent

Now this is interesting data.  If we use the 1960 ratio home prices today would need to be:

$50,029 x 2.11 = $105,561

A 38.8 percent drop from current levels.  The above chart from 1975 to the current housing peak in the late 2000s shows housing prices going up for nearly 30 years.  Many average Americans simply assumed this was the normal trajectory of home prices.

But the 1950 to 1960 example shows that after one decade, relative to income, home prices in 1960 were actually cheaper than they were in 1950.  In 1960 the median home price cost about twice the median annual household income.  Some can’t even imagine this number and think this would be ruinous for the economy.  Nonsense from the banking industry.  In fact, the 1950s saw some of the best GDP growth:

Now many would argue that the rise of the two income household has pushed home prices up.  But you can easily argue that it now takes two incomes merely to have what those in the 1950s and 1960s had.  Of course this comes from the insidious ability of the U.S. Treasury and Federal Reserve to siphon off the earning power of average Americans and give massive handouts to the banking industry.  And that is exactly what occurs.  Look back up at the mortgage calculation chart.  Aside from the monthly payment, notice something else?  The “cost” of that cheap 5.85 percent mortgage is going to run you $187,176 after 30 years.  In other words, the interest you pay is more than the actual home price.  Now if banks are borrowing near zero from the Fed why not allow average Americans to borrow directly from the Fed since virtually every mortgage is now guaranteed by the taxpayers?  Because interest and fees, unproductive aspects of our economy are being taken from the banking industry and suffocating the balance sheet of average Americans.

Home prices have gotten more expensive because the crony banking system is hungry for more and more profits.  If banks had to lend their own money, home prices would automatically adjust lower.  Is that necessarily bad?  This would provide more mobility and less of a focus on homes as commodities and more as a place of shelter.  Take for example the current bust.  Say someone in struggling Detroit finds a job in New York but can’t sell his home.  Say that new job utilizes their skills more effectively.  How is their inability to move helping the overall prosperity of our economy?  It isn’t.  Yet this is the position millions now find themselves in.

I would argue that homes are still very expensive yet the propaganda is flying from the banking industry because they want people to buy homes even though they can’t afford them.  Ironically cheaper home prices would help our economy in the long term but this would cut into additional banking profits since they currently hold over priced real estate, both residential and commercial, and want to off load the waste at peak prices to the taxpayer.  The corporatocracy has caused more and more damage to our economy and inflating home prices has been one of the outcomes of giving too much power to the financial sector.

In the 1950s and 1960s when our economy was relatively healthy and booming home prices cost about twice the annual median income.  That number sounds about right even for today.  Yet the propaganda is strong and many simply want to believe that a big drop in prices means homes are now cheap.  Don’t believe it.