FedUpUSA

Archive for the ‘Housing Crash’ 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

“HAFA” – Foreclosure Warning Dead Ahead!

Posted by Karl Denninger

Under the Radar – a bit – came this ditty at the end of November.  Coupled with the “unlimited” Fannie and Freddie “credit line”, this may presage a veritable collapse in house prices this coming spring and summer – along with a massive “dump” of inventory.

“HAMP”, the Treasury’s program to “prevent” foreclosures, did not originally appear to have a “stick.”  Well, here’s the stick folks – for those who cannot qualify for a modification, or who “blow it” while on a trial program and simply don’t get a permanent change servicers are in fact required to offer short sale or “deed in lieu” alternatives when they make sense.

Got that?  Servicers participating in HAMP must follow the guidelines set forth in this Supplemental Directive.

No choices here folks – if you’re part of HAMP, you are required to offer expedited and unified procedures for short sales and, optionally, “deed in lieu” programs.

This goes into effect in April, although servicers can start offering these programs earlier. 

Come the spring selling season you’re going to see the inventory of homes that were “HAMPd” and failed for whatever reason hit the market. 

This is not a trivial number of houses – there are close to 750,000 homes currently under trial modifications, and only a tiny number of them – something like 30,000 – have converted to permanent payment changes.

Thank Treasury for not telling you about this until the “selling season” had ended and we were in the middle of the winter months when sales are slow – and timing the “required start” date for April 1st, right into the maw of the spring selling season.

If you need to sell your house in the next year this is something you need to take into consideration.  A flood of nearly 3/4 of a million houses appear poised to hit the market as short sales and “deed in lieu” sales beginning in April.

In short it appears that Treasury has figured out that all these “extend and pretend” games are not converting delinquent loans into sustainable payments and ownership opportunities.  As such the stick has now made it’s appearance.  While this will promote the market clearing (a good thing) one wonders about:

• The propriety of “deciding” to extend an unlimited line of credit to Fannie and Freddie on Christmas Eve in the hope that the market “wouldn’t notice.”  Dennis Kucinich and a couple of other reps have made noise about Fannie and Freddie becoming the tools by which bad loans are dumped on the taxpayer in a back-door bailout of the banks.  Before you applaud Dennis make sure you look at his voting record on the bills that enabled the bailout of Fannie and Freddie – and made Treasury’s actions lawful – in the first place!
• The be really really quiet fashion in which Treasury has tried to play this one.  Remember that there are overlapping programs here, and the quiet nature of some, along with the trumpeting of others, appears to be designed to disadvantage consumers – that is, to SCREW YOU.  Specifically, the “first time” home buyers tax credit (and repeat credit) both require contracts to be signed by April 30th, 2010.  This program’s mandatory effect begins on April 1st, which means that with the ordinary process of approval and evaluation (set forth in the document linked above) that inventory will hit the market right about May 1st.  That $8,000 “credit” may be the most expensive $8,000 you have ever received compared to the deal you would obtain had you waited a couple of months and bought into the maw of the short sale and deed-in-lieu unload.  Thank Tim Geithner and President Obama for hiding their intentions in this regard until tens of thousands of Americans bought (and are still considering buying) grossly-overpriced houses when they were fully aware of their intent to force an unload at an actual market price just a few months later!

The short form is that Treasury has suddenly pulled the stick out of its pocket with regard to the HAMP program and as a consequence those who believe that “housing has stabilized” are very likely to get a truly epic surprise later this spring and into the summer months.

In addition, those who bought during the time period of the “home buyer tax credit” almost certainly, to an individual transaction, have gotten and will continue to be screwed, with the essence of the rip-off being the lack of disclosure of Treasury’s intent to force the market to clear. Indeed, Treasury has sent public signals for over two years that they have NO INTENTION of forcing market-clearing prices - EVER!

If “housing stability” is part of your investment thesis, whether it be in credit the equities, you need to check the premise upon which your thesis is based and adjust accordingly.

I applaud Treasury for what appears to be recognition of what I have advocated for more than two years: The housing market cannot be propped up at artificially-inflated prices and must be forced to clear by a return to fundamental values. 

However, I must object to how Treasury has gone about this.  Rather than being an advocate for the people of this nation Treasury has instead intentionally designed these programs and withheld critical information from the public with regard to their full intentions with the purpose and effect of inducing consumers to enter into transactions that are severely to their disadvantage – all to create yet another rip-off of the public for the benefit of the big banks.