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Archive for the ‘housing market’ 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 market can have no sustainable recovery without the employment market improving.  It is incredible that over three years into this crisis that there has been little focus on coupling employment with housing.  Banks argue that many are simply not paying their mortgage yet they want the Federal government to ease lending restrictions.  Who are they going to lend to?  Over 95 percent of all mortgages now being originated are government backed.  It is disturbing that all bank bailouts including the Fed forcing the interest rate lower merely focus on one aspect of the financial equation.  The reality is, without a burgeoning middle class housing will never recover.  Even the rising default rates in government backed loans, many “plain vanilla” loans are defaulting in record numbers because people are not able to service their debt.

We need a backdrop to the current foreclosure problems.  The financial industry simply dominates too much of our economy and now has deep connections in our political system.  Let us first look at mortgages currently in foreclosure:

Historically you will always have roughly 1 to 1.5 percent of mortgages in foreclosure.  This is just the background noise to the housing market even when we are running at full employment (i.e., under 5 percent underemployment).  Roughly 50 million homes have mortgages so the maintenance rate should be hovering around 500,000 foreclosures in the pipeline at any given time (or 5 percent of total mortgages).  Today we have over 2 million active foreclosures.  But the bigger issue is the number of homes that have borrowers not making payments:

Roughly 10 percent of mortgages not in foreclosure are now past due.  That means another 5 million mortgages are not in the foreclosure process but have borrowers who have completely stopped making payments.  Total the two categories and you have 7 million loans in foreclosure or with borrowers not making payments.  Banks are unable to deal with this self created mess and the massive amount of volume has created foreclosure mills where documents were fabricated just to get people out of their home.  So now we have finance trumping the laws of our nation.  Due process and diligence is necessary here.  This is actually what got us into this mess in the first place with banks itching for a quick profit and Wall Street creating a toxic market for mortgage backed securities to satiate their gambling ways.

Corporate profits from the finance industry are busting at the seams:

The problem of course is that the real economy is not thriving like profits in the financial industry.  It is now the case that many of the too big to fail banks merely survive because of their explicit government guarantee that failure is not an option and the taxpayer will step in no matter what happens.  Yet the vast majority of the public doesn’t want this and countless polls show a justified anger and frustration with the banks.  But the poor and working class don’t fund current politicians, corporate and banking interest do.  Many of the S&P 500 corporations now draw large portions of their revenues from abroad.  They have international work forces, the majority who don’t live and buy homes in the U.S.

The current housing mess has to be connected to the health of the real economy.  It doesn’t matter that Wal-Mart offers cheap prices by using cheap international labor if American workers are seeing their jobs disappear.  I was talking with a colleague and he mentioned that we are now undergoing the biggest experiment of our time by slowly exporting the American middle class to the world and forcing many American workers to conform to the low wages of globalization.  Wall Street presents this as a given and that nothing can be done and is all part of the free market while they just experienced the biggest government handout in the history of humankind.  Is this the kind of world we want to live in?

Clearly the housing market is tied at the hip to this trend.  That is why even with historically low interest rates the market is still in the trough and potentially heading lower:

Until the economy recovers there is little that can be done to help the housing market.  Banks can stomp their feet but the reality is, you need a sizeable working and middle class that can actually afford the mortgage payment to occupy housing units.  If wages are being pushed lower you can rest assured that home prices are heading that way as well.  There are only so many homes a CEO can buy.

My Budget360

Michael David White has painted some dire pictures of the US housing market, but this one is shocking in its implications.

Chart fromA Blistering Ride Through Hell by Michael David White.

I enjoyed the synopsis of this chart that was done by Automatic Earth in Is It Time to Storm the Bastille Again:

“That is, what Americans’ homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that’s right: US homeowners lost more, by a factor of 26, than they “gained” through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333.”

Nine out of ten Americans will notice that there is a significant gap that must be closed here. What makes it even more chilling is that the gap is continuing to widen as home prices continue to correct to the mean.

This debt must be resolved. There are two major ways to do it: repayment and default.

Repayment is probably a fantasy, if not beating a dead horse. The homeowners do not have the money with which to pay the loans given the current state of employment and wage stagnation, and the mortgages are for the most part on houses whose value is significantly under water compared to the debt, as in ‘ just mail in the keys.’

Straight up default, writing off the debt through principal adjustment, is also probably out of the question, because it would essentially vaporize the balance sheet of the US banking system which is also insolvent, to a greater degree than most understand, and if they understand it, would admit.

Automatic Earth references an essay which we also had linked here by Eric Sprott called Wither Green Shoots that points out the unfortunate fact that of the 986 bank holding companies in the US, 980 of them lost money last year. The lucky six were the TBTF banks on major government subsidy.

So, where is the government going to liquidate the debt? And what effect will it have on dollar assets when they do it?

The Japanese solution was to ignore their bad debt and insolvent kereitsu, because admitting it would cause significant loss of face, not to mention financial loss, to an elite that does not permit such things to happen. So instead they arranged for their single party LDP system to drag the debt like a ball and chain through what came to be known as ‘the lost decade’ while they tried to make it go away by export mercantilism and crony monetarism wherein funds were given to the same kereitsu in a remarkably ambitious (and expensively wasteful) series of public works boondoggles.

Do you think the US can follow this path? As if. Japan started from a base as a net exporter with a huge trade surplus and little debt. Scratch that idea.

Someone has to end up ‘holding the bag.’ And the consumer cannot rise to the occasion, the banks are all insolvent and a sinkhole until they change their business models. So what will be ‘the last bubble?’ Bernanke has managed to monetize about 1.5 trillion dollars so far. Only 5.5 trillion more to go, if housing prices can stabilize at current levels, and employment return to pre-crash levels quickly.

A few European readers have expressed their relief, and some noticeable pride, that their banking and political system resolved its own debt crisis so quickly and easily. To the extent that their banks are holding dollar denominated financial assets, they have merely stopped the table from shaking for the moment, as their sand castles await the next mega tsunami to come rolling across the Atlantic.

Consider this well, and you will understand what is happening in the economy, and why certain things occur over the next 24 months, despite the fog of wars, currency and otherwise.

It will be amazing, but it won’t be pretty. And it was all unnecessary, attributable to the dishonesty and greed of a remarkably small number of men in New York and Washington who managed to rig the markets and the political process, with the acquiescence and support of a public grown complacent and in far too many cases, soft headed and corrupt.

These are the same people, along with their enablers, who are now preaching the virtues of austerity for the many, and free and easy markets for themselves. All gain, no pain. While the game is going it must still be played.

 Bernie Madoff was lying and cheating and taking money until the day he closed his doors.

Perhaps they are in denial, but surely they must hear the footsteps of history approaching. And their bravado is yet another bluff, and hides the rising stink of fear.

Jesse’s Cafe Americain

I am a Loan Officer for a national mortgage bank – yes, I am one of those horrible bankers who forced people to take out mortgages they did not understand on homes they could not afford. Actually, I have been a loan officer for 5 years, so I started after those OTHER horrible bankers had done all those bad things to poor unsuspecting people.

At any rate, I get asked often if now is a good time to buy a home.

My answer? There has probably never been a better time to buy a home. Home prices are low, and interest rates are about as low as they have ever been. It is a Buyer’s market, and you can get a great deal on a home.

That said, there is a caveat or two. You have to have decent credit (decent, not great), a job, and you have to have some money (unless you are an Armed Services veteran, there are no more 100% loans), and you cannot have too much other long term debt (long term debt is car loans, other consumer loans, student loans, mortgages and credit card debt).

There can be issues with getting approved if you are self-employed or if you are new to a job or career field, but for the most part, loans are available, and not just for the people with great credit and 20% to use as a down payment.

In addition, you should be relatively secure in your employment situation. I know there is no guarantee that anyone will keep their jobs, especially these days. Buying a home is a large commitment, so if you have an unusual amount of job or financial anxiety, wait to buy until things improve. Peace of mind is a hard thing to lose.

So, given the current good market for buying, what does the future hold for the housing and mortgage market? If I knew for sure, I would be on my yacht sipping umbrella drinks and wondering what to snack on next, but I can make some informed predictions. I call these types of predictions SWAG’s (scientific wild-ass guesses).

My view of the future is predicated on the following assumptions. Until something changes dramatically, these things are and will continue to be true.

• Government spending and the associated deficits will continue to be HUGE – even if the Republicans take over Congress in the next election, it will be many months or several years before anything changes with government spending – this is not want I want, this is reality. Nothing changes quickly in DC.
• Taxes will rise – a lot. This is a sure thing. The tax cuts that President Bush got passed on 2001-2002 expire at the end of 2010, so taxes will go up. Add to that the new healthcare bill and other “stimulus” measures coming out of Washington, and you can expect a BIG increase in your taxes.
• The economic doldrums will continue – the decisions and spending by our federal government are exactly opposite what was/is needed to get the economy pumped up. Think I’m wrong? Check out what happened in Japan in the 90’s and see what their government did to “fix” it. They did exactly what Washington is doing, and we are going to get the same result – a decade or more of no grow, at all.

All this means that the housing and mortgage markets will be adversely affected. I expect the following:

• Interest rates will remain low for the remainder of 2010. Then, depending on what happens in the Nov. election, and what course the new Congress takes, rates will rise – maybe a lot. I would not be surprised if mortgage interest rates were at or near 10% in 12-18 months. Why will they rise? The Treasury department artificially “made the market” for mortgage interest rates by buying LOTS (over $1 trillion) of mortgage-backed securities, starting in Dec of ’08. This program stopped at the end of the 1^st quarter this year Government deficit spending. Right now, other countries ate financing our spending by buying Treasury bonds – at very low rates (near 0% returns). That will NOT continue. When the countries & investors buying our debt stop doing so, the return will have to rise to get them to buy (good old supply & demand). So, the Federal Reserve will have to raise rates to sell the bonds, and that will make rates in all other things rise as well. In addition, I think we are headed for rapid inflation, and the Fed will fight that by raising interest rates. This could happen very quickly – in a matter of weeks. I watched rates go up 2+% in a few weeks in 2005, and down 2+% at the end of 2008.
• Home Values will NOT recover – not in the next couple of years. There is not enough demand for homes to warrant an increase – except in some very specific towns & neighborhoods. People are anxious about their livelihoods and the economy and government spending, and that is not going to change until several things change 180 degrees.

All this tells me that the next year or so are not going to be perceptively better than now – and got get worse.

I hope I am wrong. I hope (and am working personally to see it happens) that there are substantial changes in Washington as a result of the November election. I hope that the new Congress will see the light and go after government spending with a blow torch, especially that horrible health care “reform”, without more taxes hikes than we will have anyway (those Bush tax cuts expiring). I hope that they make major changes to entitlement spending (Social Security, Medicare, Medicaid) that get those runaway programs under control. I hope all these things, and I am working in my small way to help make them happen, but until they do, no one can assume they will. The old saying applies – “Hope for the best, plan for the worst.”

OK, mortgage rates are low and probably going up soon. Home prices are down and probably not going up anytime soon. The federal government is filled with thieves, charlatans, mountebanks, and failed lawyers (basically the same thing, huh?) , and that will probably never change.

What are you going to do? Do like I did. I own a home and have refinanced to a rate in the mid-4%. If I had some money, I would buy rental properties and/or a vacation home, but alas I do not have the funds for that. Buy a home if you can and want to; refinance your mortgage if you have not done so yet. These things will help you and will help the economy. Then, go vote for conservatives in November and force them to do as they are told.

Contact me if you want more info about anything I have written here.

Tom MacKinnon

The Index of pending home sales fell a record 30% in May to a record-low reading of 77.6 — two hugely pessimistic predictors of future prices nationwide. Yet the combination of two record negatives went barely reported when the stats were announced last week.

So here’s the news for you now, a week late, but new to the marketplace of ideas. Pending-home sales have crashed and now stand below the worst numbers we have seen since the housing crash started in 2006. The rubber bands and duct tape are breaking apart in the property market. Presume the fix of a fall is in.

Take a look at the three charts below. Judge for yourself how important the facts are which the National Association of Realtors (NAR) announced last Thursday (July 1). I personally find them startling, alarming, critical to review.

The oversight by major news outlets — snubbing record negatives — is egregious by virtue of its ignorance of the expiration of the free-down-payment program. The pending-home-sales stat gave us our first view of buyer demand for housing without the hugely popular prop from the federal government.

I am not saying here that the news was buried. I am saying that reporters failed to do the most basic leg work. Even those who lucked out and stumbled upon the record stats, they failed to comprehend the importance of the new data. I would have missed it too if I hadn’t charted the numbers myself, but I did, so I didn’t miss it.

***

Speculation has run rampant as commentators have wondered about the direction of prices as government support starts to fall away.

The future direction of real estate prices is a major obsession of almost all economy watchers as the monthly bill for shelter overshadows others, as the value of homes is a predominant factor of family wealth, and because the banking sector has huge investments based upon residential property.

“If you’re looking for a silver lining in housing, you aren’t going to find it here,” Mike Larson of Weiss Research said. “Demand has fallen off a cliff in the wake of the tax credit expiration, with pending sales falling by the biggest margin ever to the lowest level ever.”

Mr. Larson’s comment drew attention to the two new record lows. His name is on every story that mentioned one or both record stats. Had he remained silent, these highly relevant record lows would have gone unreported completely.

Of the 15 major media outlets i reviewed, four actually did learn about both of the record negatives, but they didn’t understand the meaning of it.

The statement by NAR announcing pending-home sales makes no reference to either the record fall or the record new low. If their intention was to hide bad news, they got away with murder. Let’s show you the fools who fell for it.

***

Among the outlets who failed to uncover either of the two record negative stats are Barrons, Dow Jones, The Financial Times, Fox Business, The Los Angeles Times, and Marketwatch.

I reviewed stories on pending-home sales by 15 leading news outlets – in addition to the flunking students mentioned immediately above, I also read Atlaticwire.com, BBC News, Bloomberg, Boston.com, CNBC, Investors’ Business Daily, New York Times, Reuters, US News — and the only difference between the outlets was the extent to which they screwed up this critical epicenter-type data set (Please see the graphic nearby depicting the various degrees of incompetence.).

The future direction of housing prices are arguably the most critical factor in the most critical nation in the most critical financial crisis since the Great Depression. The signs are not hunky-dory in this market. The May pending-sale figures may in retrospect serve as a Rosetta Stone: A perfect guide to the true fortunes of residential real estate. Just in case you have forgotten, we are in one hell of a market, and Mom did not tell us this is what would happen when we grow up.

*** HousingStory.net estimates current inventory for sale of 3.9 million is 1.2 million units higher than it should be, and not too far away from the record high 4.5 million. Inventory stands at 8.3 months of sales, but it should be at 5.8 months.

 Fourteen percent of mortgages are behind on payments — about 7.7 million borrowers or, more starkly, one in seven. A record 4.63 percent of borrowers are in foreclosure. Approximately 13 million homeowners have no equity or negative equity. They would make nothing from the sale of their house if they could sell it. Or they would lose a little or a lot. Thus do we have the phenomena of strategic default — now as common as no-money-down mortgages during the boom.

 ***

 We are in a pause of a tectonic shift of plates. Prices have been flat since August 2009, but are down 30% from their peak. The fall of 30% was almost completely discounted as impossible prior to its occurrence.

 My speculation is that the fate of bubble-mortgage debt remains as our key obstacle blocking recovery (Unbelievers should rent the Godzilla movie “Eating the Lost Decades of Japan” for further enlightenment.). Total mortgage balances remain almost unchanged from the peak of the bubble –$11.68 trillion today versus $11.95 trillion at the peak (see chart below).

The data released last week on pending home sales and the dismal record of reporting on that data proves that breaking news business journalism fails even in surface scratching. The cows just want to feed on the grass in front of them and go on to the next field. 

The smart investor is going to look at these charts on pending-home sales and have a real advantage over the common media consumer. Readers of my work know I have found pessimistic facts easy to find. The pending-sales figures are a dramatic concurrence — a record fall and a record low. 

So I will give you my opinion: All hell has broken loose all over again in real estate. Don’t buy a home. Sell one. 

*** 

*** 

The press release by NAR on pending-home sales. The Fifteen Stories by Major Media Reviewed on Pending Home Sales. 

Thank you for carrying the story to Automatic Earth, Business Insider, Implode, Jesse’s Cafe Americain, MortgageNewsClips.com, Patrick.net. Housing Story

Why buying a home today makes little financial sense. 3 reasons why taking on a mortgage in today’s market is deep in speculation. Are homes still over valued? Tax benefit not as big as you would expect.

Posted by mybudget360

It is hard for many to believe that home prices in many of our largest cities are still overvalued.  Part of this distortion has to come from living in a decade long housing bubble that has adjusted the perception of value and price.  But in many areas home prices are still much too high relative to the income of local families.  When disconnects occur here, bubbles are produced.  The stock market is experiencing this since price to earnings ratios are still much too high for what businesses are drawing in through revenues.  The housing market is off by 30 percent from its 2006 peak and weakness is now appearing once again now that the tax credit has expired and the Federal Reserve is finished with their mortgage backed security buying campaign.  It only took a few weeks once artificial measures were taken off the table.

Home prices relative to income are still too high nationwide:

Source:  Visual Economics

In fact, if we look at recent data the numbers are still too high:

Median Household income:       $52,029

Median U.S. home price:             $173,100

Yet on a nationwide basis, we are getting closer to the ratio of the 1970s.  But on a more narrow level of cities and states, some areas are still very much in bubbles including California.  It is a fascinating case of consumer behavior post-housing bubble.  Since most of us have now been conditioned over the past decade that the only way to buy a home is to take out an enormous mortgage and leverage each penny of net income to a home payment, we have forgotten sounder times.  In light of this, it might appear that home prices make more financial sense in today’s climate but they do not in many areas.  Let us look at a few reasons why buying a home today is not a good idea.

Reason #1 – Smaller mortgage with higher interest rate better than big mortgage with small interest rate

One argument you hear those in the housing industry continually make is “you should buy today because rates will rise.”  What they don’t tell you is that higher rates usually mean cheaper home prices and buying a less expensive home with a smaller mortgage and higher interest rate makes much more sense than buying an expensive home with a big mortgage and cheap interest rate.  Before we walk through an example, let us look at historical mortgage rates:

Over 40 years of history shows an average 30 year mortgage rate of 9 percent.  The current average that is lower than 5 percent is an anomaly.  If we run a few scenarios, you will see that a cheap mortgage rate and an expensive home actually give buyers less power when it comes to paying down their mortgage.

We’ll run two scenarios with the current interest rate and the average to show why this occurs.  We’ll assume a same monthly payment since this is usually what is used for debt-to-income qualifications so the home price will reflect this.

Low interest rate scenario – 5% 30 year fixed

Home price:                       $250,000

30 year mortgage:           $237,500 (using a 5% down payment)

Monthly principal and interest:                  $1,274

Total interest over life of loan:                   $221,482

High interest rate scenario – 9% 30 year fixed

Home price:                       $165,000

30 year mortgage:           $156,750 (using 5% down payment)

Monthly principal and interest:                  $1,261

Total interest over life of loan:                   $297,298

On the surface, this appears to be a good deal.  By paying more with a lower rate you have more flexibility.  But let us assume this family is able to contribute $300 more per month.  What happens then?

Low interest rate scenario $300 additional monthly payment (239 payments – 19 years)

Total interest over life of loan:   $137,388

High interest rate scenario $300 additional monthly payment  (188 payments – 15 years)

Total interest over life of loan:   $135,437

Here is the big difference.  With $300 more per month, the person with the high interest rate can pay off their loan 4 years faster and save on their interest payments as well.  This is the leverage of having a higher interest rate and a lower priced home.  Also, the requirement for down payments is shifted lower since the price is moved lower.  This is good if the person ever decides to sell their home in the future because more people can qualify for the home.  The heavily exotic mortgage market simply caters to the idea that home price is the most important factor in housing.  It is not.  Affordability is the most important factor for long-term sustainability.

Tax benefits over sold?

One of the oddest pitches about buying a home is the tax deduction.  The fact of the matter is, most homeowners live in cheap enough housing that the standard deduction is all that is needed without the mortgage interest deduction being taken.  In fact, only a handful of states like California benefit from this tax deduction even though most think this helps them (probably from not understanding the complicated tax system).  To be honest, the mortgage interest break actually helps out the wealthiest in our country.

“(Tax Foundation) For tax year 2008, a little over one quarter of the nation’s tax returns claimed the mortgage interest deduction, 26.8 percent of the nation’s 143 million tax returns. Rates of home ownership are much higher than this, but many home owners don’t claim the deduction. Often they live in low-cost homes for which the deduction isn’t large enough to make a tax difference, so they don’t itemize deductions on their tax returns. In addition, home owners who have paid off their mortgages make no interest payments to deduct.

The average tax return in the U.S. deducted $3,279 in mortgage interest; that includes all tax returns, even the non-homeowners and non-itemizers. Counting only the tax returns that deducted mortgage interest, the average amount was $12,221.”

This is a stunning revelation.  The homeownership rate is approximately 67% but only 26.8% claimed the mortgage interest deduction.  So much for that sacred cow of housing right?

Reason #2 – Price to earning potential of home is still unsupported by long-term trend

Home prices in many cities are still in mini-bubbles relative to the income of families in those areas.  California is a prime example:

According to the California Association of Realtors the median home price in California is $306,000.  However the median household income is $60,000.  This means the home price is 5 times the annual household income of a family in the state.  Take for example the following:

Median household income:

1969:     $9,302

2008:     $57,000

California median home price:

1969:     $24,640

2008:     $500,000

So back in 1969, the ratio was 2.6 and at the peak it was close to 10.  Today even at 5, it may appear to be lower relative to the peak but it is still too high.  Expect this ratio to come back in line in the 3 to 4 range.  This has historically been the case for most areas across the United States.  Many states are actually back in line but many cities still think they are somehow immune to this trend.

Reason #3 – Mortgage rates will go up

The U.S. Treasury and Federal Reserve have been systematically pushing mortgage rates lower.  For example, the Federal Reserve just finished buying up $1.25 trillion in mortgage backed securities.  The Fed balance sheet is already overfilling with mortgage backed securities, loans taken from banks, and other items which never were intended to fall under their prevue:

Source:  Zero Hedge

This is not normal.  Historically we have never been in a position like this.  It is unwise to think that mortgage rates will stay low for an indefinite amount of time.  Already the credit markets are starting to push rates higher because of the risk inherent in the current debt riddled system.  Buying today assumes and is a bet that we can go into trillions of dollars of debt with no interest rate repercussions.  This is a giant gamble and the markets are acting like a volatile casino.

To buy today is a big bet.  There is too much that makes this market volatile.  Aside from the above, there is also a large amount of shadow inventory which will keep a lid on price appreciation for years to come.  Betting on housing today is probably the biggest gamble many will make.