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Archive for the ‘Housing Prices’ 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

Home sales follow very seasonal patterns.  Yet much of this natural mechanism was stunted by banks delaying foreclosures and the government artificially stimulating home sales.  Now that much of the stimulus has been exhausted, it is clear that home prices are correcting once again.  It is hard for many to imagine that home prices can go lower especially after a vicious correction.  Yet we have become conditioned to the notion of expensive home values by years of targeted propaganda.  Home prices in many regions like California are still inflated even after significant price corrections.  The upcoming decade will prove to be a weak one for home prices yet economists are once again making absurd long-term predictions regarding prices.
Take a look at a recent survey of 100 economists:

Just look at how the survey has shifted over each month of data.  In the earliest survey in May, most expected no housing price declines for the year.  Of course, we now know that homes will most definitely end the year with price declines.  For 2011 the economists expect prices to increase and it steadily paces upwards deep into 2014.  Why should we even believe a group that could not see the housing bubble coming?  We are to believe that this group has an idea of the actual appreciation rate for housing in 2014?  You might as well call the psychic hotline and ask her about this.  Even over a four-month period, economists couldn’t get this year correct!

Yet if we look carefully at the data, it is clear that we are in for a long haul with housing.  First and foremost, the middle class has been dismantled from every angle.  Incomes have remained stagnant for well over a decade and artifacts of middle class living like healthcare and college seem to get more and more expensive by the day.  What does this mean?  More money is consumed by other items besides housing with a smaller amount of disposable income.  Housing is still a necessity but it is easily substituted in the market.  If you can’t buy, you can rent.  So prices need to fall to meet the ability of what Americans can pay.  Sure banks wish they could get top dollar for foreclosed homes but that isn’t what the market can sustain.  Just look at the number of troubled mortgages in the U.S.:

None of us (short of those who lived through the Great Depression) have seen something like the above.  Each past due mortgage is a story of the deep recession.  A job that has been downsized, an illness that has eaten up a larger portion of savings, or simply the inability to continue paying on a toxic mortgage are all stories playing out each and every day.  The above chart shows that we are still near the peak and with the employment market still weak, why are we to expect any sudden change in the trend?  The secret to the recovery isn’t so shocking and once we start adding a sizeable amount of private sector jobs (300,000+ per month) then we can issue predictions of home prices rising.  Until then, it is merely parlor game speculation to say home prices will go up in 2014.

Why else do we expect home prices to fall in the upcoming year?  We already know that negative equity is the number one reason in predicting foreclosure.  And the amount of negative equity mortgages is still incredible:

Places like Nevada have nearly 70 percent of all mortgage holders underwater!  Arizona is up to 50 percent and 1 out of 3 mortgage holders in California owes more than their home is worth.  In other words, they have a giant incentive to strategically default.  Many in these states have no intention of allocating 70 to 80 percent of their income to some toxic mortgage on a property that is worth half the peak value.  The amount of shadow inventory on the bank balance sheet is growing larger and larger by the day.  Banks were hoping that by now, three years into the greatest banking bailout and wealth transfer in history, home prices would be back up.  Yet that hasn’t happened for average Americans.  Homes that hit the market will command lower prices to justify the economic realities faced by Americans.

Many adhere to the theory that prices have corrected so deep and so fast that they must bounce back like a rubber ball hitting the ground.  Yet when bubbles pop, there is no reason for this to happen.  Take a look at price declines in major areas:

Nationwide home prices are off by 30 percent from their peak.  How big is this?  Since the Great Depression we hadn’t seen one year of nominal price declines in real estate.  You can see the damage in other areas as well.  But prices are still too high even after this correction because the magnitude of the bubble was incredible.  Take for example a home in California and walk through this hypothetical case:

1998:  home sells for $190,000

2002:  home sells for $250,000           +31%

2005:  home sells for $400,000           +60%

2007:  home sells for $650,000           +38%

2010:  home sells for $350,000           -46%

Most of the time people just look at the last sales reference point.  It is an incredible fall from $650,000 to $350,000.  But look where it came from.  Prices are still close to double what they were in 1998 yet incomes over this time remained largely stagnant.  If we account for inflation, we are looking at a 35 percent increase yet the current price is much higher.  The current sales price is still too high even adjusting for inflation.  In other words, prices in many places are still in bubbles.

And the public is dealing with bigger issues like looking for work and holding on tight to jobs.  That is why if we look at current indicators of home action they are falling off cliffs:

Pending home sales have fallen off the cliff after the banking and government sugar high has worn off.  Mortgage applications are near all time lows.  Why?  Because people are not going to make the biggest financial decision of their lives in the weakest economy in a generation!  That is what banks and the political system fail to grasp.  Trying to keep home prices inflated has been an absolute catastrophe from a policy standpoint but has also cost the taxpayer an inordinate amount of money.  If you want to see where things stand just look at emergency unemployment benefits:

4.9 million Americans are receiving emergency unemployment benefits.  These are benefits that are paid out once the normal unemployment coverage expires.  All in all you have over 10 million Americans receiving UI.  How can one look at the above chart and expect home prices to go up?  The median household income of Americans is now under $50,000.  Adhering to tried ratios over decades of more stable housing days, it would look like home prices should be hovering around $150,000.  The current median home price nationally is approximately $180,000 or 20 percent too high.  If we look at niche markets in California you will find some areas that are still over priced by 50 percent based on local income metrics.  In other words, expect to read about falling home prices over the next year in the mainstream media.

My Budget360

CNBC is losing viewership practically on a daily basis, yet they have the key to turning that all around, if they’d only give Rick Santelli his own show….

The last 40 years have seen the U.S. housing market transform into a market largely driven by incredible amounts of debt.  The credit card companies understood the basic notion that the monthly payment drove most financial decisions.  Even though people purchase a home with a 30 year mortgage, the implicit understanding was that in a few years the home would be sold again and yet another new mortgage would be taken out.  Housing became like the national debt in that most realized we would never get around to paying it off.  We would simply roll over the debt over and over apparently in an endless process.  Yet this can only go on as long as average Americans have an increase in their standard of living and wages.  The opposite has occurred.  For that reason, housing is expensive in today’s market.  The median sales price of an existing home is $184,000:

As the media reports that prices are going up, the underlying message is that somehow things are getting better.  Yet the reasons for prices going up are largely due to government intervention into the market.  The two main driving forces that have pushed prices up in the last few months are:

(-1)  The new home buyer tax credit

(-2)  Federal Reserve purchasing mortgage backed securities to force interest rates lower

The outcome of this has pushed the existing sales price of homes up but Americans are not seeing improvements in their income.  You can see that 30 year mortgage rates are at historical lows:

Let us go back to the first chart.  Back in 1970 the median home price in the U.S. was $23,000.  This means very little without context.  Back in 1969 the median household income was $9,302.  So it took 2.4 times the annual household income to purchase a home:

Median household income

1969:     $9,302

2008:     $57,000

Median home price

1970:     $23,000

2010:     $184,000

The ratio today is up to 3.2 so it is still more expensive to buy a home today than it was back in 1970 relative to income and home values.  You also need to remember we have many more two income households today so we have more people working unable to purchase the same standard of living from four decades ago.  This is an important distinction.  We can even measure home values in terms of gold:

1970 gold price:                                 $35

1970 median home price:             $23,000

Ounces of gold needed to buy a home:                 657 ounces

2010 gold price:                                 $1,181

2010 median home price:             $184,000

Ounces of gold needed to buy a home:                 155 ounces

Regardless of your view on gold, it has gotten much more valuable in terms of home values over this time.  You would need 4 times the amount of gold back in 1970 to purchase the median priced home.  Today, 155 ounces is enough to purchase the typical home.  What has occurred over this time is the slow decline of the U.S. dollar.  Average Americans haven’t paid much attention to this because access to debt has hidden the real erosion of purchasing power.  It is also the case that cheaper imported goods have hidden the weakness of the currency.  But those things are now coming to fruition and we are starting to realize how much the U.S. dollar has fallen.

If U.S. home values were increasing due to a healthy job market with steady income growth then we can say price increases were justified.  Yet the gain is currently artificial.  We need only look at the jump in homeownership rates brought on by exotic mortgage financing:

The homeownership rate is now back to levels not seen since the 1990s.  Simply providing debt to someone without the means to sustain a long term payment is irresponsible.  Yet the deeper problem stemmed from banks believing that home values would keep going up and up.  In fact, some of the bigger banks saw this coming in 2005 and 2006 and started positioning their portfolio to take advantage of the coming collapse.  There was no accident here but a deliberate funneling of debt to American consumers with housing as the main Trojan horse.  Now that we know what has kept things propped up, do we want to continue down this road?  Having a high homeownership rate shouldn’t be a mandated policy.  If we have higher homeownership rates in this country based on healthy economics then that is fine.  But simply putting people into homes for the sake of doing it is bad policy.  It is also the case that many of the bailouts were ushered in under the guise of helping “homeowners” but it was really a way to fix the bad bets of banks.

The chart above shows that there were times in our past when homeownership was actually in the minority camp.  The massive increase in the late 1940s and 1950s was for the right reasons.  It came because of big increases in household formation and a booming economy.  The push in the 1990s and 2000s was largely due to bubbles.

You wouldn’t know it from reading the mainstream press but a large part of our country actually rents:

Source:  Census

37 million households in the U.S. rent.  This works out to 1 out of 3 households.  Yet government policy through tax incentives punishes those for renting.  So it was no surprise that easy lending from banks and stated government policy created the perfect storm for the largest housing bubble the world has ever witnessed.  Those that think the correction is over are wrong.  Let us look at new home sales data:

People aren’t buying new homes in large numbers because they don’t have the money to do so.  When you have 40 million Americans on food assistance, purchasing a new home doesn’t exactly show up on the radar.  For those with work, you have 4 out of 10 Americans workers employed in the lower paying service sector.  Who will buy the more expensive newer homes?  That is why most of the recent action has come in the existing home market.  What constitutes an existing home sale?  This would be a foreclosure resale or a pre-owned home being resold.  In fact, in June only 30,000 new homes were sold in the entire country while 564,000 existing homes were sold.  The gap is always big but this is near historical levels.

40 years of housing was built on more and more debt.  Households even today are required to go massively into debt to purchase a home.  The metrics are still off.  It is still too expensive to buy given the current economic conditions of our market.  Money is only as valuable as what you can buy with it.  Would you rather have those 657 ounces of gold from 1970 or the median home from back then?  That median priced home is now worth $184,000 while the 657 ounces of gold would be worth $775,917.  The purchasing power of the dollar has gotten weaker but some fail to see it because of the large amounts of debt that mask the longer term problems.  The housing market is in for a harrowing few years.  Proceed with caution.

My Budget360