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

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

By Dylan Ratigan

The dire straits of the middle class of America has made it near impossible for our politicians to keep up the pretense that our current government truly works for the “people.” Between the multiple overt and secretive bailouts, the massive bonuses and the circular use of our tax money to lobby for these continued handouts, you can no longer hide from the evidence.

When Senator Durbin said “The banks… frankly own this place,” you realize it was not in jest.

Couple this with recent protections handed by the Supreme Court to corporations to directly influence elections and it can make things seem hopeless for those not on Wall Street or their chosen politicians. Favored CEOs and now even foreign countries get all the printed money they need, leaving us paying both our bills and theirs.

And now nearly a quarter of all Americans are currently underwater in their mortgage because of that steadfast honor.

If you are one of them, chances are you didn’t do anything wrong. Almost all of you were not subprime borrowers or speculators, but merely people buying a house that they thought they could afford at the time. You were just unlucky in that you bought a house during a time when an outdated Wall Street and their complicit politicians decided to use housing to regain the income they lost due to the Schwabs and Etrades of the internet age.

You didn’t cause this mess. They did.

Now you are struggling to make the same payments on this mortgage on your now overpriced home even in light of a crashing economy and massive deflation, all while the government does everything in its power to help Wall St. keep the bonuses coming.

Well, it is becoming time to take matters into your own hands… I suggest that you call your lender and tell them if they don’t lower you mortgage by at least 20%, you are walking away. And if they don’t agree, you need to consider walking away.

It probably doesn’t feel right to you.

That is because you probably are a good person. But your mortgage is a business deal, and it is not immoral to walk away from a business deal unless you went in to the deal with the intention of defaulting.

But somehow, even though the corporations are pumped to exercise their new rights, former bankers like Henry Paulson, current ones like Jamie Dimon and — get this — now even Fannie Mae execs want to keep you from exercising your rights.

But before you let them (or anyone commenting below) force you into paying that $500k mortgage on a $300k house, ask them if they’ll push Jerry Speyer into “honoring his obligation” by breaking into his $2 billion personal piggy-bank to keep paying for Stuyvesant Town?

Or how about asking Hank and Jamie to lecture fellow bailed-out CEO John Mack about how “you’re supposed to meet your obligations, not run from them”? Maybe make him use some of his $50+ million for those buildings he bought in San Francisco?

And before shaming and punishing American homeowners, did they nag Steve Feinberg about helping “teach the American people…not to run away” by writing a check out of his billion-dollar pocket to cover all the stiffed landlords and vendors at Mervyn’s? After all, at least you aren’t single-handedly putting 1,100 employees out of work when you walk on your mortgage.

As part of the deal for your house, your mortgage holder gets interest payments from you and they also use the note to your house for their capital reserves. In return, they take the risk of a foreclosure. In many states, you paid extra to have a non-recourse loan where the lender just gets the house back if you stop paying — your interest rate would’ve been much lower if you were held personally liable like a student loan. But if you still feel bad, then donate the money saved to charity instead of to their bonuses. And when someone tries telling you why it is so wrong, here are some answers:

- Yes, it might seem selfish, but you are actually going to help fix our country the right way, through the use of pure capitalism. There are 3 parties involved in your mortgage — the mortgage holders, the servicing bank and you. You probably want to stay in your house. Most of the people who actually own your mortgage also want you to stay in your house, preferring a mortgage reduction that you keep paying instead of the total loss of a foreclosure. But the major banks (BofA, Wells Fargo, JP Morgan, Citi, etc.) that underwrite and service the loans don’t care about either of you. They (with the aid of their government) just care about hiding their true financial condition for long as possible so they can continue to bonus themselves outrageously. The credible threat of you walking away from your mortgage en masse is the only market-based solution that will force these banks to work with the mortgage holders on your behalf.

- No, you will not “hurt” your neighbors — certainly not near the scale of the banksters. Chances are someone just as nice will you will move in and (unlike you) pay a fair, non-inflated price for the house. Encourage your neighbors to fight back against the banks and ask for their own mortgage reductions as well.

- Yes, it might make getting a loan harder for everyone. Considering the spate 0% down NINJA loans over the past decade, that probably isn’t a bad thing.

- Yes, it might hurt your credit. But with time, people bounce back from having foreclosures on their record. Search online and then talk to a lawyer about the repercussions, which vary by state.

- No, the banks won’t necessarily pass the losses on to customers. They already make a lot of money. If costs are passed on to every consumer without banks competing on price, that’s a sign of illegal collusion or a monopoly. Let’s fix that instead of just letting banks ruin our lives. They might, however, not all make $145 billion in bonuses next year doing something fundamentally so easy that it is an unpaid job in Monopoly.

Meanwhile, our captured government has made it clear that they want to further reward these banksters because there are clearly better ways to “save” the economy without rewarding those most responsible for the damage.

Instead of claw backs for the past theft and strong financial reform for the future, they choose to cover-up the gross misuse of our tax money, making our country worse by helping the criminals on the backs of the most honest.

But thankfully, in this country we still have the tools to fight back and regain our country. Our vote, our voice, our laws and what we choose to do with every penny we have that doesn’t go to taxes are the benefits of our hard-fought freedom, and in this battle we must use them all to fight back. It’s time for the citizens to once again own this place.

ZeroHedge

Over a third of HAMP participants have exited the program and another batch is coming up. Those leaving the program will likely end up in foreclosure. Moreover, 4 million delinquent borrowers are not even eligible for the program.

Please consider Borrowers exit troubled Obama mortgage program.

The Obama administration’s flagship effort to help people in danger of losing their homes is falling flat.

More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That’s more than the 27 percent who have managed to have their loan payments reduced to help them keep their homes.

Last month alone, 150,000 borrowers left the program — bringing the total to 436,000 who have exited since it began in March 2009. A major reason so many have fallen out of the program is the Obama administration initially pressured banks to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.

“The majority of these modifications aren’t going to be successful,” said Wayne Yamano, vice president of John Burns Real Estate Consulting, a research firm in Irvine, Calif. “Even after the permanent modification, you’re still looking at a very high debt burden.”

HAMP Performance Report Through May 2010

Here are a couple of charts from the Making Home Affordable Program Servicer Performance Report Through May 2010.

Hamp Trials Started

Permanent Modifications

Waterfall of HAMP-Eligible Borrowers

Not all 60-day delinquent loans are eligible for HAMP. Other characteristics may preclude borrower eligibility. Based on the estimates, of the 5.7 million borrowers who were 60 days delinquent in the 1st quarter of 2010, 1.7 million borrowers are eligible for HAMP. As this represents a point-in-time snapshot of the delinquency population and estimated HAMP eligibility, we expect that more borrowers will become eligible for HAMP from now through 2012.

Only 30% of the 5.7 million borrowers who are 60 days delinquent are eligible for the program. 4 million delinquent borrowers are stuck. Of those eligible for the program, only 346,000 have completed the trial and received a permanent modification.

Many of those receiving a permanent modification will slip back into default and head for foreclosure. Many of those who successfully keep their house would be better off if they lost it.

Looking at HAMP from every angle, it’s safe to say the program was a failure and another huge wave of foreclosures is coming down the road.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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.