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U.S. Mortgage/Housing Market Has Split Personality

Posted by Larry Doyle on August 11, 2009 11:52 AM |

To speak of the United States housing market in singular terms would be a huge mistake. The different regions of the country have their own housing dynamics. The strengths and weaknesses within the local economies have a huge impact on the strength or weakness of housing.

All this said, there is no doubt that the number 417 has the greatest impact on housing in the United States. Why and how?  417k is the cutoff for individuals looking to receive a conforming mortgage. Above that level, individuals enter the realm of the Jumbo market where rates are appreciably higher and credit standards are significantly tighter. Additionally, Jumbo product is not typically eligible to be underwritten or purchased by Freddie Mac or Fannie Mae. That restriction was waived and Freddie and Fannie have purchased some Jumbo product, but it has had no meaningful impact on the dynamics within the Jumbo space. Overall, the 417k level remains an enormous line of demarcation.

That line of demarcation is further defined by the ability to modify loans. Loan modifications for Jumbo mortgages are significantly more challenging to accomplish. On top of that, mortgage servicers are now under ENORMOUS pressure by Uncle Sam to produce increased numbers of mortgage modifications. Where is Uncle Sam targeting? Conforming mortgages.

While market analysts may believe housing is turning, they are not looking at the total picture. The Jumbo market remains under real pressure while the conforming market is showing signs of stability. Under the heading of ‘a picture speaks a thousand words,’ high five to our friends at 12th St. Capital (the leading mortgage broker-dealer on Wall Street) for providing an overview of the housing market in Los Angeles. One can see the ‘split personality’ based on sales volumes between the downtown neighborhoods and those in the upper incomes. Please click on the map to view year over year sales volumes in respective Los Angeles neighborhoods. A few miles makes a world of difference.

Would welcome insights and perspectives from people in other regions of the country on the split personality of their local housing markets as well.


  • TeakWoodKite

    LD, it is much the same in the North-bay Ca. Overall the sales of property that meet conforming mortgage values are getting into bidding wars, while the value of 500k+ are utterly stagnant. In some cases “investment” firms are snatching up whole neighborhoods leading to a return of the “company store”, but with a heavy twist of corporatism Many people who would be able to re-enter the market at the low after taking the loss end are left on the side lines to increased demand / prices.

    The sub prime mess which effected 50% of the housing in my county will be felt for decades. Many of these were rolled in to a jumbo when the equity was cashed out. Houses that grew in market value at the sub prime rates and re-fi’ed in to jumbo’s are stuck like a boat in the mud at low tide.
    Only problem is the tide will be out for a decade at least.

    In 1993 my house was 200k, at peak it was 700k, and now it is at the mid 300k. I am gun shy about taking any action about being under water, because of irreversible and negative nature of such actions. The bucket that I having been bailing out with will be come to small and useless with in the next 12 months. Combine the housing debacle with record un-employment in California and the outlook is very bleak for any reasonable stability returning anytime soon.

    I saw that Fannie and Freddie made close to 1 billion in in the last quarter, where is all the love?

  • Larry Doyle

    TWK…thanks for all these fabulous insights. I have heard of some of these bulk sales occurring elsewhere.

    In regard to Freddie’s supposed profit, that is a facade because it was merely a function of changing the accounting on some previous reserves set aside against certain loans. Likely a one time deal. Going forward I expect both Freddie and Fannie will record ongoing losses.

  • TeakWoodKite

    Funny how the ticker didn’t mention it was “on paper” profit.

    Barney is smirking somewhere. Thanks LD. What I have always been curious about is just before bottom fell out, the threshold of what was considered a jumbo loan was raised. Why? A friend of mine was able to qualify for a loan they otherwise would not have, but would have bought something else that did. Now those types of loans where the first ones under water.
    One of the other things that have vanished are all the marketing to “second language” buyers. No More Big old Marketing Signs professing great rate to those from “south of the border”. (I do not infer anything other than the banks saw a sub prime mark and went for them en mass)

  • Larry Doyle

    TWK….while I can not state that people at Freddie or fannie initially knew that there was significant fraud in the underwriting process of many loans,that fact became more and more obvious as time went by.

    The loan limit was always viewed as a reflection of average home prices throughout the country.

    As Ms. Popenoe mentioned in my interview with her on Sunday evening, Freddie and Fannie were losing market share and intentionally became more aggressive to purchase more loans…regrettably many of these loans were poorly underwritten and represented greater risk.

    Lots of blame for everyone involved every step of the way.

  • Steve Wagoner

    The manipulation of the rates, terms and limits have always been to steer people into decisions that make “logical sence” to them at the time. The personal IRA “investments” is the most profound scam in the last 200 years and will gut whats left of the common mans wealth. Remember the “rules” can and will be changed. The taxes can be due any time they want them, if you don’t have the cash to pay the taxes…well cash out the IRA “investment” no matter what the market conditions are, (think selling your house in todays market)of couse you will have to pay an early withdrawl penelty and your Capital Gains on your paper profits. This is the saddest thing to watch ever…your IRA will become your IOU because you thought the rules and terms were set for your benifit.

  • Larry Doyle

    Steve….I think what you are driving at is the fact that not enough people are fully financially literate. I agree and what a shame.

    Hopefully we can have more people visit Sense on Cents to get these insights. Thanks for adding to the dialogue.

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