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HomeHousing Plans Promote Long, Slow Decline
Posted by senseoncents on February 26th, 2010 9:32 AM |
Why do I remain overall bearish on housing?
All reports to the contrary, the pace of delinquencies will continue to steadily pressure housing — especially in selected markets.
While the Obama administration is dogged by the issues within housing, I continue to believe that their approach is more exacerbating the situation than improving it. What is the crux of the problem within housing? The law of unintended consequences which changes the behaviors of some, given the engagement with others.
Bloomberg provides some insights on Obama’s new proposals toward housing in writing, Obama May Prohibit Home-Loan Foreclosures Without Preview:
The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program. (more…)
Why Housing Will Remain Under Pressure
Posted by Larry Doyle on February 16th, 2010 6:56 AM |
I have maintained and continue to maintain that unless and until we see a measurable decline in mortgage delinquencies, we will not truly experience a measurable turn in the tide for housing overall.
In this same vein, new studies project that measures taken to aid delinquent borrowers and to stem the tide of foreclosures are nothing more than fingers in the dike. These measures are merely temporarily holding back a new and eventual wave of foreclosures.
The Wall Street Journal highlights these new studies this morning in writing, Foreclosures Seen Still Hitting Prices:
More waves of foreclosures will keep downward pressure on home prices in parts of the U.S. over the next several years, two new studies project.
The studies—by John Burns Real Estate Consulting Inc. and Standard & Poor’s Financial Services LLC—both conclude that most efforts to modify loans with easier terms will delay, not prevent, the loss of homes to foreclosure.
The Treasury Department is expected to give its latest update this week on government efforts to avert foreclosures. (more…)
![[HOUSING]](http://sg.wsj.net/public/resources/images/NA-BE294A_HOUSI_NS_20100215184109.gif)
Morgan Stanley Remains Bearish on Housing
Posted by Larry Doyle on January 13th, 2010 1:20 PM |
The equity markets can and will do whatever they want, but when I look at the economy I remain steadfastly fixed on our housing and labor situation. When these cornerstones of our economic landscape not only stabilize but show marked improvements I will become more constructive on our overall outlook. Are we there yet? No way.
Thanks to a loyal Sense on Cents supporter, I am happy to provide Morgan Stanley’s U.S. Housing Outlook for 2010. What are the key points to this report?
1. Housing transactions have increased and prices have stabilized due to massive government supports.
2. The bottoming process continues and the trend for housing remains down given the high percentages of homeowners with negative equity, the high rate of unemployment, the lack of a viable Jumbo mortgage market, and increasing rates of mortgage delinquencies. (more…)
Mortgage Meltdown Continues
Posted by Larry Doyle on December 21st, 2009 1:22 PM |
While the equity market continues its ascent into the heavens, our housing market continues its descent into hell.
How long can these two indicators continue their contradictory movements? It is extremely hard to believe that the price actions and underlying dynamics in these indices can continue for an extended period. While Uncle Sam’s liquidity has been phenomenal in generating support for the equity markets, it has been decidedly less supportive to the housing market.
The Wall Street Journal addresses the ongoing meltdown in the housing and mortgage markets in writing, Mortgage Markets Continued to Falter in 3rd Quarter:
The U.S. housing market continued to deteriorate in the third quarter as even the most credit-worthy borrowers increasingly fell behind on their mortgages, highlighting the problems policy makers have faced in trying to address the problem.
A new report from the Office of Thrift Supervision and Office of the Comptroller of the Currency found that the percentage of current and performing mortgages dropped for the sixth consecutive quarter, as foreclosures in process topped 1 million mortgages at the end of September. The report covers roughly 34 million loans totaling $6 trillion in principal balances, or approximately 65% of the U.S. mortgage market.
The regulators said that serious delinquencies, loans that are at least 60 days past due, increased across all loan categories and climbed to 6.2% of the loans in the portfolio during the third quarter. The report said that just 67.7% of option adjustable-rate mortgages were considered current at the end of the third quarter, while 27.9% were either seriously delinquent or in the process of foreclosure. (more…)
FHA: Go Broke First, Tighten Standards Later
Posted by Larry Doyle on December 2nd, 2009 11:09 AM |
When will those charged with spending taxpayer money treat associated responsibilities with the seriousness they deserve? Indiscriminately and wastefully allocating taxpayer funds is not merely a question of competence but, in my opinion, a question of patriotism.
The Obama administration’s support of our nation’s housing market has been overwhelming. Taxpayer funds have been directed towards Freddie, Fannie, the FHA (Federal Housing Administration), and a wide number of banks. Although government spending and waste go hand in hand, the American taxpayer deserves so much better.
With the recent news that the FHA insurance fund is depleted, now the FHA decides to tighten standards. Spend money first, ask questions later? Where and when will this madness end? A recent release from the Federal Register/Department of Housing and Urban Development highlights new initiatives by Housing and Urban Development (HUD) which oversees the FHA. The FHA Summary reads as follows: (more…)
Housing’s Catch-22
Posted by Larry Doyle on October 12th, 2009 9:28 AM |
What is the optimal policy to deal with our ongoing housing crisis? Should Uncle Sam continue to throw more money at mortgage modifications? Should banks be compelled to implement a principal reduction program? Should Uncle Sam step in and subsidize the principal writedown involved in a principal reduction program? Would that be the mother of all socialized housing programs? Let’s navigate and address these topics knowing full well that none of these questions have any easy answers.
I witness further evidence again this morning of a continued increase in home foreclosures amidst the prime mortgage space. The Wall Street Journal highlights this ongoing development in writing, Foreclosures Grow in Housing Market’s Top Tiers:
The report shows that foreclosures, after declining earlier this year, began to accelerate in the late spring and that more expensive homes have more recently accounted for a growing share of all foreclosures. “The slope of that curve in recent months is much sharper than it was recently,” said Stan Humphries, chief economist for Zillow. Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.
Foreclosures are rising in more expensive markets as home values in those areas fall, leaving more homeowners with mortgages that exceed the value of their properties. Prime loans accounted for 58% of foreclosure starts in the second quarter, up from 44% last year, according to the Mortgage Bankers Association. Subprime mortgages accounted for one-third of foreclosure starts, down from one-half last year.
The prime category includes so-called exotic mortgages that were increasingly used to buy more expensive homes, including interest-only mortgages that allowed borrowers to defer principal payments during an initial period. Borrowers often aren’t able to refinance out of these products because the drop in home values has left them with little equity in their homes.
Default rates are particularly high and expected to rise on option adjustable-rate mortgages, which allow borrowers to make minimum payments that may not cover the interest due. Monthly payments can increase to sharply higher levels after five years or when the outstanding balance reaches a certain level. A study by Fitch Ratings found that 46% of option ARMs were 30 days past due last month, even though just 12% of such loans have reset to higher monthly payments.
Zillow estimated that nearly one in four homes with mortgages was worth less than the value of the property at the end of June. Mr. Humphries said he didn’t expect to see foreclosure volumes level off until later in 2010. (LD’s emphasis)
![[Moving Up chart]](http://s.wsj.net/public/resources/images/NA-BB100_TOPTIE_NS_20091011211658.gif)
With the waves of foreclosures not abating, Uncle Sam’s plans to merely modify mortgages is proving largely insignificant in supporting the overall housing market. Homeowners are clearly showing a strong inclination to default on their mortgages when they are ‘underwater.’ Thus, how does Uncle Sam help people get ‘above water?’ Compel banks to reduce the principal balance of the mortgage. Will they do it? Not quickly, as a principal reduction would imply an immediate hit to the banks’ capital. (more…)
Elizabeth Warren Highlights Washington’s Losing Battle on Housing
Posted by Larry Doyle on October 9th, 2009 9:21 AM |
Who in Washington will give you a straight answer? Elizabeth Warren.
Who is Elizabeth Warren? Her Wikipedia bio reads:
Elizabeth Warren
Elizabeth Warren (born 1949) is the Leo Gottlieb Professor of Law at Harvard Law School, where she teaches contract law, bankruptcy, and commercial law. In the wake of the 2008-9 financial crisis, she has also become the chair of the Congressional Oversight Panel created to oversee the U.S. banking bailout, formally known as the Troubled Assets Relief Program. In 2007, she first developed the idea to create a new Consumer Financial Protection Agency, which President Barack Obama, Christopher Dodd, and Barney Frank are now advocating as part of their financial regulatory reform proposals.
In May 2009, Warren was named one of Time Magazine’s 100 Most Influential People in the World.
Ms. Warren consistently takes no prisoners or provides no pandering in making honest assessments of the interaction between Washington and Wall Street. She has called the banks on the carpet. She has called Secretary Geithner on the carpet. She has called Congress on the carpet. Why? A general lack of honesty, integrity, and transparency in dealing with the American public.
When she speaks, I listen.
What did she have to say this morning? In commenting on a recently released report on the effectiveness of government programs to support housing, Warren questioned the scalability and the permanence of the impact of the TARP funding. Bloomberg provides further color in writing TARP Oversight Group Says Treasury Mortgage Plan Not Effective. The report highlights:
“Rising unemployment, generally flat or even falling home prices and impending mortgage-rate resets threaten to cast millions more out of their homes,” the report said. “The panel urges Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures and consider whether new programs or program enhancements could be adopted.”
New programs or program enhancements? Yesterday I opined “Washington Needs a New Housing Model” and wrote:
While the administration swims upstream on this issue, bank policy of tight credit and restrictive lending only further exacerbates the housing market. Make no mistake, though, banks are taking that approach to tight credit at the behest of regulators who know the level of losses in the banking system and are trying to preserve the industry as a whole.
I like a rallying equity market as much as anybody, but I wouldn’t spend any paper gains just yet. Why? The new housing model is displaying that:
“As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans,” concluded Sapienza. “This has an adverse effect on homeowners who do pay their mortgages, and the after-effects of more defaults and more price collapse could be economic catastrophe.”
This model needs some quick-dry crazy glue, which could only be applied in the form of a serious principal reduction program. Banks would take immediate and massive hits to capital which they clearly won’t accept.
So how can we generate some support for housing?
Aside from a principal reduction program, the penalty for those who would strategically default on their mortgage needs to be far more onerous.
The principal reduction would negatively impact bank earnings. Too bad. The banks are currently feeding at the taxpayer trough and would not be here without the bailouts. The individuals who are capable of making their payments need to accept the moral responsibility that is embedded in a contract.
Given the massive violation of moral hazards and breaking of contracts by Uncle Sam, that old man does not have a lot of credibility on that front.
What do we really learn here? Ultimately, the market is the market and efforts to manipulate or support a falling market will only be temporary. The market needs to find the clearing level where private money will purchase properties. That private money will wait while Uncle Sam continues to try to prop the market.
In the meantime, do not expect any meaningful support for housing.
LD
Increasing Vacancy Rates Will Pressure Both the Rental Market and Home Values
Posted by Larry Doyle on October 6th, 2009 11:42 AM |
You do not need to take Economics 101 to understand that an increase in supply of any asset will almost always lead to a decline in prices. This ‘tremendous grasp of the obvious’ in regard to housing runs right in the face of assertions put forth by many real estate brokers and housing experts.
High five to our friends at 12th Street Capital for bringing attention to The Wall Street Journal‘s writing, Apartment Glut Expands:
Signs advertise apartments for rent in San Francisco in July. Rents declined during the third quarter, usually a strong period for rentals. (Getty Images)
Apartment vacancies hit their highest point since 1986, surging in cities from Raleigh, N.C., to Tacoma, Wash., as rising unemployment continued to chip away at demand during the traditionally strong summer rental months.
The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets. The rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980.
(more…)
Housing: Cheap and Getting Cheaper
Posted by Larry Doyle on May 26th, 2009 10:59 AM |
The Case-Shiller Home Price Index was released this morning and disappointed with a worse than expected reading of -19% versus a year ago. Relative to the 4th quarter 2008, home prices nationwide are down 7.5%.
Are home prices continuing to decline despite the support of a variety of government programs or perhaps because of them? What do I mean? Any market – whether stocks, bonds, currencies, commodities, or housing – is constantly trying to assess both current and future demand and supply. Potential buyers or investors can most accurately assess the value of an asset when provided with full and accurate information.
In my opinion, our housing market is suffering from the unknown supply of homes – currently involved in a mortgage modification process – that will likely hit the market in the future due to foreclosure. The fact is that the ultimate default rate on many of the homes involved in a mortgage modification is extremely high. As the Wall Street Journal highlights this morning, Mortgage Modifying Fails to Halt Defaults:
A key finding from the Fitch report was that subprime, pooled loans that have been modified are souring at high rates despite a change in the loan terms. Fitch said a conservative projection was that between 65% and 75% of modified subprime loans will fall 60-days or more delinquent within 12 months of the loan change. That finding echoes prior U.S.-bank-regulatory agency reports of high redefault rates for modified loans.
The Fitch report said one reason for the high redefault rate was public pressure to modify loans even for borrowers who were likely to default whether the loan terms were changed or not. Fitch said another cause was falling home prices. Ultimately, these homeowners, deep underwater, walk away from the home, resulting in the redefault of a loan.
The simple fact is a significant percentage of the loans being modified NEVER should have been written in the first place. Modifying these loans merely forestalls the home from being foreclosed and sold. I do not believe government officials have real appreciation that this forestalled supply actually puts further pressure on housing overall. Why? The market is not being allowed to “clear,” a process in which an asset is moved from weaker hands to stronger hands. To wit, I believe we will continue to see ongoing declines in home values on a going forward basis.
A Look at Case-Shiller Numbers as provided by the WSJ:
“The tone of this report was clearly weak, and it comes at a time when markets were beginning to sense and price in (perhaps prematurely so) a stabilization in the U.S. housing market,” said Millan L. B. Mulraine of TD Securities. “Despite the encouraging signs that have been coming from the other housing market reports, we continue to highlight the risks that the correction in the U.S. housing market may continue for some time as the worsening labor market conditions and historically high inventory of unsold homes continue to off-set the favorable affordability conditions.”
That overhang of inventory will be perpetuated via the mortgage modification process. A full numerical chart highlighting the dynamics within respective metro regions is quite interesting. Not sure why Minneapolis is showing the greatest declines. Anybody who can provide color on the situation in MN, it would be deeply appreciated. Away from that, the other locales suffering the greatest declines continue to be in the obvious areas (Detroit, Las Vegas, Phoenix, Miami). Charlotte, Dallas, and Denver are displaying signs of stability.
Please share insights on housing in your region!!
LD
(About the numbers: The Case Shiller indices have a base value of 100 in January 2000. So a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the metro market.)
Home Prices, by Metro Area
