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Nov 25, 2009 | No Comments | Sean Mills
Here is the Q3 negative equity report from First American CoreLogic mentioned last night. From the report:
Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth.
Data Highlights
Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity [...]
Here is the Q3 negative equity report from First American CoreLogic mentioned last night. From the report:
Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth.
Data Highlights
Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.
The distribution of negative equity is heavily concentrated in five states: Nevada (65 percent), which had the highest percentage negative equity, followed by Arizona (48 percent), Florida (45 percent), Michigan (37 percent) and California (35 percent). Among the top five states, the average negative equity share was 40 percent, compared to 14 percent for the remaining states. In numerical terms, California (2.4 million) and Florida (2.0 million) had the largest number of negative equity mortgages accounting for 4.4 million or 42 percent of all negative equity loans
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Nov 20, 2009 | No Comments | Sean Mills
SAN FRANCISCO — In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston.
Policy changes in insurance, while introduced on a temporary basis, are becoming so popular that they could prove difficult to undo.
Back to Business
Risky IncentivesThis series examines the battles taking place to reshape [...]
SAN FRANCISCO — In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston.
Policy changes in insurance, while introduced on a temporary basis, are becoming so popular that they could prove difficult to undo.
Nov 18, 2009 | No Comments | Sean Mills
After reading some of the commentary regarding the housing starts report this morning, it might be useful to reiterate these three points:
Residential investment is the best leading indicator for the economy.
Residential investment is reported quarterly by the Bureau of Economic Analysis (BEA) as part of the GDP report. We can also use monthly housing starts [...]
After reading some of the commentary regarding the housing starts report this morning, it might be useful to reiterate these three points:
Residential investment is the best leading indicator for the economy.
Residential investment is reported quarterly by the Bureau of Economic Analysis (BEA) as part of the GDP report. We can also use monthly housing starts and new home sales as indicators of residential investment. I’ve written extensively about how residential investment is an excellent leading indicator for the economy (also see Dr. Leamer’s paper: Housing and the Business Cycle)
This morning several commentators suggested that housing starts were depressed in October because of the expiration of the tax credit (new home buyers had to close by Nov 30th to get the tax credit), and also because of the weather. Probably. But the key point is that housing starts will not increase rapidly because of the large overhang of existing vacant housing units (see 2nd graph here). And that suggests that the economy will not recover quickly either.
Another key point is that existing home sales are largely irrelevant for the economy. This is an important point to remember next week when the NAR announces that existing home sales surged to 5.8 million units or so in October (seasonally adjusted annual rate). Some reporters and analysts will jump on the existing home sales report as evidence of a housing recovery. Others will point to it as showing that the first-time home buyer tax credit is helping the economy.
Both points are wrong.
The only contribution from existing home sales to the economy are some commissions and fees. That is good news for real estate agents and mortgage brokers, but not for the overall economy.
The good news is the level of inventory for new and existing homes is declining. The bad news is the inventory of rental units is at record levels – as is the combined inventory of vacant single family homes and rental units. Residential investment will not increase significantly until this overhang is reduced.
The key to reducing the overall inventory is new household formation (encouraging renters to become owners accomplishes nothing in reducing the overall housing inventory). And the key to new household formation is jobs. And usually the best leading indicator for jobs is residential investment. Somewhat of a circular trap.
And that suggests the recovery will be sluggish and unemployment will stay high for some time.
Residential investment will not recover rapidly because of the large overhang of existing vacant housing units.
Existing home sales are largely irrelevant for the economy.
Source Article
Nov 11, 2009 | No Comments | Sean Mills
Funny thing is there is still a massive log jam of NOD/auction homes not making it to the market nor are they going back to the lenders. The % of postponed auction properties ranges from 91-95% depending on the city and county here in most southern California markets. How it will loosen up or when [...]
Funny thing is there is still a massive log jam of NOD/auction homes not making it to the market nor are they going back to the lenders. The % of postponed auction properties ranges from 91-95% depending on the city and county here in most southern California markets. How it will loosen up or when it will loosen up is anyone’s guess. There is a lot of speculation with individual and group investors buying to flip which makes me think “hey is that how we got here in the first place?” Unemployment at record levels, job loss still topping the daily news stories, national healthcare plan proposed..hey it is a great time to speculate.-Sean
Home prices continued to decline across the nation as sales of heavily discounted foreclosed properties weighed down the market.
Median prices of existing homes fell in 123 of 153 metropolitan areas during the third quarter compared with a year earlier, according to the National Association of Realtors. The national median price was $177,900, down 11.2% from the third quarter of 2008.
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Nov 10, 2009 | No Comments | Sean Mills
Last fall, as the financial system was teetering and the biggest banks were tightening credit, Karen DeForte couldn’t find a lender to refinance the two mortgages on her New York home, until she received a phone call from Lend America.
Most banks rejected Ms. DeForte because her debt level was too high and her credit score [...]
Last fall, as the financial system was teetering and the biggest banks were tightening credit, Karen DeForte couldn’t find a lender to refinance the two mortgages on her New York home, until she received a phone call from Lend America.
Most banks rejected Ms. DeForte because her debt level was too high and her credit score too low. But Lend America put Ms. DeForte into a $402,000 loan backed by the Federal Housing Administration, a New Deal-era agency that Washington and Wall Street were relying upon to pick up the slack in the mortgage market as private lenders pulled back. Ms. DeForte fell behind on payments six months later and is seeking a loan modification. Taking the loan was “a stupid mistake,” the 46-year-old office manager said.
Source Article
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Nov 10, 2009 | No Comments | Sean Mills
The new tax break for businesses signed into law on Friday will result in a windfall valued at hundreds of millions of dollars for the biggest home builders, boosting the cash hoard the companies are tapping as they limp toward recovery.
The tax break would give companies big refunds to help make up for recent losses. [...]
The new tax break for businesses signed into law on Friday will result in a windfall valued at hundreds of millions of dollars for the biggest home builders, boosting the cash hoard the companies are tapping as they limp toward recovery.
The tax break would give companies big refunds to help make up for recent losses. Specifically, it would let large firms claim cash refunds on taxes they paid going back five years, to offset current losses. Previously, the carry-back period for large firms was two years.
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Nov 2, 2009 | No Comments | Sean Mills
Congress is working on a new and even more generous set of perks for house buyers. A tentative deal in the U.S. Senate would extend the closing deadline for an $8,000 subsidy for first-time buyers to July 1 from Nov. 30. It would also boost the program’s income limits for singles to $125,000 from $75,000 [...]
Congress is working on a new and even more generous set of perks for house buyers. A tentative deal in the U.S. Senate would extend the closing deadline for an $8,000 subsidy for first-time buyers to July 1 from Nov. 30. It would also boost the program’s income limits for singles to $125,000 from $75,000 and for couples to $250,000 from $150,000, and would offer a new $6,500 reward for existing homeowners who buy again. (More details here.)
The National Association of Realtors has called such an extension “essential.” The Mortgage Bankers Association agrees. The National Association of Home Builders says, “Failure to act now could derail the fragile housing recovery even before it has time to take root.”
I respectfully disagree for perhaps a dozen reasons. Let me offer five.
1. Subsidies raise prices, and house prices are already too high.
Consumer subsidies puff up buying power, which artificially increases demand, which raises prices. With most goods, manufacturers respond by increasing supply, which brings costs back down. Some goods face constraints to new supply, though. We can build more colleges, but we can’t magically make more of the longstanding, prestigious kind. We can make more pills, but we can’t violate drug makers’ patents on popular ones. And we can build new houses, but there’s only so much space (or building permission) in the choicest locations. That produces a paradox: America’s government has for decades spent mightily on affordability initiatives for college courses, health care and houses, and yet prices for all three goods have increased faster than the rate of inflation, resulting in less affordability.
In April 2007 I wrote that houses had gotten so expensive that renting had come to make more financial sense. In July, with prices down about 30% nationwide, I charted them against rents and incomes to show that the country was closing in on its historical level of housing affordability, but wasn’t quite there yet. It never did get there. Prices in most markets have increased each month since then. We’re moving away from normal, not toward it. When the National Association of Home Builders speaks of a “fragile housing recovery,” it means an increase in prices. But what about a recovery of the ability of ordinary Americans to buy houses at fair prices? That recovery might have to wait.
2. The house subsidy has little value as economic stimulus.
The current $8,000 payment to house buyers was proposed as more than a simple perk. The law that created it is titled the American Recovery and Reinvestment Act of 2009. Proponents cited the spillover effect of house purchases on the rest of the economy. Putting aside the matter of whether stimulus spending helps (until item No. 3), the most useful stimulus spending does one or both of these two things well: It begets more spending then it provides, or it leaves behind something useful. Food stamps create $1.73 in economic activity for every $1 we spend, reckons Moody’s Economy.com. That makes sense. The poor spend just about everything that falls into their hands, and the money they spend at food markets leads grocers to spend with suppliers, and suppliers to spend with farmers, and so on. A dollar spent on unemployment benefits creates an estimated $1.63 in economic activity and one spent on infrastructure, $1.59. The result of these things? Bellies are filled, the jobless are given a lift and roads and power grids are upgraded (and, of course, a bit is wasted along the way).
Ted Gayer of the Brookings Institution, a think tank, estimates that only about 15% of house buyers who’ve received $8,000 payments to date wouldn’t have bought houses without the payments. The good news is that suggests the payments have played only a minor role in house prices reversing, and so we might not get much more of a run-up in prices from extending the plan. The bad news is that we’re wasting money. A dollar spent on the housing credit creates an estimated 90 cents of economic activity. That’s not a multiplier effect. It’s a divisor effect.
3. The benefits of stimulus spending are unproven.
There’s a reason economics is categorized as a social science in course catalogs and such. It’s to differentiate it from actual sciences, like physics and chemistry. While economists use scientific methods, much of what they study can’t be tested in a highly controlled setting, and so can’t be known for sure. On the subject of large, industrialized nations spending government funds to hasten the end of a severe economic slowdown, there are only two applicable case studies. One is Japan over the past two decades and the other is America during the Great Depression. Japan’s economic woes haven’t ended. And the Great Depression isn’t called “great” because of how quickly we fixed it.
Maybe the sudden rise in gross domestic product reported Thursday is a sign the stimulus efforts have worked, or maybe it means we’ve paid dearly for a temporary blip in the numbers.
Perhaps I should have mentioned this earlier. America was last debt-free in 1835. The last year it spent less than it collected from taxpayers was 2001. In the government’s fiscal 2009, which ended Sept. 31, it overspent by an estimated $1.4 trillion, more than ever before in dollars, and more than any year since 1945 in proportion to the size of the economy. Perks for house buyers don’t come from the government, ultimately. They come from taxpayers, either this year or in future years when the debt is paid.
By Nov. 30, the government will have spent an estimated $8.5 billion on its current round of house-buyer payments. (A Treasury Department inspector estimates that $139 million of that went to fraudsters who didn’t actually buy houses, but I’m trying to keep my list of grievances to five.) Early projections for the proposed extension say it will cost close to $12 billion. Together, the programs would cost the average household more than $170 if the bill were paid right away. But it’s borrowed money. The interest rates charged to America for its debt at the moment are blessedly low–about 3.5% on 10-year loans. The average since the 1960s is 6.9%. Let’s split the difference and assume the nation will pay roughly 5% on its debt over the next 30 years, the time it might take one of those $8,000 subsidy recipients to pay off the mortgage. By then the program’s true cost will have increased more than fourfold.
5. We already spend plenty on housing stimulus.
We already have programs that draw funds from all taxpayers and divert them to house buyers. The mortgage interest deduction does just that, only its benefits are reserved for those who borrow to buy houses, and for those whose incomes are high enough to make hunting for deductions come tax time more worthwhile than claiming the standard deduction. The interest deduction is what’s called a tax expenditure. It will cost just over $100 billion this year, or about $850 per taxpaying household. Not enough? There’s more. Interest rates are kept low at the moment by aggressive buying of mortgage securities by the Federal Reserve. We can’t say for sure how much that will cost. It depends on how many of the underlying borrowers make good on their payments, which depends in part on how much of their own money they put into the deal to begin with. Did I mention that the $8,000 house-buyer perk can be used for a down payment?
Source Article
Oct 29, 2009 | No Comments | Sean Mills
This morning the Census Bureau reported the homeownership and vacancy rates for Q3 2009. Here are a few graphs …
Click on graph for larger image in new window.
The homeownership rate increased slightly to 67.6% and is now at the levels of Q2 2000.
Note: graph starts at 60% to better show the change.
The homeownership rate [...]
This morning the Census Bureau reported the homeownership and vacancy rates for Q3 2009. Here are a few graphs …
Click on graph for larger image in new window.
The homeownership rate increased slightly to 67.6% and is now at the levels of Q2 2000.
Note: graph starts at 60% to better show the change.
The homeownership rate increased in the ’90s and early ’00s because of changes in demographics and “innovations” in mortgage lending. The increase due to demographics (older population) will probably stick, so I expect the rate to decline to the 66% to 67% range – and not all the way back to 64% to 65%.
The small increase in the homeownership rate in Q3 might by related to the first-time home buyer tax credit, but I expect the rate to decline further.
The homeowner vacancy rate was 2.6% in Q3 2009.
A normal rate for recent years appears to be about 1.7%.
This leaves the homeowner vacancy rate about 0.9% above normal, and with approximately 75.3 million homeowner occupied homes; this suggests there are close to 675 thousand excess vacant homes.
And as expected, as a result of the first-time homebuyer tax credit …
The rental vacancy rate increased to a record 11.1% in Q3 2009.
It’s hard to define a “normal” rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are close to 40 million rental units in the U.S. If the rental vacancy rate declined from 11.1% to 8%, there would be 3.1% X 40 million units or about 1.25 million units absorbed.
These excess units will keep pressure on rents and house prices for some time.
Source Article
Oct 28, 2009 | No Comments | Sean Mills
I love the source website for this article, Seeking Alpha, I suggest you spend some time looking at it from time to time. -Sean
U.S. House Prices Could Fall Another 10%
Guest Post by Oxford Analytica
Over the past few months, there have been suggestions that the US housing market might finally be bottoming out. Since July, the decline in [...]
I love the source website for this article, Seeking Alpha, I suggest you spend some time looking at it from time to time. -Sean
U.S. House Prices Could Fall Another 10%
Guest Post by Oxford Analytica
Over the past few months, there have been suggestions that the US housing market might finally be bottoming out. Since July, the decline in sales of both new and existing homes has moderated. Moreover, over the past three months, there has been a very modest increase in home prices at the national level as measured by the 20-city S&P/Case-Shiller home price index. However, the high inventory of unsold homes, continuing foreclosures, and double-digit unemployment could mean that housing prices have further to fall.
Reasons for cheer. A number of ‘green shoots’ suggest cause for some optimism:
- Inventory reduction. Whereas housing starts are presently estimated to be running at a 600,000 annual rate, underlying US household formation is presently running at an annual rate of approximately 1.5 million units. Lower residential construction relative to household formation is allowing excessive home inventories to be gradually worked off.
- Cheap mortgages. As a result of the Federal Reserve’s highly accommodative monetary policy, and the activity of the government sponsored home lending enterprises, mortgage rates have declined to more affordable levels. For example, 30-year fixed rate mortgages have fallen below 5% for the first time in many years.
- Increased affordability. The slide in home values has brought prices more into line with their long-run fundamentals. Since September 2006, US home prices have fallen 27%, bringing prices back to the level prevailing in mid-2003. As a result, the ratios of home prices to rents and of home prices to incomes are now much more in line with historic levels. The index of housing affordability now stands at its most favourable level in the past 20 years.
Reasons for doubt. Despite these ‘green shoots’ there remain a number of factors that suggest that US home prices have not quite hit bottom:
- Inventories historically high. Despite small declines in recent months, the inventory of unsold homes at the national level remains at close to its historic high. A key indication of the degree of excess home inventory is that the number of vacant homes, in which neither an owner nor a renter presently dwells, exceeds its normal level by nearly 1 million units.
- Foreclosure crisis. The United States is presently suffering from a foreclosure crisis that is further adding more homes to a market already characterised by excess inventories. Forward looking indicators, such as the number of mortgages that are more than 90 days delinquent (ie behind payment) suggest that the pace of foreclosures could increase in the months ahead.
- High unemployment. A very weak labor market situation inhibits households from making the long-term financial commitments, such as buying a home. The Labor Department estimates that approximately 16.5% percent of the labour force is either unemployed or in involuntary part-time employment. At the same time, the huge slack presently affecting the labour market is exerting downward pressure on wage income growth. Most economists — including White House Council of Economic Advisers Chair Christina Romer — do not foresee much improvement in the labour market in 2010.
- Mortgage resets. Next year, approximately 200 billion dollars in ‘Option ARM’ mortgages (adjustable rate mortgages) are due to reset to higher rates. This is likely to add to the foreclosure problem, since these resets will produce a sharp jump in debt service payments.
- Default incentive. Finally, another factor adding to the foreclosure problem is that a growing number of US households now have ‘negative equity’ in their homes (ie their mortgage debt exceeds the value of their homes). Since mortgages in most US states are ‘non-recourse loans’ (the lender cannot pursue the borrowers’ other assets, beyond the home), negative equity gives homeowners a strong incentive to default on their mortgage loans.
Outlook. The present high level of unsold housing inventories, the poor state of the labour market and the current wave of foreclosures suggest that home prices may have a further 10% to fall (in real terms). This will add to the financial distress facing the banking sector, inhibiting a return to above trend GDP growth in 2010.
This will add to the financial distress facing the banking sector, inhibiting a return to above trend GDP growth in 2010.
Oct 28, 2009 | No Comments | Sean Mills
This is no “news” to any of my friends in the business but some how it is to a lot of other people. 2009 is a time to survive and get through it not to kill it with record business.-Sean
(Calculated Risk) The MBA reports: Mortgage Applications Decrease
The Market Composite Index, a measure of mortgage loan application [...]
This is no “news” to any of my friends in the business but some how it is to a lot of other people. 2009 is a time to survive and get through it not to kill it with record business.-Sean
(Calculated Risk) The MBA reports: Mortgage Applications Decrease
The Market Composite Index, a measure of mortgage loan application volume, decreased 12.3 percent on a seasonally adjusted basis from one week earlier. …
The Refinance Index decreased 16.2 percent from the previous week and the seasonally adjusted Purchase Index decreased 5.2 percent from one week earlier.
…
The average contract interest rate for 30-year fixed-rate mortgages decreased to 5.04 percent from 5.07 percent, with points increasing to 1.25 from 1.13 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.
The purchase index is off almost 17% over the last 3 weeks, and the refinance index is off about 30%.
It appears the post home buyer tax credit slump has started, although apparently the tax credit will be extended and the eligibility expanded – so the slump might be delayed …
Click on graph for larger image in new window.
This graph shows the MBA Purchase Index and four week moving average since 2002.
The Purchase index declined to 254.9, and the 4-week moving average declined to 280.
Note: The increase in 2007 was due to the method used to construct the index: a combination of lender failures, and borrowers filing multiple applications pushed up the index in 2007, even though activity was actually declining.
The MBA reports: Mortgage Applications Decrease
The Market Composite Index, a measure of mortgage loan application volume, decreased 12.3 percent on a seasonally adjusted basis from one week earlier. …
The Refinance Index decreased 16.2 percent from the previous week and the seasonally adjusted Purchase Index decreased 5.2 percent from one week earlier.
…
The average contract interest rate for 30-year fixed-rate mortgages decreased to 5.04 percent from 5.07 percent, with points increasing to 1.25 from 1.13 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.
The purchase index is off almost 17% over the last 3 weeks, and the refinance index is off about 30%.
It appears the post home buyer tax credit slump has started, although apparently the tax credit will be extended and the eligibility expanded – so the slump might be delayed …
Click on graph for larger image in new window.
This graph shows the MBA Purchase Index and four week moving average since 2002.
The Purchase index declined to 254.9, and the 4-week moving average declined to 280.
Note: The increase in 2007 was due to the method used to construct the index: a combination of lender failures, and borrowers filing multiple applications pushed up the index in 2007, even though activity was actually declining.
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