Archive for the ‘Housing – Mortgages’ Category

$$$: What’s the impact of the Tax Cut & Jobs Act on house prices?

August 15, 2019

Answer: For sure, the TCJA put downward pressure on home values … how much depends on a home’s value before deduction caps were put in place.

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In a prior post, we started thinking about this question (since nobody else seems to have landed on the issue) … and took a stab at estimating the isolated impact of the TCJA’s cap on the mortgage interest deduction.

A couple of readers asked (1) What about the impact of the SALT deductions cap?, and (2) Can you work through a example from start to finish … as simply as possible?

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Always aiming to please my loyal readers, here’s a try at answering both inquiries with a simple(?) example….

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$$$: What’s the impact of lower mortgage interest deductions on house prices?

July 19, 2019

Worst case answer: About $50,000.

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First, a couple of disclaimers …

1) I’m not a tax accountant or lawyer … so, nothing I say should be construed to be financial or tax advice.

2) Philosophically, I’ve always thought the income tax deduction for mortgage interest should be shelved.

Note: That philosophical principle certainly never stopped me from claiming my allowed tax deductions for my home mortgages.

Mortgae - Interest Rate GRAPH

OK, let’s get started…

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Americans are decreasingly willing )or able) to move … “mobility” in sharp decline.

June 11, 2019

According to NextGov:

Mobility in the United States has fallen to record lows.

In 1985, nearly 20 percent of Americans had changed their residence within the preceding 12 months, but by 2018, fewer than ten percent had.

That’s the lowest level since 1948, when the Census Bureau first started tracking mobility.

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What’s going on?

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Nums: The state of the housing market in 2 charts …

September 12, 2013

I was a bit surprised to hear on the news that Citi was laying off a couple of thousand folks in their mortgage division.

After all, there’s been lot of talk re: housing recovery …  with some markets el fuego.

Hmmm.

Turns out that mortgage applications bottomed out after the meltdown …and arguably showed some up-trend in the past couple of years (thanks to the Fed QE program),

But,  mortgage apps have declined recently (as interest rates started moving up a bit) and are hovering at very low levels

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What about home prices?

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Economy: Housing on a run, but way below historical average.

July 26, 2013

Interesting analysis from the Wall Street Daily …

Residential Fixed Investment — aka. “housing” — has been trending upward in 2012 …

…  albeit from a low post-crisis level

… and is still far below the historical average.

 Conclusion: Trend is right …  with plenty of upside.

 

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$$$: How much house can you buy for $1,000 per month?

February 24, 2013

A simple analysis … and interesting historical perspective.

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These days — with conventional  mortgage rates running about 4% — a $1,000 monthly Principle & Interest (P&I) payment gets you a 30-year loan of about $210,000.

Assuming a 10% downpayment, that’s a $235,000 home.

IMPORTANT: That doesn’t take into account real estate taxes (usually between 1% and 1.5% of a homes value) … or insurance (a grand or two annually) … that are usually added to your monthly payment and held by the lender in an escrow account.

Here’s a chart that gives you a quick way to estimate the mortgage amount over a range of interest rates … assuming a $1,000 per month P&I payment.

Mortgae - Interest Rate GRAPH

Just take the interest rate that you can get (on the horizontal axis), draw a vertical line, and ricochet it off the blue line to estimate the corresponding mortgage amount.

Of course, as interest rates go up, the corresponding mortgage amount goes down.

If you’ve got a budget bigger than $1,000 per month, just divide your budget by 1,000 and multiply times the mortgage amount corresponding to the $1,000 payment charted above.

For example, if your monthly P&I budget is $2,000, just double the mortgage amount on the chart …. $210,000 (@4%) times 2 gets a $420,000 mortgage … which gets a $465,000 house, assuming a 10% down payment.

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The 30-year trend in “how much house?” is pretty interesting …

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Rising home prices – good sign, right?

December 2, 2012

Not necessarily.

Let’s walk through the logic.

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First, home price indices show that home prices have stopped falling … and arguably are increasing.

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= = = = =

And, relating home prices to equivalent property rental rates suggests that the bubble in home prices has been fully deflated and home prices should, at a minimum, creep upward.

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But, a CNBC analysis offers a sobering offset.

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By one metric, household net worth is running at historical levels …

November 30, 2012

Interesting analysis by the CBO

Punch line:  When you delate the numbers, i.e. take out inflation effects – household net worth is roughly 5 times disposable income … that’s down from the dot-com and housing booms & busts, but roughly at historical levels.

In other words, the market bubbles were more like sugar-rush outliers … than “new normals”.

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What percentage of housing units are vacant?

November 28, 2012

Answer: According to the CBO, about 14% … down about 1 pp from the recession high water mark … but about 3 pp higher than the historical average

The CBO says that even in normal times, the number of vacant housing units is substantial, reflecting:

  • the lengthy process of selling home
  • the number of second homes and “seasonal units”

Further, the CBO says: “excess vacant units account for about 2/3s of the slower pace of growth of residential during the current recovery relative to prior recoveries.”

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Is the housing market recovering?

November 25, 2012

According to Zillow … yes!

  • National home values rose 1.1% from September to October to $155,400 …  the largest monthly increase since August 2005
  • October is the 12th consecutive month of home value appreciation
  • On a year-over-year basis, home values were up by 4.7% – best since September of 2006
  • Rents across the nation were up by 5.4% from a year ago 

Zillow says: Most markets have already hit a bottom and 40 out of the 256 markets covered are forecasted to experience home value appreciation of 3% or higher.

 

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Whatever happened to the housing crisis? … Hint: It’s still there.

August 27, 2012

Remember the hysteria around dropping home values, slow real estate sales, and frenetic foreclosure rates?  All legit concerns.

May be my selective attention, but I don’t hear much about the housing crisis these days.

Maybe because deeply depressed prices have stopped sliding.

Maybe because all of the government’s silver-bullet programs have failed to move the needle.

Hmmm.

Reality: still a big overhang from the housing bubble needs to be absorbed.

Here’s a rough calibration of the problem, based on the below Fed chart.

Before the bubble. people were putting about $450 billion per quarter into Private Residential Fixed Investment, i.e. houses.

Eyeballing the chart, during the period 2001 and 3009, PRFI averaged about $650 billion per quarter… about $200 billion per quarter over “normal”.

$200 billion times 36 quarters = $7.2 Trillion in excess … or “overhang”.

In the past 3 years, we’ve been running about $100 billion below the pre-bubble “normal” … in effect, absorbing about $1.2 trillion of the overhang (12 quarters times $100 billion).

Bottom line: still have over 80% of the bubble to absorb.

Ouch

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When the subject comes up again — and it will — remember to revisit my longstanding idea for unleashing private capital to buoy the housing market. It doesn’t cure the overhang problem, but provides some price relief and liquidity to the market.

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Private capital being unleashed on the residential housing market …. finally!

April 25, 2012

Way back in November 2008 —  in a post titled:  “Big Idea: Rallying private capital to stabilize housing prices.”  — I proposed a plan to resuscitate the residential housing market.

The essence of the plan (in 2008) was to:

  1. Eliminate ALL of the capital gains taxes on residential property that is bought from now until, say, December 31, 2010 and held for at least 18 months,
  2. Allow these “qualified residential properties”, if they are rented, to be depreciated for tax purposes at an aggressively accelerated rate (say, over 5 or 10 years) to generate high non-cash tax losses, and
  3. Allow ALL tax losses generated by these “qualified residential rental properties” to offset owners’ taxable ordinary income with no “passive loss’ limitations, thereby reducing their federal income tax liability.

At the time, I said “the positive results are practically guaranteed”.

Well, almost 4 years later, look what’s happening — even without the bold strokes that I suggested.

The NY Times reports that “Investors Are Looking to Buy Homes by the Thousands”.

Some deep-pocketed investors are betting that the residential real estate market is poised to explode.

With home prices down more than a third from their peak and the market swamped with foreclosures, large investors are salivating at the opportunity to buy perhaps thousands of homes at deep discounts and fill them with tenants.

There are close to 650,000 foreclosed properties sitting on the books of lenders.

An additional 710,000 are in the foreclosure process, and about 3.25 million borrowers are delinquent on their loans and in danger of losing their homes.

With so many families displaced from their homes by foreclosure, rental demand is rising. Others who might previously have bought are now unable to qualify for loans.

Investors believe the rental income can deliver returns well above those offered by Treasury securities or stock dividends.

At the same time, economists say, they could help areas hardest hit by the housing crash reach a bottom of the market.

Imagine if the movement had started 4 years ago.

And, imagine if the movement was boosted with the tax incentives,

It’s late, but not too late.

As I said before; “the positive results are practically guaranteed”.

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Unleashing private capital to stabilize the housing market … it’s happening !

February 8, 2012

For a couple of years (literally – back as far as Nov. 2008), I’ve been blogging that the key to stabilizing the housing market is incentivizing private capital (i.e. investors) to buy up distressed properties and rent them.

To refresh your memory, here’s the plan I advocated.

  1. Eliminate future capital gains taxes on any residential property bought in the next 2 years, and held for at least 3 years.
  2. Allow investors (i.e. landlords) who rent the properties to depreciate the properties on an aggressively accelerated basis (i.e. say, 5 years),
  3. Allow any excess tax losses from renting to be applied to ordinary income.

I argued that the likely outcome: a massive inflow of private capital to buy residential properties, housing prices would be bid up, folks would have access to affordable rentals, and the economy would be stimulated … REALLY stimulated.

Well, BusinessWeek reports that “the dealmakers running America’s private equity firms see opportunity in one of the most distressed precincts of the U.S. economy: residential housing”

Buyout funds are raising billions to convert foreclosed homes into rentals, which Washington hopes will improve the housing market

For example:

  • GTIS Partners will spend $1 billion by 2016 acquiring single-family homes to manage as rentals
  • GI Partners, a Menlo Park (Calif.) private equity fund, expects to invest $1 billion
  • Los Angeles-based Oaktree Capital Management will spend $450 million on similar housing deals.
  • Cerberus Capital Management, (DB)Deutsche Bank, (FIG)Fortress Investment Group, and Starwood Capital Group sponded to an Administration request for proposals on how to dispose of the government’s inventory of foreclosed homes.

Some pundits say: “This will be a new institutional asset class in the next 24 months.”

Why the enthusiasm?

  • Obviously, low prices and high demand for rentals make the market intriguing.
  • About 7.5 million homes with a market value of $1 trillion will be liquidated through foreclosures or other distressed sales by 2016.
  • “The share of Americans who are willing and able to own their own home is still falling,”
  • 20 million single-family homes are already serving as rentals
  • Single-family home rentals — which have yielded annual returns averaging 8.1 percent since 1990 — can generate cash flows that are 3 percentage points higher than apartments.
  • The U.S. government is eager to clear out the foreclosed properties now on its books.

Hmmm.

Imagine if there was a tax incentive … and imagine if the program had been in place for a couple of years …

Oh, well.

>> Latest Posts

An ironic twist to Team O’s plan for refinancing underwater mortgages …

February 7, 2012

Last week, the Campaigner-in-Chief stumped for a program to allow folks with underwater mortgages to refinance at current market interest rates.

According to Obama:

There are more than 10 million homeowners across the country who, because of an unprecedented decline in home prices, owe more on their mortgage than their homes are worth.

For those responsible homeowners, there are actions we can take now to provide some relief.

That’s why I’m sending Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage by refinancing at today’s low rates.

No more red tape or runaround from the banks.

A small fee on the largest financial institutions will ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust.

I’m basically ok with the idea, but there’s some irony: Remember when the payroll tax cut was extended (for 2 months)  last December?

Well, it was also pitched as deficit neutral.

How was it going to be paid for?

Well, the 2-month payroll tax holiday is being offset (over 10 years) by an increase in mortgage fees,

Every new or refinancing loan going through Fannie Mae or Freddie Mac – that’s over 90% of all mortgages – get tagged with an added fee (20 basis points, .2 %)

According to NPR, the added fee works out to about $17 per month for an average mortgage of about $200,000.

So, let me get this straight: Team O is going to force lenders to cut the rate on underwater mortgages — most of which will go thru Fannie and Freddie — and then hit the folks who are refinancing with a an added fee for cover the cost of payroll tax cuts.

This stuff gets wackier by the minute  …

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Have I got a deal for you …

January 3, 2012

Hooray.

Big victory for the middle class.

President Obama got his 2-month payroll tax holiday.

So, 150 million folks get $1,000 in 2012 tax savings.

Oops.

The program is only for 2 months, so the committed tax savings are only $167.

Still better than nothing, right?

Not so fast

How is it being paid for?

Well, first, “paid for” is a misnomer … it’s being offset in the governments 10 year hypothetical budget.

Hypothetical because the Senate hasn’t passed a 2012 budget, let alone a 10-year budget.

OK, let’s pretend.

The 2-month payroll tax holiday is being offset (over 10 years) by an increase in mortgage fees,

Every new or refinancing  loan going through Fannie Mae or Freddie Mac – that’s over 90% of all mortgages – get tagged with an added  fee (20 basis points, .2 %)

According to NPR, the added fee works out to about $17 per month for an average mortgage of about $200,000.

So, let’s work the nums.

“Average” folks who don’t have or don’t get or don’t refinance a mortgage walk away with $167 free and clear.

That’s a good deal.

“Average” folks who initiate a loan or refinance through Fannie or Freddie get hit with $17 in added monthly fees as long as they hold a mortgage … assuming that the added fee never goes away – a pretty safe bet.

Let’s pretend the average guy stays mortgaged for 30 years.

What’s the financial impact?

Well, the nominal cost of the mortgage adder is over $6,000.

But, to be fair, let’s discount it back to a present value.

For 30 years, the mortgage cost adder has an PV of over $3,100.

So, for the average guy with a new or refinanced mortgage, the payroll tax holiday will COST him a NPV loss of almost $3,000.

Still wonder why the economy is in trouble?

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The good news: housing is more affordable now … if you have a job, that is.

October 28, 2011

According to the WSJ ;

“While the fall in home prices has been painful for current owners, it has also made housing far more affordable for new buyers.”

In fact, the ratio of homes prices to annual income is at its lowest point in 30 years.

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Tidbits

Five years into the housing bust, the U.S. still has 10.9 million “underwater” borrowers, whose homes are worth less than the original purchase price.

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If Pres. Obama’s  homeowners refinance gets traction, investors who hold mortgage-backed securities will take a hit when those securities fall in value as borrowers prepay their old loans.  In fact, the MBS market fell out of bed after the White House announcement on Monday.

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The Congressional Budget Office tested an economic model of the President’s refinancing plan and estimated that:

  • Government enterprises like Fannie and Freddie would save $3.9 billion from refinancing, but they’d also lose $4.5 billion from the reduced value of their mortgage-backed securities.
  • Pension funds, banks and others would lose as much as $15 billion.

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A couple of years late, Orzag jumps on the HomaFiles idea re: housing.

October 6, 2011

For a couple of years, I’ve been saying that private capital should be unleashed to stabilize the housing market.

How? Accelerated depreciation for residential  rental property with unabsorbed passive losses used to reduce ordinary income … and no capital gains on the property when sold – after a couple of years minimum holding period.

Well, well, well.

In a Bloomberg article “U.S. Can Rent Its Way Toward a Housing Recovery”,  Peter Orszag – Obama’s former budget guy – now proposes roughly the same idea.

Just a couple of years late.

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Revenge of the appraisers …

August 19, 2011

Worth-read article posted by RCP summarizing the history of residential appraisers … and the impact of attempts by the gov’t to regulate them.

Punch line:

Among the many guilty co-conspirators in the housing bubble were appraisers who succumbed to pressure from loan officers, buyers and real estate agents eager to get deals done. Wary of losing business, these appraisers submitted home valuations that were unrealistically high, contributing to an upward spiral of prices that was unsustainable.

Appraisers’ lack of independence brought calls for reform once the market melted down, including a spate of new federal regulations commencing in 2009, the latest in a long string of efforts by the government over the last half century to reform the business. Now, ironically, those new regulations are being blamed for some of the housing market’s current struggles, as exceptionally low home valuations kill deals, including those between highly qualified buyers and eager sellers.

Some real estate agents and lenders estimate low appraisals are killing from 20 to 40 percent of deals. Even allowing for a certain amount of exaggeration endemic to the real estate business, low valuations have become a significant problem in the market’s struggles.

Ken’s Take: I’ve heard some stories about low valuations killing deals … and low valuations working out to buyers’ advantage as sellers cut prices to conform to the valuations..

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Unleashing private capital to stabilize the housing market …

August 15, 2011

For a couple of years (literally), I’ve been blogging that the key to stabilizing the housing market is incentivizing private capital (i.e. investors) to buy up distressed properties and rent them.

Finally, I found somebody who’s thinking on the same track.

Daniel Indiviglio of the Atlantic agrees that “Investors Can Fix the Housing Market”.

He says to “Stop Trying to Prevent Foreclosures — Mortgage Modifications Aren’t Working” and to “Ignore Consumers — They Can’t Fix This Problem”

The first point is a gimme.

Regarding consumers inability to fix the problem, he argues:

Remember that home buying credit?

Yeah, it didn’t work out so well. Home sales rose for about a year, then they plummeted and prices began to fall again.

The problem is that consumers aren’t in any position to fix the problem, so you just pulled forward a little bit of future demand.

Most people who can qualify for and afford to own a home already have one at this point.

To clear out housing inventory, you’ll need to rely on people who have cash to spend. Most Americans don’t.

The essence of his answer: make real estate investment tax-free for the next couple of years.

I agree.

To refresh your memory, here’s my plan.

  1. Eliminate future capital gains taxes on any residential property bought in the next 2 years, and held for at least 3 years.
  2. Allow investors (i.e. landlords) who rent the properties to depreciate the properties on an aggressively accelerated basis (i.e. say, 5 years),
  3. Allow any excess tax losses from renting to be applied to ordinary income.

The likely outcome: a massive inflow of private capital to buy residential properties, housing prices would be bid up, folks would have access to affordable rentals, and the economy would be stimulated … REALLY stimulated.

>> Latest Posts

Apparently the Feds don’t read the HomaFiles …

August 12, 2011

A couple of years late, the WSJ reports that …

The Obama administration will announce plans to seek investors’ ideas for turning thousands of foreclosed properties owned by government-backed entities into rental homes, .

The move is intended to put a floor under declining home prices by creating a way to deal with hundreds of thousands of potential foreclosures in coming years.

No kidding …

Loyal readers know that the HomaFiles has been all over this issue for a couple of years,  Original post

Ken’s Plan:

Some simple tax code changes can unleash private capital to suck up bargain priced residential real estate and induce investors rent it out.

Specifically, eliminate future capital gains taxes on any residential property bought in the next 2 years, allow investors (i.e. landlords) who rent the properties to depreciate the properties on an aggressively accelerated basis (i.e. say, 5 years), and allow any excess tax losses from renting to be applied to ordinary income.

The likely outcome: a massive inflow of private capital to buy residential properties, housing prices would be bid up, folks would have access to affordable rentals, and the economy would be stimulated … REALLY stimulated.

The downsides?

The higher prices would be somewhat artificial, unless the model becomes a new paradigm – replacing the American Dream of home ownership.

And for sure, the tax benefits would accrue to “fat cats”.

So what, let’s get the economy rolling …

>> Latest Posts

“For Sale, Bring Cash”

July 5, 2011

Punch line: USA Today reports that “cash buyers are kings in weak home-sales market.”

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According to the National Association of Realtors, in May 2011, all-cash buyers, who are mostly investors, accounted for 30% of existing home sales, up from 12% two years ago.

The cash buyers are enticed by low prices and potential rental income.

Cash buyers are especially prevalent in markets where prices have fallen the most, often areas hard hit by foreclosures.

  • In Las Vegas, the foreclosure capitol of the U.S. for the past four years, cash buyers accounted for 49% of first-quarter sales
  • In the Miami-Fort Lauderdale area, 63% of first-quarter buyers paid in cash.
  • In Phoenix,  44% are cash buyers.

Cash buyers often get better deals because sellers know their offers won’t fall through for lack of financing. A 5% cash discount is typical.

Source: USA Today

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“It’s raining. Brother, can you spare me an umbrella?

January 11, 2011

As usual, Thomas Sowell hits the nail on the head.

Why should responsible taxpayers bail out fiscally irresponsible non-taxpayers (and fiscally irresponsible states)?

Excerpts from RCP: Saving” the Housing Market, January 4, 2011

Sometimes, some people are especially deserving.

But this cannot be said about those who borrowed money to buy homes that they could not afford, or who borrowed against the equity in their homes, and now find that what they owe is more than the home is worth.

If anyone is especially deserving, it is those who had the common sense to avoid taking on bigger financial obligations than they could handle, but who are now expected to pay as taxpayers for other people’s irresponsibility.

No doubt some people who are facing foreclosures might have been able to continue making their mortgage payments if they had not lost their jobs.

But since when were we all guaranteed never to lose our jobs?

People used to put money aside “for a rainy day.” But now people who have spent like there are no rainy days are supposed to have the taxpayers pay to give them an umbrella.

What about the people who saved and put their money in a bank?

Those who blithely say that the banks ought to modify the mortgage terms to accommodate people who are behind in making their monthly payments forget that, however “rich” a bank may be, most of its money actually belongs to vast numbers of depositors, most of whom are not rich.

Those depositors deserve to get the best return on their money that supply and demand can offer.

Why should people who save be sacrificed for the benefit of those who spent more than they could afford?

http://www.realclearpolitics.com/articles/2011/01/04/saving_the_housing_market_108421.html

For the next cocktail party: Some (sad) housing factoids …

September 23, 2010

According to the WSJ …

  • New home sales, pending home sales, and mortgage applications are down to a 13-year low
  • New home prices have fallen by an average of 30%, reducing home occupancy cost to 15% of family incomes, down from the conventional 25%.
  • About 11 million residential properties have mortgage balances that exceed the home’s value.
  • The total inventory of homes and the shadow inventory of 3.7 million empty (foreclosed) homes.
  • Eight million home loans are in some state of delinquency, default or foreclosure.
  • Another eight million homeowners are estimated to have mortgages representing 95% or more of the value of their homes, leaving them with 5% or less equity in their homes and thus vulnerable to further price declines.
  • If prices fall another 5% to 10%, an estimated 40% of American homeowners with mortgages in excess of the value of their homes.
  • Under the Home Affordable Modification Program, half of the borrowers have been redefaulting within 12 months, even after monthly payments were cut by as much as 50%.
  • A well-balanced housing market has a supply of about five to six months. These days the inventory backlog has surged to about a 12½ months’ supply. This explains why average sale prices have been declining for so many months. The high end of the market, in particular, is under great pressure.
  • Household formation (marriages) is also shrinking now, down to an annual rate of about 600,000, compared to net household formation in excess of a million annually during the bubble years.
  • $6 trillion of home equity value has disappeared, a loss that has had a devastating effect on consumer confidence, retirement savings and current spending.
  • Every 1% decline in home prices today lowers household wealth by approximately $170 billion …  and, each dollar lost in housing wealth lowers consumption by 5 cents.
  • A million-plus fewer homes are being built on on an annual basis from the peak years of the housing boom … with five people or more working on each home, we have permanently lost over five million jobs in residential construction.

Source: WSJ: The Recession and the Housing Drag, Sept 21, 2010 
http://online.wsj.com/article/SB10001424052748703989304575503752698078816.html?mod=WSJ_Opinion_LEADTop

Is there already a glut of homes for rent?

September 15, 2010

I’ve been advocating tax changes to induce private capital to buy up distressed residential properties and rent them for at least a couple of years.

This article caught my eye …

Says it’s already a big trend – without tax incentives.

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Excerpted from: Real Estate Channel, Will Growing Rental Trends Undermine U.S. Home Sales?, 08/23/10

There is a far-reaching change occurring now which threatens housing markets around the country.

There is a “psychology change” in the mind of consumers: 76% now believe that renting is a better option than buying in the current real estate market

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As early as the summer of 2005, the slowdown in speculative buying in the hottest metros caused a flood of investor-owned homes to hit the rental market. 

Many of these homes became rentals because the investor was unable to flip the property

The glut of rental homes in bubble markets such as Phoenix had caused rents to plunge to half the cost of owning that same home by the beginning of 2008. 

Many rental properties were attracting “displaced homeowners”. 

What happens after a single-family foreclosure is that “the family moves into a rental house down the street.”  The irony is that the home they are moving into may also be a foreclosure that had been bought by an investor.

The attraction of renting now is boosted by the growing vacancy rate for both houses and apartments. 

With nationwide vacancy rates now well over 10%, it is extremely difficult for a landlord to even consider raising rents. 

Since roughly 25% of all home sales are currently going to investors paying cash, large numbers of homes will continue to be thrown onto the rental market. 

http://www.realestatechannel.com/us-markets/residential-real-estate-1/real-estate-news-rent-versus-buy-a-home-david-neithercut-equity-residential-wall-street-journal-homes-for-rent-condos-for-rent-national-apartment-association-3040.php

Top priority: stabilize housing …

August 30, 2010

The obvious has become clear to me: there will be no meaningful economic recovery until the housing market is stabilized.

Why?

It’s not so much that some folks are being foreclosed on – some deservedly since they bought houses they couldn’t afford with little or no downpayment; some undeservedly because they got caught in the downdraft and lost their jobs .

It’s more because:

  1. Since homes are most families’ biggest assets, the decline in home values impacts consumption.  It’s called the “wealth effect”.
  2. An inability to sell homes – at a profit, or at all – reduces folks’ mobility, making it impossible or impractical to move from a high unemployment market (think Detroit) to one that may have brighter job prospects (think North Dakota).
  3. Since homes are often used as collateral to stake new small businesses, distressed home values cut entrepreneurs borrowing power. And, it is accepted wisdom that small businesses fuel job growth.

I’ve argued that the Feds approach – modify loans to “keep people in their homes” – is philosophically flawed and strategically misdirected. 

If somebody made no downpayment and few monthly payments, then it’s not “their home”.  It’s the bank’s home.

More important, it doesn’t fix the problem.

My answer: unleash private capital to suck up bargain priced residential real estate and rent it out.

Specifically, eliminate future capital gains taxes on any residential property bought in the next 2 years, allow investors (i.e. landlords) who rent the properties to depreciate the properties on an aggressively accelerated basis (i.e. say, 5 years), and allow any excess tax losses from renting to be applied to ordinary income.

My bet: there would be a massive inflow of private capital to buy residential properties, housing prices would be bid up, folks would have access to affordable rentals, and the economy would be stimulated … REALLY stimulated.

The downsides?

Sure, the higher prices would be somewhat artificial … unless the model becomes a new paradigm – replacing the American Dream of home ownership.

And sure, the tax benefits accrue to fat cats.

So what, let’s get the economy rolling …

Why Small Businesses Aren’t Hiring …

August 25, 2010

This is the first time I’ve seen somebody make the direct connection between the decline in housing prices and the high unemployment rate. 

Common knowledge: consumers are spending less because of the “wealth effect” .

Insightful twist: most small businesses serve the real estate market and many of them use their owners’ homes as collateral for their loans.

For my answer to the residential housing mess, see last week’s post:
https://kenhoma.wordpress.com/2010/08/18/instead-of-an-august-surprise-answer-for-getting-housing-on-track/

* * * * *

According to AEI …

In the recoveries from the previous two recessions, small businesses led job creation. This time, however, small businesses aren’t hiring.

Here’s why.

The collapse in home prices is holding back small-business hiring. And unless we fix the residential real estate mess, we won’t see small business hiring anytime soon.

The weak residential real estate market is keeping small businesses from hiring in five ways:

1. Declining house prices have softened demand for small businesses’ products and services.

The 29.5 percent drop in home values from the first quarter of 2006 until the end of the first quarter of 2010 has led to a huge drop in household wealth, which has led to reduced consumer spending.

Studies show that consumption falls by about 8 cents for every dollar of decline in wealth.

2. Small businesses are overrepresented in the real estate-related industries that have been decimated by the residential housing market collapse.

Falling home prices have devastated employment in construction and real estate businesses, virtually all of which are small companies.

Prior to the recession, 10.4% of all people employed in small businesses worked in construction. Add another 2.5% who work in real estate and rental and leasing businesses, and we had more than one in eight U.S. small business workers in construction and real estate.

3. Small business owners use their homes to obtain business credit.

Business borrowing of almost one in four small business owners is tied to the value of their homes.

As home prices have fallen, small-business-owning homes have seen their personal balance sheets weaken.

As home values have fallen, small business owners whose business debt is linked to residential real estate have faced demand for more collateral by lenders.

The weakened balance sheets and demand for additional collateral has meant that fewer small business owners have been able to expand.

4. Banks have tightened lending standards in response to a rising share of non-performing real estate loans.

The banks with real-estate problems are among the biggest small business lenders.

These banks have tightened up their lending standards.

Tighter loan standards mean fewer small businesses can get capital for expansion that leads to hiring.

5. Small business owners were major customers of residential real estate loans during the boom, making them among the consumers hardest hit from the collapse in home prices.

Small business owners took on a lot of mortgage debt during the real estate bubble and are now suffering from the fall in residential real estate prices.

Tighter loan standards mean fewer small businesses can get capital for expansion that leads to hiring.

* * * * *

We should acknowledge why small businesses aren’t leading job creation this time around and come up with solutions to the residential real estate problems that are holding them back.

If the residential real estate mess keeps the small business sector from hiring, it will be awfully difficult to reduce our unemployment rate to a reasonable level.

Excerpted from AEI: Why Small Businesses Aren’t Hiring, August 24, 2010
http://www.american.com/archive/2010/august/why-small-businesses-arent-hiring

Instead of an August surprise … an answer for getting housing on track …

August 18, 2010

According to Reuters …

Main Street may be about to get its own gigantic bailout.

Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth.

Republican leaders believe this is going to happen since it doesn’t require Congressional approval  ….and Wall Street banks are alerting their clients privately to this possibility.

James Pethokoukis, August Surprise from Obama?, Aug 5, 2010
http://blogs.reuters.com/james-pethokoukis/2010/08/05/an-august-surprise-from-obama/

I have a better idea.  Below is a reprised post from November 2008 with my plan for getting housing back on track.

* * * * *

Ken’s Plan Summary: (1) eliminate ALL of the capital gains taxes on residential property that is bought from now until, say, December 31, 2011 and held for at least 18 months, (2) allow these “qualified residential properties”, if they are rented, to be depreciated for tax purposes at an aggressively accelerated rate (say, over 5 or 10 years) to generate high non-cash tax losses, and (3) allow ALL tax losses generated by these “qualified residential rental properties” to offset owners’ taxable ordinary income with no “passive loss’ limitations, thereby reducing their federal income tax liability.

The positive results are practically guaranteed.  Nonetheless, I haven’t even heard the ideas mentioned.  Guess the politically correct folks in DC don’t read the Homa Files.

* * * * *

From HomaFiles archive, “Big Idea: Rallying private capital to stabilize housing prices”, November 23, 2008.

A stark reality of the current mortgage crisis is that there have been — and will continue to be – an unprecedented and destabilizing number of foreclosures that need to be absorbed into the housing market.  Until they are, home prices will continue to slide and the crisis will persist..

To date, most of the government’s programmatic emphasis has focused on mitigating the financial pressures on lending institutions and investors who funded bad loans, by injecting supplementary capital (loans or preferred stock purchases), or by buying toxic securities..  Some political rhetoric has centered on preventing distressed citizens from “losing their homes”, but few substantive steps have been taken.  Why?

First, once a mortgage has been “securitized” – as most have been — there are contractual limitations on possible loan modifications.   In these instances, mortgage “servicers” have their hands tied.  They are only empowered to collect payments and foreclose on non-payers, with very little latitude between the extremes.

Second, there is the proverbial elephant in the middle of the room.  Many so-called home owners are – truth be told — really “occupants” not “owners”.  Some have no equity in the homes.  Some never did – even before housing prices crashed, submerging loan balances under water.   Many wouldn’t qualify today for restructured loans under the most liberal of terms – e.g. lowered interest rates, extended payment periods, reduced principle balances (to the current fair market value of the homes).  Whether the people legitimately qualified for their initial loans is irrelevant.  Whether their initial loan terms were predatory is also largely irrelevant. Objectively, the low bar is whether they can foot the bill for a restructured mortgage.  The emerging evidence seems to suggest that many – maybe most – can’t.

That leads to an inescapable conclusion: regardless of what remedial government bailouts are enacted – the housing market will continue to be flooded with foreclosures.

So, a pivotal economic policy question is how to get the foreclosed properties off the market and into the hands of private owners (i.e. not onto the government’s asset rolls), and how to keep them there until they can be remarketed at an orderly pace and higher prices.

Three straightforward changes to the income tax code – throwbacks to yesteryear — could provide the necessary financial incentives to rally private capital back into the housing market to buy, hold, and rent foreclosed homes: (1) eliminate ALL of the capital gains taxes on residential property that is bought from now until, say, December 31, 2010 and held for at least 18 months, (2) allow these “qualified residential properties”, if they are rented, to be depreciated for tax purposes at an aggressively accelerated rate (say, over 5 or 10 years) to generate high non-cash tax losses, and (3) allow ALL tax losses generated by these “qualified residential rental properties” to offset owners’ taxable ordinary income with no “passive loss’ limitations, thereby reducing their federal income tax liability.

For example, assume that an investor buys a foreclosed home for $200,000 and rents it out at a price that simply breaks even on a cash flow basis.  That is, the rental price just covers interest, taxes, insurance, maintenance, etc.  Assuming a 5-year accelerated depreciation schedule, the rental would generate an annual non-cash tax loss of $40,000 that could be used to offset the investor’s ordinary income.  If the investor were in the Obama-boosted 39.6% marginal tax bracket, that ordinary income offset could save the investor almost $16,000 in federal income taxes each year that the property is held and rented.  If the home were then resold – say, in 3 years for $250,000 –  the investor would book $170,000 in capital gains (the $50,000 home price increase, plus the $120,000 in depreciation claimed against ordinary income when the property was being rented), but the investor would owe no capital gains taxes.

Such a program potentially offers several benefits: (1) it would entice private capital to buy (and hold) foreclosures and other distressed residential property, (2) it would likely provide affordable rental housing to people (maybe the current occupants of the homes) who realistically can’t and shouldn’t shoulder the costs of home ownership , and (3) it might take some of the sting out of President Obama’s proposed tax hikes.

It’s a win-win solution to part of a thorny problem.

Original post:
https://kenhoma.wordpress.com/2008/11/25/big-idea-rallying-private-capital-to-stabilize-housing-prices/
© K.E. Homa 2008

Rent vs. Buy: The rule of 15

June 10, 2010

Punch line: If the annual rent for a home is less than 1/15th of a comparable home’s market value … rent, don’t buy.

* * * * *

Excerpted from WSJ: A Fresh Look at Rent vs. Buy, June3, 2010

Is it cheaper to buy, or to rent?

The cross-over point is about 15 times annual rent.

In other words, as a rough rule of thumb, homes are probably fairly valued in a city when they cost about 15 times a year’s rent.

So, for example, if you’re paying $10,000 a year to rent a place, think twice about buying a home that costs more than $150,000.

So what’s the multiple in New York right now?

The average two-bedroom condo or townhouse in New York city costs about 32 times as much to buy as it does to rent.

Other major markets over 20 times include Seattle (24 times), San Francisco (22 times) and Portland, Ore. (22 times).

On the other hand Miami list prices are now about eight times annual rents. Phoenix is about 10 times and Las Vegas about 11.

Note: a cut-off point at 15 times rents may be on the low side … it assumes you’re only going to stay in your home for the typical seven years. If you stay a lot longer, the transaction costs of buying and selling become less and less important. That makes owning more attractive – hence a higher multiple.

The cult of homeownership makes no sense. If renting is much cheaper than buying, think seriously about it.

Full article:
http://online.wsj.com/article_email/SB10001424052748703561604575282910161870380-lMyQjAxMTAwMDAwNDEwNDQyWj.html

 

Clash of the Titans: U.S. vs. G.S. … my bet’s on Goldman.

April 19, 2010

First, friends and family know that I’m no fan of investment banks.

My view: IBs are heavily populated with soulless folks who have strayed way too far the constructive role of efficiently raising capital for “producing” firms that make things and serve people … to a focus on simply making money via maneuvers that don’t advance the economy (e.g. 2nd and 3rd order derivatives).

Second, I took the bait on Friday and thought the SEC really had something on Goldman … that the crooks had gotten their come uppance.

Now, I’m not so sure. 

Admittedly, I’m heavily swayed by today’s WSJ editorial that reads in part:

The Securities and Exchange Commission’s complaint against Goldman Sachs is playing in the media as the Rosetta Stone that finally exposes the Wall Street perfidy and double-dealing behind the financial crisis. Our reaction is different: Is that all there is?

After 18 months of investigation, the best the government can come up with is an allegation that Goldman misled some of the world’s most sophisticated investors about a single 2007 “synthetic” collateralized debt obligation (CDO).

Far from being the smoking gun of the financial crisis, this case looks more like a water pistol.

WSJ, The SEC vs. Goldman, April 19, 2010
http://online.wsj.com/article/SB10001424052702303491304575188352960427106.html

Fundamentally, the “synthetic CDO” at issue did not hold mortgages, or even mortgage-backed securities.

This is why it is called a “synthetic” CDO, which means it is a financial instrument that lets investors bet on the future value of certain mortgage-backed securities without actually owning them. (see pics and link below)

It was simply a mega-bet peddled to “whales” — sophisticated investors (mostly financial institutions with floors of MBAs and lawyers)    — a bet structured by an uber-bookie who took the other side of the bet.  A common practice among “players”. 

image

The main impact of the “action” was transferring a few billion dollars from the long-side housing gamblers (the financial institutions and other fat cats)  to the bookie (Paulson & Company).

Since the market crashed — i.e. the “favorite” lost the game — the whales (e.g. the Royal Bank of Scotland)  lost big — especially since they were betting with borrowed money.

My take: This wasn’t numbers being run on the city streets of Baltimore … it was big guys vs. big guys … who cares if they all lose? 

This didn’t cause the housing bubble or its bust … and Goldman will walk on the rap. 

* * * * *

Anatomy of a CDO

Wall Street Journal has an interesting depiction of how a synthetic CDO is put together.

Click either of the pics to go to WSJ’s interactive description — cool, but complicated.

image

image

Unstimulata: New-Home Sales Drop 11.2% … and a reprise of my Rx

February 26, 2010

Bottom line: No surprise, the housing market is still in the doldrums.

Below are the details … and below them are a reprise of my November 2008 post with a plan for handling part of the foreclosure problem and getting housing back on track.

* * * * *

Excerpted from WSJ: U.S. New-Home Sales Drop 11.2%, Feb. 24, 2010

U.S. new-home sales unexpectedly fell in January, setting a record low and erasing all gains made in the market during the past year as the economy recovers from recession.

Demand for single-family homes fell 11.2% from the previous month to a seasonally adjusted annual rate of 309,000.

Over the past year, sales had climbed, albeit slowly and unevenly, because of low prices, low mortgage rates, and tax incentives. But Wednesday’s report wiped out the advance and showed, year over year, sales were 6.1% down from January 2009.

Wednesday’s new-home sales data showed inventories picking up slightly. There were an estimated 234,000 homes for sale at the end of January, up from 233,000 in December. The months’ supply at the current sales rate rose, to 9.1 from 8 in December.

The median price for a new home fell, year over year, in January by 2.4%, to $203,500 from $208,600 in January 2009.

Full article:
http://online.wsj.com/article/SB10001424052748704240004575085232728239148.html?mod=djemalertNEWS

* * * * *

Rallying private capital to stabilize the housing market

Ken’s Plan Summary: (1) eliminate ALL of the capital gains taxes on residential property that is bought from now until, say, December 31, 2010 and held for at least 18 months, (2) allow these “qualified residential properties”, if they are rented, to be depreciated for tax purposes at an aggressively accelerated rate (say, over 5 or 10 years) to generate high non-cash tax losses, and (3) allow ALL tax losses generated by these “qualified residential rental properties” to offset owners’ taxable ordinary income with no “passive loss’ limitations, thereby reducing their federal income tax liability.

The positive results are practically guaranteed.  Nonetheless, I haven’t even heard the ideas mentioned.  Guess the politically correct folks in DC don’t read the Homa Files.

* * * * *

From HomaFiles archive, “Big Idea: Rallying private capital to stabilize housing prices”, November 23, 2008.

A stark reality of the current mortgage crisis is that there have been — and will continue to be – an unprecedented and destabilizing number of foreclosures that need to be absorbed into the housing market.  Until they are, home prices will continue to slide and the crisis will persist..

To date, most of the government’s programmatic emphasis has focused on mitigating the financial pressures on lending institutions and investors who funded bad loans, by injecting supplementary capital (loans or preferred stock purchases), or by buying toxic securities..  Some political rhetoric has centered on preventing distressed citizens from “losing their homes”, but few substantive steps have been taken.  Why?

First, once a mortgage has been “securitized” – as most have been — there are contractual limitations on possible loan modifications.   In these instances, mortgage “servicers” have their hands tied.  They are only empowered to collect payments and foreclose on non-payers, with very little latitude between the extremes.

Second, there is the proverbial elephant in the middle of the room.  Many so-called home owners are – truth be told — really “occupants” not “owners”.  Some have no equity in the homes.  Some never did – even before housing prices crashed, submerging loan balances under water.   Many wouldn’t qualify today for restructured loans under the most liberal of terms – e.g. lowered interest rates, extended payment periods, reduced principle balances (to the current fair market value of the homes).  Whether the people legitimately qualified for their initial loans is irrelevant.  Whether their initial loan terms were predatory is also largely irrelevant. Objectively, the low bar is whether they can foot the bill for a restructured mortgage.  The emerging evidence seems to suggest that many – maybe most – can’t.

That leads to an inescapable conclusion: regardless of what remedial government bailouts are enacted – the housing market will continue to be flooded with foreclosures.

So, a pivotal economic policy question is how to get the foreclosed properties off the market and into the hands of private owners (i.e. not onto the government’s asset rolls), and how to keep them there until they can be remarketed at an orderly pace and higher prices.

Three straightforward changes to the income tax code – throwbacks to yesteryear — could provide the necessary financial incentives to rally private capital back into the housing market to buy, hold, and rent foreclosed homes: (1) eliminate ALL of the capital gains taxes on residential property that is bought from now until, say, December 31, 2010 and held for at least 18 months, (2) allow these “qualified residential properties”, if they are rented, to be depreciated for tax purposes at an aggressively accelerated rate (say, over 5 or 10 years) to generate high non-cash tax losses, and (3) allow ALL tax losses generated by these “qualified residential rental properties” to offset owners’ taxable ordinary income with no “passive loss’ limitations, thereby reducing their federal income tax liability.

For example, assume that an investor buys a foreclosed home for $200,000 and rents it out at a price that simply breaks even on a cash flow basis.  That is, the rental price just covers interest, taxes, insurance, maintenance, etc.  Assuming a 5-year accelerated depreciation schedule, the rental would generate an annual non-cash tax loss of $40,000 that could be used to offset the investor’s ordinary income.  If the investor were in the Obama-boosted 39.6% marginal tax bracket, that ordinary income offset could save the investor almost $16,000 in federal income taxes each year that the property is held and rented.  If the home were then resold – say, in 3 years for $250,000 –  the investor would book $170,000 in capital gains (the $50,000 home price increase, plus the $120,000 in depreciation claimed against ordinary income when the property was being rented), but the investor would owe no capital gains taxes.

Such a program potentially offers several benefits: (1) it would entice private capital to buy (and hold) foreclosures and other distressed residential property, (2) it would likely provide affordable rental housing to people (maybe the current occupants of the homes) who realistically can’t and shouldn’t shoulder the costs of home ownership , and (3) it might take some of the sting out of President-elect Obama’s proposed tax hikes.

It’s a win-win solution to part of a thorny problem.

Original post:
https://kenhoma.wordpress.com/2008/11/25/big-idea-rallying-private-capital-to-stabilize-housing-prices/
© K.E. Homa 2008

The housing-foreclosure problem hasn’t gone away …

October 6, 2009

Ken’s Take: Mortgage defaults and housing prices are still a big problem, though they seem to have been pushed to a back burner.

In his WSJ essay, Economist Martin Feldstein has the diagnosis right, but the prescription wrong …

* * * * *

Some Facts

  • More than three million homes are now in serious default (nonpayment for 90 days or more) or foreclosure, nearly double the number a year ago.
  • Sales of properties in foreclosure or serious default made up one third of all home sales in May and June.
  • So far only about 200,000 mortgages have been modified this way, far fewer than the administration’s goal of modifying three million mortgages.
  • Nearly half of all modified mortgages go into default within six months.
  • Today one-third of all homes with mortgages have mortgage debt that exceeds the value of the home. Among these homeowners, half of the loan-to-value ratios exceed 130%.

* * * * *

Feldstein’s Remedy

Borrowers should get relief now, and the banks should get a guarantee down the road.

An epidemic of mortgage defaults and foreclosures is threatening the economic recovery. The problem is serious and getting worse.

There are two separate but mutually reinforcing reasons for the surge in defaults and foreclosures: the reduced affordability of mortgage payments and the high loan-to-value ratios of many houses.

The United States, unlike almost every other country, mortgages are effectively no-recourse loans. If a homeowner defaults, the creditor can take the house but is unable to take other assets or income to make good on the remaining unpaid mortgage balance. No-recourse mortgages increase foreclosures, resulting in more properties being thrown on the market, and lead to an excess decline in house prices.

The risk remains of a continuing downward spiral of house prices.

The administration should work with creditors and homeowners to reduce the principal on mortgages that are at risk of default.

Here’s how such a plan might work in a way that homeowners and creditors could both welcome, that is fair to taxpayers, and that would help the economy:

Any homeowner with a loan-to-value ratio over 120% could apply for a reduction in his mortgage balance. The government and the creditor would then share equally in the cost of writing the loan balance down to 120% of the value of the home. But the homeowner who opts for this write-down would be obliged to convert the remaining mortgage to a loan with full recourse that could not be discharged in bankruptcy. The bank gets a more legally secure loan

Slowing the downward spiral of house prices will protect the solvency of the banks and the net worth of households. The failure to do that could mean a deeper and longer recession that imposes much higher costs to the government.

http://online.wsj.com/article/SB10001424052970204908604574330883957532854.html?mod=djemEditorialPage

* * * * *

Ken’s Rx: Create a more robust rental market of single family homes by providing tax incentives to investor-landlords – e.g. no cap gains taxes, accelerated depreciation, application of cap losses to offset earned income.  That would bolster prices – albeit, artificially – and provide affordable housing  — albeit, sans ownership.  I’ll detail the plan in a subsequent post.

* * * * *

The housing glut … peaking, but still high — very high.

October 6, 2009

There are still a record number of houses on the market — 9.4 months’ worth of existing homes for sale, according to NAR data.

The backlog is usually under six months.

And, based on current and projected delinquencies, nearly seven million housing units will eventually enter foreclosure … that could add 1.35 years’ worth of inventory to the market.

[housing supply]

Source: WSJ: Housing Recovery Obstacle: So Many Houses, Sept 24, 2009http://online.wsj.com/article/SB125374552378835617.html#mod=WSJ_hpp_MIDDLENexttoWhatsNewsTop

* * * * *

Housing prices: might be hitting bottom … and, taking a long-term perspective, not as bad as they sound

July 31, 2009

Ken’s Take: Understandably, the focus on home prices tends to be on the recent month-to-month and year-to-year changes – since that’s what hits people’s net worth.  There appear to be some signs that some markets are bottoming out.

Usually lost in the shuffle is the fact that longer term, say back to 2000, housing prices in many (most?) markets have shown “healthy” annualized increases – even after adjusting for the market crash. For example, current housing prices in the DC market translate to an annualized inflation rate of about 6% since 2000.

Of course, that isn’t much consolation to folks who bought their houses during the boom period.

* * * * *

Annualized since 2000

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.

image

* * * * *

Monthly and Annual Changes

Source: WSJ, Case-Shiller July 2009 update, July 29,2009

The S&P/Case-Shiller home-price indexes, a closely watched gauge of U.S. home prices, posted their first month-to-month increase in nearly three years in May, but annual weakness continued. (See charts below)

Las Vegas and Phoenix continued to posted the largest monthly and annual declines. Phoenix is down 55% from its peak in June 2006, while Las Vegas is off 53% from its highest level.

* * * * *

image

 

image

Full article and interactive chart:
http://blogs.wsj.com/economics/2009/07/28/a-look-at-case-shiller-numbers-by-metro-area-july-2009-update/

* * * * *

Penny Mac … heard of it?

July 14, 2009

This was a new one to me…

In the book Catastrophe, Dick Morris includes a chapter on PennyMac — a joint venture set up by former high-level executives at Countrywide Financial. The name stands for Penny Mortgages After Countrywide.

Here’s the scheme:

Penny Mac buys distressed mortgages from failing banks at the lowest possible prices, works out affordable deals with homeowners, and then re-bundles and re-sells the now “performing”.loans.

For example, according to Morris, Penny Mac recently bought $558 million of home mortgages from the FDIC, which acquired the notes after the collapse of the First National Bank of Nevada. PennyMac paid only $42.2 million, averaging only $.30 to $.50 on the dollar. PennyMac keeps $.20 on every dollar that it initially recovers, with an increase to $.40 down the line.

Think about it. Countrywide executives made bad loans, sold them in packages to investors,  and then, they buy them back as distressed loans at a deep discount, restructure the terms — since they have plenty of spread to play with — and then sell the loans again, at a profit.

Makes you scratch your head, doesn’t it?

* * * * *

When loans exceed posted collateral, borrowers walk away … is that new news ?

July 8, 2009

Takeaway: About half of all foreclosures are attributable to loans going underwater.  That is, the borrower could keep the loan commitment and keep paying, but chooses to simply stop making payments.  For the other half, about half lose their jobs and can’t make payments and almost 40% are simply deadbeats who shouldn’t have been given the loans in the first place.  Relatively few borrowers are forced into foreclosure by rate hikes – e.g expired teaser rates and ARMs.

The good news: looks like almost all of the air has be let out of the bubble, i.e. the bottom may be near.

* * * * *

Stanley Liebowitz — professor of economics at the University of Texas, Dallas – cranked through a database covering more than 30 million mortgages to determine the root causes of foreclosures.

 

image

His main conclusion:”Although the government is throwing money — almost $2 trillion and counting — at the mortgage markets with the intent of stabilizing house prices, its methods are poorly targeted”.”

Why?  Because “Zero money down, not subprime loans, led to the mortgage meltdown. The important factor is whether or not the homeowner currently has or ever had an important financial stake in the house. Yet merely because an individual has a home with negative equity does not imply that he or she cannot make mortgage payments so much as it implies that the borrower is more willing to walk away from the loan.”

The good news: “Housing prices are likely to stop falling fairly soon  … That’s because current prices are approaching their long-term, inflation-adjusted pre-bubble level. These pre-bubble prices appeared to be a long-term equilibrium, meaning that prices would be expected to return to those levels.”  

WSJ, New Evidence on the Foreclosure Crisis, July 3, 2009
http://online.wsj.com/article/SB124657539489189043.html#mod=djemEditorialPage

* * * * *

Cutting Prof. Leibowitz’s numbers another way: about half of all foreclosures are attributable to loans going underwater.  That is, the borrower could keep the loan commitment and keep paying, but chooses to simply stop making payments.  For the other half, about half lose their jobs and can’t make payments and almost 40% are simply deadbeats who shouldn’t have been given the loans in the first place.  Relatively few borrowers are forced into foreclosure by rate hikes – e.g expired teaser rates and ARMs.

 

image

* * * * *

Talk about rewarding failure … How about free housing for mortgage defaulters ? … Here’s the math

January 22, 2009

There are plenty reasons to object to the recent groundswell of support for modifying distressed mortgages (badly delinquent or already in foreclosure) by slashing rates, lengthening payback periods, and writing off part of the loan balance if a home is under water (i.e. the loan balance is greater than the market value of the home.  The latter provision — forgiving part of the loan because housing prices have fallen is particularly troublesome.

First, there’s the moral issue: when somebody borrows money, they accept both a legal and a moral responsibility to pay it back.  Whether or not the collateral they posted retains its value is irrelevant.  Brokerage houses don’t write-down clients’ margin accounts because the stock market tanked.  Banks don’t write-down auto loans if a borrower totals their car.

If that argument doesn’t carry sway, consider this: under reasonably realistic assumptions, folks who default on their mortgages and get government induced loan modifications may, in effect, get their housing for free for an extended period.  Here’s the math.

Assume the Subprime Sam “buys” a home for $150,000 with no downpayment.  After making a couple of payments, he stiffs the bank.  Property values fall in his neighborhood — say, by 25%.

In the old days, the bank would have simply foreclosed on the loan and booted Sam out of the house.  Not so fast these days.

Instead, the Feds “encourage” the lender to modify the loan — say, by lowering the mortgage rate to 4.5%, by lengthen the term to 40 years, and by reducing the loan balance to the current fair market value of the house. 

Let’s say that Sam’s house dropped by the 25% neighborhood average and has a current $112,500 fair market value.

The bank writes off $37,500 of the original $150,000 loan, and Sam’s monthly mortgage payment drops to $500 — less than half of what he used to pay. (Trust me on the math).

Now, things get interesting,

If Sam is an typical mortgage loan “modifiee”, then — based on empirical data — there is at least a 40% chance that he’ll default on the loan again — within 6 months.  That is, unless housing prices fall more — in which case, Sam is virtually certain to default again and walk away from the home and his mortgage obligation.

Let’s be positive, though, and assume that Sam takes his debt seriously this time, and that real estate prices bottom and start to creep up again.

For the sake of argument, let’s pretend that home values claw their way back up.  Let’s pretend that — in around 7 years — Sam’s  house is worth the original $150,000 again.  (Note: that’s a home inflation rate of less than 5% annually — maybe a bit optimistic, but not wildly so)

And, let’s pretend that Sam sells the house then and walks away with about $40,000 —  $150,000 from the sale, less the roughly $110,000 he’d still owe on his loan. (Note: Principal pay-down is minimal during the early years of a 40 year mortgage).

Now, over that time period, Sam made 80 monthly mortgage payments of $500 each — totaling about $40,000

So, Sam pitched in zero down payment and $40,000 in mortgage payments — then, he netted $40,000 on the sale. Presto.  Free housing for about 7 years.

Of course, home prices might stay in the dumper and Sam may end up “out of pocket” for his housing.

But, that’s only fair.  Especially since his mortgage payments are less than half of his non-defaulting neighbor’s, and since the bank had to write-off $37,500 to get the whacky process rolling.

Talk about unintended consequences and moral hazard …

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From economic crisis to moral crisis …

January 14, 2009

There are plenty reasons to object to the recent groundswell of support for modifying distressed mortgages (badly delinquent or already in foreclosure) by slashing rates, lengthening payback periods, and writing off part of the loan balance if a home is under water (i.e. the loan balance is greater than the market value of the home).  I find the latter provision — forgiving part of the loan because housing prices have fallen — to be particularly troublesome.

Let’s start with the moral issue:

When somebody borrows money, they accept both a legal and a moral responsibility to pay it back. 

A lender may require collateral to mitigate the riskiness of a loan, but the posting of collateral doesn’t relieve borrowers of their repayment obligations.  

If the collateral that is posted loses some or all of its market value,that’s a bad break for the lender.  But, the lender is still entitled to get its money paid back.

For example, when folks buy stocks on margin, they are borrowing money from a brokerage house and posting stocks as collateral.  If the stocks tank, the brokerage houses don’t altruistically write down the loan balance.  They sell off the borrowers’s stocks to cover the loan balance.

If somebody totals their car (i.e. value goes to zero), the bank doesn’t simply write off the auto loan.  Nope, the borrower is still on the hook — even if the insurance company stiffs them.

So, why should a home mortgage get written down when the real estate market stumbles and homes drop in market value?  It just doesn’t make sense morally.

Skipping on a debt is skipping on a debt.  Period.

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The liberal politicos’ response is that we have a moral responsibility to keep people in their homes during rough economic times.  As I’ve said a few times already, most of these folks are occupants, not owners.  They have no equity in the homes, and in most instances — with no money down and interest only payments — they never did.  These aren’t “their” homes we’re talking about …

In subsequent posts, I’ll give the economic arguments against writing down mortgage loan balances.  I’ll even show how mortgage defaulters are likely to be rewarded with free housing if their loan balances are written down.  Talk about moral hazard …. 

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Fannie moves to speed “short sales”

January 12, 2009

Background:  In the housing market, a short sale occurs when a home is resold for less than the outstanding balance on the home’s mortgage.  Either the seller has to make up the difference, or the lender has to write-off the short portion of the loan. Of course, most sellers aren’t able to make the lender whole, so either the lender bites the bullet or forecloses — hoping to sell the property at a higher price.  That’s not likely these days either.

Ken’s Take: This is a good move by Fannie — reflecting the realities of the market.  More posts this week on the mortgage market and Fed proposals re: foreclosures.

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Excerpted from AP, Fannie Mae tests ‘short sale’ program, January 9, 2009

Real estate agents nationwide have complained about how long it takes for a lender to sign off on a short sale, often derailing the deal and leading a homeowner into foreclosure.

So, Fannie Mae — the  mortgage giant — is testing a new program aimed at reducing the number of foreclosures by pre-approving sales where homeowners sell houses for less than the amount owed on them.

The company will determine an acceptable listing price for a so-called “short sale” even before a buyer has been found.

Fannie Mae wants to make the short sale as fast and easy as possible so distressed homeowners can avoid foreclosure.

Full article:
ttp://www.businessweek.com/ap/financialnews/D95JTMFG1.htm 

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