Allowing delinquent mortgage squatting caused more strategic defaults than crashing prices
Ever since the housing bust began, banks have been caught between a rock and a hard place. On one side, if they foreclose and liquidate their inventory, prices plummet which prompts underwater borrowers to strategically default. The downward spiral of strategic default is in clear evidence in Nevada. On the other side, if banks don't foreclose, borrowers know they can quit paying and live payment-free indefinitely. This method has the advantage for banks of providing an illusion of collateral value backing their loans, but recent data shows banks build an even larger shadow inventory that must eventually be liquidated. Those liquidations will most likely cause still-elevated house prices to drop.
Wendell and Margret Brady haven’t paid their mortgage in more[READ MORE]
Recently I wrote that a durable recovery would be demand driven, not supported by restricted supply. Reductions in supply may temporarily force house prices higher, but a sustained recovery requires higher prices and higher sales volumes. In other words, a durable recovery requires a resurgence of demand. Reduced supply threatens to choke off the recovery as buyers lose interest in a market where little is available for sale, and the prices being asked are too high. In a high demand market, buyers don't wait on the sidelines. In a supply restricted market, they do. And wisely so because educated buyers know the supply will come to the market eventually, and there is no need to overpay today for a product that will be available tomorrow.[READ MORE]
I have posted the chart on the lack of owner-occupant demand dozens of times to remind everyone that current demand is far weaker than what's widely reported. But that's not to say demand will remain weak forever. There is latent demand from two large groups that currently can't buy homes: the credit impaired and the unemployed. The millions of former owners who have damaged credit from either a short sale or foreclosure represent a large reservoir of future demand. When these people save for a down payment, wait out any mandatory waiting periods, and regain their credit scores, most of them will chose to buy again despite their previous bad experience with home ownership. For this group, it's only a matter of time and fiscal discipline. We will start to see more and more of these former owners re-enter the housing[READ MORE]
I love football. I have enjoyed watching NFL football since I was a child. I was born in Wisconsin just after the famed "Ice Bowl." I grew up a Packer fan, but I've come to enjoy watching the sport whenever it's played well regardless of the teams involved. Perhaps as a Packer fan, I am more upset than most about the travesty which occurred on Monday night. A series of bad calls changed the outcome of the game and gave the Seattle Seahawks a victory they did not earn on the field. The officials are not supposed to determine who wins; the players are. As a fan watching the game, let me give you my experience of the comedy of errors that culminated in the worst call in NFL history. It's important because this wasn't just a single bad call. It[READ MORE]
The federal reserve controls short-term interest rates through buying and selling Treasury notes. These rates determine how much interest people earn in savings accounts, the asset class favored by senior citizens. The federal reserve lowered interest rates to zero to force money out of savings accounts in hopes this money would seek out riskier asset classes and stimulate the economy. Since seniors are risk adverse, most have left their savings in place, and those that need those savings to survive -- which is most seniors -- are depleting their savings accounts to make ends meet. When many seniors planned their retirement, they counted on a certain amount of interest income to survive. The federal reserve has instead diverted this money to its member banks to help them earn[READ MORE]
A durable recovery begins with increasing demand. More and more people have both stronger desire and more money to spend on housing when a sustained market rally takes hold. Both sales prices and sales volumes rise when demand increases. If you don't have both, the rally is suspect. Right now, overall demand is slightly higher, but this is almost entirely due to an increase in investor activity. Despite record low interest rates, demand from owner-occupants is moribund. The truth is the recent increase in prices is almost entirely due to restricted supply, and durable recoveries are not built on weak demand and restricted supply.
California’s housing supply is shrinking! Is this a Wall Street Minsky Moment for California’s real estate market? Data: Housing inventory has decreased by[READ MORE]
Our economy depends on Ponzi borrowing to the point that the government actually encourages this behavior despite the fact that millions lost their homes because of it. The ability to freely access and spend home equity creates moral hazard. It encourages over-borrowing and overpaying. It was one of the primary contributors to the housing bubble. The desire for HELOC booty motivated the foolishness. Many people run up $10,000 to $15,000 per year in credit card debt because they are fiscally irresponsible and fail to live within their means. During the bubble, loan owners would go to the housing ATM machine, pull out a year’s worth of irresponsible spending, and pay off their credit card debt. After two or three years of this, they come to rely on this yearly cash infusion. Rather than seeing their annual $10,000 to[READ MORE]
Do we really need to give high wage earners a huge tax break as an encouragement to take on excessive debts? That's what the home mortgage interest deduction really does. If the deduction were eliminated, home values in areas like Orange County populated by high wage earners would drop to establish a new equilibrium, but nobody would go without. In fact, the home mortgage interest deduction does little or nothing to increase home ownership rates because the low wage earners at the fringe of affordability don't use the deduction anyway. Studies have show home ownership rates are just as high in countries like Canada that do not have the deduction. So why do we keep it? Apparently, there is a lot of political pressure even from those who don't utilize the subsidy. As a renter paying[READ MORE]
Since the housing bust began, the banks have largely controlled the inventory of homes on the MLS. At first, they flooded the MLS with subprime foreclosures, but with mark-to-fantasy accounting, they were able to slow their foreclosure rates and store delinquent borrowers in shadow inventory. Since early 2009, the number of properties available for sales has been completely controlled by the banks. They determine when to list their standing inventory of REO, and they control the approval on every short sale. Between those two sources, the banks control the market. Banks decided early this year to slow the rate they took back properties at foreclose auctions thus reducing MLS inventory of REO significantly. More recently banks increased foreclosures 30% as their REO pipeline stabilizes, but this supply is still[READ MORE]
Imagine a room with 100 people representing the pool of subprime borrowers. These are new entrants to the market. They were previously unable to buy due to bad credit, lack of savings, and other reasons. All of them are told they are going to bid on an asset that never goes down in value, and they will be given the ability to borrow unlimited funds (stated-income “liar loans”) The only caveat is the borrowed money must be paid back when the asset is sold (not that they care, they already have bad credit). Imagine what happens? People start to buy the asset, and prices rise. Others in the room seeing the rising prices come to[READ MORE]