The last six months seen some incredible housing activity. In Orange County, the housing market exploded with some segments of the market increasing 20% in value, bidding wars for homes, and a high percentage of cash sales. Then in May there were indications that the Federal Reserve might scale back it's Quantitative Easing (money creation) program. This cause mortgage rates to increase and then skyrocket in June. Simultaneously, home values increased due to low supply and the previously ultra low rates. These two factors should change the housing market dynamic, and I was looking for some indicators of this change. Some news articles this week gave some cues on these early indicators. So let's examine the number of purchase loans, types of loans, and the behavior of investors; these are all indicators relating to purchasing. At[READ MORE]
Archive for June, 2013
House prices generally rise along with wages. When wages go up, people use their borrowing power to bid up home prices. Of course, this requires three simplifying assumptions. First, interest rates must be steady. Steadily dropping interest rates can increase borrower leverage in the absence of increasing wages. In fact, most of the increase in prices from 1990 to 2012 can be directly attributed to falling interest rates. Homebuyers in 1990 made the same house payments as a buyer in 2012, but prices in 2012 were considerably higher due to the decline in interest rates from 10.5% to 3.5%. It doesn't look likely that interest rates will fall below our recent record lows, certainly not enough to recreate the excess leverage created from 1990 to 2012. The second simplifying assumption is that the percentage of income put toward housing remains constant.[READ MORE]
The picture of the housing market painted by the mainstream media is that the housing market is recovering on strong sales and strong home price appreciation. People are going back to work, and using their new incomes to buy homes. Unfortunately, this rosy picture doesn't reflect what's really happening. Sales are up because investors are buying homes. Owner-occupant sales activity is stuck at mid 1990s levels. The rise in prices is not due to surging demand. Instead, it's due to a 50% decline in for-sale inventory causing the few active buyers to compete and bid up prices. There is nothing natural or sustainable about the manipulations of the market driving the current pace of sales and price increases.[READ MORE]
Should everyone really own a house? Are renters so much less a part of their communities that the government must spend billions of dollars subsidizing home ownership? These are important questions. How we answer them will guide how we remake our housing finance system which was destroyed with the collapse of the housing bubble. The current system of government props with the taxpayer insuring more than 90% of the mortgages in the US is not tenable or desirable. Is there a balance between public and private sector appropriate to the housing market?
Those who want government guarantees for mortgages see them as a path to encourage homeownership and market stability, but instead guarantees pose needless risks to homeowners and taxpayers. Government guarantees suffer from three flaws: the inability and unwillingness to price[READ MORE]
Resale prices of used houses in Orange County are rising rapidly. The weakest city in my monthly report was La Palma that has only risen 3.3% year-over-year. On the other end of the spectrum, Dana Point is up a whopping 19.5%! More than half the cities in Orange County are up more than 10%. When I run my monthly reports, I use the dollars-per-square-foot measure of house prices. It isn't subject to much distortion based on a change in mix like the generic median price is. It's a better measure of how much house buyers are getting for their money. I am not among the alarmists suggesting the recent rapid prices increases are the sign of another housing bubble. Again, I look at the data, and it says that house prices are still undervalued in most OC markets. My methodology is to[READ MORE]
Crony capitalism has replaced free markets in America. We instituted too-big-to-fail banks during the Great Recession partly because the financial interests have become so powerful in Washington that nobody dared suggest we let these behemoths fail and let the bonuses of incompetent bankers disappear. The relationship between corporations and the government is closer than any time since the late 19th century. Perhaps we could use a little Teddy Roosevelt type trust-busting to clean up our broken financial system. Until the next TR comes along, we get to watch scandal after scandal were former government officials go to the private sector to peddle their influence and get outsized paydays (like Robert Rubin at Citibank). The latest abuse of power and influence comes from the independent foreclosure review mandated by the bank settlement agreement. A company run by a former government official[READ MORE]
One of the side affects of Quantitative Easing (QE) and the Zero Interest Rate Policy (ZIRP) has been ability of homeowners with debt to refinance at lower rates with shorter mortgage terms like a 10 year, 15 year or 20 year fixed rate mortgages. Even the loan mods for loanowners have cheap teaser mortgages rates. The result of this side side is homeowners are being dividend up into loosely dividend groups. 1) loanowers that will have no equity on their homes after 10 years. 2) Homeowners that have refinanced into 10, 15, or 20 year mortgages that nearly paid them off after 10 years. This have implications for retirement for these two different groups of indebted homeowners.
The other key factor related to interest rates and mortgage rates is that Certificates of Deposits are paying[READ MORE]
The federal reserve sets policy in meetings of the Federal Open Market Committee (FOMC), a group of bankers. The FOMC sets target interest rates and directs its traders to either buy or sell securities to meet interest rate targets.When the federal reserve buys Treasuries, the price goes up, and interest rates go down. When the federal reserve sells Treasuries, the price goes down, and interest rates go up. Prior to the financial meltdown in 2008, the federal reserve only bought short-term Treasuries, but in an effort to rescue housing, they began an unprecedented campaign of buying 10-year Treasuries and mortgage-backed securities in order to drive down mortgage interest rates. It's important to remember that the federal reserve had never done anything like this before. However, with the member banks of the federal reserve exposed to a $1 trillion in unsecured mortgage[READ MORE]
Language has a powerful influence on our perceptions and beliefs about reality. The current meme on the housing market is that prices have "recovered." Financial recovery suggests the return to a natural equilibrium from and undervalued state. In the case of housing, this suggests the peak of the housing bubble was the fair market value and restoring peak prices means housing has "recovered." The reality is far different. A bubble is a financial condition where asset values become greatly detached from fundamentals and inflate beyond any reasonable measure. When a financial bubble bursts, asset values crash back to fundamental values and often overshoot to the downside. The deflation of a bubble to fundamental values is the recovery. Reflating asset prices to peak valuations is merely a manipulation of market pricing -- the opposite of recovery. The chart above shows the median cost[READ MORE]
Banks don't want to modify borrower's loans. They would far rather be paid back the money they borrowed with interest at the terms originally negotiated in the promissory note. The only reason banks are even considering loan modifications is because the collateral backing behind the loan no longer covers the original capital amount. If it did, banks would foreclose, boot out the delinquent borrowers, and resell the house to someone who was ready, willing, and able to make payments under the negotiated terms. It should be obvious that banks don't want to modify these loans. If this were something they wanted to do, they would make it much easier, wouldn't they? Have you ever seen someone opening a savings or checking account go through the same hassles as someone trying to obtain a loan modification? If banks want the[READ MORE]