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Archive for the ‘Housing Prices’ Category

CNBC is losing viewership practically on a daily basis, yet they have the key to turning that all around, if they’d only give Rick Santelli his own show….

The last 40 years have seen the U.S. housing market transform into a market largely driven by incredible amounts of debt.  The credit card companies understood the basic notion that the monthly payment drove most financial decisions.  Even though people purchase a home with a 30 year mortgage, the implicit understanding was that in a few years the home would be sold again and yet another new mortgage would be taken out.  Housing became like the national debt in that most realized we would never get around to paying it off.  We would simply roll over the debt over and over apparently in an endless process.  Yet this can only go on as long as average Americans have an increase in their standard of living and wages.  The opposite has occurred.  For that reason, housing is expensive in today’s market.  The median sales price of an existing home is $184,000:

As the media reports that prices are going up, the underlying message is that somehow things are getting better.  Yet the reasons for prices going up are largely due to government intervention into the market.  The two main driving forces that have pushed prices up in the last few months are:

(-1)  The new home buyer tax credit

(-2)  Federal Reserve purchasing mortgage backed securities to force interest rates lower

The outcome of this has pushed the existing sales price of homes up but Americans are not seeing improvements in their income.  You can see that 30 year mortgage rates are at historical lows:

Let us go back to the first chart.  Back in 1970 the median home price in the U.S. was $23,000.  This means very little without context.  Back in 1969 the median household income was $9,302.  So it took 2.4 times the annual household income to purchase a home:

Median household income

1969:     $9,302

2008:     $57,000

Median home price

1970:     $23,000

2010:     $184,000

The ratio today is up to 3.2 so it is still more expensive to buy a home today than it was back in 1970 relative to income and home values.  You also need to remember we have many more two income households today so we have more people working unable to purchase the same standard of living from four decades ago.  This is an important distinction.  We can even measure home values in terms of gold:

1970 gold price:                                 $35

1970 median home price:             $23,000

Ounces of gold needed to buy a home:                 657 ounces

2010 gold price:                                 $1,181

2010 median home price:             $184,000

Ounces of gold needed to buy a home:                 155 ounces

Regardless of your view on gold, it has gotten much more valuable in terms of home values over this time.  You would need 4 times the amount of gold back in 1970 to purchase the median priced home.  Today, 155 ounces is enough to purchase the typical home.  What has occurred over this time is the slow decline of the U.S. dollar.  Average Americans haven’t paid much attention to this because access to debt has hidden the real erosion of purchasing power.  It is also the case that cheaper imported goods have hidden the weakness of the currency.  But those things are now coming to fruition and we are starting to realize how much the U.S. dollar has fallen.

If U.S. home values were increasing due to a healthy job market with steady income growth then we can say price increases were justified.  Yet the gain is currently artificial.  We need only look at the jump in homeownership rates brought on by exotic mortgage financing:

The homeownership rate is now back to levels not seen since the 1990s.  Simply providing debt to someone without the means to sustain a long term payment is irresponsible.  Yet the deeper problem stemmed from banks believing that home values would keep going up and up.  In fact, some of the bigger banks saw this coming in 2005 and 2006 and started positioning their portfolio to take advantage of the coming collapse.  There was no accident here but a deliberate funneling of debt to American consumers with housing as the main Trojan horse.  Now that we know what has kept things propped up, do we want to continue down this road?  Having a high homeownership rate shouldn’t be a mandated policy.  If we have higher homeownership rates in this country based on healthy economics then that is fine.  But simply putting people into homes for the sake of doing it is bad policy.  It is also the case that many of the bailouts were ushered in under the guise of helping “homeowners” but it was really a way to fix the bad bets of banks.

The chart above shows that there were times in our past when homeownership was actually in the minority camp.  The massive increase in the late 1940s and 1950s was for the right reasons.  It came because of big increases in household formation and a booming economy.  The push in the 1990s and 2000s was largely due to bubbles.

You wouldn’t know it from reading the mainstream press but a large part of our country actually rents:

Source:  Census

37 million households in the U.S. rent.  This works out to 1 out of 3 households.  Yet government policy through tax incentives punishes those for renting.  So it was no surprise that easy lending from banks and stated government policy created the perfect storm for the largest housing bubble the world has ever witnessed.  Those that think the correction is over are wrong.  Let us look at new home sales data:

People aren’t buying new homes in large numbers because they don’t have the money to do so.  When you have 40 million Americans on food assistance, purchasing a new home doesn’t exactly show up on the radar.  For those with work, you have 4 out of 10 Americans workers employed in the lower paying service sector.  Who will buy the more expensive newer homes?  That is why most of the recent action has come in the existing home market.  What constitutes an existing home sale?  This would be a foreclosure resale or a pre-owned home being resold.  In fact, in June only 30,000 new homes were sold in the entire country while 564,000 existing homes were sold.  The gap is always big but this is near historical levels.

40 years of housing was built on more and more debt.  Households even today are required to go massively into debt to purchase a home.  The metrics are still off.  It is still too expensive to buy given the current economic conditions of our market.  Money is only as valuable as what you can buy with it.  Would you rather have those 657 ounces of gold from 1970 or the median home from back then?  That median priced home is now worth $184,000 while the 657 ounces of gold would be worth $775,917.  The purchasing power of the dollar has gotten weaker but some fail to see it because of the large amounts of debt that mask the longer term problems.  The housing market is in for a harrowing few years.  Proceed with caution.

My Budget360

The Index of pending home sales fell a record 30% in May to a record-low reading of 77.6 — two hugely pessimistic predictors of future prices nationwide. Yet the combination of two record negatives went barely reported when the stats were announced last week.

So here’s the news for you now, a week late, but new to the marketplace of ideas. Pending-home sales have crashed and now stand below the worst numbers we have seen since the housing crash started in 2006. The rubber bands and duct tape are breaking apart in the property market. Presume the fix of a fall is in.

Take a look at the three charts below. Judge for yourself how important the facts are which the National Association of Realtors (NAR) announced last Thursday (July 1). I personally find them startling, alarming, critical to review.

The oversight by major news outlets — snubbing record negatives — is egregious by virtue of its ignorance of the expiration of the free-down-payment program. The pending-home-sales stat gave us our first view of buyer demand for housing without the hugely popular prop from the federal government.

I am not saying here that the news was buried. I am saying that reporters failed to do the most basic leg work. Even those who lucked out and stumbled upon the record stats, they failed to comprehend the importance of the new data. I would have missed it too if I hadn’t charted the numbers myself, but I did, so I didn’t miss it.

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Speculation has run rampant as commentators have wondered about the direction of prices as government support starts to fall away.

The future direction of real estate prices is a major obsession of almost all economy watchers as the monthly bill for shelter overshadows others, as the value of homes is a predominant factor of family wealth, and because the banking sector has huge investments based upon residential property.

“If you’re looking for a silver lining in housing, you aren’t going to find it here,” Mike Larson of Weiss Research said. “Demand has fallen off a cliff in the wake of the tax credit expiration, with pending sales falling by the biggest margin ever to the lowest level ever.”

Mr. Larson’s comment drew attention to the two new record lows. His name is on every story that mentioned one or both record stats. Had he remained silent, these highly relevant record lows would have gone unreported completely.

Of the 15 major media outlets i reviewed, four actually did learn about both of the record negatives, but they didn’t understand the meaning of it.

The statement by NAR announcing pending-home sales makes no reference to either the record fall or the record new low. If their intention was to hide bad news, they got away with murder. Let’s show you the fools who fell for it.

***

Among the outlets who failed to uncover either of the two record negative stats are Barrons, Dow Jones, The Financial Times, Fox Business, The Los Angeles Times, and Marketwatch.

I reviewed stories on pending-home sales by 15 leading news outlets – in addition to the flunking students mentioned immediately above, I also read Atlaticwire.com, BBC News, Bloomberg, Boston.com, CNBC, Investors’ Business Daily, New York Times, Reuters, US News — and the only difference between the outlets was the extent to which they screwed up this critical epicenter-type data set (Please see the graphic nearby depicting the various degrees of incompetence.).

The future direction of housing prices are arguably the most critical factor in the most critical nation in the most critical financial crisis since the Great Depression. The signs are not hunky-dory in this market. The May pending-sale figures may in retrospect serve as a Rosetta Stone: A perfect guide to the true fortunes of residential real estate. Just in case you have forgotten, we are in one hell of a market, and Mom did not tell us this is what would happen when we grow up.

*** HousingStory.net estimates current inventory for sale of 3.9 million is 1.2 million units higher than it should be, and not too far away from the record high 4.5 million. Inventory stands at 8.3 months of sales, but it should be at 5.8 months.

 Fourteen percent of mortgages are behind on payments — about 7.7 million borrowers or, more starkly, one in seven. A record 4.63 percent of borrowers are in foreclosure. Approximately 13 million homeowners have no equity or negative equity. They would make nothing from the sale of their house if they could sell it. Or they would lose a little or a lot. Thus do we have the phenomena of strategic default — now as common as no-money-down mortgages during the boom.

 ***

 We are in a pause of a tectonic shift of plates. Prices have been flat since August 2009, but are down 30% from their peak. The fall of 30% was almost completely discounted as impossible prior to its occurrence.

 My speculation is that the fate of bubble-mortgage debt remains as our key obstacle blocking recovery (Unbelievers should rent the Godzilla movie “Eating the Lost Decades of Japan” for further enlightenment.). Total mortgage balances remain almost unchanged from the peak of the bubble –$11.68 trillion today versus $11.95 trillion at the peak (see chart below).

The data released last week on pending home sales and the dismal record of reporting on that data proves that breaking news business journalism fails even in surface scratching. The cows just want to feed on the grass in front of them and go on to the next field. 

The smart investor is going to look at these charts on pending-home sales and have a real advantage over the common media consumer. Readers of my work know I have found pessimistic facts easy to find. The pending-sales figures are a dramatic concurrence — a record fall and a record low. 

So I will give you my opinion: All hell has broken loose all over again in real estate. Don’t buy a home. Sell one. 

*** 

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The press release by NAR on pending-home sales. The Fifteen Stories by Major Media Reviewed on Pending Home Sales. 

Thank you for carrying the story to Automatic Earth, Business Insider, Implode, Jesse’s Cafe Americain, MortgageNewsClips.com, Patrick.net. Housing Story

By Dylan Ratigan

The dire straits of the middle class of America has made it near impossible for our politicians to keep up the pretense that our current government truly works for the “people.” Between the multiple overt and secretive bailouts, the massive bonuses and the circular use of our tax money to lobby for these continued handouts, you can no longer hide from the evidence.

When Senator Durbin said “The banks… frankly own this place,” you realize it was not in jest.

Couple this with recent protections handed by the Supreme Court to corporations to directly influence elections and it can make things seem hopeless for those not on Wall Street or their chosen politicians. Favored CEOs and now even foreign countries get all the printed money they need, leaving us paying both our bills and theirs.

And now nearly a quarter of all Americans are currently underwater in their mortgage because of that steadfast honor.

If you are one of them, chances are you didn’t do anything wrong. Almost all of you were not subprime borrowers or speculators, but merely people buying a house that they thought they could afford at the time. You were just unlucky in that you bought a house during a time when an outdated Wall Street and their complicit politicians decided to use housing to regain the income they lost due to the Schwabs and Etrades of the internet age.

You didn’t cause this mess. They did.

Now you are struggling to make the same payments on this mortgage on your now overpriced home even in light of a crashing economy and massive deflation, all while the government does everything in its power to help Wall St. keep the bonuses coming.

Well, it is becoming time to take matters into your own hands… I suggest that you call your lender and tell them if they don’t lower you mortgage by at least 20%, you are walking away. And if they don’t agree, you need to consider walking away.

It probably doesn’t feel right to you.

That is because you probably are a good person. But your mortgage is a business deal, and it is not immoral to walk away from a business deal unless you went in to the deal with the intention of defaulting.

But somehow, even though the corporations are pumped to exercise their new rights, former bankers like Henry Paulson, current ones like Jamie Dimon and — get this — now even Fannie Mae execs want to keep you from exercising your rights.

But before you let them (or anyone commenting below) force you into paying that $500k mortgage on a $300k house, ask them if they’ll push Jerry Speyer into “honoring his obligation” by breaking into his $2 billion personal piggy-bank to keep paying for Stuyvesant Town?

Or how about asking Hank and Jamie to lecture fellow bailed-out CEO John Mack about how “you’re supposed to meet your obligations, not run from them”? Maybe make him use some of his $50+ million for those buildings he bought in San Francisco?

And before shaming and punishing American homeowners, did they nag Steve Feinberg about helping “teach the American people…not to run away” by writing a check out of his billion-dollar pocket to cover all the stiffed landlords and vendors at Mervyn’s? After all, at least you aren’t single-handedly putting 1,100 employees out of work when you walk on your mortgage.

As part of the deal for your house, your mortgage holder gets interest payments from you and they also use the note to your house for their capital reserves. In return, they take the risk of a foreclosure. In many states, you paid extra to have a non-recourse loan where the lender just gets the house back if you stop paying — your interest rate would’ve been much lower if you were held personally liable like a student loan. But if you still feel bad, then donate the money saved to charity instead of to their bonuses. And when someone tries telling you why it is so wrong, here are some answers:

- Yes, it might seem selfish, but you are actually going to help fix our country the right way, through the use of pure capitalism. There are 3 parties involved in your mortgage — the mortgage holders, the servicing bank and you. You probably want to stay in your house. Most of the people who actually own your mortgage also want you to stay in your house, preferring a mortgage reduction that you keep paying instead of the total loss of a foreclosure. But the major banks (BofA, Wells Fargo, JP Morgan, Citi, etc.) that underwrite and service the loans don’t care about either of you. They (with the aid of their government) just care about hiding their true financial condition for long as possible so they can continue to bonus themselves outrageously. The credible threat of you walking away from your mortgage en masse is the only market-based solution that will force these banks to work with the mortgage holders on your behalf.

- No, you will not “hurt” your neighbors — certainly not near the scale of the banksters. Chances are someone just as nice will you will move in and (unlike you) pay a fair, non-inflated price for the house. Encourage your neighbors to fight back against the banks and ask for their own mortgage reductions as well.

- Yes, it might make getting a loan harder for everyone. Considering the spate 0% down NINJA loans over the past decade, that probably isn’t a bad thing.

- Yes, it might hurt your credit. But with time, people bounce back from having foreclosures on their record. Search online and then talk to a lawyer about the repercussions, which vary by state.

- No, the banks won’t necessarily pass the losses on to customers. They already make a lot of money. If costs are passed on to every consumer without banks competing on price, that’s a sign of illegal collusion or a monopoly. Let’s fix that instead of just letting banks ruin our lives. They might, however, not all make $145 billion in bonuses next year doing something fundamentally so easy that it is an unpaid job in Monopoly.

Meanwhile, our captured government has made it clear that they want to further reward these banksters because there are clearly better ways to “save” the economy without rewarding those most responsible for the damage.

Instead of claw backs for the past theft and strong financial reform for the future, they choose to cover-up the gross misuse of our tax money, making our country worse by helping the criminals on the backs of the most honest.

But thankfully, in this country we still have the tools to fight back and regain our country. Our vote, our voice, our laws and what we choose to do with every penny we have that doesn’t go to taxes are the benefits of our hard-fought freedom, and in this battle we must use them all to fight back. It’s time for the citizens to once again own this place.

ZeroHedge

Over a third of HAMP participants have exited the program and another batch is coming up. Those leaving the program will likely end up in foreclosure. Moreover, 4 million delinquent borrowers are not even eligible for the program.

Please consider Borrowers exit troubled Obama mortgage program.

The Obama administration’s flagship effort to help people in danger of losing their homes is falling flat.

More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That’s more than the 27 percent who have managed to have their loan payments reduced to help them keep their homes.

Last month alone, 150,000 borrowers left the program — bringing the total to 436,000 who have exited since it began in March 2009. A major reason so many have fallen out of the program is the Obama administration initially pressured banks to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.

“The majority of these modifications aren’t going to be successful,” said Wayne Yamano, vice president of John Burns Real Estate Consulting, a research firm in Irvine, Calif. “Even after the permanent modification, you’re still looking at a very high debt burden.”

HAMP Performance Report Through May 2010

Here are a couple of charts from the Making Home Affordable Program Servicer Performance Report Through May 2010.

Hamp Trials Started

Permanent Modifications

Waterfall of HAMP-Eligible Borrowers

Not all 60-day delinquent loans are eligible for HAMP. Other characteristics may preclude borrower eligibility. Based on the estimates, of the 5.7 million borrowers who were 60 days delinquent in the 1st quarter of 2010, 1.7 million borrowers are eligible for HAMP. As this represents a point-in-time snapshot of the delinquency population and estimated HAMP eligibility, we expect that more borrowers will become eligible for HAMP from now through 2012.

Only 30% of the 5.7 million borrowers who are 60 days delinquent are eligible for the program. 4 million delinquent borrowers are stuck. Of those eligible for the program, only 346,000 have completed the trial and received a permanent modification.

Many of those receiving a permanent modification will slip back into default and head for foreclosure. Many of those who successfully keep their house would be better off if they lost it.

Looking at HAMP from every angle, it’s safe to say the program was a failure and another huge wave of foreclosures is coming down the road.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Why buying a home today makes little financial sense. 3 reasons why taking on a mortgage in today’s market is deep in speculation. Are homes still over valued? Tax benefit not as big as you would expect.

Posted by mybudget360

It is hard for many to believe that home prices in many of our largest cities are still overvalued.  Part of this distortion has to come from living in a decade long housing bubble that has adjusted the perception of value and price.  But in many areas home prices are still much too high relative to the income of local families.  When disconnects occur here, bubbles are produced.  The stock market is experiencing this since price to earnings ratios are still much too high for what businesses are drawing in through revenues.  The housing market is off by 30 percent from its 2006 peak and weakness is now appearing once again now that the tax credit has expired and the Federal Reserve is finished with their mortgage backed security buying campaign.  It only took a few weeks once artificial measures were taken off the table.

Home prices relative to income are still too high nationwide:

Source:  Visual Economics

In fact, if we look at recent data the numbers are still too high:

Median Household income:       $52,029

Median U.S. home price:             $173,100

Yet on a nationwide basis, we are getting closer to the ratio of the 1970s.  But on a more narrow level of cities and states, some areas are still very much in bubbles including California.  It is a fascinating case of consumer behavior post-housing bubble.  Since most of us have now been conditioned over the past decade that the only way to buy a home is to take out an enormous mortgage and leverage each penny of net income to a home payment, we have forgotten sounder times.  In light of this, it might appear that home prices make more financial sense in today’s climate but they do not in many areas.  Let us look at a few reasons why buying a home today is not a good idea.

Reason #1 – Smaller mortgage with higher interest rate better than big mortgage with small interest rate

One argument you hear those in the housing industry continually make is “you should buy today because rates will rise.”  What they don’t tell you is that higher rates usually mean cheaper home prices and buying a less expensive home with a smaller mortgage and higher interest rate makes much more sense than buying an expensive home with a big mortgage and cheap interest rate.  Before we walk through an example, let us look at historical mortgage rates:

Over 40 years of history shows an average 30 year mortgage rate of 9 percent.  The current average that is lower than 5 percent is an anomaly.  If we run a few scenarios, you will see that a cheap mortgage rate and an expensive home actually give buyers less power when it comes to paying down their mortgage.

We’ll run two scenarios with the current interest rate and the average to show why this occurs.  We’ll assume a same monthly payment since this is usually what is used for debt-to-income qualifications so the home price will reflect this.

Low interest rate scenario – 5% 30 year fixed

Home price:                       $250,000

30 year mortgage:           $237,500 (using a 5% down payment)

Monthly principal and interest:                  $1,274

Total interest over life of loan:                   $221,482

High interest rate scenario – 9% 30 year fixed

Home price:                       $165,000

30 year mortgage:           $156,750 (using 5% down payment)

Monthly principal and interest:                  $1,261

Total interest over life of loan:                   $297,298

On the surface, this appears to be a good deal.  By paying more with a lower rate you have more flexibility.  But let us assume this family is able to contribute $300 more per month.  What happens then?

Low interest rate scenario $300 additional monthly payment (239 payments – 19 years)

Total interest over life of loan:   $137,388

High interest rate scenario $300 additional monthly payment  (188 payments – 15 years)

Total interest over life of loan:   $135,437

Here is the big difference.  With $300 more per month, the person with the high interest rate can pay off their loan 4 years faster and save on their interest payments as well.  This is the leverage of having a higher interest rate and a lower priced home.  Also, the requirement for down payments is shifted lower since the price is moved lower.  This is good if the person ever decides to sell their home in the future because more people can qualify for the home.  The heavily exotic mortgage market simply caters to the idea that home price is the most important factor in housing.  It is not.  Affordability is the most important factor for long-term sustainability.

Tax benefits over sold?

One of the oddest pitches about buying a home is the tax deduction.  The fact of the matter is, most homeowners live in cheap enough housing that the standard deduction is all that is needed without the mortgage interest deduction being taken.  In fact, only a handful of states like California benefit from this tax deduction even though most think this helps them (probably from not understanding the complicated tax system).  To be honest, the mortgage interest break actually helps out the wealthiest in our country.

“(Tax Foundation) For tax year 2008, a little over one quarter of the nation’s tax returns claimed the mortgage interest deduction, 26.8 percent of the nation’s 143 million tax returns. Rates of home ownership are much higher than this, but many home owners don’t claim the deduction. Often they live in low-cost homes for which the deduction isn’t large enough to make a tax difference, so they don’t itemize deductions on their tax returns. In addition, home owners who have paid off their mortgages make no interest payments to deduct.

The average tax return in the U.S. deducted $3,279 in mortgage interest; that includes all tax returns, even the non-homeowners and non-itemizers. Counting only the tax returns that deducted mortgage interest, the average amount was $12,221.”

This is a stunning revelation.  The homeownership rate is approximately 67% but only 26.8% claimed the mortgage interest deduction.  So much for that sacred cow of housing right?

Reason #2 – Price to earning potential of home is still unsupported by long-term trend

Home prices in many cities are still in mini-bubbles relative to the income of families in those areas.  California is a prime example:

According to the California Association of Realtors the median home price in California is $306,000.  However the median household income is $60,000.  This means the home price is 5 times the annual household income of a family in the state.  Take for example the following:

Median household income:

1969:     $9,302

2008:     $57,000

California median home price:

1969:     $24,640

2008:     $500,000

So back in 1969, the ratio was 2.6 and at the peak it was close to 10.  Today even at 5, it may appear to be lower relative to the peak but it is still too high.  Expect this ratio to come back in line in the 3 to 4 range.  This has historically been the case for most areas across the United States.  Many states are actually back in line but many cities still think they are somehow immune to this trend.

Reason #3 – Mortgage rates will go up

The U.S. Treasury and Federal Reserve have been systematically pushing mortgage rates lower.  For example, the Federal Reserve just finished buying up $1.25 trillion in mortgage backed securities.  The Fed balance sheet is already overfilling with mortgage backed securities, loans taken from banks, and other items which never were intended to fall under their prevue:

Source:  Zero Hedge

This is not normal.  Historically we have never been in a position like this.  It is unwise to think that mortgage rates will stay low for an indefinite amount of time.  Already the credit markets are starting to push rates higher because of the risk inherent in the current debt riddled system.  Buying today assumes and is a bet that we can go into trillions of dollars of debt with no interest rate repercussions.  This is a giant gamble and the markets are acting like a volatile casino.

To buy today is a big bet.  There is too much that makes this market volatile.  Aside from the above, there is also a large amount of shadow inventory which will keep a lid on price appreciation for years to come.  Betting on housing today is probably the biggest gamble many will make.