Tuesday, December 29, 2009

Case Shiller Price Index - October 2009

From Case Shiller's Press Release:
“The turn-around in home prices seen in the Spring and Summer has faded with only seven of the 20 cities seeing month-to-month gains, although all 20 continue to show improvements on a year-over-year basis. All in all, this report should be described as flat.” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s.
As of October 2009, average home prices across the United States are at similar levels to where they were in the autumn of 2003. From the peak in the second quarter of 2006 through the trough in April 2009, the 10-City Composite is down 33.5% and the 20-City Composite is down 32.6%. With the relative improvement of the past few months, the peak-to-date figures through October 2009 are -29.8% and -29.0%, respectively.
Prices declined in 12 of the 20 Case-Shiller metropolitan areas, and were flat in New York.

Case-Shiller House Price Graphs for October (Calculated Risk Blog)

In the Washington, DC area prices were fell -.4% (not seasonally adjusted) in October compared to September; Annually prices have declined -2.8%. I expect small price declines during over the winter months in the DC area.

Monday, December 28, 2009

Get to know your blogger

I'm on vacation this week. David says he'll post to the blog while I'm gone. In the meantime, get to know your blogger through Wikipedia user boxes. Click on the image to see the full-sized version.

Saturday, December 26, 2009

Updated housing bubble graph

For those who are interested, I have finally gotten around to updating my housing bubble graphs. The national graph now has a new feature: pre-bubble trend lines.

Click on the graph to view the full-sized version.

Friday, December 25, 2009

David Lereah Launches New Real Estate Blog

David Lereah launches a new blog called Real Estate Economy Watch.

Seeking Alpha has this to say:

Maybe not… but it appears that Lereah has launched a new venture… let’s call it a blog… with both an ironic title and a decidedly more realistic un-spun outlook.

Real Estate Economy Watch” is effectively a blog that hosts daily commentary on the housing market, tracks market data, and even specifically follows the course the “housing crisis”.

The title is ironic because it is reminiscent of “David Lereah Watch” a popular blog that relentlessly pounded Lereah during the heyday of the bubble crescendo.

The content, on the other hand, bears an unrecognizable skeptical edge.

Solid name for his site. I hope that it also contains solid content. Of course he cannot be trusted.

Wednesday, December 23, 2009

Bernanke criticized for ignoring housing bubble

Kevin Drum criticizes Fed Chairman Ben Bernanke for being complacent about the growing housing bubble. Nobel laureate Paul Krugman follows suit.

NAHB: Senate health care bill targets home builders

The National Association of Home Builders isn't happy with the Senate's version of the health care reform bill:
Home builders say they are unfairly targeted in the sweeping Senate health-care legislation that could mean coverage for millions of Americans.

"In their rush to pass massive health care reform before Christmas, Senate Democrats included a last-minute provision overtly targeting the construction industry, including home builders," the National Association of Home Builders said in an email alert to its 200,000 members Monday. "In order to find the 60 votes needed to pass health-care reform, a provision was slipped into the health-care bill to exclude the construction industry from the small business health-care exemption contained in the bill."

Employers with more than 50 employees would be required to offer insurance or pay a fine of up to $750 per employee if any employee obtains federal subsidies for coverage. But the builder group says the bill singles out the construction industry by "only giving construction firms an exemption from the bill's employer mandates if a firm employs less than five people. Every other industry is granted an exemption if they have fewer than 50 employees."

Tuesday, December 22, 2009

Home prices falling again?

This comes from Calculated Risk:
Earlier today I mentioned that the Fed started using First American CoreLogic's LoanPerformance House Price Index last year for the Flow of Funds report.

And also that LoanPerformance announced today that house prices fell 0.7% in October.

Since most people have been following Case-Shiller, here is a graph of the LoanPerformance index (with and without foreclosures) and the Case-Shiller Composite 20 index.
The LoanPerformance HPI with foreclosures is the red line, the LoanPerformance HPI without foreclosures is the blue line, and the Case-Shiller 20-city index is the green line. (The Case-Shiller index includes foreclosures.) Notice that both LoanPerformance indices show falling prices again, while the Case-Shiller index is showing slowing price increases. Click on the graph to see the full-sized version.

Consider this a Christmas present for bubbleheads.

Saturday, December 19, 2009


Morgan Stanley is immoral. (Just in case you didn't already know.)

Finally, a stimulus bill I can support. But why does Congress feel the need to tell states how to spend the money? Why not just give money to the states and let those closer to the ground level make the spending decisions. Does Washington, D.C. really know what's good for Wyoming better than the Wyoming state legislature does?

Friday, December 18, 2009

Bearish housing predictions

Predictions from Trulia CEO Pete Flint:
Next year "government interventions will start to disappear, shadow inventory will hit the market and mortgage rates will start to rise" to around 6 percent from under 5 percent, he said. "We're in a false state of stability."

Shadow inventory includes houses that banks now hold but have yet to put up for sale.

Double-digit unemployment will push more owners into foreclosure, further destabilizing the housing market and pressing prices down another 5 to 10 percent, said Flint.
Predictions from RealtyTrac:
Foreclosures could escalate to 4 million in 2010, RealtyTrac Senior Vice president Rick Sharga said.

"Unemployment, negative equity are driving factors, as is credit availability," he said. "We don't believe we will get back to normal levels of foreclosure activity on a month-to-month basis until probably the end of 2012, and we will still be going through the shadow inventory well into 2013."

Banks will place the unsold homes on the market at a measured pace to thwart prices on all homes from falling off a cliff anew, he said.

Thursday, December 17, 2009

Question for readers

Do you agree with Time's choice of Ben Bernanke as Person of the Year?

To paraphrase an old Paul Krugman saying, "Whom the Gods would destroy, they first put on the cover of BusinessWeek Time magazine."

By the way, here's a little Bernanke nugget from The Wall Street Journal's Real Time Economics blog:
In an extended interview with Time Magazine, Fed Chairman Ben Bernanke says he refinanced his own mortgage a couple of months ago at 5%, and switched from a floating rate, which the Fed chairman said “exploded” in cost, to 30-year fixed. Mr. Bernanke bought a 2,600 square foot house in 2004 for $839,000.

A conspiracy theorist might infer that Mr. Bernanke sees rates rising a lot in the years ahead. Why else lock in a low rate now? It’s also interesting that he had an adjustable rate mortgage whose cost exploded. Could the Fed chairman have been in an exotic mortgage with a rate that reset much higher?

Citigroup: No foreclosures during the holidays

Citigroup is suspending foreclosures for the next 30 days:
Citigroup Inc. will suspend foreclosures and evictions for 30 days in a temporary break for about 4,000 borrowers during the holiday season.

The New York-based bank said Thursday the suspension will run from Friday through Jan. 17. It applies only to borrowers whose loans are owned by Citi. Borrowers who make payments to Citi but whose loans are owned by other investors are out of luck.

"We want our borrowers to have a much less stressful time, to spend their time with their families during the holidays as opposed to worrying about their homes," Sanjiv Das, head of the company's mortgage division, said in an interview.

Monday, December 14, 2009

Ginnie Mae is an enabler of risky lending

From The Washington Post:
The trouble signs surrounding Lend America had been building for years. A top executive was convicted of mortgage fraud but still helped run the company. Home loans made by its headquarters were defaulting at an extremely high rate. Federal prosecutors alleged in a civil suit that the company falsified loan documents and committed fraud.

Yet despite these red flags, a little-known federal agency continued giving its blessing to Lend America, allowing it to do business in the name of the U.S. government. The Government National Mortgage Association, known as Ginnie Mae, authorized the firm to bundle its mortgages into securities and sell them to investors around the world — all backed by U.S. taxpayer money. ...

Lend America is hardly the only lender with a troubled record that Ginnie Mae has endorsed. The agency has provided taxpayer backing to at least 36 other mortgage companies with a history of reckless lending, fines or other sanctions by state and federal regulators or civil lawsuits, according to an analysis of government records, court documents and statistics in a HUD database.

Ginnie Mae's ongoing relationship with these firms allows them to swap the home loans they've made for new cash so they can make more loans, which can then be traded for even more cash to make even more loans. Housing experts say this dynamic turbocharges the type of bad mortgage lending that first helped trigger the financial crisis that battered global markets over the past two years. And ultimately, taxpayers are on the hook for the troubled mortgages. ...

More than a dozen lenders with Ginnie's endorsement have made loans that are now delinquent at rates far in excess of what regulators consider acceptable. And some of these lenders have been accused of misleading both borrowers and the government about these loans.

Sunday, December 13, 2009

CNBC: The Bubble Decade

CNBC has a new documentary about this past decade's economy called The Bubble Decade. Apparently it first aired last night, will air tonight and tomorrow night, and probably numerous times after that. Here's the synopsis:
In The Bubble Decade, a one-hour CNBC Original documentary, Correspondent David Faber reports on one of the most dramatic periods in the history of America’s financial markets. As the first decade of the 21st century draws to a close, Faber looks back at the tumultuous era, one marked by ambition and innovation, avarice and excess, and record highs – and lows – on Wall Street.

The sweeping story of the three economic bubbles that defined the decade begins with the tech bubble, its apex marked by AOL’s audacious takeover of Time Warner. The deal signified the heights and hope of the dot-com boom, a chapter that saw the creation of scores of high-flying internet companies, many of which would die an early death. The middle of the decade brought the housing boom and the formation of the real estate bubble. It was the age of easy money, with banks all too eager to fund new construction, and developers and homeowners all too eager to take on loans they couldn’t afford. The last bubble of the decade to burst was the credit bubble, exemplified by private equity firms awash in money and on the lookout for takeover targets. In some cases, these private equity deals and leveraged buyouts resulted in a lucky few making a fortune, with the targeted company loaded up with debt and ruined in the process.

The rollercoaster ride of the past decade is told through the people who lived it: some who made millions, some who lost millions, and some who did both. Faber profiles Internet entrepreneurs, real estate speculators, and corporate takeover specialists. In addition to reporting the taped segments, Faber will moderate two panels of key players who shaped the biggest financial stories of the decade.
It's hard to believe this decade is almost over. Each decade goes by faster than the last.

Show times:
  • Sunday, December 13th 10p ET
  • Monday, December 14th 8p ET

Saturday, December 12, 2009

The ethics of stiffing the bank

Megan McArdle gives her thoughts.

Prof. Karl Case retires

Wellesley College economics professor Karl Case, of Case-Shiller fame, retired from teaching yesterday:
The idea for the most influential measure of the nation’s housing market began in Karl E. Case’s living room about 25 years ago. ...

He grew obsessed with housing values and wanted to come up with a better way to measure them. Within a few years, Case and his colleague Robert J. Shiller of Yale University created what is now called the S&P/Case-Shiller Home Prices Indices, a measure based on repeat home sales that industry officials and economists rely on to gauge the health of the country’s housing market.

Case spun his ideas on home values into a series of papers, became one of the nation’s foremost specialists on housing, and imparted his passion to students, leading them on tours of Boston neighborhoods and requiring them to go through the process of buying a house as part of their course work.

Now the 63-year-old professor, suffering from Parkinson’s disease, has decided to retire, his last class scheduled for today. Case said his brain and body are not functioning the way they used to. He is slowly losing his short-term memory and can no longer remember the names of all his current students. ... "I can remember the names of every kid from 25 years ago," Case said. "All of a sudden I have a class now, and I don’t remember their names." ...

Case said he is going to keep talking about housing, even in retirement, and will work on the 10th edition of his textbook, “Principles of Economics.’’ He also plans to continue speaking at conferences.

Thursday, December 10, 2009

Foreclosure filings up 18% YoY; down 8% MoM

From CNN Money:
Foreclosure filings fell by 8% in November, making it the fourth consecutive month of improvement in the housing market.

There were 306,627 filings last month, according to RealtyTrac, an online marketer of foreclosed properties. That decline follows a 3% drop in October, 4% in September and 1% in August. ...

However, while there are signs of improvement, the industry has yet to turn around: Foreclosure filings were still a lofty 18% above November 2008's levels.

Wednesday, December 09, 2009

FHA: Helping the affluent buy housing

The Federal Housing Administration exists in part to make housing more affordable for low-income families. However, with the advent of the financial crisis the FHA has experienced mission creep. The first of its new missions is to help prop up housing prices, thus preventing housing from becoming affordable. The second of its new missions is to help high-income Americans buy homes. Since the FHA is currently on financially shaky ground, these new missions could end up coming at taxpayer expense.

The Washington Post explains the latter of these new missions:
CREATED DURING the depths of the Great Depression, the Federal Housing Administration has a long history of supporting homeownership in the United States. In recent decades, its mission has been to enable lower-income Americans to tap otherwise inaccessible mortgage credit. ...

What must be debated, and indeed challenged, is the stepped-up use of the FHA to boost demand for, and hence the price of, houses in the current crisis. This is true not only because of the fiscal implications; the FHA's reserves are currently below the statutory minimum, raising the specter of an eventual taxpayer rescue. It is true also because of the regressive distributional implications; the FHA is increasingly helping people who are decidedly not poor to buy houses that are anything but modest. ...

Even some fairly fancy condo buildings are now trumpeting FHA financing. As the New York Times reported recently, among those buying property with little or no money down, thanks to FHA, are investors and well-off people who could have come up with more equity. ...Whatever the additional risk may be, the federal government is assuming it in a way that facilitates the upward transfer of wealth.

When adopted last year, the higher FHA loan limits were billed as a temporary fillip to the housing market. But temporary subsidies have a way of enduring. ... This might help build a floor under the still-shaky housing market, as intended. But it would also complete the mission creep of the agency from one dedicated to upward mobility to one that also produces middle- and upper-middle-class enrichment.
The Wall Street Journal explains that Congressmen of both parties want these new missions to become permanent:
Lawmakers from high-cost housing districts, for example, want to ensure that the FHA doesn’t disappear from their neighborhoods. They’ve introduced a bill that would make permanent the higher loan limits that Congress temporarily expanded last year. ... [Barney] Frank said he thinks limits should be increased to around $800,000. ... Other lawmakers, meanwhile, want to bring back programs that allowed borrowers to receive FHA-backed loans without making down payments.
A traditional rule of thumb is that the price of the house you buy should be roughly three times your annual income. (Many of the homeowners who ended up underwater recently ignored this rule of thumb, looking only at their monthly payments instead.) Using this 3X annual income ratio, an $800,000 FHA loan would allow people earning up to $266,667 per year to qualify. Using a far more generous 4X annual income ratio, people earning up to $200,000 would qualify. These income levels are way above the U.S. median. Even in America's three wealthiest counties as of 2008—Fairfax County, Virginia, Loudoun County, Virginia, and Howard County, Maryland—these income levels are at least double the median household income.

So here's a question for readers: Since the FHA is knowingly offering huge mortgages with very little down payment (3.5%), and knows that such behavior led to massive defaults when banks recently did the same thing, is it morally ethically acceptable for a borrower to walk away from an FHA loan—leaving taxpayers with the bill—if he ends up underwater on his home?

Tuesday, December 08, 2009

Housing: Canada vs. the United States

Canadian vs. U.S. housing prices:

Canadian vs. U.S. delinquency rates:

Commentary from the source:
While it is difficult to disentangle the reasons why Canada avoided the subprime boom, some factors can be identified that may have contributed to the differences in the Canadian and U.S. subprime markets.

Perhaps the simplest story is that Canada was “lucky” to be a late adopter of U.S. innovations rather than an innovator in mortgage finance. While the subprime share of the Canadian market was small, it was growing rapidly prior to the onset of the U.S. subprime crisis. In response to the U.S. crisis, some subprime lenders exited the Canadian market due to difficulties in securing funding. In addition, the Canadian government moved in July 2008 to tighten the standards for mortgage insurance required for high LTV loans originated by federally regulated financial institutions. This further limited the ability of Canadian banks to directly offer subprime-type products to borrowers.

There are also several institutional details that played a role. The Canadian market lacks a counterpart to Freddie Mac and Fannie Mae, both of which played a significant role in the growth of securitization in the U.S. In addition, bank capital regulation in Canada treats off-balance sheet vehicles more strictly than the U.S., and the stricter treatment reduces the incentive for Canadian banks to move mortgage loans to off-balance sheet vehicles. Finally, as noted above, the fact that the government-mandated mortgage insurance for high LTV loans issued by Canadian banks effectively made it impossible for banks to offer certain subprime products. This likely slowed the growth of the subprime market in Canada, as nonbank intermediaries had to organically grow origination networks.

The Canada-U.S. comparison suggests the low interest rate policy of the central banks in both countries contributed to the housing boom over 2001–2006 and that a relaxation of lending standards in the U.S. was the critical factor in setting the stage for the housing bust. A caveat worth emphasizing, however, is that the Canada-U.S. comparison tells us little about what would have happened if U.S. monetary policy had been tighter earlier. Tighter monetary policy in the early part of the decade may have helped to limit the subprime boom by slowing the rate of house price appreciation over 2002–2006. The Canada-U.S. comparison does, however, highlight the practical challenge facing policymakers in assessing whether a rapid run-up in asset prices is a bubble or a “sustainable” movement in market prices.

November 2009 job losses: BLS vs. ADP

Via Mark Thoma, FT Alphaville questions the accuracy of the BLS payroll numbers released on Friday:
Just how amazing were the US payroll numbers released on Friday?

So amazing they’re verging on the (perish the thought) unbelievable, according to some analysts.

The consensus forecast among analysts for the November job loss had been -130,000, with even the relatively optimistic and sometime-clairvoyant economists at Goldman Sachs forecasting -100,000. The official data showed a fall of just 11,000 — about 90 per cent fewer than the consensus estimate.
Many months ago I began tracking the Automatic Data Processing payroll numbers in addition to those from the Bureau of Labor Statistics in order to satisfy those conspiracy theorist commenters who just don't trust the government's data. For November 2009, ADP and the BLS disagree by over 150,000 job losses.

Here's my graph of BLS data for this recession:

Here's my graph of ADP data for this recession:

Update: I just noticed that the BLS measures both private and government payrolls while ADP only measures private payrolls. However, even just comparing private payrolls, the disparity is roughly the same. ADP says there were 169,000 private nonfarm job losses in November, while the BLS says there were only 18,000 private nonfarm job losses—a 9-fold difference.

Thoughts on "too big to fail"

Economist and blogger Rebecca Wilder has some thoughts on "too big to fail" banks.

Monday, December 07, 2009

More bubbles to come

Robin Wells, a former Princeton University economics professor and current wife of Paul Krugman, says we will continue having financial bubbles:
The world is trapped in a global savings glut. It is both the source of our economic woes and an obstacle to the task of pulling ourselves out of the ditch. Worse yet, the glut's continued existence will feed a succession of asset bubbles until we confront it, head on, and find ways to soak up the excess.

Yes, we can blame the City and Wall Street for turning the global savings glut into fissile material. But that's like saying, "hyenas do what hyenas do". Given extraordinarily lax regulation and a flood of money to play with, bankers were just acting according to their incentive schemes. They merely took advantage of the opportunities the glut presented. The real culprits are thrifty Germans, and state-owned enterprises in China – along with governments of other countries, of course, turning a blind eye to the escalating problems. ...

What makes this a global glut is that the world as a whole is saving more than can be profitably invested. The corollary is that, eventually, those funds will earn less than nothing. And through financial engineering, those losses are now distributed around the world. ...

Until the savings glut is vanquished, asset bubbles and instability will be fed, exacerbating income inequality and favouring wealthy bankers and the Chinese elite. It will continue drawing resources away from productive sectors of the economy and channelling them into high-paying but socially useless financial engineering – or into yet more excess capacity.
If you've ever considered going into banking, perhaps it's not too late. Real estate agents may again be raking in the dough. And Bubble Meter may continue to have plenty to blog about.

Sunday, December 06, 2009

Bargain book about the financial crisis

Looking for an inexpensive Christmas gift for yourself or others? Just want something to read while traveling? The Two Trillion Dollar Meltdown is currently available from Amazon.com for only $4.55.

I haven't read the book, so I can't attest to its quality. I do, however, get a kick out of this 1-star reader review of the first edition from April 29, 2008:
"Trillion Dollar Melt Down" is about the 2007 sub-prime credit crisis. The huge problem, though, is that the book mostly proclaimed that the sky was falling in 2007 when it was written, but now - (mid 2008) when the book has finally reached the market - the sky still hasn't fallen, no recession has started, and unemployment is still very low. The book, then, seems like a short (194 pages), obsolete gimmick, raced to market, to capitalize on old fears about something that never happened.

Saturday, December 05, 2009

The unemployment rate declines!

The economy keeps getting better (or less bad). The unemployment rate actually fell in November, down to 10.0% compared to 10.2% a month earlier:

The year-over-year percent change in initial jobless claims has fallen below zero, which means employed workers are safer than they were a year ago:

November's month-over-month change in nonfarm payrolls was just about zero, the best it's been since December 2007:

Compare the above graph with a graph of ADP's numbers.

The year-over-year percent change in aggregate weekly hours worked is rising:

Permabears must be growling at the improving data.

Friday, December 04, 2009

2010 housing predictions

CNBC real estate reporter Diana Olick makes four predictions for the coming year:
  1. The residential housing market will dip again in mid-2010 before settling into a recovery in the back half of the year.
  2. Foreclosure inventory will be a lot higher than some predict.
  3. No more historic lows on the 30-year fixed.
  4. Commercial real estate will continue to suffer the ills of low vacancy rates, low rents and high default rates.

Thursday, December 03, 2009

ADP: November 2009 job losses

According to the ADP Employment Report, the month over month rate of job losses continued to decline in November. This graph shows the number of job losses in thousands:

Here are ADP's comments on the numbers:
Nonfarm private employment decreased 169,000 from October to November 2009 on a seasonally adjusted basis, according to the ADP National Employment Report®. ...

November was the eighth consecutive month during which the decline in employment was less than in the previous month. Although overall economic activity is stabilizing, employment usually trails economic activity, so it is likely to decline for at least a few more months.
Keep in mind that we need 100,000-200,000 job gains each month just to keep up with population growth.

Wednesday, December 02, 2009

Home sales contracts up in October

The number of home sales contracts surged in October, as home buyers tried to take advantage of the first time homeowner tax credit:
In October the National Association of Realtors recorded an unprecedented ninth consecutive month of increases in the number of signed contracts.

Although these are not closed sales, and some deals can fall through, signed contracts are a good indicator of where the housing market is headed.

Between September and October NAR's Pending Home Sales Index rose 3.7% to 114.1 from 110 in October. But the index is 31.8% higher than a year ago, when it was 86.6. That's the biggest year-over-year gain in the history of the index.

The PHSI is also at its highest level since March 2006, and the rise confounded expert expectations. A panel of industry analysts put together by Briefing.com had forecast a 1% drop in new contracts.

NAR's chief economist, Lawrence Yun, gives much of the credit for increased sales to the homebuyer's tax credit, which first-time homebuyers could claim to reduce their taxes by up to $8,000. ...

The credit had been due to lapse on Dec. 1, so many October buyers may have acted to get in under the wire.

Tuesday, December 01, 2009

Law professor: Walk away

A law professor encourages people to walk away from their homes:
Go ahead. Break the chains. Stop paying on your mortgage if you owe more than the house is worth. And most important: Don't feel guilty about it. Don't think you're doing something morally wrong.

That's the incendiary core message of a new academic paper by Brent T. White, a University of Arizona law school professor, titled "Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis."

White argues that far more of the estimated 15 million American homeowners who are underwater on their mortgages should stiff their lenders and take a hike. ...

Better yet, you can default "strategically." Buy all the major items you'll need for the next couple of years — a new car, even a new house — just before you pull the plug on your current mortgage lender.
Scenario #1: You walk into a bank and take a bunch of money that doesn't belong to you. This is called theft.

Scenario #2: You take out a loan, promising to pay it back. Then, after you have the money, you decide not to pay it back. How is this not also theft?

I can completely understand not paying back a loan if you lose your job and are unable to pay back the loan. I can also understand if you get sick and end up with huge medical bills that make it impossible to pay back a loan. I can even understand not paying back a loan if the bank deceived you regarding what your payments would be.

However, if you decide not to pay back the loan simply because you overpaid for your house, then I consider that the moral equivalent of theft.

Keep in mind that being underwater doesn't mean you can't afford the monthly payments. It just means that the value of your house has fallen by more than the amount of your down payment (and any subsequent principal payments). A person who stiffs their lender because their investment didn't turn out as expected is scum. Just because you can steal from a bank doesn't mean you should steal from a bank.

Update: This is not just a moral issue. It's a practical one, too. Mortgage interest rates contain a risk premium. A society in which homeowners eagerly stiff the bank is a society in which it is riskier to lend. A society in which homeowners feel a moral obligation to repay their debts is a society in which it is less risky to lend. More risk means a higher risk premium, and thus higher interest rates. Less risk means a lower risk premium, and thus lower mortgage interest rates. Society as a whole benefits when everyone feels a moral obligation to fulfill their end of agreements.


"You buy this house and you will be rich."

Saturday, November 28, 2009

Flashback 2005: Margaret Hwang Smith and Gary Smith said "there is no bubble"

Margaret Hwang Smith and Gary Smith, economics professors at Pomona College in Claremont, California, argued in a paper titled "Bubble, Bubble, Where’s the Housing Bubble?" that "there is no bubble in the prices of single-family homes in 2005."
In a bubble, market prices are far above fundamental values calculated with reasonable assumptions about the future cash flow. By this definition, there is no bubble in the prices of single-family homes in 2005. ... The observation that real estate prices are higher than they used to be or higher than the values predicted by models using historical prices does not prove that current prices are above fundamental values. ... The relevant question, however, is not how much prices have increased in the past or how fast people expect them to increase in the future, but whether, at current prices, a house is still a fundamentally sound investment. Our answer is generally yes, if the owner plans to stay in the area for many years to come.
If housing was "still a fundamentally sound investment" near the peak of the market, then why is the federal government today trying to rescue homeowners from foreclosure? Why is the Smiths' home state of California in such an economic mess?

Congratulations, Margaret Hwang Smith and Gary Smith! I hereby award you the James K. Glassman and Kevin A. Hassett Award for being completely unable to recognize an asset bubble.

Friday, November 27, 2009

Quote of the day

This quote from Dean Baker—one of the first economists to notice the housing bubble (about a year-and-a-half after I noticed it, but I digress)—actually comes from two weeks ago. I just found it and I like it, even if it is an exaggeration:
The Fed Is Responsible for 10.2 Percent Unemployment in the Same Way That Al Queda Was Responsible for September 11th
An elaboration:
There may well be an anti-elitist strain to the anger against the Fed and Bernanke, but serious people do not dispute their responsibility for the economic crisis. There was an enormous housing bubble that was easy for competent economists to recognize. It was inevitable that it would collapse and that its collapse would lead to a serious downturn. Bernanke and the Fed allowed the bubble to just continue to expand until it collapsed of its own weight instead of using the powers of the Fed to rein it in before it grew to dangerous levels. All of this is entirely clear to those who know the history.

Wednesday, November 25, 2009

GDP revised downward

From The Wall Street Journal:
What last month had appeared to be third-quarter growth of 3.5% in gross domestic product turns out to have been a more modest 2.8%. Consumer spending was pared back to 2.9% from 3.4%. The cash-for-clunkers subsidy produced fewer new-vehicle purchases than first estimated. In short, we aren't getting much bang for our $787 billion stimulus bucks.

Cato on the housing crisis

The Cato Institute's view of the housing bubble and resulting financial crisis:
The housing bubble and its aftermath arose from market distortions created by the Federal Reserve, the government backing of Fannie Mae and Freddie Mac, and the Department of Housing and Urban Development and its Federal Housing Administration. Americans suffered through a severe recession in 2008 and 2009, a downturn unfortunately precipitated by perverse government policies.

Regarding bad decisions made by the private sector, the traditional remedy for severely mistaken investment policies was to shut and dismantle those firms making mistakes to stop the bleeding, to free their assets and personnel to go where they can add value, and to make room for firms with better entrepreneurial ideas. That sort of market restructuring should have been allowed to happen in the U.S. financial sector.

A financial market in which failed enterprises like Freddie Mac or AIG are never shut down is like an American Idol contest in which the poorest singers never go home. The closure of Lehman Brothers (and the near-closure of Merrill Lynch), by raising the interest rate that the market charges to highly leveraged investment banks, forced Goldman Sachs and Morgan Stanley to change their business models drastically. The most effective and appropriate form of business regulation is regulation by profit and loss.

The long-term remedy for the severely mistaken government monetary and regulatory policies that have produced the current financial train wreck is similar. We need to identify and undo policies that distort housing and financial markets, and dismantle failed agencies and departments, such as HUD, whose missions require them to distort markets. We should be guided by recognizing the two chief errors that have been made. First, cheap-money policies by the Federal Reserve do not produce sustainable prosperity. Second, delivering mortgage subsidies by imposing affordable housing mandates on banks and by providing federal support to Fannie Mae and Freddie Mac bonds can backfire in a tragic way that damages the broader economy.

Tuesday, November 24, 2009

Almost one-quarter of mortgage borrowers are underwater

From The Wall Street Journal:
The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Existing home sales up 23.5% year-over-year

The month-over-month change was 10.1%:
Existing home sales surged in October to the highest level in more than 2-1/2 years, according to a real estate industry report issued Monday.

The National Association of Realtors reported that existing home sales rose 10.1% last month to a seasonally adjusted annual rate of 6.1 million units, up from the downwardly revised rate of 5.54 million in September. ...

The gain was likely due to an influx of buyers looking to take advantage of an $8,000 tax credit that the Obama administration made available for qualified first-time home buyers, the report said.

The tax credit was scheduled to expire at the end of November, but it has been extended to April 30 and expanded to include more home buyers.

"Many buyers have been rushing to beat the deadline ... and similarly robust sales may be occurring in November," NAR chief economist Lawrence Yun said in a statement.
Make money in 2010: Your home

But such a spike means December and early 2010 will probably see a "measurable decline before another surge in spring and early summer," Yun said.

Adam York, economist at Wells Fargo, agreed that "it's really a story of the tax credit, and a payback is inevitable." ...

The median price of homes sold in October was $173,100, a 7.1% year-over-year drop. Distressed properties comprised 30% of the houses sold during the month.

Thursday, November 19, 2009

Housing starts fell significantly in October

Month-over-month housing starts fell in October:
In a blow to the optimism that had surrounded the U.S. housing sector in recent months, housing starts fell a sharp 10.6% in October, the Commerce Department reported Wednesday.

New construction on housing units dropped to a seasonally adjusted annual rate of 529,000, the lowest level since April. The 10.6% drop was the biggest percentage decline for starts since January.

Both single-family homes and multifamily units declined last month.

Prior to the October decline, housing starts have been flat for four straight months, on the heels of a big rebound earlier in the year from historic lows for the home-building industry.
As you know, I don't put much stock in month-over-month changes. However, I suspect October's decline was tax credit related. Since it was uncertain in October whether the homeowner tax credit would get renewed, this may give us an idea of what to expect when the tax credit finally goes away next year (hopefully).

Wednesday, November 18, 2009

Five myths about homeownership

Joseph Gyourko, chairman of the real estate department and the director of the Zell/Lurie Real Estate Center at the University of Pennsylvania's Wharton School, lists five myths about home ownership:
  1. Housing is a great long-term investment.
  2. The homebuyer tax credit makes buying a house more affordable.
  3. Homeownership is good for society because owners make better citizens.
  4. It's safe to buy a house with a very low down payment.
  5. Owning a home is cheaper than renting one because you save on rent.
For his explanation of why they are myths, click here. I don't necessarily agree with all of his conclusions.

Monday, November 16, 2009

When did the housing bubble begin?

The Wall Street Journal asks when the housing bubble began:
Why should we care when it all began? It’s politics. If the housing bubble began during the Clinton administration, it can be blamed on the Democrats and their efforts to expand homeownership to people who, in some cases, may not have been quite ready for it. If it began under George W. Bush, then it can be imputed to the Republicans’ love of deregulation.

Of course, as we all know, the causes of today’s mess are far more complicated than either of those hypotheses allow. But nuance rarely figures in the debates of our age.

Edward Pinto, a mortgage-industry consultant who was the chief credit officer at Fannie Mae in the late 1980s, argued in a WSJ op-ed essay Friday that “most agree that the housing bubble started in 1997.”

I asked Mr. Pinto why he chose 1997. He pointed to a chart of long-term home prices patched together by Robert Shiller, a Yale economist. The chart shows inflation-adjusted house prices starting to move up sharply in the late 1990s. ...

Tom Lawler, an independent economist who worked at Fannie Mae from 1984 to 2006, says few housing gurus think the bubble began as early as 1997. In his view, the bubble began around 2002. The collapse of the tech-stock bubble in the year 2000 prompted many people, searching for other types of investments, to focus on real estate.
I spotted the housing bubble in spring of 2001, so I think people who claim it began later than that are fools. Anybody who looks at Robert Shiller's graph of house prices can easily see that the uptrend in real housing prices began in 1997-1998. We were in clear bubble territory by the end of 2000. Rather than blaming it on politicians, the strongest argument coming from economists is that the bubble was caused by a global savings glut that began in the late 1990s.

Here's my graph of nominal and inflation-adjusted housing prices since 1970. Look for yourself. When do you think the housing bubble began? (Click on the graph to see the full-sized version.)

Update: I notice that the Edward Pinto article blames the housing bubble on the Community Reinvestment Act (CRA). For Republicans who want to blame the bubble on the CRA and for Democrats who want to blame the bubble on bank deregulation, let me point out that the housing bubble was a global event. There was/is a simultaneous housing bubble in the United States, Australia, Britain, Ireland, and Spain, to name a few countries. The CRA does not explain why there was a bubble in Spain. Also, the November, 1999, passage of the Gramm-Leach-Bliley Act does not explain why real U.S. home prices began their ascent two years earlier.

Saturday, November 14, 2009

Why eminent domain should be used sparingly

This is karma:
The private homes that New London, Conn., took away from Suzette Kelo and her neighbors have been torn down. Their former site is a wasteland of fields of weeds, a monument to the power of eminent domain.

But now Pfizer, the drug company whose neighboring research facility had been the original cause of the homes' seizure, has just announced that it is closing up shop in New London.

To lure those jobs to New London a decade ago, the local government promised to demolish the older residential neighborhood adjacent to the land Pfizer was buying for next-to-nothing. Suzette Kelo fought the taking to the Supreme Court, and lost. Five justices found this redevelopment met the constitutional hurdle of "public use." ...

Scott Bullock, Kelo's co-counsel in the case, told me: "This shows the folly of these redevelopment projects that use massive taxpayer subsidies and other forms of corporate welfare and abuse eminent domain."
The City of New London forcibly took people's homes away from them and got what in return? A field of weeds and jobs that are gone in a decade? Screw the City of New London.

Friday, November 13, 2009

Jeffrey Sachs: How to stimulate the economy

Columbia University economist Jeffrey Sachs criticizes the Democratic and Republican ideas for stimulating the economy:
Following a Keynesian approach, the Obama administration has focused on restoring consumer spending. They have gone about this with a combination of near-zero interest rates, massive Fed financing of mortgages and various consumption incentives, such as rebates for new homebuyers and cash for clunkers.

During the previous bubble, the US consumer was encouraged to over-borrow. Recreating a new bubble is like offering just one more drink, on the government’s account, to overcome a mass hangover. ...

The Republican alternative is equally fatuous. For every problem there is a single Republican answer: tax cuts.
What does Dr. Sachs propose as an alternative?
There are three parts of a long-term solution. The first is to promote greater exports, partly through dollar depreciation and partly through expanded government support for export financing, for example extended to credit-constrained low-income countries that want to purchase US-produced technology. ...

A second component is a massive expansion of education spending and job training. The unemployment rate among college graduates is only 4.7 per cent, while it is 15.5 per cent among those without a high-school diploma. The US woefully under-invests in education outlays for the poor, who drop out of school and then cannot find gainful employment.

A massive expansion of education and training would address the current unemployment crisis in three ways: by shrinking the numbers of young people searching for work, by building job skills for the future, and by increasing total spending in the economy through education outlays.

The third component is to spur an investment boom in areas of high social return that are currently blocked by the lack of clear policies. The conversion to a low-carbon economy would create jobs in the short run, a more productive economy in the medium run, and US technological leadership in the longer run.

The same is true with the overhaul of America’s ageing infrastructure at a time when cutting-edge technologies can dramatically improve the efficiency of resource use, the safety of the built environment, and the sustainability of our ecosystems.
I'll let readers decide, but it seems to me that one of the most respected economists in the world agrees with me that education and infrastructure spending make for good economic stimulus, while the home buyer tax credit and cash for clunkers do not.

Again, education and infrastructure spending stimulate the economy in the short run and promote long-term economic growth because they add to our country's stock of capital (both human and physical). On the other hand, the home buyer tax credit and cash for clunkers may stimulate the economy in the short run, but they subtract from long-term economic growth.

Wednesday, November 11, 2009

Robert Shiller conflicted by housing data

Fox Business journalist Alexis Glick describes her recent interview with Robert Shiller:
Today it was clearly visible that the historical data he looks at to predict the future is not working. The current appreciation in housing and other economic indicators are not what the models would suggest. Time and time again he said “this is a time of great uncertainty.” He’s clearly puzzled by the rapid appreciation in home prices while disturbed by the “bail out economy” and the national deficit. He admitted, “Things seem to be working right now but we’re in a GRAND experiment.” I found it incredibly telling.

At one point I said, “You seem so conflicted.” He said, “I am terribly conflicted. This is the most uncertain time that I can remember. Things are violating the laws that I learned. The turn around in real estate is so dramatic. The whole country is experiencing an upsurge but I don’t know what to make of it.”
He's had other recent interviews:

Government has been dumping $40,000-$80,000 in cash into each marginal home purchase. With that kind of money, it would be shocking not to have a housing recovery. That spending gets added to the national debt. The people who get the hand out are often different from the people who pay the bill, so this is a case of robbing Peter to pay Paul.

Also, this massive spending changes the mark-to-market (short-term) value of homes, but since it does nothing to change the owner-equivalent rents those homes generate, it does not change the discounted cash flow (long-term) value of homes. Like credit card spending, we'll still be paying the cost when the benefit is long gone.

Hat tip to an anonymous blog commenter, who shall remain anonymous, and hat tip to Kevin for a link to the video.

Tuesday, November 10, 2009

Fannie Mae needs another bailout; Freddie Mac will need one

Fannie Mae is in more financial trouble:
Fannie Mae, the federally controlled mortgage finance giant, said Thursday it lost $19 billion in the third quarter and had submitted a request to the Treasury Department for $15 billion in more aid to stay afloat.

District-based Fannie Mae and its McLean sibling, Freddie Mac, were seized in early September 2008 by the federal government. Since then, Fannie Mae has lost $111 billion. The $15 billion in aid it has requested comes on top of $45 billion it already received. Freddie Mac has received $51 billion in aid.

In total, the seizure of Fannie Mae and Freddie Mac has cost taxpayers $121 billion, among the costliest of the government's interventions to stabilize the financial markets.

Fannie Mae said its losses and its need for additional government aid are both likely to continue. And it said activities it was undertaking at the behest of the Treasury Department, such as modifying mortgages to help homeowners avoid foreclosure, were magnifying its losses. ...

In its earnings statement, Fannie Mae said its assistance to struggling homeowners "could adversely affect our economic returns, possibly significantly."
Meanwhile, Freddie Mac doesn't need another bailout yet but it will:
Freddie Mac said it didn't need any additional federal aid for the second straight quarter as it reported a loss of $6.3 billion for the third quarter on Friday.

But the company said it expected to ask for more handouts from the U.S. Treasury in the future as rising unemployment and falling home prices continue to drive higher credit-related losses for both Freddie and its larger rival, Fannie Mae.
The government really didn't have much choice but to take control of Fannie and Freddie when they were teetering on collapse. However, government didn't have to keep these failed companies operational. The loses they will endure for continuing to lend during a declining housing bubble can be justly blamed on the politicians. The government should simply shut down Fannie Mae, Freddie Mac, and AIG. There's no good reason to keep these failed companies in business.

To put the costs in perspective, $121 billion in losses divided by 105 million American households means that these two companies have cost your household roughly $1,150.

Monday, November 09, 2009

Congress and president renewed home buyer tax credit on Friday

As I'm sure you've heard, Congress and President Obama renewed the home buyer tax credit on Friday. It's a massive waste of money that will simply add to the national debt. Unlike infrastructure spending, which will enhance long-term growth while helping to bail the country out of its current financial mess, spending $40,000+ each just to transfer existing houses from one person to another will harm long-term economic growth. It will harm economic growth because the government is not getting anything substantive in return for its spending and because it will have to pay perpetual interest on that deficit spending.

Washington Post columnist Steven Pearlstein reiterates why the home buyer tax credit is wasteful:
Politicians in Washington are desperate to show that they're doing something about jobs.

Unfortunately, what they're proposing to do is to spend a lot of money that they don't have in ways that won't work to help too many people who are neither desperate nor deserving.

Topping the list of idiotic ideas is the bipartisan push to reinflate the housing bubble by not only extending the tax credit for struggling first-time home buyers for six months but also expanding it to another "neglected corner of human misery," as the Heritage Foundation's Ron Utt so aptly put it -- affluent homeowners who want to trade their current places for something better.

This $10 billion boondoggle is nothing more than a giveaway to the real estate industrial complex and people who could afford to buy a new home anyway. Even its most prominent supporters acknowledge that of the first-timers who have already claimed the credit, only one in five wouldn't have bought a home without it, which works out to a cost per sale induced of $45,000. A more impartial estimate, by Goldman Sachs, puts the figure at $75,000. That is almost certain to go even higher once the credit is extended to existing homeowners with incomes of up to $225,000 buying houses worth as much as $800,000. ...

It is disappointing enough that President Obama and his team of crackerjack economic advisers have not had the wisdom or courage to oppose what any first-year graduate student would recognize as truly lousy policy. But perhaps that's because the Panderer in Chief is himself knee deep in stimulus hokum of his own with his proposal to shower Social Security recipients with a $250 cost-of-living increase this year even though their cost of living has actually declined. At a cost of $14 billion in borrowed money, it's a grossly inefficient way to stimulate the economy, create jobs or even boost consumer confidence.

Friday, November 06, 2009

October 2009 job numbers

The unemployment rate has reached the highest level since the early 1980s, rising to 10.2% in October 2009. The last time the U3 (official) unemployment rate was this high was April, 1983. (As a kid back then, it really didn't seem that bad—although I'm doing well now, too.)

Initial weekly unemployment insurance claims continue to improve—or more precisely, they are getting worse at a slower rate. This graph shows year-over-year numbers. Ideally, we'd like the YoY numbers to be below zero for an extended period of time.

The government's job loss numbers show a continuing, but slowing, contraction in the job market. Remember, we need monthly job gains of 100,000-200,000 just to keep up with population growth.

For conspiracy theorists who don't believe the government's numbers, here are the monthly job loss numbers as measured by Automatic Data Processing, Inc.

Readers, how will these job numbers affect foreclosures and home prices?

Thursday, November 05, 2009

Home buyer tax credit = more global warming

According to Harvard economist Edward Glaeser, Congress and the White House are intent on harming the planet:
ENVIRONMENTALISTS who are worried about global warming should pay attention to the congressional debate about extending the home buyers tax credit. Federal tax policies toward housing have long encouraged Americans to emit more carbon. President Obama could do the country, and the planet, a service by either refusing to sign the extension of the $8,000 credit or by insisting that it be accompanied by offsetting reductions in the home mortgage interest deduction.

According to the Residential Energy Consumption Survey, per person energy use in owner-occupied housing is 39 percent higher than in rental units. Energy use, per household member, is 49 percent higher in single-family detached houses than in apartments in buildings with more than five units. These differences reflect the strong connection between home size and energy use. The average four-bedroom house consumes 72 percent more electricity than the average two-bedroom house.

Yet the tax code encourages Americans to live in big, energy-guzzling homes, instead of thrifty apartments, and Congress seems intent on further unbalancing the federal budget to egg on home buyers.

Wednesday, November 04, 2009

Homebuyer tax credit nearing renewal

Stupid stuff like this is why, after a decade of voting straight Democratic in state and federal elections, I decided to stay home yesterday and let the winds of change blow. I'm disgusted with both political parties.

Tuesday, November 03, 2009

How the crisis could change economic theory

Here's an interesting look at how our little housing bubble may change macroeconomic theory.
The crisis exposed the inadequacy of economists' traditional tool kit, forcing them to revisit questions many had long thought answered, such as how to tame disruptive boom-and-bust cycles. ...

"We could be looking at a paradigm shift," says Frederic Mishkin, a former Federal Reserve governor now at Columbia University.

That shift could change the way central bankers do their job, possibly leading them to wade more deeply into markets. They could, for example, place greater emphasis on the amount of borrowing in the economy, rather than just the interest rates at which borrowing is done. In boom times, that could lead them to restrict how much money various players, ranging from hedge funds to home buyers, can borrow.

Monday, November 02, 2009

D.C. area foreclosures double year-over-year

From last Wednesday's Washington Post:
The number of Washington area homeowners in foreclosure has more that doubled in the past year, according to a report to be released Wednesday that shows the problem remains most acute in a few counties and could get worse as more borrowers fall behind on their payments.

About 2.7 percent of local borrowers are in the foreclosure process, meaning that the bank has started the legal process to take back the property, according to the report by the Urban Institute, a nonprofit policy research group based in Washington. That was slightly below the national average of 2.9 percent.

But that is up from about 1.4 percent in June 2008 and 0.5 percent in June 2007, according to the report. (The report excludes Howard and Anne Arundel counties.) ...

But the problem is far worse in three counties: Prince George's, where 5.2 percent of borrowers are in foreclosure; Charles with 3.9 percent; and Prince William with 3.7 percent. These areas had high concentrations of minority borrowers who were more likely to take out subprime loans, according to the report.

Thursday, October 29, 2009

Cash for Clunkers cost $24,000 per car

Edmunds.com has analyzed the car sales numbers during the Cash for Clunkers program and estimated that the marginal cost was $24,000 of our tax dollars for each new car sold:
A total of 690,000 new vehicles were sold under the Cash for Clunkers program last summer, but only 125,000 of those were vehicles that would not have been sold anyway, according to an analysis released Wednesday by the automotive Web site Edmunds.com. ...

The Cash for Clunkers program gave car buyers rebates of up to $4,500 if they traded in less fuel-efficient vehicles for new vehicles that met certain fuel economy requirements. A total of $3 billion was allotted for those rebates.

The average rebate was $4,000. But the overwhelming majority of sales would have taken place anyway at some time in the last half of 2009, according to Edmunds.com. That means the government ended up spending about $24,000 each for those 125,000 additional vehicle sales.
The average rebate value mentioned above seems like bad rounding. It appears the average rebate was closer to $4,348. Here's the math:

$3 billion overall cost ÷ 690,000 cars sold = $4,348 per car total cost

(690,000 / 125,000) × $4,348 = $24,000 per car marginal cost

In an example of regulatory capture (government regulators protecting the industry they are supposed to regulate), the Department of Transportation is defending Cash for Clunkers (i.e. "Car Allowance Rebate System") by saying that it was good for the auto industry:
"It is unfortunate that Edmunds.com has had nothing but negative things to say about a wildly successful program that sold nearly 250,000 cars in its first four days alone," said Bill Adams, spokesman for the Department of Transportation. "There can be no doubt that CARS drummed up more business for car dealers at a time when they needed help the most."
Note that what's good for car dealers is not necessarily what's good for the overall economy, just as what's good for Realtors is not necessarily what's good for the overall economy. Like the first-time home buyer tax credit, Cash for Clunkers is nothing more than wasteful corporate welfare.

The White House has come out with a weak, short-term-oriented defense of the program. Notice, however, that for the most part the left-wing economics bloggers who are usually quick to defend the White House against faulty economic reasoning (e.g. Paul Krugman, Mark Thoma, Calculated Risk) are remaining silent on this one. In fact, left-leaning economist Jeffrey Sachs is out with his own criticism of Cash for Clunkers' supposed climate benefits. Sachs actually makes the mistake of measuring total cost, rather than marginal cost, so the program is actually 5.5 times more wasteful than the numbers he complains about.

Just like the first-time home buyer tax credit, Cash for Clunkers is a handout of our tax money to the special interests who lobby Congress.

What does a median-priced house look like?

The median price of a house in the United States is roughly $175,000. Here's what a house at that price looks like in different parts of the country.

Tuesday, October 27, 2009

Shoddy construction

Discussing a recent New York Times article about shoddy condo construction during the boom, the Wall Street Journal's "Developments" blog writes:
The story about shoddy construction during the boom isn’t just a NYC tale. As M.P. McQueen reported in the Journal this summer, the furious pace of home building from the late 1990s through the first half of this decade contributed to a surge in defects. It caused shortages of both skilled construction workers and quality materials. Many municipalities also fell behind inspecting and certifying new homes.

The sheer volume of new buildings that went up during the condo construction boom is the main reason for the increase in defective buildings, lawyers and engineers told the Times.

So one would expect to see more problems in other cities that experienced a condo boom recently.
I doubt this is just a condo problem. It's something I've worried about when I eventually buy a home. So many homes were built during the boom, I bet many of them were rushed. I also bet that the increased demand for construction workers during the boom led to a drop in the average skill of the people hired to do the work, with many of them unable to even speak English. On the whole, houses built during this decade may be of inferior quality to houses built previously.

Monday, October 26, 2009

Government intervention added 5% to home prices

Here's a summary of the analysis from Goldman Sachs:
Uncle Sam’s interventions in the housing market have pushed home prices 5% higher on a national average than they would have been otherwise, Goldman Sachs estimates in a report released late Friday. ...

But these artificial props won’t last forever and may have created a false bottom in the market. “The risk of renewed home-price declines remains significant,” Goldman economist Alec Phillips writes in the report, “and our working assumption is a further 5% to 10% decline by mid-2010.”

Federal government policies encouraging loan mods have reduced the supply of homes on the market temporarily because it takes months for loan servicers (the firms that collect mortgage payments) to figure out which borrowers qualify. ...

Goldman estimates the tax credit has boosted sales by 200,000 units. ...

Mammoth purchases of mortgage securities by the Federal Reserve appear to have held home mortgage rates about 0.30 percentage point lower than they would have been, Goldman says. Those purchases are due to be phased out in next year’s first quarter.
Thanks to Kahner for pointing out Calculated Risk's response:
Based on Goldman's estimates, the first-time home buyer tax credit probably cost around $80,000 per additional home sold. Ouch.
Forget Wall Street, I think Congress needs a salary cut.

Saturday, October 24, 2009


I've heard that financial journalists sometimes get jealous of the Wall Street tycoons they cover, but this is ridiculous:

Apparently CNNMoney.com staff reporter David Goldman wants his pay cut, too. My advice to Time Warner is go ahead, be generous, give the guy what he wants.

Friday, October 23, 2009

MarketWatch: Kill the Credit

MarketWatch Washington bureau chief Rex Nutting argues against renewing the first-time home buyer tax credit:
The tax credit is an extremely ineffective stimulus, and like the TARP, it mainly rewards the very people who got us into this mess. ... Also, the tax credit gets the economic incentives all wrong. ...

The National Association of Realtors says about 2 million new buyers will take advantage of the subsidy this year, but the real-estate lobbying group admits that the vast majority of those buyers would have bought a home without any subsidy.

Most of the subsidy is wasted. ... It's expensive, but the worst thing about the subsidy is that it doesn't address the issue of oversupply, which is the main reason prices have fallen so much.

Most first-time buyers move from renting to owning a house. That subtracts one home from the vacancy list, but adds an apartment. The net change is zero. There is little gain for the economy.

In the second quarter, a record 4.4 million apartments were vacant (a record 10.6% of all units) and there were 1.9 million vacant dwellings that typically were occupied by the owner. The housing problem in America isn't that home prices are falling; it's that there are so many vacancies that prices must fall. Incomes did not rise as fast as home prices did, so many families simply can't afford current prices. The laws of supply and demand have not been repealed. ...

The tax credit is designed so a buyer can use it for a down payment. Combined with another flawed government plan to recreate subprime lending inside the Federal Housing Administration, the tax credit encourages more buyers to put less of their own money down.

The one thing we know about foreclosures is that they are much more likely if the owner has no equity. So the tax credit, which was designed to reduce foreclosures by helping to prop up prices, actually will lead to more defaults as already stretched buyers lose their jobs.
Remember, the first-time home buyer tax credit is costing $43,000 for every extra home sold. That's a massive waste of your money just to transfer an existing home from one person to another.

Thursday, October 22, 2009

HUD unexcited about extending the tax credit

The secretary of the Department of Housing and Urban Development (HUD) appears unexcited about extending the first-time home buyer tax credit:
The nation’s top housing official expressed doubt over the need to extend the $8,000 tax credit for first-time home buyers, and said that the Obama administration was reviewing whether the additional cost of extending the credit was worth any benefit in home sales.

Shaun Donovan, the secretary of the Department of Housing and Urban Development, told a Senate hearing on Tuesday that there was “clear evidence” that the tax credit had benefited the housing market. But he said that the “real issue” in considering an extension was whether an extension was worth the cost to the government in lost tax revenue.
Note that Calculated Risk estimates that the first-time home buyer tax credit costs about $43,000 for every extra home sold:
Here is the math: 1.9 million buyers qualify for the credit (the NAR estimates between 1.8 and 2.0 million) = $15.2 billion.

The NAR estimates the tax credit resulted in 350 thousand additional purchases. So divide $15.2 billion by 350 thousand = $43,000 per additional home. And the numbers will get worse if the program is extended.
The credit also appears to be vulnerable to tax fraud:
The Internal Revenue Service is examining more than 100,000 suspicious claims for the first-time home-buyer tax break, another sign of potential trouble for the soon-to-expire program.
It's a waste of money, poor economics, and vulnerable to tax fraud, so of course Congress will renew it.

The FHA failed a recent audit

Reckless lending practices are part of what got us into the current financial crisis, and the government's response has been...
The Federal Housing Administration may be under-equipped to manage its exploding market share, according to an internal audit released last week. The report gave the FHA poor marks for its steps to screen lenders that are allowed to sell loans backed by the federal agency.

The FHA’s market share has grown sharply as the private mortgage market collapsed over the past two years, and the FHA now insures around one-quarter of all U.S. mortgages, up from around 2% in 2006. ...

The audit, by the inspector general for the Department of Housing and Urban Development, found that the agency was under-equipped to manage a big inflow in applications by lenders to make FHA-backed loans. ...

The agency’s management of its affiliated lenders remains a top concern because the FHA’s financial reserves have dropped below mandatory levels for the first time in its 75-year history. Critics warn that rising defaults on FHA-backed loans could require a taxpayer bailout, but agency officials insist taxpayer money won’t be needed. Fraud remains a top concern as defaults rise on loans backed by the agency. ...

Some in Congress want the agency to do more by increasing minimum down payments to 5%, up from the current 3.5%. The agency says that such a move would kill any nascent housing recovery.
Things are really messed up when 5% down payments would "kill any nascent housing recovery." 20% down payments used to be the norm. Is America really that addicted to debt?

Wednesday, October 21, 2009

Breakin' the law in D.C.!

This is not exactly on topic, but:
The Heenes may have violated FAA regulations barring people from flying balloons or kites within 5 miles of an airport, an FAA official said.
Has anyone ever noticed the annual kite festival on the National Mall? That's only 2 miles from Reagan National Airport by my measurement. Somebody please arrest the Smithsonian Institution! Have FAA officials never been to D.C.?

It turns out that there's a qualification:
"…within 5 miles of the boundary of any airport…No person may operate an unshielded moored balloon or kite more than 150 feet above the surface of the earth unless…"
So, if you let go of your kite at the festival and it flies up 150 feet above the earth, then you're a malefactor.

Tuesday, October 20, 2009

Fiserv: Home prices to resume decline

Home prices are predicted to fall 11% by mid-2010:
If you thought home prices were bottoming out, you may be wrong. They're expected to head a lot lower. ...

Overall, the national median home price is predicted to drop 11.3% by June 30, 2010, according to Fiserv, a financial information and analysis firm. For the following year, the firm anticipates some stabilization with prices rising 3.6%.

In the past, Fiserv anticipated the rapid decline in home-sale prices over the past few years — though it underestimated the scope.

Mark Zandi, chief economist with Moody's Economy.com, agreed with Fiserv's current assessments. "I think more price declines are coming because the foreclosure crisis is not over," he said. ...

If Fiserv's forecast holds, Miami real median home price will tumble to $142,000 by June 2011. ...

Brad Hunter, chief economist for Metrostudy, which provides housing market information to the industry, ... pointed out that the tax credit for first-time home buyers helped support prices during the three months of Case-Shiller gains. ... But the market assistance ends when the credit expires on Dec. 1. Hunter also sees a new wave of foreclosure problems coming from higher priced loans and prime mortgages.
With winter coming, Miami is about to start looking better and better.

Commercial vs. residential real estate prices

From the CalculatedRisk blog, commercial real estate prices vs. residential real estate prices since 2001:

Note that commercial real estate prices aren't getting subsidized via the first-time home buyer tax credit. As far as I'm aware, they don't qualify for FHA loans either.