housing crash

OldTrader -

thanks for your posts, very interesting.

a bit more on CA's scheme:

http://www.law.duke.edu/journals/dlj/articles/dlj53p1399.htm

 

Too bad this thread is called "housing crash". I think that polarizes the issue. Is it booming or crashing? Two extremes.

To me the thread name points to a general fear that speculators and some homeowners share. And I'm talking about homeowners who are fairly highly leveraged with their loan. A homeowner like that is sure betting the price won't drop too far, and hopefully will rise.

Since the topic is Crash, then I guess this is appropriate to the thread

There has been a RE boom that has swept a lot of people up into it. Some people are leveraged more than is safe, if we have a slump. A RE slump effects more than RE. It is a loss of national economic wealth. The loss of that causes some degree of loss in the general business sector, ie maybe not as much re-fi money to throw around. This can cause a loss of jobs, etc. etc...... None of us can see the future, but it is obvious that a loss in consumer spending will make the RE slump worse to some degree. The problem works from at least 2 directions at once. A RE slump doesn't occur in a vaccum. To some extent it feeds on itself.

As that slump starts, highly leveraged or those looking to take money off the table, will decide to sell. Move to a less risky position, one by one. There won't be a discernible stampede at the turn in the market. Novices, at RE risk, can be fooled on timing. The hints to sell will be subtle. You can't look at a homebuilder chart because they operate at an economy of scale that the little guy doesn't. They can sell when you can't. They have their own in-house financing and you don't.

The very fact that we have so many views on RE's health points to a lot of fear, IMO. So those who are at risk should read this from Bloomberg. Note the blood in the streets quote. This is really not a subtle message. I make my living from RE and this is anything but a subtle hint for those who need to get to a safer spot.

At some point sellers will stop leaving one by one. A consensus to sell will occur and there will be a definite downtrend. It reminds me so much of a head and shoulders chart. Especially the volume aspect. The price on the right side can fall of its own weight without a lot of volume (sellers).

 

how sound are the private mortgage insurers........are they well regulated??? also, why would the defaulters bother with bankruptcy protection if they have already lost their home(s)??? what is your present take on fannie mae???

btw, i enjoyed your other posts as well.

 

Looks like they are rounding up a few more housing "longs" before the decline....


Tue, Jan. 04, 2005

Pilot program funds mortgage loans for illegal immigrants

XIAO ZHANG

Associated Press

MILWAUKEE - In a pilot program described as the first of its kind, an agency created by the state government is making it easier for illegal immigrants in Wisconsin to obtain mortgage loans.

Immigrants who do not have Social Security numbers - a common requirement for loans - can use an alternative government-issued tax number to get financing for new homes, under the Wisconsin Housing and Economic Development Authority (WHEDA) program.

Many holders of the Individual Taxpayer Identification Number (ITIN) are living and working illegally in this country, even though they pay taxes.

Some say the Wisconsin program is an example of how groups and companies are starting to recognize the potential market of immigrants. Critics say the program provides a reward for those who are violating immigration laws.

Some banks already issue mortgage loans to illegal immigrants, but WHEDA is believed to be the first and only quasi-government organization to buy such loans from the banks, said Geoff Cooper, director of emerging markets for MGIC Investment Corp., and Gary Acosta, president of the National Association of Hispanic Real Estate Professionals.

"Anyone will tell you the real growth in home ownership in the state, in the country, is in the minorities and immigrant market," said Antonio Riley, executive director of WHEDA, a public corporation created by the Wisconsin Legislature in 1972.

The agency, which funded more than 4,000 home mortgages last year, underwrote 87 mortgage loans to ITIN holders since the program started in April. Six banks in Milwaukee and Madison participate in it, and the authority has talked about expanding it to Racine, WHEDA spokesman Ron Legro said.

But state Sen. Glenn Grothman, R-West Bend, is threatening legislative action if WHEDA doesn't kill the program, which he contends rewards people for breaking the law.

"It is an insult to border guards and immigration officials who are trying to enforce the immigration law," he said. "It is an insult to people who are waiting patiently to enter the country legally."

Financial experts say WHEDA's program was simply a reaction to the country's changing demographics. Estimates of illegal immigrants in the country range from 10 million to 12 million, Acosta said.

"If this becomes a standard in the industry it could have a multibillion-dollar positive impact on the economy," he said.

Some private banks already write mortgage loans and open bank accounts for ITIN holders. MGIC, a Milwaukee-based issuer of private mortgage insurance, started insuring ITIN loans last fall.

Using the tax numbers allows banks to know the true identities of immigrants, who might otherwise go to predatory lenders or use false Social Security numbers to get mortgage loans, MGIC's Cooper said.

ITIN was created in 1997 for the Internal Revenue Service for foreign citizens who needed to pay taxes in the United States but could not obtain Social Security numbers. The government has issued about 7 million ITINs as of last year, the IRS said.

ITIN gained currency in the financial market after banks realized the potential of the immigrant market.

About 70 percent of immigrants from Latin America are "unbanked," said Michael Frias, community affairs officer at the Federal Deposit Insurance Corporation.

Even the Patriot Act, created to fight terrorism after the Sept. 11, 2001, attacks, acknowledged ITIN is an acceptable form of identification for banks, said Frias, who spearheaded a Midwest task force to extend banking services to immigrants.

Milwaukee's Mitchell Bank was among the first in the nation to have an ITIN loan program. The bank on Mitchell Street served European immigrants in the neighborhood in the early 1900s. As years went by, Hispanics replaced the Germans and Poles, said James P. Maloney, the bank's president and chairman.

"As the neighborhood changed, we ultimately decided we had to change or move," he said.

The bank now hires Hispanic employees, has all documents in Spanish and is authorized to help immigrants obtain ITINs. It created credit history for immigrants who often don't have any by examining their utility bills, rent payments and the money they send home. The ITIN loans performed better than conventional loans, Maloney said.

The home ownership rate on Milwaukee's largely Hispanic South Side is less than 20 percent, and the immigrant market is "more than we could ever handle," Maloney said.

But the bank has limited capacity for ITIN loans, because companies that usually buy mortgage loans from banks refuse to underwrite these loans, saying they are too risky, Maloney said. The WHEDA program fills that void.

"It's very forward thinking on their part," he said. "They couldn't be doing anything better for our neighborhood."

But Acosta said unless the major players enter the market, the WHEDA program will have minimum impact on the industry.

"Unless Fannie Mae, Freddie Mac and FHA (Federal Housing Administration) start doing this type of loans, it's only going to have a marginal impact."

 

Well said by Fed:
``Some participants believed that the prolonged period of policy accommodation had generated a significant degree of liquidity that might be contributing to signs of potentially excessive risk-taking in financial markets evidenced by quite narrow spreads, a pickup in initial public offerings, an upturn in mergers and acquisition activity, and anecdotal reports that speculative demands were becoming apparent in the market for single family homes and condominiums,'' the minutes said.

 

1) Can't tell you whether the mortgage insurers are sound or regulated. GE used to be a mortgage insurer, although they spun this company off recentely. Best bet would be to do a google search on mortgage insurance companies, or private mortgage insurance. It will give you plenty of reading. Some of these mortgage insurers also insure municipal bonds as well. MGIC used to do that.

2) The defaulting borrower could file a bankruptcy for alot of reasons. They might be involved in a deficiency on their house, so by filing they wipe that deficiency out. Usually when they lose the house, all the rest of their credit is trashed too, so they may have credit card companies after them, etc etc. Bankruptcy stops everyone in their tracks. Without the bankruptcy the lender/credit card company etc could get a judgment, garnish wages, seize assets, etc etc.

3) FNM is a mess. But I'm certainly no expert on it.

OldTrader

 

It has been studied recently to see what the result might be. The Northern Trust Company Economic Research Department report dated December 16, "even with a very small 39 basis point rise in mortgage rates, housing affordability in the U.S. plunged by 9%."

I was interested to be told of that study at the HomeBuilder's Assoc. meeting. We usually get an update on that when builders become concerned. Otherwise, most of us are in the dark. Even someone with all the experience Arnie has, 26 yrs.

RE is not as easy to understand as it would seem, and there are so many types of RE investments, different basis points, location, competition and just avg. homeowners mixed in with speculators and investors.

A housing crash or no crash will depend on the two main drivers IMO: jobs and interest rates (general affordability). Traderbal related it to a stock's P/E. If new home values drop then resales will follow at some ratio (that will most likely vary by area).

 

Most owner-occupied homes are sold for reasons such as: job loss, divorce, job transfer or desire to "move up". NOT because of some drop in "value".

Think about it?? Nice home, two kids in neighborhood school, church nearby, neighbors, etc. You come one day and say "gee, honey" I heard the people down the street sold for $15,000 less than their asking price!!! Get the kids in the car, we're getting the hell out of here right now.

Doesn't happen that way, boys and girls. Sorry to be bad news to you housing bears.

Read the fine print in some of the home builders announcements about sales being down. Several said it was because of a shortage of lots and available land. Not necessarily a slowing in demand.

But be assured, some of the "hot" spots will take a hit and the speculators will lose money. But the guy who moved to the area because of job, schools etc will be just fine

SteveD

 

Exactly. That is why I personally don't like the "housing crash" name. It polarizes everyone when the issue is most likely a fear of a possible slump in numbers of homes sold, induced by rising interest rates.

If that fear becomes a reality, then no one really knows what will happen. The market will show us.

I have noticed that RE values usually move up or down, rather than hold steady. The reason I've always heard from realtors is that builders over supply the market causing a dip in prices as excess inventory is absorbed. I'd buy that reason most of the time. Builders are greedy.

In this case, I personally think the FED left rates too low for too long. This brought in buyers who maybe should have stayed renters. Look at OWP's post.

I personally think there will be a bad slump. But, prices could go much higher first. IMO, it depends on inflation and FED monetary policy. So much is out of our control. Fed. Gov. Bernacke told us about helicopter money.

 

http://chronwatch.com/content/contentDisplay.asp?aid=12147&catcode=13

"Has Greenspan Over-Pumped the Real Estate Bubble?

Written by Noel Sheppard

Tuesday, January 04, 2005

Like most people with even a passing interest in matters relating to business, I have been reading articles in financial periodicals and have heard the prognostications of many economists concerning a looming “Real Estate Bubble” for at least the past three years. Regardless of the logical and empirical approach to much of the research that has been shared on this subject, my own analysis has been quite contrary to these bearish assertions.

Some recent events, however, have begun to weaken my resolve, and lead me to believe that the residential real estate market is indeed beginning to behave in an irrational fashion that could be portending an imminent peak.

The first cautionary signal was raised when a good friend of mine told me about what has happened to the house that he bought in Sarasota, Florida this April. As he will be retiring in two years, he purchased a lot with construction plans for a lovely model in a fine, gated golf community a bit inland from the Gulf. His base price before his personal add-ons was $399,000. They have barely broken ground to lay the foundation, and a similar floor plan in this community’s next development is now going for $699,000. That is a 75% appreciation in eight months -- an annualized increase of 112.5%. Now that’s what I call a bubble.

Granted, there may be mitigating circumstances in Florida related to the hurricanes, very strong economic growth in the region, retirement home purchases by baby boomers just like my friend, etc. Yet when assets begin to appreciate at this kind of a pace -- not just the ten and twenty percent annual rates that we have been seeing in many parts of the nation including Florida for the past five years or so -- one must pay heed.

The next shoe dropped a few days later when another friend of mine who owns a mortgage company told me about his average client the past three months or so -- mid-40’s to mid-50’s couple that is tired of their recent paltry gains in the stock market, and is, for the first time, purchasing a home or condominium as a rental/investment property. In doing so, they are not only leveraging themselves to the hilt, but also are negatively amortizing with total payments -- including taxes, insurance, homeowners’ association dues, and equity reduction -- that give them a monthly negative cash-flow of $1000 AFTER rent collection. But, they’re not concerned about this guaranteed recurring loss of capital because they believe they’ll make it all up when they sell the house for a huge profit somewhere down the road. That’s also what I would call a bubble.

To try and put this kind of speculative borrowing and investment behavior in perspective, in the stock market, this would be akin to buying on margin -- purchasing stocks with money that you had borrowed off of the value of other stocks you owned -- to such an extent that your interest costs were eating into the principle of the equities that you held. Now, to be sure, this is not an uncommon practice for investment professionals and experienced traders. But analysts are always keeping track of the total retail margin debt that exists as a percentage of retail stock accounts to gauge speculative excesses in the market. To be sure, one of the real warning signs in the first quarter of 2000 when stocks were peaking was the level of this very debt. Now, it is quite conceivable that this same degree of speculation is emerging in the real estate market.

Finally, my other concern about behavior like this is that these are first-time real estate “investors,” or what stock traders would refer to as “weak hands.” Strong hands are professionals and seasoned investors. Weak hands are neophytes who have no experience with equities, which always get sucked in as buyers at or close to the peak. Certainly, this is what happened in the first quarter of 2000 when you couldn’t swing a dead cat in this country without accidentally hitting someone who had never invested in stocks in their lives, but now owned either dot-com shares, or an aggressive growth mutual fund that was largely investing in what turned out to be worthless assets.

Today, the weak hands -- people who have never purchased investment property before -- are actually willing to lose money every month because they believe that real estate will keep going up.

It’s dot-coms all over again, folks, but with much larger sums of money, much greater degrees of leverage, and, as a result, much more ominous portent.

When people were speculating this way in the stock market five years ago, for the most part, all they lost was their savings and their retirement plans. This time, if the cards begin to implode, people could end up quite literally losing not just their investment properties, but also the homes that they live in.

What potentially is the cause of this speculative excess this time? Well, to a certain extent, the same as one of the root causes of the recent stock bubble -- overly aggressive monetary policy. If you recall, in the fourth quarter of 1999, in order to ward off the possible banking illiquidity that was feared to transpire as a result of money hoarding prior toY2K, the Federal Reserve left interest rates unchanged at its December meeting. At the same time, they executed a variety of procedures to make sure banks were quite flush with cash just in case Y2K problems arose. Many economists after the fact believed that this “looser” than required monetary policy precipitated the upward movement in stocks at the end of the millennium.

As one can plainly see from a NASDAQ chart, this index went from roughly 2500 to 4000 during the fourth quarter of 1999 -- a 60% rise -- with some of the catalyst clearly being an overly aggressive monetary policy. Moreover, Alan Greenspan was certainly too slow in altering said policy. For instance, at the time, there were many economists like myself who expected that once Y2K had passed without the dire consequences that had been presaged, the Fed would immediately -- meaning as soon as the first or second business day of the New Year -- raise rates. Why? Because the economy was very strong throughout 1999, and clearly warranted a tighter monetary policy than was necessary to avoid Y2K related liquidity problems. Unfortunately, by leaving rates unchanged, Mr. Greenspan encouraged the final rally in stocks that quarter that ended with the eventual financial bloodbath. If Mr. Greenspan had immediately raised rates early in January 2000 -- rather than waiting until February -- the final push from NASDAQ 4000 to 5000 in roughly ten weeks might not have occurred.

Subsequently, as far as real estate is concerned, Mr. Greenspan might be making the very same mistake, for without question, much of this extended real estate boom is largely interest rate driven. Part of today’s aggressive monetary strategy, however, is clearly also intended to deflate the value of the dollar to help our multinational companies export products and reduce American appetites for foreign goods. Unfortunately, even at the current 2.25% federal funds rate, our monetary policy is still on the easing side given that a neutral posture would attempt to mimic the current rate of GDP growth. For example, as GDP grew by 3.7% in the third quarter, and will end up likely somewhere between 3.5% and 4% this year, with projections of roughly the same next year, a neutral policy would be a funds rate somewhere between 3.5% and 4%. Obviously, as we are nowhere near that yet, even though our economy has been expanding since the fourth quarter of 2001, our central bank for all intents and purposes still has its foot on the gas pedal with much of the fuel going right into the real estate speculation engine.

One has to wonder if Mr. Greenspan isn’t making the same mistake that he made in 1999 and 2000 when he left rates too low for too long. In fact, of Mr. Greenspan’s policy errors during his fabulous tenure, it has usually been either this kind of a situation where he doesn’t raise interest rates in a timely and aggressive enough fashion to prevent an asset-bust, or an overreaction to a financial crisis (1987 stock market crash) with excessive easing that results in a rekindling of inflation.

Irrespective of these cautionary signs, there are economic realities that exist today that are quite different than what was transpiring just before our last two real estate busts in the early 80’s and early 90’s. Both of those collapses were preceded by exogenous economic events that lead to huge employment dislocations in entire industries. In the 80’s, it was the implosion of the oil patch. In the 90’s, it was the fall of the defense complex as well as the savings and loan industry. By contrast, as our economy looks quite healthy at this stage compared to what was occurring during both of those periods: no apparent similar dissolution of an entire employment sector appears presently to loom on the horizon.

As a result, my concerns -- much as they were in January 1999 when I first started worrying about equity valuations -- might be very early. Moreover, if Dollar Diplomacy works, the population models moving forward could suggest that any correction in real estate valuations regardless of severity might just be a short-term deflating of present aberrations.

As an exploding stock bubble was largely responsible for our last recession, however, and a real estate collapse acted to significantly exacerbate the previous one, this matter warrants continued scrutiny.

About the Writer: Noel Sheppard is a business owner, economist, and writer residing in Northern California. Noel receives e-mail at slep@danvillebc.com."