« November 2006 | | January 2007 »

Buying & Selling: Housing Slowdown Ripple Effects

The common wisdom among bubble bloggers, bubble-centric economists, and the like seems to be in two camps. Either the slump is precipitating a disastrous recession that will crush economic growth for years, or it will be a hard, painful, but managable deceleration that will ultimately trigger more investment and home ownership as prices fall.

I tend to favor the latter option, because I'm not a doomsayer and the cycles of economic boom and bust are too pronounced to ignore. With that in mind, it's fascinating to watch the effects of the slump on other business sectors that are bad in the short term, but are ultimately beneficial in the long term.

For example, take this story about declines in lumber production:

The housing slowdown is expected to reduce lumber demand this year by 3.2 percent after reaching record highs in 2005, according to the association.Residential construction is the lumber industry's largest market, accounting for more than 40 percent of the lumber used each year, the association said. After a nearly 9 percent downturn in 2006, it forecast new housing starts to fall by another 10 percent to 1.69 million in 2007.

While this will spell serious trouble for the lumber industry, it can only be beneficial to our environment, which is an often-neglected concern in the mad rush to develop property on every last square foot of earth on the planet.

Or take this story about the dwindling employment for immigrants due to the housing lull. Undocumented cheap labor has been a huge boon to the housing industry these last five years, even as it's contributed to a roiling mass of negative sentiment about immigration, job loss, and even identity theft. But now it seems that the spigot is running dry, leaving a lot of people with no jobs and bad prospects:

"That's one of the dangers of importing lots of workers," said Ira Mehlmen, spokesman for the Federation for American Immigration Reform, which seeks to curb illegal immigration. "After their services are no longer required, you end up with them and with their families. "There isn't much reason for them to return home when services and other benefits are available."

Short-term thinking is the bane of modern society in many ways, and the housing market is just another example. The push to build and sell far too much product to people living far beyond their means has wrought all manner of unforeseen consequences, and the ripples will be felt for many years to come.

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Buying & Selling: The Rise & Fall (And Rise) Of Home Sales

By now it's a familiar pattern, replayed for months throughout the housing slump's continuing decline:

First, higher interest rates cause a slackening of loan applications and refinancings:

Demand for home purchase loans also weakened as the MBA's seasonally adjusted purchase index , widely considered a timely gauge of U.S. home sales, fell 10.6 percent to 390.2, its lowest since late October. The index was also below its year-ago level of 432.9...Also driving demand lower last week was a 18.5 percent fall in the MBA's seasonally adjusted index of refinancing applications to 1,604.6, its lowest since early September. A year earlier the index stood at 1,259.1.

Then you have sellers giving in to the inevitable and cutting prices which leads--surprise, surprise--to slight surges in home sales:

The National Association of Realtors reported that sales of previously owned homes rose 0.6 percent in November to a seasonally adjusted annual rate of 6.28 million units. That followed a 0.5 percent sales increase in October and marked the first back-to-back sales gains since the spring of 2005.

Keep in mind, however, that these gains are from existing homes. New home construction is still on the downslope, and excess condo inventory will keep those units standing alone and empty until there are bigger price reductions across the board.

Of course, none of this is stopping the NAR from saying, once again, that now is a great time to buy. And while this statement is much more true than it was, say, a year ago, it's still not true enough. Not yet. But soon....

Posted at 04:33 PM | TrackBack

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Renting: 'Nuff Respect Due

It was an exciting moment early on in the history of this humble blog when we got quoted in the New York Times last year. Well, I'm happy to say that my colleague David Livingston, aka the legendary Bubble Meter has surpassed all expectations with his mention in the WSJ about renters riding out the housing slump.

I've always been of the mind that unless you're 100 percent sure you can commit to buying a house you can afford, with a fixed mortgage and 20 percent down, you should rent. There are too many toxic products out there to lure cash-strapped buyers into financial misery with as it is, and still not nearly enough education and knowledge among the masses. But it's too easy to classify people as stupid renters and gullible buyers. Everyone has a different situation, and different circumstances.

With that said, David and those like him who have sounded the warning bell about housing were dead on the money, so to speak. Prices are too high, demand is slumping, foreclosures are on the rise, and everyone from Ben Bernanke to the Lereah himself has been forced to concede that the downslide is "substantial." If it hadn't been for people like David that challenged the common wisdom of "Renting is a waste of money--you should buy," we'd have a lot more F%$ed borrowers.

So, ignore the haters and listen to the fans, David. You're doing the right thing.

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Tales From FEMAVille: Waste, Fraud, and Abuse

While half of New Orleans and most of the Gulf Coast is lingering in disrepair and decay nearly 18 months after the hurricane triple threat, aid and reconstruction money continues to be wasted by the billions:

Federal investigators have already determined the Bush administration squandered $1 billion on fraudulent disaster aid to individuals after the 2005 storm. Now they are shifting their attention to the multimillion dollar contracts to politically connected firms that critics have long said are a prime area for abuse.

This is probably one of the biggest tragedies in this, a continuing nest of tragedies. Money that should be going to reopening neighborhoods, building new homes, fixing the levees, rebuilding schools, and improving infrastructure is instead disappearing down the drain of corporatized fraud and abuse, with the helpful enabling hands of the Worst President Ever.

And where's that money going? I have an idea:

Casino operators are confident heading into 2007, when further industry expansion is set to help fill what some managers see as an almost insatiable appetite for the kind of escapism — from gambling and shopping to pampering — casinos are peddling. Boomtown is eyeing both a new gambling boat and hotel as part of its proposed, $145 million expansion. One more casino also is set to open on Mississippi's Gulf Coast sometime next year, Clark said.

Nothing like some hard-earned and easily-lost money at the craps table to boost revenues in a state that hasn't got much else to pull from, eh?

If the Feddie Gov can't do its job and provide even the slightest bit of oversight, then it falls to the localities to keep people honest. Wish 'em luck--they're gonna need it.

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Mortgage & Loan: Foreclosure For The Holidays

Ah, Christmastime. Warm fireplaces, family gatherings, being stuck in airports, and now the danger of losing your home:

A new Center for Responsible Lending (CRL) study reveals that 2.2 million American households are likely to lose their homes and as much as $164 billion due to foreclosures in the subprime mortgage market...CRL's research suggests that risky lending practices have triggered the worst foreclosure crisis in the modern mortgage market, projecting that one out of five (19.4%) subprime loans issued during 2005-2006 will fail.

Calculated Risk has an extremely thorough and in-depth study on the different types of ARMS, how they work, and why introducing them as instruments for the subprime lending market was the mother of all bad ideas:

When hybrids hit the subprime market, they not surprisingly mutated a bit, the initial fixed period on the majority of loans shrinking to 2 years with a 6-month reset, often with interest only for two years and a deeply-discounted start rate. This made the “subprime hybrid” an even worse performer than the old one-year “true ARM,” but certain folks continued to delude themselves (and their investors) that the “hybridization” of these products actually improved the risk characteristics, never mind that the loan was less a cross between a FRM and an ARM than it was a high-risk ARM with a single drop of FRM in it two generations ago.

No doubt this accounts for the slowdown in refinancing, as cash-strapped subprime borrowers pause and wait for the prime moment to make the jump to fixed loans.

As you celebrate your holiday season and gift-giving this weekend, take a moment to count yourself lucky you have a place to live, and that you aren't stuck in the ticking time bomb of a bad loan that's draining your money away like a vampire's bite.

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Mortgage & Loan: "The Worst Is Over"

"Everything's coming up roses..."

So says White House hack shill Edward Lazear when asked about his forecast for the housing slump:

Of the housing slump, Lazear said, "it looks like the precipitous decline that we saw earlier is not going to occur in 2007."

Given the timetables for how these things work, we are only now seeing the effects of market faltering from six months ago, so it will take at least until mid-2007 for any real indications as to a resurgence of housing's strength. So I wouldn't break out the bubbly just yet.

Bonddad has a roundup of homebuilders' failed prognostications and diminished outlooks, much of which I have covered myself. All of these guys claimed better days ahead, but they're still feeling the pain. Much like Lereah and his unqualified hackdom, this stuff is wish fulfillment--trying to tell the market everything is ok, in the hopes that they can actually make it so.

Posted at 12:37 PM | TrackBack

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Credit & Debt: Inflation Pressures Increase

Apparently all of the stabilization in gas prices didn't really account for much, as wholesale price inflation is increasing at a rapid pace:

Economists had been expecting a rebound in wholesale prices following two months of big declines. However, the 2 percent jump was four times bigger than the 0.5 percent increase they had forecast. Even excluding volatile energy and food prices, core inflation posted a 1.3 percent advance, the biggest jump in 26 years....The increase in the core rate of inflation was led by a record 13.7 percent jump in the price of light trucks, a category that includes sport utility vehicles. The price of new passenger cars rose by 2.2 percent.

Hey, here's a thought--maybe if you STOP BUYING GAS-GUZZLING SUVs, we won't consume as much oil and be on OPEC's johnson for the rest of eternity.

Anyway, what does this mean for housing? Will Bernanke push to raise or lower rates in 2007? Right now, it seems like there may indeed be a bottoming out, as evinced by Tim Duy's quoted comments at Economists' View:

Regarding housing, I don’t feel a need to chronicle the housing market’s decline – no need to recreate Calculated Risk’s efforts. I will only add that from the Fed’s perspective, the slide in new residential investment will not go on forever. There is a bottom. And when that bottom is reached, then the contribution to GDP growth will go from a negative 1.2% to zero. This would, for example, have made Q306 GDP growth 3.4% instead of 2.2%. And 3.4% is well above the Fed’s estimate of potential.

Now, they don’t really believe that the economy will snapback to 3.4% on average – and if it does, we should be expecting additional rate hikes. I think they believe the mortgage equity withdrawal story, and anticipate an Act II to the housing slowdown. In Act II, the drag from the consumer becomes more evident, pushing consumption growth rates to the 2-3% range.

I recommend reading the whole piece, as it's a reasoned take on our economic outlook that doesn't fall into hysteria, but also does not deny the realities of our situation.

And speaking of denying reality, Economists' View also gathers James Galbraith's hilarious take on Bernanke-nomics:

So here's the Bernanke-Paulson position in brief summary:

1) China's currency strategy has helped produce rapid growth for 30 years; therefore it should be abandoned.
2) China's high savings rates have been a key to this success; therefore they should be reduced.
3) China, a country emerging from communism, should spend more on public health and social security, so that ordinary Chinese can save less. (This is actually a good point, as far as it goes.)
4) The United States, a capitalist country, should spend less on social security and public health, so that ordinary Americans will be forced to save more.
5) Somehow, all this will reduce the deficit in the US-China balance of trade, a goal whose importance everyone agrees on but that no one can actually explain.

Here's a simpler version:

1) Put China in debt through excessive credit and consumption
2)....
3) Profit!

Posted at 02:43 PM | TrackBack

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Mortgage & Loan: CFA On The Housing Beat

The Consumer Federation of America has put out two new reports of interest to Housing.com readers.

First is a brief discussing the propensity of women to be hit with subprime mortgage loans. Unsurprisingly, Black and Hispanic women are even more heavily targeted with high-interest loans, but even more so as they increase in affluence:

Adjustable rate mortgages are now the
predominant product in the subprime market. The subprime market provides higher cost credit
predominantly to borrowers who are un-served by the prime market and is fertile ground for abusive
predatory lending practices. Growing delinquency and foreclosure rates for these loans demonstrate that
some borrowers are placed into mortgages with unsustainable terms and payments.

That anyone should have to suffer through subprime lending is bad enough, but that these products are being distributed in a pattern of (un?)conscious racism and sexism is unconscionable.

Fortunately, the CFA also has the good news that nontraditional housing brokers are gaining market traction:

“Nontraditional brokers who charge lower prices or truly represent the interests of buyers
or sellers offer these consumers more real choices in terms of commission rates, services, and
representation,” said Stephen Brobeck, CFA’s Executive Director. “State regulators should join
the U.S. Department of Justice and the Federal Trade Commission in working to stop blatant
discrimination by traditional brokers against these innovative service providers,” he added.

One step forward, one half-step back. Go check those reports out.

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Credit & Debt: Follow The Money

So by now you've heard that Goldman Sachs is handing out the mad loot as a result of all-time record profits. Well, former chairman "Hammerin'" Hank Paulson, along with his faithful sidekick Benny Bernanke, are off to China in the hopes of getting the Red Menace to embrace our sophisticated consumer capitalism:

The Chinese government is committed to creation of a social safety net, including health and retirement programs that will contribute to balanced growth by giving Chinese workers and families the confidence to spend more.

China's high saving rate is a major contributor to the country's large global trade surplus. Increasing consumption in China will benefit U.S. and other exporters. (Emphasis added.)

Paulson is clearly a student of the John Snow school of diplomacy, wherein we convince China that it's in their national interest to save less, spend more, and use credit cards.

And how's that philosophy working out back here in America?:

Late payments and new foreclosures on U.S. homes rose in the third quarter and are likely to grow as a massive wave of adjustable-rate mortgages reset at higher interest rates, the Mortgage Bankers Association said on Wednesday. Delinquencies rose for all home loans, but most notably for adjustable loans to subprime borrowers who were already stretched before mortgage rates climbed, the industry trade group said in its quarterly National Delinquency Survey...The MBA predicts that between $1.1 trillion and $1.5 trillion of mortgages face rate resets next year. Up to $700 billion of those loans will be refinanced, while up to $800 billion will adjust at less affordable rates. (Emphasis added.)

'Nuff said.

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Credit & Debt: Fed Holds Course On Interest Rates

"Everything is proceeding as I have foreseen it...."

The Federal Reserve has closed out 2006 by maintaining the prime lending rate at 5.25%.

I'm not one to parse these statements as microscopically as some, but Economist's View notes a a few key changes in the language, specifically the addition of the word "substantial" to the description of the cooling housing market. Paper Money notices this as well:

It appears that Bernanke and the other Fed officials are not only firmly aware of the extent of the housing downturn but they are now also willing to share their outlook publicly.

So we've moved from "denial" to "anger" to "acceptance" on the scale of housing bubble grief. Of course, as this Reuters article points out, the cooling economy fits well with the Bernanke agenda:

While Fed Chairman Ben Bernanke and his colleagues have said higher-than-desired core inflation is a worry, they expect it to ease as slower growth pushes up unemployment.

Put more simply, that pesky wage growth can be undercut as more people lose jobs and take work at lower wages, requiring more debt to finance their lifestyles. Thank goodness!

So it seems that nothing much has changed, and time will indeed tell the tale.

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Mortgage & Loan: The Nature Of The Threat

Why is this man NOT smiling?

Apparently Henry Paulson has just now realized that the collapse of the subprime lending market does indeed portend bad tidings for the market in general:

Treasury Secretary Henry Paulson said the government wants to issue guidelines to banks and savings and loans that will allow people to get home loans "without taking unnecessary risks."

"Expanding opportunities for more people to buy a home is a good thing. But we do not want Americans to become overextended and see their dream end in foreclosure," Paulson said at a conference on the housing market organized by the Office of Thrift Supervision, a
Treasury Department agency.

Now that Wall Street is seeing the end of five years' worth of profit financed on the backs of consumer debt, it wants to get tight-fisted. The legendary Bonddad of Daily Kos fame has struck out on his own, and he comes out swinging with a great post explaining how home loans are used to generate capital, and why things continue to look grim:

What’s important about this particular story is Ownit was a large company. They weren’t a fly-by-night organization; they were almost in the top ten of all US sub-prime mortgage lenders. That should indicate the sub-prime mortgage market is definitely showing signs of problems.

And yet, some bulls are claiming the housing market may survive, pointing to California dreamin' as an example. But there's one key sentence in this story that may explain how Cali will survive the housing collapse:

But California builders are hiring amid a shift to multifamily and nonresidential properties, Matsuda said. (Emphasis added.)

Just as all of the excess condo developments on the market will have to sell at low prices or convert to rentals in order to recoup costs, so too will builders prop up sagging profits by going commercial. But who's left holding the mortgage and lending bag when this happens? And what about the people already trapped in homes they can't afford?

What comes next for them?

Posted at 11:04 PM | TrackBack

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Credit & Debt: The Sin Of Wages

The New York Times takes a look around and notices that wages are indeed on the rise, thus lifting all boats on the tide:

After years of sharply rising income inequality, the recent rise in wages also appears to be increasing pay for both rich and poor. From July through September, the inflation-adjusted hourly pay of workers near the bottom of the wage scale — those making less than 90 percent of all workers but more than the worst-off 10 percent — rose 0.1 percent.

This would seem to be good news, right? More pay means more savings, more investment, and more consumption, without taking on excessive debt. Well, as Ezra Klein and Kevin Drum both note, the real concern for policymakers like Bernanke are those pesky labor costs:

Wages have risen so swiftly that some economists worry that they could push inflation up on their own, by forcing companies to raise prices. Last week, the Federal Reserve chairman, Ben S. Bernanke, warned that the central bank might have to raise interest rates again. “One factor that we are watching carefully is labor costs,” he said.

As I have said many times before, Bernanke's job has been to continue Greenspan's work of promoting economic "growth" through debt and consumption. The housing bubble of the last five years was absolutely empowered by low interest rates and massive debt assumption through the promotion of toxic mortgage products and the continual exhortations to spend money we don't have.

Now that people are making more money, they'll be saving more, and not needing credit cards, interest-only loans with no down payment, or any of that crap. And where will Wall Street be? Remember way back when David Lereah called people who paid off their mortgages unsophisticated? That's the mentality.

These people live to make sure you don't make enough money and use debt to finance your lifestyle, thus making them richer. It's that simple. Don't play that game.

Posted at 04:14 PM | TrackBack

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Mortgage & Loan: The Bane Of Subprime Lending

The New York Times covered the increasing pain of homeowners with subprime loans yesterday. It's funny to watch the author strain to reassure his readership that this isn't a sign of a nationwide housing slump, and it'll only affect "those" people.

But the truth is that the failing subprime market affects everyone, and investors are getting exceedingly nervous:

Based on current performance, 2006 is on track to be one of the worst ever for subprime loans, according to UBS AG, it said. It cited the bank saying that roughly 80,000 subprime borrowers who took out mortgages packaged into securities this year are behind on their payments.

Not only that, subprime shysters such as Ownit are going out of business, and attempts to sell other subprime units are going more slowly than expected.

This is what happens when you bank the success of an entire industry on gouging consumers because they've had poor credit histories, using astronomical interest rates and predatory terms, and specifically targeted at minorities and women. Eventually, all of that bad karma is going to come back and haunt you.

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Buying & Selling: Toll Bros. Looking Up?

Once again, luxury home builder Toll Brothers is feeling the pain of the housing slump. This time, they're reporting a 44 percent drop in Q4 profit. And yet, they're actually showing signs of bullishness for their next round of orders:

Robert Toll said a few areas in the East Coast showed signs of stabilization, including Washington, D.C., and suburbs in Maryland and northern Virginia. After cutting projections for several quarters, the Horsham, Pa.-based builder raised the number of homes it expects to deliver in the first quarter to a range of 1,600 to 1,900 homes at average prices of $670,000 to $680,000. That's up from a prior projection of 1,500 to 1,800 units.

Right, because that worked so well the last time. Still, there has been evidence that the market is picking up again, so perhaps it's me that's wrong. For the homebuyers' sake, I hope so.

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Mortgage & Loan: Foreclosure Of A Dream

It's a little old, but RealtyTrac posted a list of the top 10 foreclosure markets in the U.S. The news is chilling. To a man, each region blames the factors that contributed to the housing bubble in the first place: heavy use of adjustable-rate and interest-only loans with no money down, rising interest rates, and sluggish sales in the market. Take Hotlanta, for example:

Atlanta ranked eighth in the country in foreclosure rate, reporting one new foreclosure filing for every 107 households - more than three times the national average.

"Mortgage fraud, liberal lending practices, and inexperienced investors, along with corporate layoffs and slashed pension funds are contributing causes for the high foreclosure rate," said Atlanta real estate agent Ken McCall.

Here's an interesting article detailing how foreclosure isn't just a problem for "those people" anymore--it's now hitting even the affluent and the exurbian. The article astutely notes that the push for those huge McMansions drove buyers to stretch themselves beyond their means and well into risky territory, and now it's coming back to haunt them:

Pam acknowledged she didn't carefully read all the documents and hadn't fully realized that for the first two years, they would pay just the interest on the loan, and that the interest rate would reset this coming spring. They placed far too much trust in the broker, she said.

"As an accountant, I feel kind of stupid at this point," Pam said. "If you kind of place all your trust in somebody, and you think they're doing everything they can to help you and are looking out for your best interest, you're not sitting there picking it apart."

What's most heartbreaking about this is watching otherwise intelligent people drink the Kool-Aid in order to convince themselves that they're not being screwed, and that their broker let them do it.

And just proving that there's never a missed opportunity for parasites to profit off human misery, there are more instances of "foreclosure rescue" scam artists screwing strapped homeowners even worse.

Expect to see a lot more stories of this nature in the coming months.

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Buying & Selling: NAR Vs. DOJ, Round Two

The Justice Department's lawsuit against the National Association of Realtors for monopolistic practices has cleared to proceed.

Reaction seems decidedly mixed on the Internets, with some folks over at Techdirt claiming the lawsuit is a symptom of government monopolist tendencies. While that may very well be true, the fact that it's proceeding at all in this era of laissez-faire corporatism is a blessing.

The collusive practices of realtors have contributed to an environment where buyers and sellers don't have the information they need to make the best decisions possible. Given how easy it is to become a real estate agent, and how the Internet enables such wide and open sharing of information, realtors need to adapt to a flat-fee structure or get ready to share some quality time with the dinosaurs.

Let's take down this monopoly and then set up safeguards to prevent it from happening again, shall we?

Read Bloomberg's take via the Baltimore Sun for more information.

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